[R-G] [BillTottenWeblog] Re: Get ready for Obama's coming hyperinflation

[Bill Totten]

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

By Sabri Oncu, at 8:41 AM, May 24, 2009
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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

By Henry C.K. Liu, at 8:44 AM, May 24, 2009
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Henry makes good points. I've 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 "magic of compound interest" could
be reality only as long as the economy also "magically" 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 year's 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 "debt financing" 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 "spending money
into circulation" 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 "real" economy of employment and production - that
is, by "taxpayers," 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 "unit of account" or standard of measurement to provide
"stable purchasing power" - and therefore presumably, monetary stability
and economic fairness. Most such theorizing aims at making money
"neutral," to facilitate the "wheels of commerce" while "preserving
purchasing power." 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.

(Continued in next comment)

By Michael Hudson, at 9:03 AM, May 24, 2009
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(Continued from previous comment)

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
"hard" 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 "taxes" originated as tribute). Only
in modern times has the public sector become a debtor to private
creditors. And in today's 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 -"savers" -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 economy's rising
volume of debts can't 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 "market basket."

By Michael Hudson, at 9:04 AM, May 24, 2009
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Henry:

> > This is not demand destruction, but money destruction as a restorer
of value while it produces a negative effect on demand.

The end result of which is demand destruction, is it not? By the way,
what Henry described is known as debt overhang: the creditors get most
the newly injected money and the rest gets almost nothing: businesses
continue to bankrupt, lay-offs and hence unemployment increase, incomes
decrease, demand for consumption goods go down and hence consumption
goods prices decrease, more businesses go bankrupt and the cycle
continues until we hit a bottom.

What is being mistaken as recovery is what Henry said: "The danger is
that this unearned nominal profit is mistaken as a sign of recovery,"
where the unearned nominal profit he mentioned is the money that goes to
the creditors. This whole thing is about bailing out the creditors. To
bail out the economy, you need to give that money to those who would
spend them, that is, to the people, not to the creditors. And until
something starts to increase the incomes of the people, the fears of
inflation are unwarranted.

Sabri

By Sabri Oncu, at 9:09 AM, May 24, 2009
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