Archive for September 13th, 2010
WASHINGTON (MarketWatch) — The U.S. government’s budget deficit was $91 billion in August, the Treasury Department said Monday, as the federal government again spent more than it brought in.
This is why the Treasury borrowed the following:
The number in pink is the real number.
That’s the total amount of debt as of 8/31 less the total amount as of 7/31. It’s called “subtraction” Timmy….
And that’s not $91 billion, it’s $212 billion.
If the US Government was a corporation Tim Geithner would be in prison for intentionally submitting false accounting statements.
If we the people had an ounce of common sense we would look up the Treasury’s own “Debt to the Penny” data for ourselves (it’s online) as I have and we would scream in a loud concerted voice:
But we’re too lazy to do that, and the media won’t do it. I’ll take bets on the latter – neither CNBS or Bloomberg will point out that this is an intentionally false number, and that the real deficit is more than twice as much.
But it’s all good you see, the Dow is up.
(You don’t actually need a job, do you?)
Update: Yes, I know last month the DTTP numbers – debt to the penny – were the other way. But the divergence between deficit and debt sales is disturbing. Zerohedge did an article on this today, and it’s worth reading…..
“What has been decided is what’s necessary for all banks at a global level,” Trichet said. “We’re in a global economy, which is a pertinent entity economically and financially, and we have to get a level playing field.”
Ok, that’s an international agreement.
The Constitution says (Art 2 Section 2), on The Presidency (Executive Branch):
He shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur…..
So while Trichet can express his hopes all he wants, I must ask:
Do we still have a Constitution, in which advice and consent of 2/3rds of the Senate is required to form a binding agreement between nations, or will President Obama and Treasury, along with Ben Bernanke, once again treat the US Constitution as toilet paper?
From an interview in the WSJ and my random thoughts thereupon….
The challenge we face in Washington is to decide how to provide more support for demand that’s going to be good not just for short term growth but long term growth. Our view is that shifting the mix to incentives for business, incentives for investment, is better than the feasible alternatives. We’ve had some experience with short term incentives, that pulled forward spending on housing and automobiles. These helped spark recovery but are not what is needed for the long term.
No they didn’t. You pulled forward demand (again) which is what we have done repeatedly since the 2000 Tech Wreck. There’s been no intelligence displayed here – it didn’t work in 2000, it didn’t work in 2003, and it didn’t work this time.
Home buyers waving Obama “freebies” kept demand going for a while, but the snapback has decimated sales. Now that this has expired we’ve seen monthly sales reports where fully half or more of the sales are foreclosures and other distressed situations (short sales, etc.) The original plan was idiotic – it didn’t stimulate organic demand, it instead pulled forward people into homes at prices that were still well above affordable levels, and will simply spark another round of foreclosures in a year or two.
When it comes to automobiles it’s even more stupid. “Cash for Clunkers” did indeed result in the sale of plenty of cars. But last month was the worst August since statistics began being kept. Worse, the program crushed and therefore destroyed virtually all of the lower-priced used cars that people of lower economic means rely on in order to get to work. I’ve been there – many years ago I bought the literal $500 car (an AMC Pacer) with which to get to my job every day. Without it I would have been on the street as my job was 15 miles from my apartment, and I could simply not afford a car loan. Cash for clunkers ruined people in that situation and was nothing more or less than a sop to union labor at the expense of those in society who had more-limited means.
We just don’t think it would be responsible for this country, given the size of our future deficits, and given the substantial burden the middle class has been bearing over the past decade in particular, to go out and borrow $700 billion from our children so we can sustain those Bush tax cuts that only go to the wealthiest 2% of Americans
That’s fine. The problem you’re going to run into is that tax policy influences behavior. There were several years where I simply bought municipal bonds and lived on the tax-free interest. That’s perfectly legal for me – or anyone else who would be hit by these “wealthiest Americans tax” – to do.
Believe me, it was nice sending in a zero-balance 1040. It’s not that hard either, and in muni interest it’s perfectly legal. Anyone with a million dollars can live in a reasonable fashion in retirement in this way. No, you won’t be rich like a king, but you will be tax-free – entirely tax-free – at the federal level. Giving the finger to the government is not only entirely possible, it is something I’ve done before, and am likely to do again if my personal threshold for the money I earn is exceeded by the amount you propose to tax.
Works for me Turbo.
There are some Republicans who think you should never have to pay for tax cuts. Their view is that it’s better to make those permanent for the high end. We had a 10-year experiment in doing that. It did not prove very effective at stimulating growth or job creation or income growth for average Americans, and it was incredible expensive. It added a huge amount to our long-term deficits.
Actually, the problem with Bush – and you – in that regard is in so-called “Free Trade.” It is nothing of the sort. You and your predecessor have allowed wage and environment arbitrage to eviscerate the working class in this country. The fix is found in Tariffs, but you won’t do that because your Chinese masters demand their blowjobs, and you’re all too happy to oblige on your knees. You know that if you stop they stop funding your $1.5 trillion deficits, and that means instant “kaboom” for your plans.
So instead you screw Americans, and then play the class warfare game. Again, that’s fine. Americans of means can legally erect the middle finger in your direction, and those without means will lose their jobs.
Speaking of jobs, here’s the real problem you’re unable to deal with via these policies:
The only way to address this is to bring the jobs back home. This means you have to cut off wage and environment arbitrage. There is no other alternative, but you won’t do it. We never got the jobs back after the 2000 Tech Wreck and we won’t get ‘em back this time either. But without fixing that graph you can’t possibly fund your federal programs.
You’re trapped Turbo – and you know it.
Are you satisfied with China’s progress on the yuan?
Geithner: Of course not. China took the very important step in June of signaling that they’re going to let the exchange rate start to reflect market forces. But they’ve done very, very little, they’ve let it move very, very little in the interim. It’s very important to us, and I think it’s important to China, I think they recognize this, that you need to let it move up over a sustained period of time.
China isn’t going to do crap until they’re forced. They’re a mercantile command economy. That’s a fact, and nothing you can do will change it. You can only deal with it – or refuse to.
So far you’ve refused, despite all the campaign rhetoric before President Obama was elected. Congress is similarly small-balled when it comes to this issue, as the big multinational corporations that import all the plastic crap we consume in this country are absolutely dependent on that cheap labor to support their alleged “profits” and thus your much-vaunted “stock market” prices.
Cutting off the ability to enslave people in what amount to labor camps and spew poison-laced air and water means that those constituencies get very pissed at the Administration. It also means much lower stock prices, as costs will go up and thus margins will go down, and that translates into P/E compression. This is very bad for your mantra that the DOW must rise.
But the DOW won’t give people jobs. Only work does that. And only reasonable-paying jobs producing goods can support a middle-class in our economy – a sound middle class.
We had it in the 1950s and 60s, but after the oil shocks of the 70s it started to migrate over to China and India. Now our manufacturing base has been eviscerated. We don’t produce computers or televisions in the United States any more. We don’t run fab lines in the US to produce microprocessors and other components for our computers either. Increasingly, we don’t even do our accounting in the United States or our customer service, instead offshoring that to sweatshops in India at a fraction of the labor expense here.
We cannot have a solid middle class in this country comprised of people who flip burgers and pull espressos at Starbucks, but that’s all that will soon be left here in the US.
You needed to designate China as a currency manipulator on the day you were sworn in, but you didn’t and you won’t do it now, even though there’s no argument available to you on the facts for avoiding doing so.
Bluntly, you’re once again dodging the issue, because despite the populist rhetoric the only people you give a damn about are the bankers and the “captains of industry” – all of whom are interested in only one thing – maximizing profit. So long as that can be done with slave labor and pumping environmental poisons into the air and water in China, it will be, and Americans will not find meaningful employment.
15 Shocking Poverty Statistics That Are Skyrocketing As The American Middle Class Continues To Be Slowly Wiped Out
The “America” that so many of us have taken for granted for so many decades is literally disintegrating right in front of our eyes. Most Americans are still operating under the delusion that the United States will always be “the wealthiest nation” in the world and that our economy will always produce large numbers of high paying jobs and that the U.S. will always have a very large middle class. But that is not what is happening. The very foundations of the U.S. economy have rotted away and we now find ourselves on the verge of an economic collapse. Already, millions upon millions of Americans are slipping out of the middle class and into the devastating grip of poverty. Statistic after statistic proves that the middle class in the United States is shrinking month after month after month. Meanwhile, millions of Americans are starting to wake up and are beginning to realize that we have very serious problems on our hands, but they have no idea what is causing our economic distress and they are unaware that most of our politicians have absolutely no idea how to fix the economic disaster that we have created.
On the mainstream news, the American people are treated to endless footage of leaders from both political parties proclaiming that the primary reason that we are in the midst of such an economic mess is because of what the other political party has done.
Republicans proclaim that we are experiencing all of this economic chaos because of the Democrats.
Democrats proclaim that we are experiencing all of this economic chaos because of the Republicans.
Even many readers of this column (who are generally more educated and more informed than most average Americans) leave comment after comment blaming either the Democrats of the Republicans for our current economic mess.
But do you really want to know who is to blame for our economic problems?
Both of them.
This economic nightmare has taken literally decades to develop, and both Democrats and Republicans have contributed greatly to this disaster.
Both parties have absolutely refused to stand up to the Federal Reserve and the horrific economic policies that they have been shoving down our throats for decades.
Both parties have stood idly by as the U.S. trade deficit has absolutely exploded in size and the United States has become significantly poorer month after month after month.
Both parties have refused to do anything as month after month after month large numbers of factories and good paying jobs leave the United States.
Both parties have shoved the spending accelerator to the floor when they have been in power and now we have the largest national debt in the history of the world.
Both parties have done essentially nothing as the health care industry, which was once the envy of the world, has degenerated into a cesspool of corruption and greed and now seems designed to do little more than to provide pharmaceutical companies and health insurance crooks with obscene profits.
If factories keep leaving the United States and jobs keep leaving the United States and the federal government keeps going into more debt and state governments keep going into more debt and local governments keep going into more debt, then things are going to keep getting worse.
It does not take a genius to figure that out.
The United States is continually getting poorer and is continually going into more debt.
Can anyone out there explain how that is a formula for economic prosperity?
Can anyone explain how that would work?
Please leave a comment and explain that to all of us if you can.
The truth is that as wealth continues to leave the United States and as the U.S. gets even deeper into debt, more Americans are going to become poor.
It really is that simple.
The following are 15 shocking poverty statistics that are skyrocketing as the American middle class continues to be slowly wiped out….
#1 Approximately 45 million Americans were living in poverty in 2009.
#2 According to the Associated Press, experts believe that 2009 saw the largest single year increase in the U.S. poverty rate since the U.S. government began calculating poverty figures back in 1959.
#3 The U.S. poverty rate is now the third worst among the developed nations tracked by the Organization for Economic Cooperation and Development.
#4 According to the U.S. Department of Agriculture, on a year-over-year basis, household participation in the food stamp program has increased 20.28%.
#5 The number of Americans on food stamps surpassed 41 million for the first time ever in June.
#6 As of June, the number of Americans on food stamps had set a new all-time record for 19 consecutive months.
#7 One out of every six Americans is now being served by at least one government anti-poverty program.
#8 More than 50 million Americans are now on Medicaid, the U.S. government health care program designed principally to help the poor.
#9 One out of every seven mortgages in the United States was either delinquent or in foreclosure during the first quarter of 2010.
#10 Nearly 10 million Americans now receive unemployment insurance, which is almost four times as many as were receiving it in 2007.
#11 The number of Americans receiving long-term unemployment benefits has risen over 60 percent in just the past year.
#12 According to one recent survey, 28% of all U.S. households have at least one member that is looking for a full-time job.
#13 Nationwide, bankruptcy filings rose 20 percent in the 12 month period ending June 30th.
#14 More than 25 percent of all Americans now have a credit score below 599.
#15 One out of every five children in the United States is now living in poverty.
As millions more Americans continue to climb on to the “safety net”, how long is it going to be before it breaks?
The reality is that the system can only support so many people. We are now at a point where our anti-poverty programs are clearly unsustainable in the long-term, but nobody has a solution for how we are going to get all of these people off of these programs or how we are going to provide good jobs for all of them.
The cost of every U.S. government anti-poverty program is absolutely soaring. Meanwhile, the U.S. government is already running a budget deficit that is approaching 1.5 trillion dollars every year. If you cannot understand that we have a very serious problem on our hands then you are probably not awake.
The U.S. economic system is dying. Blaming the other political party is not a solution. Running around the country offering “hope” and “change” and giving people a vague sense that things will get “better” soon is not going to cut it either.
The American people need very real economic solutions to very real economic problems.
But nearly all of our politicians are way too busy either trying to get elected or trying to stay in office to tackle the very serious problems which are destroying our economy.
Unfortunately, the American people love to watch our politicians play politics. They love to watch the little ping-pong ball of blame go back and forth. They love to pick sides and to cheer for their “team”.
None of that is doing any good. Right now millions of Americans are getting sucked into poverty each year and neither major political party is doing anything real to address the very real economic problems that are causing that to happen.
But most Americans have become so “dumbed down” that they don’t even understand what the real problems are anymore.
All most Americans seem to want these days is to watch a good show.
So send in the clowns.
There are certainly enough of them in Washington D.C. to keep Americans entertained for quite a long time.
Over the past few weeks, many people have asked me to comment on John Hussman’s August 23, 2010 post Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar.
Most wanted to know how that article changed my view regarding deflation. It didn’t.
Several others went so far as to tell me that Hussman was calling for hyperinflation. They were point blank wrong.
Here is the pertinent section from Hussman’s September 6, 2010 post The Recognition Window.
A note on quantitative easing
One of the things I’m increasingly dismayed to learn is that no matter how much detail, data, and qualification I might include in these commentaries, my conclusions will often be summed up by writers or bloggers in a single sentence that often bears no relation to my point. For instance, my view that quantitative easing will trigger a “jump depreciation” in the dollar has evidently placed me among analysts warning of hyperinflation and Treasury default (a club whose card is nowhere in my wallet).
To clarify once again – I emphatically do not anticipate inflationary pressures until the second half of this decade. As I’ve repeatedly emphasized, the primary driver of inflation – historically and across countries – has been growth in government spending for purposes that do not expand the productive capacity of the economy.
Quantitative easing does not pressure the dollar by fueling inflation. It has a much more subtle effect (but one that can be expected to be amplified if fiscal policy is long-run inflationary as it is at present). Normally, equilibrium in capital flows between countries is achieved through changes in interest rates. As a result, countries with greater capital needs or higher long-run inflation tendencies also have higher interest rates. If interest rates can adjust, exchange rates don’t have to. But notice what quantitative easing does: by sitting on long-term bond yields (and creating a negative real interest rate differential versus other countries), quantitative easing prevents bond prices from acting as an adjustment factor, and forces the burden of adjustment on the exchange rate.
While some observers have noted that the value of the Japanese yen did not deteriorate dramatically over the full course of quantitative easing by the Bank of Japan – from its beginning until it was finally wound down – this argument misses the point. The exchange rate depreciation occurs as a jump adjustment in order to set up a subsequent appreciation over time. That gradual appreciation is needed to offset the lost interest difference caused by the policy of zero interest rates.
In the Octagon
Some of the arguments that people have recently presented for hyperinflation are so silly they are not worth discussing.
Yet, I have been drawn into discussing such arguments because of an unfortunate off-the-cuff statement I made on a recent podcast, and because of a misrepresentation of another statement I made in the same podcast.
A recent guest post by Gonzalo Lira on Zero Hedge, providing a theoretical framework for the arrival of hyperinflation, went viral, generating over 75k views and over 1,000 comments, further confirming that the biggest and most confounding debate in all of finance is what will the final outcome of the Fed’s market manipulative actions be: deflation, inflation or, and not really comparable, hyperinflation (which is a distinctly different phenomenon from either of the above). The post infuriated some hard core deflationists who continue to refuse to acknowledge the possibility that in its attempt to inspire inflation at all costs, the Fed may just push beyond the tipping point of monetary imprudence away from mere target 2-3% inflation, and create an outright debasement of the world’s reserve currency.
One among these was none other than Mish himself, who a week ago recorded a podcast on Global Edge with Eric Townsend and Michael Hampton (link here), in which his conclusion was that Hyperinflation is the endgame, “so it is unlikely.”
Hyperinflation Ends The Game
Actually what I said is “Hyperinflation Ends The Game” NOT as Zero Hedge stated “Hyperinflation is the endgame”. The difference between those phrases is enormous.
In the podcast I was asked about a guest post by Gonzalo Lira on Zero Hedge. I had seen the article and I made an off-the-cuff statement that the post was so silly it was not worth commenting not.
How Hyperinflation Starts According to Lira
Please consider the following snip as to how hyperinflation starts according to Gonzalo Lira.
So this is how hyperinflation will happen:
One day—when nothing much is going on in the markets, but general nervousness is running like a low-grade fever (as has been the case for a while now)—there will be a commodities burp: A slight but sudden rise in the price of a necessary commodity, such as oil.
This will jiggle Treasury yields, as asset managers will reduce their Treasury allocations, and go into the pressured commodity, in order to catch a profit. (Actually it won’t even be the asset managers—it will be their programmed trades.) These asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell.
It won’t be the volume of the sell-off that will pique Bernanke and the drones at the Fed—it will be the timing. It’ll happen right before a largish Treasury auction. So Bernanke and the Fed will buy Treasuries, in an effort to counteract the sell-off and maintain low yields—they want to maintain low yields in order to discourage deflation. But they’ll also want to keep the Treasury cheaply funded. QE-lite has already set the stage for direct Fed buys of Treasuries. The world didn’t end. So the Fed will feel confident as it moves forward and nips this Treasury yield jiggle in the bud.
Debating the Flat Earth Society
Supposedly … A slight rise in oil will cause a “jiggle” in treasury yields.
As a result of that jiggle “asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell.”
Since when are much despised treasuries the “principal asset” of asset managers? And pray tell, why would the asset managers “have to sell”?
Oil at $140 did not start a chain reaction before. Why would a “slight but sudden rise” in commodity prices start such a chain reaction, now?
I do not know how anyone could keep reading after those statements, but it goes on and on, getting sillier and sillier about who has to sell what and why, and in turn what the Fed’s response will be.
One interesting aspect of Lira’s post is that I agree with his definition of hyperinflation: a complete loss of faith in currency. Yet, Lira never even discusses how a selloff in treasuries causes a loss of faith in the dollar.
However, Lira does go on to say “….That’s why I think there’ll be hyperinflation in America—that bubble’s soon to pop. I’m guessing if it doesn’t happen this fall, it’ll happen next fall, without question before the end of 2011. ”
Commenting on the above is tantamount to debating the flat earth society. The premise is so silly it’s not worth discussing, yet here I am trapped into discussion by a mischaracterization of my statement “Hyperinflation Ends The Game”.
How Does Hyperinflation Occur?
“FOFOA” hops into the hyperinflation debate with Just Another Hyperinflation Post – Part 1
First of all I would like to clear up probably the most common misconception about hyperinflation. What most people believe is that massive printing of base money (new cash) leads to hyperinflation. No, it’s the other way around. Hyperinflation leads to the massive printing of base money (new cash).
Hyperinflation, in most people minds, conjures images of trillion dollar Zimbabwe notes. But this image is simply the government’s reflexive response to the onset of hyperinflation, which is actually the loss of confidence in the currency. First comes the loss of confidence (hyperinflation), then, and only then, comes the massive printing to keep the government and its obligations afloat.
Zimbabwe vs. Weimar
In the case of Zimbabwe, a loss of faith in currency occurred before the printing occurred. The Weimar Republic is a different story.
In Zimbabwe, the Mugabe government initiated a “land reform” program intended to correct the inequitable land distribution created by colonial rule. Ultimately, Mugabe’s attempt to to bail out the poor at the expense of the wealthy is what triggered capital flight and loss of faith of the currency.
His reforms not only caused a flight of capital and human capital (the wealthy), they also led to sanctions by the US and Europe. In response, Mugabe turned on the printing presses but the loss of faith in the currency had already occurred.
In Weimar Germany, printing for war reparations kicked off hyperinflation. Wikipedia provides a good accounting in Inflation in the Weimar Republic.
It is sometimes argued that Germany had to inflate its currency to pay the war reparations required under the Treaty of Versailles, but this is misleading, because the treaty did not allow payment in German currency. The German currency was relatively stable at about 60 Marks per US Dollar during the first half of 1921.
But the “London ultimatum” in May 1921 demanded reparations in gold or foreign currency to be paid in annual installments of 2,000,000,000 (2 billion) goldmarks plus 26 percent of the value of Germany’s exports. The first payment was paid when due in August 1921. That was the beginning of an increasingly rapid devaluation of the Mark which fell to less than one third of a cent by November 1921 (approx. 330 Marks per US Dollar).
The total reparations demanded was 132,000,000,000 (132 billion) goldmarks which was far more than the total German gold or foreign exchange. An attempt was made by Germany to buy foreign exchange with Marks backed by treasury bills and commercial debts, but that only increased the speed of devaluation. The monetary policy at this time was highly influenced by the Chartalism, and was notably criticized at the time from economists ranging from John Maynard Keynes to Ludwig von Mises.
Hyperinflation is a Political Event
The commonality between Zimbabwe and Weimar is they are both political events. In Zimbabwe a political event triggered capital flight, in Weimar a political event started massive printing, triggering hyperinflation.
Interestingly, FOFOA’s commentary seriously weakens the hyperinflation case once one dives into the politics of the cause.
Can The Fed Cause Hyperinflation?
I do not think the Fed can cause hyperinflation and more importantly I am sure they would not if they could. The reason is “Hyperinflation Would End The Game”
- Hyperinflation by definition would destroy the currency and thus the banks
- Hyperinflation would destroy the wealthy and all their corporate bond holding
- Hyperinflation would destroy the Fed
- Hyperinflation would destroy the wealthy political class
That is what I meant by it would “end the game” and that is why the banks, the Fed, the politicians, and the wealthy would not let “the game” progress that far.
Fiat World Mathematical Model
The above addresses the question of “Would the Fed Cause Hyperinflation?”
“Could the Fed cause hyperinflation?” is a different question. I have my doubts.
To understand how powerless the Fed is, one needs to understand the difference between credit and money, how much the former dwarfs the latter, and what the Fed’s role is in getting banks to lend. I discussed those ideas in Fiat World Mathematical Model.
Unlike Congress, the Fed has no power to give money away. Nor would they do so if they could.
By the way, I did see Quantitative Easing, ZIRP, and various Keynesian silliness in advance and stated they would not work.
October 30, 2008: ZIRP Coming To Fed?
ZIRP did not help Japan and it will not help US banks either. In fact, the rate cuts appear to be counterproductive. However, one cannot rule out the Fed cutting rates to 0% anyway. Bernanke is in academic wonderland and appears to be hell bent on sticking with his models regardless of how poorly those models perform in actual practice.
March 06, 2009: Groping In The Dark’ With Quantitative Easing
Excuse me but has anyone looked at the success rate of Bernanke’s quick slash of interest rates from 5.25 to 0 and the fast $trillions Congress, Paulson, Geithner and Obama have thrown down various black holes?
Of course the Keynesian clowns will always come back with “It would have worked if only we threw money away faster”. They do every time. Krugman Still Wrong After All These Years is the perfect example.
January 02, 2009: How “Something For Nothing” Ideas Become Policy
Bernanke Correctly Judged Nothing
Bernanke considers himself an expert on the great depression and on the Japanese deflation as well. Trying to act quickly, Bernanke has come out blazing with 8 new policy tools, including the TALF, TARP, PDCF, ABCPMMMF, CPFF, TAF, and MMIFF to go on top of Open Market Operations, Discount Rate setting, and setting reserve requirements.
The result so far is deflation. The result in Japan was deflation.
There is only one way to defeat deflation and that is to not let the conditions that foster it to build up in the first place. What caused this deflationary bust is the credit boom that preceded it. What caused the great depression was the credit boom that preceded it. Hoover’s policies and FDR’s policies made the great depression worse.
Bernanke’s policies are going to make this depression worse. Yes, I used the word depression. It may not be as big as the great depression, but the word “recession” does not do justice to what we are in and what is coming down the pike.
I agree with Hussman that Quantitative Easing will not cause hyperinflation. Nor will “jiggling” of treasury yields, nor would a “slight but sudden blip” in commodity prices, nor would another $1 trillion stimulus effort.
Kevin Feltes and Jerome Levy, economists for the Jerome Levy Forecasting Center, have come to the same conclusion.
For an discussion of ideas from the Levy institute, please see “Contained Depression”
For Now, It’s Deflation
For a full discussion of where we are today please see Are we “Trending Towards Deflation” or in It?
Unlike hyperinflation, deflation does not “end the game” (destroy the currency). The Great Depression and Japan both provide proof enough.
Given that hyperinflation is a complete loss of faith in currency, tangible goods, any tangible goods must by definition rise exponentially in such a situation. Yet amazingly many hyperinflationists are bearish on housing.
Hyperinflation accompanied by a housing collapse is simply impossible – by definition.
What Could Cause Hyperinflation?
As noted above, the Quantitative Easing will not cause hyperinflation. Moreover, it is doubtful the Fed can cause it at all. The Fed cannot give money away nor can the Fed force banks to lend or consumers to borrow. Those who disagree must still address the difference between theory and practice.
Unlike the Fed, Congress could give money away.
I do not know if giving everyone in the US $60,000 would do it or not, but announcing a plan to give everyone $60,000 a month indefinitely would sure do it.
How likely is that?
The answer is 0%. Congress struggles right now extending unemployment insurance. There is little political will for more stimulus. The next Congress is a guaranteed bet to be more conservative.
To be sure, more stimulus and more Quantitative Easing are coming but the latter does not matter and the former will be in insufficient quantity.
Theory vs. Practice
Please note that banks do not want hyperinflation or even massive inflation. The reason is simple: Banks will not want to be paid back with cheaper dollars, especially worthless dollars, and Congress is beholden to itself and the banks.
Hyperinflation could theoretically come from massive sustained political will to bail out the little guy at the expense of the banks, the wealthy, and the political class. However, unlike Mugabe and Zimbabwe, neither the banks nor the Fed nor the political class wants to bail out the poor at the expense of the wealthy.
Indeed, Bernanke’s, Paulson’s, and Geithner’s actions to date have done the exact opposite!
We have bailed out the banks at the expense of the ordinary taxpayer (keeping the little guy in debt).
This is what it comes down to: In theory, Congress can easily cause hyperinflation. In practice, they won’t, and neither will the Fed. As Yogi Berra once quipped “In theory there is no difference between theory and practice. In practice, there is.”
Mike “Mish” Shedlock