[A-List] Get ready for Obama's coming hyperinflation

[Michael Hudson]

Henry makes good points.
    I¹ve been drafting an article along similar lines:
Michael

Why debt-leveraged asset-price inflation ends in debt deflation

            The present crash is more than just a bubble bursting. The
financial system was structured to fail. The bubble was a way to postpone
the debt crash by a policy of inflating asset prices to provide collateral
against which debtors could borrow to pay their bankers. This is the essence
of Ponzi schemes (now called Madoff schemes): borrowing the interest to pay
lenders or investors. Retirees were to be paid out of stock-market gains.
Savers too. The ³magic of compound interest² could be reality only as long
as the economy also ³magically² produced a surplus large enough to cover the
exponentially growing volume of debt ­ not only bank debt but pension debt,
Social Security debt, retirement funding.

            This is not a monetary problem as such. It is a debt problem. It
appears as a fiscal problem to the extent that taxes on the financial sector
and wealthy creditors are cut, stifling the real economy from producing the
surplus that is needed to pay them.

            Take the past year¹s jump of nearly $10 trillion in U.S. federal
debt, for example. This giveaway is unparalleled since the government gave
away vast landholdings to the railroad barons in the 1860s. Yet some
orthodox financial observers have expressed surprise that this particular
form of ³debt financing² is not inflationary. Many consumer prices are
drifting down, and wages and many asset prices are plunging, especially for
real estate. Instead of the government ³spending money into circulation² by
hiring employees and buying goods and services, it simply handed over
Treasury bonds to the banks  (the largest political campaign contributors).
The expense of paying interest on this debt is to be borne by the ³real²
economy of employment and production ­ that is, by ³taxpayers,² in contrast
to the Finance, Insurance and Real Estate (FIRE) sector receiving public
handouts and which has obtained tax exemption for most of its revenue. This
state of affairs has led stock prices to soar, at least temporarily since
March 2009, headed by bank stocks benefiting from the government bailout.

            Academic theory has little to say about this state of affairs.
The monetary system is a topic that attracts cranks, especially
philosophically oriented individuals who speculate abstractly about how to
devise a ³unit of account² or standard of measurement to provide ³stable
purchasing power² ­ and therefore presumably, monetary stability and
economic fairness. Most such theorizing aims at making money ³neutral,² to
facilitate the ³wheels of commerce² while ³preserving purchasing power.² A
fatal over-simplifying assumption is that prices tend to rise and fall
together at the same rate ­ asset prices for real estate, stocks and bonds,
and commodity prices for fuel and food, manufactures and other consumer
goods. In practice, the focus is on the consumer price index and wages. Yet
the dynamics that determining prices for property and financial assets are
altogether different from the forces determining consumer prices and wages.

            The most important starting point should be recognition that
money is debt. The financial system is a credit system, which is to say, a
debt system. Money is whatever unit debts are denominated in. The State
Theory of Money holds that governments give value to money by accepting it
in payment for tax debts and fees. In Bronze Age Mesopotamia silver played
this role, but with a fixed price schedule with barley and other means of
payment for public-sector transactions and account keeping. The main source
of economic instability stemmed from the fact that this ³hard² commodity
money was plugged into the system of debts to private- and public-sector
creditors. Most debts in early times were owed to the public sector, as
taxes or user fees. In antiquity, the public sector was the major creditor
as provider of public services for user fees and as levying tribute and
taxes (most ³taxes² originated as tribute). Only in modern times has the
public sector become a debtor to private creditors. And in today¹s twist,
the national Treasury is bailing out these creditors ­ a creditor to the
creditor class, albeit as a pure giveaway.

            The most important characteristic of debts is that they
generally accrue interest. Private creditors receiving this interest ­
³savers² ­ normally recycle it by finding yet new borrowers in an
exponentially growing dynamic. So the monetary system tends to expand the
volume of savings and debts. This means that debtors as a whole tend to owe
creditors more and more money. This leads to increasing economic
polarization between creditors and debtors. When carrying charges on the
economy¹s rising volume of debts can¹t be paid, a financial crash ensues.
Creditors foreclose on the property of debtors. It does not matter whether
the debts in question are measured in gold or paper or some abstract,
artificially administered ³market basket.²



On 5/23/09 12:56 AM, "Henry C.K. Liu" <hliu at mindspring.com> wrote:

> The conventional terms - inflation, deflation, are no longer adequate for
> describing the overall effect of Fed-released excess liquidity. This is
> because the new money went to reflate a burst debt-driven asset price bubble.
> But the new money is not going to consumers in the form of wages to restore
> demand, but instead going only to debt-infested distressed institutions to
> allow them to deleverage. Thus deflation in the equity market (falling share
> prices) will slow down, while aggregate wages will continue to fall to further
> drastically reduce demand. Falling demand will deflate commodity prices, but
> not enough to restore demand because wages are falling faster. When financial
> institutions deleverage with free Fed money, the creditors receive the money
> while the Fed assumes the liability. Deleverage reduces cost while increases
> cash flow to allow zombie institutions to return to profitability with
> unearned profit. Thus we have profit inflation with price deflation in a
> shrinking economy. What we will have is not Weimar Republic type
> hyperinflation, but zombie financial institutions turning nominally profitable
> in a collapsing economy. The danger is that this unearned nominal profit is
> mistaken as a sign of recovery. Normally, hyperinflation favors debtors by
> destroying the value of liabilities owed to creditors. Deleveraging with Fed
> money cancels debt a full face value with money that has not been earned by
> anyone. That kind of money is toxic in that the more valuable it is ( with
> increasing purchasing power to buy more),  the more it degrades wealth because
> no wealth has been put into the money to be stored, thus negating  the
> fundamental prerequisite of money as a storer of value. This is not demand
> destruction, but money destruction as a restorer of value while it produces a
> negative effect on demand.
> 
> Thinking about the value of any real asset (gold, oil etc) in dollar terms is
> misleading. One should think about the value of the dollar in asset (gold)
> terms, because asset (gold) is wealth. The Fed can create money but it cannot
> create wealth.
> 
> Excerpt from my article: Central Banking Practices Monetarism at the Expense
> of the Economy
> 
> Central bankers are savvy enough to know that while they can create money,
> they cannot create wealth. To bind money to wealth, central bankers must fight
> inflation as if it were a financial plague. But the first law of growth
> economics states that to create wealth through growth, some inflation must be
> tolerated. The solution then is to make the working poor pay for the pain of
> inflation by giving the rich a bigger share of the monetized wealth created
> via inflation, so that the loss of purchasing power from inflation is mostly
> borne by the low-wage working poor, and not by the owners of capital, the
> monetary value of which is protected from inflation.
>   
> Inflation is deemed benign as long as wages rise at a slower pace than asset
> prices. The monetarist iron law of wages worked in the industrial age, with
> the resultant excess capacity absorbed by conspicuous consumption of the
> moneyed class, although it eventually heralded in the age of revolutions. But
> the iron law of wages no longer works in the post-industrial age in which
> growth can only come from demand management because overcapacity has grown
> beyond the ability of conspicuous consumption of a few to absorb in an
> economic democracy.
>   
> That has been the basic problem of the global economy for the past three
> decades. Low wages have landed the world in its current sorry state of
> overcapacity masked by unsustainable demand created by a debt bubble that
> finally imploded in July 2007. The whole world is now producing goods and
> services made by low-wage workers who cannot afford to buy what they make
> except by taking on debt on which they eventually will default.
> 
> http://www.henryckliu.com/page188.html
> 
> Henry C.K. Liu
> 
> Sabri Oncu wrote:
>>  
>> I doubt that we are facing an imminent hyper-inflation. It may happen
>> in due time because of the large amounts of money pumped into the
>> system, but not in the next two-three years as far as I can see. I may
>> be wrong, of course, but I seriously doubt that we are facing an
>> imminent hyper-inflation. What I am more worried about is deflation,
>> which seems to be what is happening at the moment. The US unemployment
>> is about to exceed 10% by optimistic forecasts,  so what we are facing
>> is income destruction of the potential "consumers", which inevitably
>> will result in continued demand destruction. When demand disappears,
>> how the heck can the prices go up"? Further, this demand destruction
>> is not just a US phenomenon: demand is being destructed across the
>> globe.
>> 
>> Sabri
>> 
>> 
>>   
> 


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