Hyperinflation
July 25th, 2008 by 
reality
In Zimbabwe, one of these won’t even buy a loaf of bread. This is what happens when monetary authorities start printing to support government spending that is more than the country can sustain. It means that any money people had becomes worthless. To those of us who are investors, this is the scary part of holding money. Its value is completely dependent on the restraint of government. And we all know how strong that is. Not. So we watch it like a hawk. Image from tomchao.com.
Posted in Inflation & The Dollar, Rogues and Rascals, The Fisc | 
July 25th, 2008 at 8:58 pm
National Australia Bank just announced 55% American housing loan losses. I look forward to smoke, mirrors, and perhaps a stick save or two next week.
http://www.businessspectator.com.au/bs.nsf/Article/NAB-will-shock-Wall-Street-GV4M7?OpenDocument&src=stf
July 25th, 2008 at 11:21 pm
P.S. Two more banks failed today. I wonder what the next surprise will be.
http://biz.yahoo.com/ap/080726/bank_takeover.html
July 27th, 2008 at 12:23 pm
Sorry for the delay. Spam filter caught you.
July 28th, 2008 at 7:58 am
Personally, I found it relatively easy to identify the NASDAQ and housing bubbles and predict prices will eventually return to equilibrium. All you need to do is look at a graph plot.
Inflation/deflation is really difficult for me to predict. Perhaps the root of the problem is the definition of inflation. Housing, taxes and private schooling for my kids comprise 90% of my cash flow. These have already achieved 200%-500% inflation in the past few years. As you have stated in the past, all of these home loans (and HEL) created new money which spurred this inflation.
During this time, however, the gov’t insisted inflation was in check (in fact they claimed deflation was a risk a while back). I guess it’s because they don’t count homes, taxes and private school tuition. If bread increases from $1 to $2 and gas increases from $4 to $5, it won’t really make a dent in my expenses.
So, will we have hyperinflation? I don’t see it. I see recession and depression more likely. No more creating money thru home loans (and HEL). In fact, foreclosures and writedowns reduce the $ supply.
Best guess is -
Stagflation (where inflation is on gas and food, housing declines, taxes increase) - 90% probability.
Depression - (everything deflates because everyone is out of work) 10% probability
In either case, I think cash will be king in the next 2 years. Those with cash 2-5 years from now will be able to get some pretty good buys on securities and real estate.
July 28th, 2008 at 1:09 pm
The big wigs just announced a new covered bond market backed by mortgage pools.
http://www.marketwatch.com/news/story/four-big-banks-agree-kick-start/story.aspx?guid=%7B91AC7737%2DBDEC%2D4179%2DB208%2D8345B0F1F741%7D&tool=1&dist=bigcharts&
Wikipedia has this to say about covered bonds.
“Covered bonds are debt securities backed by cash flows from mortgages or public sector loans. They are similar in many ways to asset-backed securities created in securitization, but covered bond assets remain on the issuer’s consolidated balance sheet.
Essentially, a covered bond is a corporate bond with one important enhancement: recourse to a pool of assets that secures or “covers” the bond if the originator (usually a financial institution) becomes insolvent. This enhancement typically (although not always) results in the bonds’ being assigned AAA credit ratings.”
Isn’t this another name for an MBS? How will it fix anything?
July 28th, 2008 at 2:24 pm
From the same Marketwatch article about covered bonds: “covered bonds will be attractive to investors and will be a better tool of getting liquidity into the system”.
First impression - a positive initiative. Only unable to understand, how that covered bonds will became tradeable (and so - liquid) better, then current over the counter instruments. On a base of credit ratings? Credit scores? Mortgage LTV rates?
Effective market would act as price discovery mechanism. How can a value of basket of mortgages can be discovered on the market better, then carefully analyzing every single mortgage?
July 28th, 2008 at 2:34 pm
Another financial innovation. Another shell for the game. The pea won’t under this one, either, when the buyer comes to look.
The question is, how much capital will need to be allocated to cover these bonds? From where is the capital coming?
July 28th, 2008 at 4:55 pm
Speaking about inflation/deflation, I possibly agree with Mike Shedlock (Mish) - money base is not growing.
http://globaleconomicanalysis.blogspot.com/2008/07/tms-truer-money-supply.html
Mish states credit is contracting, so he expects several years of deflationary contraction, recession and reverse of current price inflation trends.
I agree with credit deflation thesis, but have strong doubts about stabilization of commodity prices. Discredit of financial systems from my point of view unavoidably leads to hoarding of real resources and market protectionism worldwide. International currency reserves increasingly are to be used for provision of natural resources and agricultural products, and this can lead to further price inflation of commodities.
Read somewhere, now unable to find a link - China, it seems, is subsidizing ~50% of price of fuel. Quite good explanation on Econobrowser blog today:
“Oil prices and economic fundamentals”
http://www.econbrowser.com/archives/2008/07/oil_prices_and.html
(excerpt:)
“Here’s the framework I would propose for answering the question of how much the price of oil should have risen since 2005– the price of oil needed to go up by whatever it took to persuade places like the U.S., Europe, and Japan to reduce their consumption by the amount that China, the newly industrialized countries, and oil-producing countries were increasing theirs.”
I have all reasons to believe national and local governments of US an EU countries will try to deficit-spend-out from current difficult conditions uptill even more adverse commodity price shock. At that point, I expect some money printing, a jump of real interest rates, a lot of volatility and political tensions.
Where to hide for investor? A theme to separate post on this blog, perhaps.
July 28th, 2008 at 5:18 pm
“Where to hide for investor?”
The banks are looking for patsies to take their losses and the the government is aiding them. Meanwhile, I am trying to find a safe hiding place too but the prospectuses that I read scare the living daylight out of me.
GLD doesn’t audit their subcontractors and isn’t responsible if their subs “lose” anything. FXF says they invest in ambiguous swiss franc investments (mortgages anyone) and isn’t responsible for anything either. Brokerage street name pools may not hold enough shares to match what their investors think they own. Now you can’t short the biggest naked shorters in town and more brokerages have stopped issuing share certificates.
Sadly, everything is an entry in a computer and if a financial entity goes bankrupt we are all left standing in line at the bankrupcty court for our share of what is left. I doubt that the execs will leave many crumbs.
No wonder financial institutions don’t trust each other.
P.S. Can I take the blue pill now?
July 29th, 2008 at 10:05 am
In my previous comment (#8) I mistakenly used term “money base” instead of “supply of money”.