The Road to Hyperinflation
So our Fed is ostensibly basing their interest rate decisions on the CPI. The CPI is a lie. It no longer tracks the actual increase in prices that we see every day when we go to buy the items we buy every day.
The government is printing money at a furious pace. In 2000 the debt was 5.6 trillion. With the bail-out bringing us to 11.3 trillion, we are more than double the debt in 8 years, and by extension, the money supply is heading for double too. In our fiat system, debt is money. The government has “printed” 6 trillion fresh US Dollars in the last 8 years, an amount roughly equal to the amount of US Dollars that existed in the entire world in 2000.
What’s the worst case scenario? I think to answer that question one needs to look at the interest rates. What will happen when the nominal rates are way lower than the effective rates of inflation? The implication of this would be that one could actually profit by carrying debt that was issued at incorrectly low rates. Because increased debt means increased supply of money, we have a system with positive, runaway, feedback.
September 21st, 2008 at 3:12 am
[...] Road to Hyperinflation Gigs Shrugged » Blog Archive » The Road to Hyperinflation I was going to post this in a message here, but I figured the wider world might be worth preaching [...]
September 22nd, 2008 at 11:15 am
I generally agree with what you are saying here, but the claim of 6 trillion fresh bucks in the last 8 years isnt quite accurate. The current debt is 9.6 trillion. On Sept 7, 2000 when the National Debt Clock in NYC was taken down, the debt stood at 5.7 trillion. (http://archives.cnn.com/2000/US/09/07/debt.clock/). So about 3.9 trillion have been added to the debt since then. The current financial bailouts will likely cost us another 1trillion, MAYBE 2 trillion by the time we’re done (and that wont be until we are well into the next term). When the dems say “Doubled” they are using the term rather loosely (as if a 60% increase = a 100% increase, but whats 40% between friends, right?)
There’s also some importance in paying attention to what the numbers really mean.
For instance, the Bear Stearns takeover by JP Morgan is being said by the dems to have “cost the taxpayer $76 billion”, when it has done nothing of the sort, the gov’t only guaranteed a loan for JP Morgan to take over Bear Stearns. It didn’t cost the taxpayer anything for the government to do that. That’s like saying when you take out a GSL for college, you are borrowing from the taxpayer. Nothing of the sort, you borrow from a bank, and the govt guarantees the loan (that does not mean the govt guarantees they will pay it if you default, it means the government guarantees to the bank that they will make you pay it).
If its the Federal Reserve taking over something, keep in mind the Fed is NOT part of the federal government, its a private bank.
As for FDIC taking over banks, thats its job as a quasi-public insurance company. Banks tend to fail because they have been taught over time that they can always get a bailout from uncle sugar if the need arises, so they take excessive risks. If you eliminate govt subsidized deposit insurance, banks would act a lot more cautious in their lending.
Another contributing factor to the whole mess was that the mortgage crisis was caused by the democrats and race-extortionists demanding that banks lend into high-risk neighborhoods in order to expand home ownership, particularly among minorities. The banks caved in and made a lot of high risk mortgage loans that were defaulted on rather quickly. That straw caused a vicious cycle of banks calling in loans to reduce debt footprint and forcing more people into default. Same pattern we saw in 1988. Only this time the mortgages had been offloaded onto wall street investment funds as a means of banks reducing their risk. Wall Street didnt know what the hell they were doing with this new fangled investment instrument, and few people understood the fine print.
In the end, homeownership is going to rebound back to its historic average (maybe below it for a while) resulting in fewer people owning homes. Nice unintended consequence of an attempt to boost home ownership by govt fiat, and proof of why government intrusion into markets is a dumbass idea.
September 22nd, 2008 at 4:32 pm
5.7 trillion to $11.3 trillion is almost exactly double. We’ll be at 11.3 trillion after this more recent bail out round is done.
September 25th, 2008 at 10:53 pm
IntLibber Brautigan Says:
“Another contributing factor to the whole mess was that the mortgage crisis was caused by the democrats and race-extortionists demanding that banks lend into high-risk neighborhoods in order to expand home ownership, particularly among minorities.”
Sorry, the democrats alone did not cause this. This was caused by several factors over the last 15 to 20 years. BOTH parties are to blame, however the Republican party is responsible for most of the decisions that were made that led to the current sorry state of affairs.
cause 1: Post dot-bomb/9-11 fed reserve interest rates being held below inflation rate in order to pump up the economy. The fed res interest rate was set low because companies were shutting down due to losses. The Regan mantra is Trickle Down. e.g. create money, loan it out cheap and business will boom. This was a direct implementation of trickle down economics.
cause 2: Speculation driven pricing in “attractive” middle class level housing of California, Nevada, New Mexico, and Florida. “just flip it” became the mantra of these areas. That’s speculation for you. 1 in 3 homes in California were flipped within 6 months since 2002.
cause 3: Lack of non-monetary services growth in the US economy (this one is important) By 2007 over 50% of the US GDP is derived from financial services. Where’d all the real economy go? (China, India, Taiwan.. take your pick).
cause 4: Refusal by the SEC to regulate Credit Default Swaps. AIG was one of the first companies to issue CDS. When other companies saw the “lucrative” fees generated by a new class of insurance that wasn’t regulated, they all piled on to get the premiums. It was a bit like Bob bank and John Savings issued insurance to each other’s loans. On the books, the fees for each issuance was recorded and the assets that used to be valued at market pricing were then recorded as 100% par value. Magic! Pre pay your losses. Only one problem. When the guarantees were issued, most companies reserved barely 0.05% of the payable value against losses. After all house values never go down, right?
cause 5: Refusal by the Federal Reserve and other agencies to enforce existing Investment Bank regulations of 8 times leveraging limits after the 2001/02 recession. (bear sterns did 38 times leverage as an example) In 2003 (I think, may be a year off) the fed granted “special expemption status” to all 5 bad boys. No longer were they limited to a mere 12x leveraging. They got the leveraging after making special request based on “market returns were insufficient to guarantee meeting the historical return averages for the next year”. They apparently thought the lack of a real economy under all that banking was a temporary thing.
cause 6: Refusal by the Federal Reserve to enforce minimum cash equivalent balances of banks. Some dropped to 0.2% reserves from the normal 5% requirement. Banks were also having troubles with losses starting to eat up their mandatory cash reserves. So they lobbied and got congressional approval in 2003 to lower the fractional reserve requirement to pretty much nothing in order to continue to make the profit margins tht they were accustomed to in the 90’s.
cause 7: Mortgage Brokers, Realty Agencies, and appraisers willingly, and knowingly, inflating home and income values in order to get loans generated and sold. The FBI is investigating 54 corporations and 1,400+ individual brokers, agents, and appraisers for fraud. It’s so rampant that the FBI has put fully 1/3rd of their entire staff into interviewing and documenting the paper trail. They expect to indite most (if not all) of the individuals and corporate boards. This will take YEARS to work through just the blatant violations. They aren’t even touching the “possibles” for now.
cause 8: Refusal by the SEC to regulate the 3 ratings agencies that all investment houses relied on to review financial products.
cause 9: Faked and seriously (and proven) broken rating models served up as “due diligence” by Fitch, S&P, and Moody’s in order to garner “rating sales” income from financial issuing businesses. None of the companies were willing to adjust ratings in an expeditious way once things started smelling bad in Jan 2007 as the first wave of mortgage defaults began to exceed the historical averages of “prime mortgages”. The ratings agencies had no history of default rates for subprime or alt-a, so they used the default rate of prime mortgages as a starting point.
I probably missed a few things but the core causes are here. In essence, lots of money was printed up in order to “inflate” our way out of the credit destruction triggered by the dot-bomb crash and the foolish panic from 9-11. All that money had to go somewhere. All that lost profit from the brewing recession had to be made up somewhere or the public would know we were at the end of the bull run. So, it went to banking services, credit cards, loans for anything and everything. Greenspan/Bush/Repubs KNEW that the only way to show growth was to create as much financial activity as possible.
This is the result of a lack of oversight, criminal exploitation of a bubble, and attempting to stop a natural market downturn cycle.
Period.
oh, by the way, I’m SICK AND TIRED of every republican conservative blaming everyone but themselves for this mess. Fucking lump it already. EVERYONE caused this. That includes YOU republicans.
November 20th, 2008 at 7:36 am
Ahzz,
What makes you think I’m a republican? I am a libertarian, thank you very much. The only distinction I make between republicans and democrats most of the time is, come the revolution, republicans will be hung a little lower on the tree simply because they never treated gun owning freedom-lovers like myself as threats to national security, but democrats always have. Now that thats said, here are the facts: after the 2004 elections, dems pushed things through, but responsible republicans, like Senator Sununu, tried to roll back the Community Reinvestment Act and require fanniemae and freddiemac actually base their lending decisions on something sensible, like, say, a CREDIT SCORE, rather than the borrowers zip code, race, age, etc etc. The democratic majority beat this down. Much could have been done in 2005 to prevent this debacle. The GOP TRIED. The DNC only made it worse.