In previous crisis people have rushed into dollars and the dollar became stronger. This time the dollar is not getting stronger but gold is. Some point, well before hyperinflation, I expect gold to be more of a safe haven than the dollar. I think we have reached that point. It may also be that the trouble in OPEC countries risks weakening the support the dollar gets from oil being priced in dollars. And clearly it can also be both.
We are starting to get clear signs of price inflation and I expect we will get more. As signs of inflation go up interest rates will go up too. Rising interest rates are bad for bonds, stocks, and real estate. Commodities, gold, and silver may be the only safe havens.
Sunday, February 27, 2011
Thursday, February 24, 2011
Abandon All Hope
After the US voters showed a clear interest in government having some fiscal restraint congress can only find $74 billion to cut out of a budget of $3,800 billion. For this and other reasons things are going to get really bad. These cuts will probably really end up smaller.
Over the last two months the 2011 deficit estimate has gone from $1.267 trillion to $1.4 trillion and then $1.645 trillion. So the best estimate of the size of the deficit has gone up $378 billion in the last 2 months when they have been promising cuts. Every 1% increase in interest rates adds around $140 billion per year in interest payments on the debt. Interest rates are going up. These $74 billion cuts are nothing, the deficit will keep going up.
The printing of money is out of control and there is no longer any reason to hope that it will be controlled. The US has past its Havenstein Moment. At this point hyperinflation is nearly certain. As they say when a hurricane is coming, "PREPARATIONS TO PROTECT LIFE AND PROPERTY SHOULD BE RUSHED TO COMPLETION."
Over the last two months the 2011 deficit estimate has gone from $1.267 trillion to $1.4 trillion and then $1.645 trillion. So the best estimate of the size of the deficit has gone up $378 billion in the last 2 months when they have been promising cuts. Every 1% increase in interest rates adds around $140 billion per year in interest payments on the debt. Interest rates are going up. These $74 billion cuts are nothing, the deficit will keep going up.
The printing of money is out of control and there is no longer any reason to hope that it will be controlled. The US has past its Havenstein Moment. At this point hyperinflation is nearly certain. As they say when a hurricane is coming, "PREPARATIONS TO PROTECT LIFE AND PROPERTY SHOULD BE RUSHED TO COMPLETION."
Wednesday, February 9, 2011
Commodities Already Priced in Gold
The last people to switch to the new money will get the worst deal.
Note that 17.5% interest compounded annually for 10 years will result in something being 5 times the original size. This kind of inflation in commodities will eventually feed through to everything else.
Tuesday, February 1, 2011
This is not what a recovery looks like.
Monday, January 24, 2011
Hussman + Mish => Hyperinflation
Today's Hussman article has a very good explanation of how money velocity, interest rates, quantity of money, and prices relate to each other. It also shows the fix the Fed is in. When interest rates go up people won't be so casual and slow with their money, so the velocity of money will go up. If other things stay the same, this would cause prices to go up. He calculates that if treasury bills get to 4%, and the Fed does not take out money, prices will be more than double. So he figures the Fed must withdraw lots of money. To do this the Fed must sell the debt it recently bought to get the money supply back down where it used to be.
Mish recently noted that if the Fed sold (or marked to market) the debt they bought over the last few years after interest rates go up they would have a huge loss. To a good approximation a 30 year bond is worth half as much if the market interest rate doubles. Mish says the Fed can just hold the debt till maturity so it won't take a loss. The Hussman article show the flaw in this thinking, the Fed must sell to withdraw money when interest rates go up or there will be huge inflation.
Like other banks, the Fed currently operates on mark to fantasy accounting. They will not really be able to sell their assets for anywhere near what they paid, so they can not withdraw all the money they created when they bought these. The other problem is that the Fed is monetizing about $100 billion per month and the Federal deficit is about $100 billion per month. If the Fed stops buying debt and starts selling, how can they find enough buyers? So I don't believe they will actually sell any, there is no real exit strategy.
If you put Hussman and Mish together, neither of which is a hyperinflationist, you get close to the hyperinflationist case. I highly recommend reading both of these articles and thinking about the implications of the two together.
Mish recently noted that if the Fed sold (or marked to market) the debt they bought over the last few years after interest rates go up they would have a huge loss. To a good approximation a 30 year bond is worth half as much if the market interest rate doubles. Mish says the Fed can just hold the debt till maturity so it won't take a loss. The Hussman article show the flaw in this thinking, the Fed must sell to withdraw money when interest rates go up or there will be huge inflation.
Like other banks, the Fed currently operates on mark to fantasy accounting. They will not really be able to sell their assets for anywhere near what they paid, so they can not withdraw all the money they created when they bought these. The other problem is that the Fed is monetizing about $100 billion per month and the Federal deficit is about $100 billion per month. If the Fed stops buying debt and starts selling, how can they find enough buyers? So I don't believe they will actually sell any, there is no real exit strategy.
If you put Hussman and Mish together, neither of which is a hyperinflationist, you get close to the hyperinflationist case. I highly recommend reading both of these articles and thinking about the implications of the two together.
Saturday, January 1, 2011
The Bernanke Stock Jump
On Aug 27, 2010 Bernanke gave a speech at Jackson Hole and since then the market is up around 20%. I suspect the speech resulted in the stock market jump. However, there is no meat in the speech to justify such a jump. It did make it seem that Bernanke was not going to start an "exit strategy" but instead thought he needed to add more money. Since Bernanke has no skill in predicting the future nobody should trust any forecasting he does.
In particular Bernanke thought he could hold down interest rates but bond yields are going up since then. At this point bonds are about the worst investment you can make so they should go down and interest rates up for some time. During the history of the Fed messing with interest rates, stocks tend to move the opposite direction interest rates are moving so we should expect stocks to go down.
In particular Bernanke thought he could hold down interest rates but bond yields are going up since then. At this point bonds are about the worst investment you can make so they should go down and interest rates up for some time. During the history of the Fed messing with interest rates, stocks tend to move the opposite direction interest rates are moving so we should expect stocks to go down.
Sunday, December 19, 2010
Electronic Dollars Pegged to Paper Dollars
There are people, like Bernanke, who talk as if electronic dollars are different than paper dollars. These are really both part of base money but for this post let's think of them as two different types of dollars.
Dollars in a bank's reserve account at the Fed are "electronic dollars" and green dollars on paper are "paper dollars". Now the Fed maintains a 1 to 1 peg between these two things. If a bank gives them a paper dollar the Fed will credit them an electronic dollar. If a bank has an electronic dollar it can turn it in and get a paper dollar.
Since there is a 1 to 1 peg between electronic dollars and paper dollars, it is really the banks and their users that determine what fraction of the base money is paper money and what fraction is electronic money. It is not really up to the Fed.
If the Fed makes lots of new electronic dollars, and people still want the same ratio of electronic dollars to paper dollars, it will result in lots of new paper dollars as well. They might not have to print the new paper dollars the same day they made the electronic dollars, but after things equalize they will.
Since the Fed can make both electronic dollars and paper dollars, it can theoretically always maintain the peg between electronic dollars and paper dollars at 1 to 1.
However, imagine that many people holding government bonds no longer roll them over and want to get paid in paper dollars. There could suddenly be $1 trillion of electronic dollars turned in for paper dollars. I am sure the Fed does not have enough $20 and $100 bills around to cover this. It would probably take a long time to print a trillion dollars in $20s or $100s. So what would the Fed do? It would probably make a $1,000 bill and maybe even a $10,000 bill.
In the Caribbean many people won't take a $100 US bill now because the risk of counterfeit is too great. I doubt that a $1,000 bill or $10,000 bill would go over well.
Dollars in a bank's reserve account at the Fed are "electronic dollars" and green dollars on paper are "paper dollars". Now the Fed maintains a 1 to 1 peg between these two things. If a bank gives them a paper dollar the Fed will credit them an electronic dollar. If a bank has an electronic dollar it can turn it in and get a paper dollar.
Since there is a 1 to 1 peg between electronic dollars and paper dollars, it is really the banks and their users that determine what fraction of the base money is paper money and what fraction is electronic money. It is not really up to the Fed.
If the Fed makes lots of new electronic dollars, and people still want the same ratio of electronic dollars to paper dollars, it will result in lots of new paper dollars as well. They might not have to print the new paper dollars the same day they made the electronic dollars, but after things equalize they will.
Since the Fed can make both electronic dollars and paper dollars, it can theoretically always maintain the peg between electronic dollars and paper dollars at 1 to 1.
However, imagine that many people holding government bonds no longer roll them over and want to get paid in paper dollars. There could suddenly be $1 trillion of electronic dollars turned in for paper dollars. I am sure the Fed does not have enough $20 and $100 bills around to cover this. It would probably take a long time to print a trillion dollars in $20s or $100s. So what would the Fed do? It would probably make a $1,000 bill and maybe even a $10,000 bill.
In the Caribbean many people won't take a $100 US bill now because the risk of counterfeit is too great. I doubt that a $1,000 bill or $10,000 bill would go over well.
Wednesday, December 8, 2010
Sunday, November 28, 2010
22,727 Golden Geese
A goose egg weighs about 144 grams and is about the density of water. Gold is 19.3 times the density of water. So let us postulate that a golden goose lays a 2779 gram or about 89 troy oz gold egg. At current market prices of about $1360/oz this comes to about $121,000 per egg. If we figure a goose lays one egg each day then we get $44,165,000 worth per year. The US is printing about $1 trillion per year. This is equal to the yearly profits from 22,727 golden geese.
The total value of all US public companies is $14.2 trillion with a P/E of 18.2 and dividend yield of 1.85% which means total earnings of about $0.78 trillion and total dividend of $263 billion. Bernanke's printing presses make more money each year than the total earnings of all US public companies and about 4 times as much as the total dividends.
The total of individual income taxes in the US is about $1 trillion. So Bernanke's printing is as much as all individual income taxes.
The total US military spending in 2009 was $711 billion, more than the rest of the world combined. Bernanke is printing well over this amount.
There is an interesting phenomenon called the resource curse where countries exploiting natural resources tend to have lower growth rates than countries without much resources. The US ability to print the world's money is like a magical resource equal to 22,727 golden geese. The features of the resource curse seem to be applying to the US.
The total world production of gold was only 2,572 metric tons per year in 2009 which is equal to the production of 2,545 golden geese. If the US really had 22,727 golden geese the total world gold production would be about 10 times the current rate. If there were such high production of gold, clearly we would expect the dollars per ounce of gold to go down. With such high production of dollars, we should expect the value of each dollar to go down in terms of gold.
When the world stops treating US dollars like they were "as good as gold", it will be as if all these golden geese die. When they are gone the US will miss them. The US will have to export real things to be able to import oil and stuff from China. Life in the US will be much harder.
The total value of all US public companies is $14.2 trillion with a P/E of 18.2 and dividend yield of 1.85% which means total earnings of about $0.78 trillion and total dividend of $263 billion. Bernanke's printing presses make more money each year than the total earnings of all US public companies and about 4 times as much as the total dividends.
The total of individual income taxes in the US is about $1 trillion. So Bernanke's printing is as much as all individual income taxes.
The total US military spending in 2009 was $711 billion, more than the rest of the world combined. Bernanke is printing well over this amount.
There is an interesting phenomenon called the resource curse where countries exploiting natural resources tend to have lower growth rates than countries without much resources. The US ability to print the world's money is like a magical resource equal to 22,727 golden geese. The features of the resource curse seem to be applying to the US.
The total world production of gold was only 2,572 metric tons per year in 2009 which is equal to the production of 2,545 golden geese. If the US really had 22,727 golden geese the total world gold production would be about 10 times the current rate. If there were such high production of gold, clearly we would expect the dollars per ounce of gold to go down. With such high production of dollars, we should expect the value of each dollar to go down in terms of gold.
When the world stops treating US dollars like they were "as good as gold", it will be as if all these golden geese die. When they are gone the US will miss them. The US will have to export real things to be able to import oil and stuff from China. Life in the US will be much harder.
Saturday, November 20, 2010
The International Monetary System has a Structural Flaw
In a recent talk Bernanke gave he said, "As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances." He is trying to put the blame on "surplus countries" like China. But the real problem with the international monetary system is that it is based on the US dollar and there are no limits on the US as a "deficit country". There is nothing stopping the US from printing as much money as it wants and having a huge trade deficit. The only reason China has a trade surplus is that the US has a trade deficit.
People like to believe that their problems are due to others, so Bernanke and Obama saying the problem is due to China plays well in the US. But clearly China is not buying it.
As the US prints more money it exports some in exchange for real goods. Think about this, the US can run off some money (electronic or paper) and buy an oil tanker full of oil. How cool is that? The US can make some money, loan it to Goldman Sachs at 0.1%, who can then buy huge parts of Africa. There is currently nothing limiting this kind of thing. This US money made out of thin air can be used to buy up huge amounts of stocks on stock markets around the world and vast quantities of real estate around the world. This is a huge structural flaw in the world financial system.
When central banks backed their currencies with gold, any country that printed too much would lose its gold to other countries. As it lost gold, prices in both countries would naturally adjust to help keep it from losing more gold. And theoretically if it ran out of gold it could buy nothing else. The current system has no market forces to keep the US from just printing forever.
The world has been counting on the US to play nice and for most of the last 40 years this flawed system sort of worked. But now the US is printing at a rate of about $1 trillion per year. This is about the same as the $1 trillion per year the world spends on importing food. So to the world this is a very big number, even if Krugman thinks there should be $8 to $10 trillion in quantitative easing. My own feeling is that $1 trillion per year will be enough to force the world to stop using the dollar as the world reserve currency. At this point the US will have to export as much as it imports. It is used to importing far more than it exports. This will make things very hard for the US.
People like to believe that their problems are due to others, so Bernanke and Obama saying the problem is due to China plays well in the US. But clearly China is not buying it.
As the US prints more money it exports some in exchange for real goods. Think about this, the US can run off some money (electronic or paper) and buy an oil tanker full of oil. How cool is that? The US can make some money, loan it to Goldman Sachs at 0.1%, who can then buy huge parts of Africa. There is currently nothing limiting this kind of thing. This US money made out of thin air can be used to buy up huge amounts of stocks on stock markets around the world and vast quantities of real estate around the world. This is a huge structural flaw in the world financial system.
When central banks backed their currencies with gold, any country that printed too much would lose its gold to other countries. As it lost gold, prices in both countries would naturally adjust to help keep it from losing more gold. And theoretically if it ran out of gold it could buy nothing else. The current system has no market forces to keep the US from just printing forever.
The world has been counting on the US to play nice and for most of the last 40 years this flawed system sort of worked. But now the US is printing at a rate of about $1 trillion per year. This is about the same as the $1 trillion per year the world spends on importing food. So to the world this is a very big number, even if Krugman thinks there should be $8 to $10 trillion in quantitative easing. My own feeling is that $1 trillion per year will be enough to force the world to stop using the dollar as the world reserve currency. At this point the US will have to export as much as it imports. It is used to importing far more than it exports. This will make things very hard for the US.
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