Stocks down yesterday. Gold down. Oil down. Everything was down. The beginning of the end? Beats us. The Fed is still pumping in money. But investors are beginning to look beyond QE2.
If the economy really is recovering, they say to themselves, the Fed will be able to back off from money printing. Stocks, gold, commodities – everything should go down.
Did we mention a “hyperinflationary depression”?
What’s that, you’re probably wondering.
Well, it’s when you have a deflationary correction…and soaring prices too. And that’s what happens when the feds try to stop a major correction by pumping in huge amounts of money and credit.
But let’s stop and look at how an economy works.
As an expansion gets underway, first consumers spend money that they earn. Then, they spend money that they will earn in the future. And then, they spend money that they will never earn.
The private economies of many of the world’s developed nations reached the “never earn” stage in 2007. All of a sudden, lenders realized that they were never going to see their money again. Many borrowers would never earn enough money to pay off their loans.
The economy began a contraction…correcting its mistakes by writing down the value of those loans.
Markets are always discovering what things are worth. In 2007, they began to discover that a lot of the world’s credits weren’t worth as much as people had thought.
But then the feds were on the case.
While an individual person might run up debts greater than he can pay, the feds go one step further.
First, an expanding government lives on what taxpayers give it. Then, it lives on what taxpayers give it, plus what it can borrow from them. Then, it spends everything that it can squeeze out of taxpayers, plus what it plans to squeeze out of generations of taxpayers who haven’t been born yet. Finally, when it has crushed all the blood out of the turnips, current and future, it spends money that no taxpayer will ever earn or pay in taxes. It just prints money.
This creates a far bigger problem. Because, no one knows what to make of this new money. Where did it come from? Who earned it? What does it mean?
Since the economy is contracting, the new money doesn’t have much traction…at first. It is lent to hedge funds, banks, and other speculators. Soon, it finds its way into asset markets and basic commodity prices.
That’s why we’ve seen so many record setting prices in recent weeks.
But this is a special kind of inflation. Instead of stimulating people to buy, spend, borrow, and invest…it makes them feel poor. They pay more for gasoline and have less left over for other things. If they have a job, their earnings barely creep up…while prices race ahead.
Want to see the process in action? It’s happening already in the US. And it is even more advanced in England. Here’s the report from The Telegraph:
The Centre for Economics and Business Research (CEBR) said soaring inflation coupled with low pay rises means household peacetime disposable income is at its lowest since 1921.
Rising food, clothing and energy prices mean the average British family will have £910 less to spend this year than they did in 2009.
The CEBR calculates that household disposable income will fall by 2pc this year, more than double last year’s fall of 0.8pc and the biggest drop since the savage 1919 to 1921 post-First World War recession.
It forecasts inflation will average 3.9pc in 2011, its highest since 1992, as January’s increase in VAT from 17.5pc to 20pc and the rising cost of oil and other commodities continue to drive up prices.
At the same time, salaries will rise just 1.9pc as unemployment remains high and the public sector makes cutbacks.
Is this the description of a hyperinflation depression? Nope. Just an inflationary recession…so far. But wait until the feds pump some more…
Bill Bonnerfor The Daily Reckoning
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010.
It sure would be nice to have that $3 trillion little Bush spent on Iraq back.
I don’t know where you’re getting the $3 trillion figure that Bush spent in Iraq but do you have a link? Is there a report from CBO stating this? Is this figure coming out of hot air from your arse like Ben Bernanke?
It sure would be nice to hit the Powerball on Saturday.
So the Brits have decided to raise their VAT in the face of a downturn? This is typical gov response to their perceived need for more funding. From where is that money supposed to come?
In a depressed economy, adding more tax burden just destroys productivity. I think the Law of Diminishing Return applies – more taxes produce less revenue.
Under today’s economic conditions, it is my opinion (go aheads and tell me how wrong I am) that the only major canidate for hyperinflation is Iceland. When England and the Ducth get pissed off enough about not getting paid back for the bank bailout, the currency traders will jump on board to devalue their currency to the point that Iceland will no longer be able to trade with the reast of the world.
Does anyone know if there is an ETF for shorting the Icelandic currency?
most governments could get vast sums by sending non-productive workers home, forever. for some “reason” no one ever cares to push this fact.
these worthless time-servers didn’t seem to care when others lost jobs and went, basically, broke.
now, they’re so cool, apparently, and such bullies, that all the other kids @ school just fork over their lunch money and cower behind nanny’s skirts.
what a healthy situation!
JMR: iceland has given the middle finger to the international bankster cabal.
maybe in another decade, you’ll be able to tear yer lips from their derrieres.
yuk! you make me sick!
There was a book published in 2007 or 2008 called “the three trillion dollar war” by Joseph E. Stiglitz and Linda J. Bilmes.
The 3 trillion is conservative, but it includes costs that we don’t normally take into account, like trying to reintegrate some of these soldiers back into civilian life by paying for their medical bills and treating their PTSD syndromes
I am no fan of the war, but if you want to take everything into account you need to admit that a large portion of this money comes back to the US. You pay a soldier money and his wife spends it at a local restaurant. Or he may save it all and bring it home. Or think of the doctors receiving the medical bills. Sure, that is being picky, but you wanted to “include costs that we don’t normally take into account.”
If you are cynical, you start to think that is half the reason our soldiers are overseas, so they don’t notice there are no jobs for them stateside.
Why does the U.S. Dept of Energy need it’s own nuclear weapons program?
My guess is, they just want to hide part of the cost of the military under a different budget.
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Because in 1974, Congress made that particular U.S. Department responsible for developing them.
This piece well encapsulates the present situation.
It might be added the world central banks have little choice. For the US – without the 1.65 trillion deficit spending to pay for ongoing entitlements, federal salaries, and contractors’ war gadget’s(America’s major manufacturing effort)-, the demultiplier effect throughout the entire economy would rapidly implode 30 percent of the present GDP with even less real capacity to honor debt.
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