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ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Posts Tagged ‘hyper-inflation

Gold, Eurodollars, and the Black Swan that will devour the US Futures and Derivatives Markets

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by Jesse at CaféAméricain
Posted December 3, 2011

THE EURODOLLARS ESTIMATE IN THE CHART BELOW IS BASED ON THE BIS BANKING ESTIMATES from Commercial Banks and may not include official reserves held by Central Banks. As you know the Federal Reserve stopped reporting Eurodollars some years ago, with the consequence that it also stopped reporting M3 money supply. I like to think of Eurodollars and banking system derivatives as the Fed’s off-balance-sheet method of monetization and policy implementation, with plausible deniability.

Swap lines are provided to other Central Banks, and they in turn make the loans to their member banks, and from there to their customers. So this eurodollar creation is made outside the real domestic economy, and therefore has no immediate effect on domestic money supply and prices at the end of the money chain. But the effect is there, and the smart money closer to the financial system sees it coming. I do not know if the Fed’s swap line activity actually shows up immediately in their Balance Sheet and therefore the Adjusted Monetary Base. But I think it is fairly obvious that if swaps are used to create dollars by foreign central banks, who in turn loan those dollars to their own members, the impact of that broader dollar creation will only be felt with a significant lag in the domestic US economy. But it will be felt at some point.

When the Fed was tracking Eurodollars, I believe that they were not counting certain assets, or liabilities from the banks point of view, as money.  What exactly those assets might be and how liquid they are is a open question.  How much of them were held in Agency debt, and how much in Treasury debt?  Is a liquid obligation held by a foreign source part of the broad money supply, or not?  Since it can be quickly converted into dollars, and then into another currency, leaves little question that it is potential money at least.

At least part of the problem being faced by Europe in this crisis is the sharp point of the deleveraging of US assets underlying dollar denominated debt.   And if foreign confidence in the US dollar debt breaks, the losses would be daunting for the holders of that debt, so there will first be a rush into Treasuries and away from Agency debt and CDOs.  This will be like the ocean retracting, causing people to flock to the shore in wonder at the cheapness of the debt.  But eventually the returning tsunami of US dollars may very well swamp the Fed’s Balance Sheet and the domestic US economy and the savings of many. The hyper-inflation of financial paper is happening quietly and  off the books. The growth rate in derivatives held by the Banks is mind boggling. And how this will manifest in the real world economy is not fully known. A good sized chunk of the financial system may simply vaporise.  And I suspect that the policy makers will heavily allocate the damage to the least powerful members of the private sector.

Ownership of the real economy will continue to be concentrated in fewer and fewer hands. Stagflation is the most likely outcome because of this lack of reform and the rise of a self-serving oligarchy. As for the US Dollar, as I have said on numerous occasions, inflation and deflation are at the end of the day a policy decision. Period. Those who see a hyper-deflation or a hyper-inflation as inevitable elude my knowledge of the facts as they are. The Fed owns a printing press, and it uses it selectively.

Speaking of lags, I think the unusually long lag between the growth in Eurodollars and the price of Gold can be attributed to the gold sales programs by the Western Central Banks. Once those programs were suspended, and the Banks turned again into net buyers, the gold price rose dramatically. The most recent Eurodollar operation of the Central Banks in relieving the Dollar short squeeze in euro is not yet in the totals.

It should also be noted that there are other correlations one can use in determining the gold price, most notable ‘real interest rates.’ However, there are linkages amongst all the variables, given a non-organic increase in the money supply and artificially low interest rates for example being among them. So, when will the price of gold stop rising? Most likely when the Central Banks stop printing money, and return to transparently set market based interest rates and a productively reformed financial system. ‘Not on the horizon’ does come to mind.

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A Hyper-Inflationary Great Depression Is Coming

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by John Williams
Originally posted May 04 2010
Courtesy of The Gold Report (http://www.theaureport.com)

SHADOWSTAT’S JOHN WILLIAMS HAS DONE HIS MATH AND BELIEVES HIS NUMBERS TELL THE TRUTH. He explains why the U.S. is in a depression and why a “Hyper-Inflationary Great Depression” is now unavoidable. John also shares why he selects gold as a metal for asset conversion in this exclusive interview with The Gold Report.

The Gold Report: John, last December you stated, “The U.S. economic and systemic crisis of the past of the past two years are just precursors to a great collapse,” or what you call a “hyper-inflationary great depression.” Is this prediction unique to the U.S., or do you feel that other economies face the same fate?

John Williams: The hyper-inflationary portion largely will be unique to the U.S. If the U.S. falls into a great depression, there’s no way the rest of the world cannot have some negative economic impact.

TGR: How will the United States’ decreased economic power impact global economies? Will the rest of the world survive?

JW: People will find to their happy surprise that they’ll be able to survive. Most businesses are pretty creative. The thing is, the U.S. economic activity accounts for roughly half that of the globe. There’s no way that the U.S. economy can turn down severely without there being an equivalent, at least a parallel downturn outside the U.S. with its major trading partners.

When I talk about a great depression in the United States, it is coincident with a hyper-inflation. We’re already in the deepest and longest economic contraction seen since the Great Depression. If you look at the timing as set by the National Bureau of Economic Research, which is the arbiter of U.S. recessions, as to whether or not we have one, they’ve refused to call an end to this one, so far. But assuming you called an end to it back in the middle of 2009, it would still be the longest recession seen since the first down-leg of the Great Depression.

In terms of depth, year-to-year decline in the gross domestic product, or GDP, as reported in the third quarter of 2009, was the steepest annual decline ever reported in that series, which goes back to the late ’40s on a quarterly basis. Other than for the shutdown of war production at the end of World War II, which usually is not counted as a normal business cycle, the full annual decline in 2009 GDP was the deepest since the Great Depression. There’s strong evidence that we’re going to see an intensified downturn ahead, but it won’t become a great depression until a hyper-inflation kicks in. That is because hyper-inflation will be very disruptive to the normal flow of commerce and will take you to really low levels of activity that we haven’t seen probably in the history of the Republic.

Let me define what I mean by depression and great depression, because there’s no formal definition out there that matches the common expectation. Before World War II, economic downturns commonly were referred to as depressions. If you drew a graph of the level of activity in a depression over time, it would show a dip in the economy, and you’d go down and then up. The down part was referred to as recession and the up part as recovery. The Great Depression was one that was so severe that in the post-World War II era, those looking at economic cycles tried to come up with a euphemism for “depression.” They didn’t want to create the image of or remind people of the 1930s. Basically, they called economic downturns recessions, and most people think of a depression now as a severe recession.

I’ve talked with people in the Bureau of Economic Analysis and the National Bureau of Economic Research in terms of developing a formal depression definition. The traditional definition of recession—that of two consecutive quarters of inflation-adjusted contraction in GDP—still is a solid one, despite recent refinements. Although there’s no official consensus on this, generally, a depression would be considered a recession where peak-to-trough contraction in the economy was more than 10%; a great depression would be a recession where the peak-to-trough contraction was more than 25%.

We’re borderline depression in terms of where we’re going to be here before I think the hyper-inflation kicks in. You’ve certainly seen depression-like numbers in things such as retail sales, industrial production and new orders for durable goods, where you’re down more than 10% from peak-to-trough. In terms of housing, you’re down more than 75%, and that certainly would be in the great depression category. With hyper-inflation, you have disruption to the normal flow of commerce and that will slow things down very remarkably from where we are now.

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Antiques Roadshow, 2014

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From: Of Two Minds – Charles Hugh Smith
Antiques Roadshow, 2014   (July 15, 2009)
Collectibles will soon be a “woulda, coulda, shoulda” situation as revealed by our time-travel to “Antiques Roadshow 2014.”
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As millions of McMansions and mansions alike are emptied of “valuables,” collectibles will become a “woulda, coulda, shoulda” asset: shoulda sold before the value plummeted.
Let’s set the time-travel machine dial to 2014 and tune into the popular PBS TV program “Antiques Roadshow”:
Appraiser: I see you’ve brought a mint-condition 1965 Fender Stratocaster guitar.
Hopeful collector: Yes. My grandfather bought it when he was in a surf music band, but the band broke up when he got drafted and the guitar has been in storage ever since.
Appraiser: (lifts guitar from case). I see you have the original sales receipt, and that the instrument is in excellent condition.
Hopeful collector: Yes. When we were kids we’d take it out every once in awhile to play with it, but it’s all original.
Appraiser: It’s very nice, and this model was once highly desirable. Six years ago, guitars like this were selling at auction for $15,000 to $20,000.
Hopeful collector: (Smile fades). You mean they’re no longer highly desirable?
Appraiser: (places guitar in case). There’s a glut of guitars on the market now, and quite frankly, several similar guitars went unsold at recent auctions. I have dozens in my shop right now which I’m trying to sell overseas for $1,000 each.
Hopeful collector: How much could I get for it if I had to sell it right now?
Appraiser: The market is very difficult right now and I would place an auction value of $500 to $1,000 on the instrument–if we could find a buyer, of course.
Camera pulls back and text scrolls: “vintage Stratocaster: $500 to $1,000”
Cut to next appraiser, a cheerful furniture expert:
Cheerful Appraiser: I see you’ve brought in a Colonial sideboard in wonderful condition. Let’s take a look. (Pulls out drawer.) Wonderful–it’s the original poplar wood, which was typical of furniture made in Philadelphia in the 1790s. (Strokes top of the sideboard.) And this is the original finish–what a the beautiful patina.
Hopeful collector: (Enthusiastically) We haven’t refinished it or done anything but repair the rear foot.
Cheerful Appraiser: Terrific–you’ve done the right thing. May I ask what you paid for it?
Hopeful collector: (Less enthusiastically) Six years ago we bought it at auction for $10,000.
Cheerful Appraiser: Well, that was a very fair price at that time, but as you know, the furniture market has changed and there are many, many fine pieces available. So even though this is wonderful piece I would consider it very fortunate if this brought $1,000 at auction. There are very few collectors buying right now, as everyone’s store and basement is already jammed.
Hopeful collector: (Murmuring) Would you give me $500 cash for it after the show?
Cheerful Appraiser: Gosh, I wish I had room for it but I can’t move anything now except at rock-bottom prices.
Camera pulls back and text scrolls: “Colonial sideboard: $500 to $1,000” 


The global credit bubble created an oversupply of cheap money sloshing around looking for a home, and some of that ocean of lucre sloshed into collectibles. Now, as global credit vanishes and assets are being liquidated or foreclosed to pay down debt, millions of basements, living rooms and storage closets will be emptied not just of junk but of collectibles the owner no longer has room for. What the owner needs is not a declining asset which takes up space but cold, hard cash.
As in all post-boom markets, everyone will be rushing to sell at the same time, depressing prices. As museums scramble to compensate for falling admission revenues and declining trust funds, they will have no choice but to quietly start thinning their collections–90% of which are in storage anyway.
As the once-wealthy find their assets falling, then collectibles will be the first to be jettisoned. As mansions get sold, foreclosed, auctioned or taken over by the State then the contents will be sold to the highest bidder–which won’t be very high once the flood of stuff hitting the market becomes a tidal wave: Keeping Up Appearances: London Turns Eye to Empty Mansions (WSJ)
One line of thinking is that hyper-inflation might drive up the value of tangible goods such as collectibles. But hyper-inflation is by no means a guaranteed outcome, nor is the desire for collectibles. There are only three real measures of wealth: health, food and energy. Everything else is a means of exchange or a speculative store of temporary value.

by Charles Hugh Smith
Posted originally July 15, 2009

COLLECTIBLES WILL SOON BE A “woulda, coulda, shoulda” situation as revealed by our time-travel to “Antiques Roadshow 2014.”

As millions of McMansions and mansions alike are emptied of “valuables,” collectibles will become the sort of asset that should have been sold before the value plummeted. Let’s set the time-travel machine dial to 2014 and tune into the popular PBS TV program “Antiques Roadshow”:

Appraiser: I see you’ve brought a mint-condition 1965 Fender Stratocaster guitar.
Hopeful collector: Yes. My grandfather bought it when he was in a surf music band, but the band broke up when he got drafted and the guitar has been in storage ever since.
Appraiser: (lifts guitar from case). I see you have the original sales receipt, and that the instrument is in excellent condition.
Hopeful collector: Yes. When we were kids we’d take it out every once in awhile to play with it, but it’s all original.
Appraiser: It’s very nice, and this model was once highly desirable. Six years ago, guitars like this were selling at auction for $15,000 to $20,000.
Hopeful collector: (Smile fades). You mean they’re no longer highly desirable?
Appraiser: (places guitar in case). There’s a glut of guitars on the market now, and quite frankly, several similar guitars went unsold at recent auctions. I have dozens in my shop right now which I’m trying to sell overseas for $1,000 each.
Hopeful collector: How much could I get for it if I had to sell it right now?
Appraiser: The market is very difficult right now and I would place an auction value of $500 to $1,000 on the instrument–if we could find a buyer, of course.

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Written by aurick

19/08/2009 at 2:50 pm