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:
- Economic growth
- Fiscal adjustment/austerity
- Default or restructuring
- A sudden surprise burst in inflation
- A steady dose of financial repression accompanying steady inflation
- 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.
Reinhart, Carmen & Sbrancia M Belen – The Liquidation of Government Debt
Dalio, Ray, Bridgewater – An In Depth look at Deleveragings
Carmen M. Reinhart and Kenneth S. Rogoff - This Time is Different: A Panoramic View of Eight Centuries of Financial Crises