Financial Repression and Stagflation policy avoids the Hyperinflation Scenario

I have been trying to consider some things from a fresh perspective. You see, if you look at things the same way you looked at them before, you see the same stuff, and draw the same conclusions as the last time.

So like any good investigator would do, I must try to obtain different viewpoints, and different sources of information, before we sift the information and come to a conclusion about the economy, or the market. But where to get the different sources? One way is to step outside my experience when appraising things, and hopefully a new viewpoint on the same old reality will bring a new idea about that reality.

So how about this:

If you don't pay your credit card bill, more letters will arrive. Soon the contact becomes more insistent, and the phone will ring looking for information and money to pay your debts please. After a while a personal visit is likely, it will be diplomatic, since from the credit card company's side of things there is no need for a falling out if the amount owed can be settled peacefully. Let's say you don't plan to pay. You argue, make denials, and try to confuse the conversation. The card company respond with court orders and use the law to their right for payment. If that doesn't work, some muscle can be brought to bear. In the past, and no doubt in the future many debtors who owed money to the wrong person have had their legs broken to remind them of the urgency of the matter. Things escalate, attempts are made to confiscate alternative items of equal value, and so on. Tenants have fortified their property so that debt collectors might not gain access when they call.

This is the debt collection process, and people who pay their way never get to experience the more forceful end of it, but plenty of other people do.

So let's step this up in size, and study this from a country sized perspective. Nations have borrowed beyond their ability to repay before, so there are a lot of case studies available. I read once that Hitler originally rearmed Germany because he was planning to refuse making WW1 war reparation payments to the allies and he expected that those countries  might come calling when he stopped paying them.

So it seems clear that due to circumstances, a debtor slowly moves into having the siege mentality. Outsiders are seen as being hostile, and must be defended against, and a need appears for keeping a close watch on developments.

It is debatable which comes first: the being in debt, or the persecution complex? But it hardly matters, since they coexist in the world of the debtor, and countries behave in a similar way to debtor individuals.  An arming process fulfills the desire to retain assets they still have, or to generate the ability to capture more resources if possible.

A change of attitude to the home population seems to be common. For instance fully employed earning tax payers are an asset of great value, and social welfare recipients who receive money instead of paying it o their government ... well it's ok for a while, but history shows that wars tend to occur after depressions in which a new alternative use is found for the non tax paying subjects of the ruler. I heard that pensioners in Japan were insulted last year when a prominent government member suggested that they should hurry up and die. Governing attitudes change for thye worse when productive worker tax payers become tax takers. The ruling class tax takers don't like too much competition for their pleasant niche in society, and bad things happen.

You would think an educated intelligent population might be expected to refuse to elect leaders who start making hostile moves but once again a quick look at history shows us that the rulers have figured that out too. Divide and conquer always works. Let them argue over lots of distractions, and the people always rally around the cause.

In the light of this reasoning, there is an explanation many distractions currently  being reported in the news lately. The government debtor is setting up systems and barriers against unpleasantness arising from refusal to address their debt. The western governments are locating private wealth and trying to contain it for potential acquisition, and over the past decade military excursions to resource producing nations have increased. It is really all about the money. And anyone's money will do when it's needed.

So what can a government do when it gets into debt? Hyperinflation has been tried and it gets nasty quite fast, so the developed countries have a safer way.

Carmen Reinhart has stated that throughout history high debt/GDP ratios have been reduced by:

  1. Economic growth
  2. Fiscal adjustment/austerity
  3. Default or restructuring
  4. A sudden surprise burst in inflation
  5. A steady dose of financial repression accompanying steady inflation
  6. And Reinhart noted that options (iv) and (v) are only viable for domestic currency debts.

I put it that option (i) has failed. Option (ii) is being resisted and in extremely difficult to put in place, but attempts have been made. Option (iii) is catastrophic as seen in Greece, Iceland etc, and to be avoided or deferred as long as possible. It has been allowed in smaller economies however.

This leaves (iv) and (v). Which are the means already successfully used by UK and US from the 1940s to the 1970s to eliminate war debt.

Financial repression, also called stagflation, must include directed lending to government by captive domestic audiences such as pension funds, capped interest rates, and tight connection between government and banks, and regulation/restriction of cross-border movement of capital. All of these are in place to a certain degree.

Government debts are currently being placed at under market interest rates in pension funds and captive financial institutions in European countries.

The negative interest rates requires are lower than people assume, the UK and US used 3 to 4 % negative real rates and this eliminated debt equal to 3-4% of GDP per year in the decades after WWI and WWII.

A surprise inflation surge to 10-11% accelerates the process, and is not a hyperinflation. Such surges would be more bullish for metals, and the government may consider them an accellerated solution than the slower burn which could last 20 years.

In the light of this, gold and silver holders should think more in terms of a “slow burn” providing conservation of purchasing power, with better results becoming visible later when growth returns. I suggest that this is why the consolidation in the precious metals has taken longer already than many thought it would take.

If this is the case, after finding and confirming their lows it’s possible that gold and silver may rise in a more gradual way than popularly assumed, because the authorities keep a cap on inflation from running away, and they have been successful so far in doing this.

However there always remains the likelihood of planned surprise inflation surges which have also been done before and are likely to represent an attractive alternative to the austerity which western politicians find very difficult to administer.

The high military activity is also highly suggestive that western leaders have not yet dismissed option (iii) -the possibility of financial restructuring and debt writedowns applied to external creditors.

argentus maximus

Souces:

Reinhart, Carmen & Sbrancia M Belen – The Liquidation of Government Debt

http://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf

Dalio, Ray, Bridgewater – An In Depth look at Deleveragings

http://www.bwater.com/Uploads/FileManager/research/deleveraging/an-in-depth-look-at-deleveragings--ray-dalio-bridgewater.pdf

Carmen M. Reinhart and Kenneth S. Rogoff - This Time is Different: A Panoramic View of Eight Centuries of Financial Crises

103 Comments

cpnscarlet's picture

OK OK....

FIRST = Couldn't resist

silver66's picture

second

shut in on Saturday night, reading a metals blog

Silver66

Eppes's picture

3rd

Good weekend smiley

Spartacus Rex's picture

Option ( i ) Failed?

Exactly WHEN do you somehow imagine that such was ever honestly implemented? And let's also apply the Cause & Effect Rule of Logic & Reasoning, and consider your thoughts in particular as to why: " (you)  put it that option (i) has failed."

judejin's picture

the author still has blind trust

in ppl that lie to him, monitor him, tax him, grope him...

but the current situation is much more the debt load. it's more about the cashflow, USSA and the entire economy accumulates more debt because it is like a ponzi scheme that constantly requires new money coming in to prevent it from imploding.

this imploding is feared by the elites(wall street banks) most because they're levered 20-50 to 1. they have no choice but to inflate ever more.

"when money dies" tells how businessmen in weimer republic begged central banks to print ever more, because stopping printing means universal bankcruptcy.

the hyperinflation ending is the destiny of any paper currency because it is inherent in its nature or mechanism, how it feeds, lives and dies.

JY896's picture

Excellent thought experiment

The 'spurts' of 10-12% inflation growth are perfectly possible. They have been done (or rather endured) in many smaller countries, and for a few years in the US as well. The issue I see is that the half-life of usefulness for such steps may be just that -- halving in duration with each administered dose.

The locals certainly did not appreciate the 90's in this monetary climate:

The other issue is the impact on bonds, and especially bond derivatives. All the pension funds and 401Ks in the US cannot cover even a fraction of the notional amounts.

Mudsharkbytes's picture

I guess five, okay SIX then…

…though I've precious little to add besides that.

EDIT:  Actually I do now that I've read the post.

Doesn't option iii - sudden default, sometimes occur unplanned?  With all the financial hi-jinks that they've been pulling, couldn't a sudden unplanned financial collapse occur anyway?

Spartacus Rex's picture

@ judejin

WTH? "this imploding is feared by the elites(wall street banks) most because they're levered 20-50 to 1"  "Feared" my A**! The "elites (wall street banks)" are actually the ones who intentionally planned such a scenario! To wit, the deliberate ramping down of the Fiat Debt Currency (so called "Money") Velocity! "See" they cry in alarm, this is why "gummint must deficit spend even more / borrow even more Debt Instrument Currency!" 

Spartacus Rex's picture

@ JY

And if the entire rest of the World was not being compelled to subsidize the inflationary effects from the Int'l Banksters' deliberate debauching/ debasing of the "Reserve Currency", what is your reasonable guesstimate as to what the true figure would be for the U.S.' domestic inflation rate currently?

Godblessusall's picture

Wisely spoken

Argentus, your style of explaining things keeping in view the bigger picture is of immense value...Your posts are usually a clear presentation of an understanding derived from an eagle-eye position but without the eagle's propensity to look for a prey...Thank you for sharing your wisdom...Love your posts on 'setup...', too!

AlienEyes's picture

@ Spartacus Rex

If you don’t think economic growth has failed, I’d like to know where it has succeeded. Don’t even start with that stock market crap which is clearly driven by “QE Forever”. That much cash has got to show up somewhere. After all, a ruptured duck looks good if you stick $100,000 up its arse. 
Spartacus Rex's picture

@ Alien Eyes

Re: "If you don’t think economic growth has failed, I’d like to know where it has succeeded."   Ummm, CHINA? 

AlienEyes's picture

China is in as much or more

China is in as much or more trouble than we are.

Jakarta Expat's picture

@Alien Eyes and Spartacus

Living in SE Asia for the last 29 years SE Asia has grown immensely and from countries I have visited almost on a yearly basis specifically Singapore, Malaysia, Thailand and as Saprtacus mentioned China. 

Jakarta Expat's picture

@Alien Eyes China in as much or more

True but only to a certain point but the only thing China has going against them in the long run is all of that "paper" US debt they bought otherwise they are in a lot better shape than the US production market.

boomer sooner's picture

If blasts of inflation

If blasts of inflation happen, what will be the killer, is the loss of purchasing power by the consumer.  looking from the 40s to the 70's, we went from single income being able to provide an average life style, to a two person income for an average lifestyle.  In the 90's, the lifestyle grew very fast as did the debts.  The burp of the dotcom bubble bust caused a slow down, but a decrease in regulation and interest rates reenergized and ballooned the debt growth until the vomit of 2007-08.  I am starting to see some of the pre 07-08 debt growth starting to accelerate again.

In my business, I have made it a point to only work for customers who can pay (no credit cards accepted).  In the last 30 days, my day to day calls for service have slowed.  A late summer slow down is usually expected, but normally I get 2-5 calls a day and now down to 3-5 every 3 days or so, a change is happening. Most of my day to day calls come from AngieList, and on there, I list as payment of not accepting credit cards.  This week I finally broke down and ordered Gopayment from Intuit (quickbooks).  Will go until Sept before changing web status and see if a change in business happens.  Only one other service provider has more recommendations than I out of about 30, so I think (haha) I have a fairly good feel for the local market.  We shall see.

LCS update - stopped by local and he had about ($17.87x) $20 in dimes, $10 quarters, $30 halves, 20 morgan and peace, no silver or gold bullion or rounds.  No eagles, on order and will be here come Friday.  About 5 gold coins, misc dates, size, origin.  I have been picking through his and one other shop for gold/silver jewelry for Christmas/birthday gifts and the pickins are getting very slim.  Beginning to think that raiding grandma's jewelry box is getting low.

Spartacus Rex's picture

@ Alien Eyes

By chance did you read this article I posted earlier on Turd's Premium Podcast?  

Life in a Modern Debtor Nation by Bill Bonner

 
Spartacus Rex's picture

@ boomer sooner

"In my business, I have made it a point to only work for customers who can pay (no credit cards accepted)." Kudos & Right On!

boomer sooner's picture

@ Spartacus Rex

I am afraid times are changing.  Slowly I see people who I have worked for in the past starting to pay more attention to what My bill will be.  I can say my material costs have increased by 10-30% over the last 12-18 months.  Most of the brass components have really jumped.

Spartacus Rex's picture

@ Jakarta Ex Pat

Re: "the only thing China has going against them in the long run is all of that "paper" US debt" And do you know what China is currently doing with all of that "  "paper" US debt"? 

Spartacus Rex's picture

@ Boomer Sooner

Re: "I am afraid times are changing." I hear you, so we will skip the "preaching to the choir" my friend. I have taken on more 'break even' bids in the last 5 years than in the previous 4 decades combined just to keep crews working and their families fed. But then again I cannot begin to count the times that I have been graced by the Almighty to make more by 'accident' than most others do on purpose. 

Jakarta Expat's picture

@Spartacus Rex

No idea Spartacus what they are doing with all of that USD paper but the first thing that comes to mind is this.

But I am sure China has hired some wall street wizkid to advise them how to use it as some kind of leverage to the best for their financial gain.

Spartacus Rex's picture

@ Jakarta Ex Pat

Far from using it to wipe their 'collective' tushes, China is using such Fiat Currency Reserves & Treasury Paper to buy the rights to develop Natural Resources in Africa as well as So. America, in conjunction with setting up bilateral currency swaps and trade deals around the world.  Ergo, the Banksters' pressure on the current Administration to focus on the "China Pivot", due to the inevitable and impending tsunami of "Reserve Currency" about to wash up on America's shores.

Jakarta Expat's picture

@Spartacus Rex

A very smart move as once that is done then it is no longer their problem and it belongs to someone else and the Chinese reap hard worldwide natural resources for paper.

At this point in time in fiat terms my wife's USD holdings are the lowest compared to equivalent amounts of Indonesian Rupiah, Singapore Dollar and Australian Dollar fiat that she holds.  She currently holds an asset that someone has asked about buying, it is worth about 80 to 90K USD and we are discussing accepting only Singapore dollars for it at this point.

Spartacus, Would you accept this "paper" and trade it for a hard asset you owned if you had to keep the paper a minimum of 2 or 3 years?

philipat's picture

China...

....And, also, of course, using all that paper to buy physical Gold, especially at the bargain prices gifted to them as a consequence of the financial repression.

Spartacus Rex's picture

@ Jakarta Ex Pat

Actually Jakarta, I already have a 3 year supply of Moon Floss. Thank you kindly all the same!

AlienEyes's picture

@Spartacus Rex

No, sorry but I missed that entire thread.

Spartacus Rex's picture

@ Alien Eyes

But you did (or will)click  on the link provided and read it now hopefully Right?

Jakarta Expat's picture

@Spartacus Rex

That is good, at least you have one area of your body covered. Considering that last picture of yourself that you shared here a few days ago I also hope you have a supply of facial cleanser if you ever come across Blythe, Lloyd or Jamie anytime soon, right Stacy. LOL

Spartacus Rex's picture

@ Jakarta EX Pat

Re: "Considering that last picture of yourself that you shared here a few days ago" Sorry, I must be lapsing into one of my C.R.S. moments (Got a link?) As to that Moon Floss, that's actually more for my Better Half's benefit & peace of mind. Hell hath no fury like a Mrs. without adequate essentials like 'Alpha Whiskey'!

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