Monday, May 13, 2013

The missing Bond Vigilantes are now Currency Vigilantes

The central banks are so aggressive on buying bonds that they are effectively controlling the price of the bonds.   Because of this investors are not shorting bonds but instead shorting the currency.   As the central banks print like crazy to control interest rates on bonds they devalue the currency.   So while there are not many Bond Vigilantes, there are Currency Vigilantes.  

16 comments:

  1. Hi Vincent, I just discovered this site. Very interesting stuff. I'm wondering about the 40% deficit, 80 % debt rule. Clearly Japan is below in the deficit and way above in the debt but you still think it might be time for hyperinflation? Do you think it would be possible to have a combined formula of debt and deficit as a pedictor of hyperinflation taking into account if one is below and one is above these levels?

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  2. Thanks. I think that more than 40% of Japanese government spending is deficit spending. I think Japan is headed for hyperinflation. See post before this one. I also have a post with some ideas to look into for trying to predict hyperinflation.

    http://howfiatdies.blogspot.com/2012/05/predicting-timing-of-hyperinflation.html

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  3. Thanks for the reply. This is crazy. I googled last years numbers but when I googled this year after your reply it turns out they are planning a deficit of 46%. Wow, I wasn't aware of that. Any advice how to play this? There are leveraged ETFs for short yen, short JGB, long nikkei for instance. I think long nikkei may have bigger potential than the others.

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  4. Vincent, I'm trying to understand which number is the acurate one for the Japaneese budget deficit. I've found this:

    http://www.forbes.com/sites/stephenharner/2012/10/16/imf-raises-alarms-over-japans-dangerous-fiscal-course/

    "The scale of the government debt problem is becomes depressingly clear in the IMF Fiscal Monitor data on “gross financing needs” for the years 2012 and 2013. Again, as a percentage of GDP, we have “maturing debt,” “budget deficit,” and “total financing.” For Japan, the figures, respectively, for 2012 are 49.3%, 10%, and 59.4% (i.e., the government needs to access the market for funds equivalent to 59.4% of GDP to keep running in this year only). The estimates for 2013 are 51.4%, 9.1%, and 60.4%."

    Which number should be seen as the deficit number?

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    1. I believe the Japanese government is spending about twice what they get in taxes. So 50% of their spending is deficit spending.

      For hyperinflation the amount that is "maturing debt" and "total financing" are also interesting. If people stop buying bonds then the central bank would end up buying lots with new money.

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  5. Hi Vincent great work you really know your monetary science i have often wondered about inflating your debt away ,which leads me to my question .If i borrow 500k to buy a house and the currency is devalued you essentially wipe out your mortgage debt shouldnt i be loading up on debt or do banks have a fine print that says in the event of a hyperinflation you will need to pay the mortage debt based on whatever the new currency will be (I happen to believe that it will be the SDR courtesy of the IMF) or should i load up on gold instead and buy a house for a small handful of gold in the peak of the hyperinflation ,i have read about wymar republic of germany this was the case where the elites bought up blocks of houses during the peak of their hyerinflation with just handfulls of gold .thanks for your great work

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    1. Thanks. There have been hyperinflation cases where they indexed the principle balance on loans with inflation. But usually by that time it is already wiped out. My guess is that if you can get a low fixed rate mortgage on some property that you will be very happy with your deal a few years from now.

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    2. thanks for reply ok say i buy a house does the house inflate with hyperinflation and if so how would one be able to keep up with the property taxes . my house that i bought for 500k would it be say 5billion then the property tax on that would become a liabilty would it not ? I'm a little confused about purchasing a house now or wait till shtf when there is blood in the streets i have gold and silver and cash to do lots with just dont really know where to put it

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    3. The reason for buying now is that the value of the mortgage goes to zero. You will still have to deal with property tax and it would be best to be in someplace with low or no property taxes. The price of property may actually go down as interest rates first start going up. People can afford to pay a higher price when loans are at 4% than when loans are at 15%. So maybe you are better off to be in gold now and then buy later. If you can buy a house for 5% down then you have great leverage and so maybe that is the way to go. It is hard to say. You have to make your own choices and just do what you think is best for you.

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  6. thanks again . I should point out that I am hungarian and am well aware how hyperinflation can ravage your savings as my grandfather lost almost everything he had in the 1925-26 hyperinflation during a conversion of the Korona to the Pengo currency and he learned how the wealthy survived because they had gold and silver bullion ,he then aquired metals bullion from then on only to enter hyperinflation in 1945-46 but this time he actually became wealthy because he purchased assets like land and a car (he purchased a nice mercedies benz for 1 once gold coin and a few sliver coins lol) the car at that time was an extremely hi end car for that era and the man he purchased it from had no money left or any bullion but had a family to feed thus having to sacrifice that car. Grandpa is the reason why i buy metals now .I also happen to think that this time around it will be a global hyperinflation because almost all nations base money supply has increased dramatically since 2008 and we have never had that before ,only countries have hyperinflated I also think that the BIS and IMF are working or moving towards a single currency for the western world ie....north america europe via the SDRs which coincidently my country Canada has 9 billion SDRs on reserve (I noticed that there is a currency converter on the web for SDRs) which i presume the canadian government sold most of its gold to the IMF in exchange for SDRs .this may all sound absolutly ridicules as i have been told but my group of economic buddies but all the evidence points to a major monetary shift in our lifetime .this would greatly increase the soveriegn control to a central location which would greatly increase control to banks (BIS)and not governments which is the elitist dream .eventually the eastern world may have to capitualate to the BIS but i am not sure how that may play out due to the complexity of the situation What are your thoughts on this senario would love to hear your opinion

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    1. That is very cool about your grandpa. Yes, I too think we will end up with global hyperinflation. It is clearly going to be a major monetary shift but it is not really clear what the end result will be. I don't see something like SDRs taking over. Maybe gold or silver, at least between countries. Ya, not clear how it will play out but this is one of those times where holding gold or silver seems much better than holding paper money.

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  7. In the bond market, prices move inversely to yields. When investors perceive that inflation risk or credit risk is rising they demand higher yields to compensate for the added risk. As a result, bond prices fall and yields rise, which increases the net cost of borrowing. The term references the ability of the bond market to serve as a restraint on the government's ability to over-spend and over-borrow.

    Regards,
    William Martin
    Financial Claims Made Simple

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    1. Krugman has made a big deal out of the fact that today there do not seem to be Bond Vigilanties. That they have gone missing. When the central banks get to this level of money creation they can really control interest rates, but then they lose control of the value of their currencies. So while it might not make sense to bet that Japanese interest rates go up, it probably makes sense to bet that the value of the Yen goes down.

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  8. Anonymous, remember that with any asset you buy, you will have to pay "inflation" tax.
    That is, if you buy a house for $100,000, and you sell it later for $2,000,000, you will have to pay tax on a profit of $1,900,000 at whatever the going tax rate is at the time.

    So, the more you profit from inflation, the more tax the government will "steal" from you.

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    1. Long ago I moved to a taxhaven and renounced my US citizenship. So while that is true for most people, it is not true for me. :-)

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