Andy, i have heard some obscure analysts on the fringe speculate about the potential for hyperinflation as far back as '99. not long after the '98 deflation scare the opposite was suddenly something that began to be considered by some.
however, i don't think it likely.
in spite of the excessive money creation, it is obvious enough that in some sectors of the economy overcapacities are simply overwhelming. at the same time, we have a huge mountain of private sector debt, the collateral for which looks ever more shaky, and which has reached astonishing proportions when compared to GDP, disposable income, equity, or any other relevant datum.
a decade of drunken overconsumption has pushed the savings rate into the negative column, and the collapse of the NAZ bubble has shown quite nicely why investments do not equal savings.
and now look at the obvious inflationary forces that have reared their head, like energy, shelter costs, medical expenses, certain foodstuffs and metals, they're all either recurring necessary expenses in the case of households, or input costs for the manufacturing industry. from the households PoV this means end demand for all other non-necessary items is being depressed, and in the case of the manufacturers, margins are squeezed as the higher input costs prove impossible to pass on in most cases.
the reaction that is to be expected is that the scramble to raise savings ,cut costs and lower debt will lead to a further fall-off in demand, and so on.
at some point then, it is conceivable that further attempts at monetary inflation meet with no more takers. some of the insatiable demand for funds in a weakening economy that the current expansion of the monetary aggregates suggests is very likely connected to the very fact that outstanding debt levels are so high while the cash flows supporting them are shrinking. debt needs to be rolled over all the time, and lots of new debt is incurred for the specific purpose of paying back prior lenders, only to once again run up one's debt with them. mortgage refis/credit cards are obvious examples for this in the household sector, where home equity ownership shrinks year after year in spite of some breathtaking regional real estate bubbles.
in the corporate world, AMZN would be a great example for an insatiable black hole into which cash disappears at baffling speed.
such schemes need in typically ponzi like fashion an environment in which credit growth continues to stay ahead of the rate of growth of defaults and the 'default potentiality' of the system, which in turn tends to grow along with the degree of leverage. it's in short an elaborate confidence game.
once confidence wanes, support for the debt pyramid does too, and defaults begin to catch up with credit growth. that's the liquidity trap inflection point, where lenders cut back sharply , and the lowest risk assets, or those that historically correlate negatively with the deteriorating situation are sought after. e.g.:
tfc-charts.w2d.com
the contraction of the tech bubble is per se a hugely deflationary event, and a confidence buster.
compared to the still relatively perky CRB (weakening of late) i think the debt issue is of a different order of magnitude in terms of potential impact.
the sheer size of everything relating to the financial economy is daunting. from trading volume in the stock market, to the rate of growth of WS and GSE balance sheets and the notional value of outstanding derivatives , everything seems extraordinarily out of whack when compared to the real economy. it seems hardly possible for the gap to continue to widen at such accelerating rates forever. on the contrary, it can be assumed that we're overdue for an adjustment, which could be in progress. if it is proportionate to the excess preceding it, it may get a lot harsher than most expect. otoh, an unexpectedly successful reflation may not bring about the desired outcome in every respect either.
here's a reasoned argument in favor of a stagflationary outcome by Ed Bugos from August last year:
safehaven.ca
centers mainly on the net debtor and dollar aspects, which i think would be overwhelmed in a sharp debt and asset deflation. if things indeed progress to the liquidity trap point one day, both borrowers and lenders would be put out of business and perhaps slip into the sort of half life they enjoy in Japan, that vegetates on big government spending with all monetary avenues apparently exhausted.
one more thing re. the financial economy: the modern instruments like derivatives and securitizations lessen individual risk on a case by case basis, but heighten systemic risk at the same time. the seeming innocence of individual positions, that are 'netted out' with offsetting contracts for instance, is one of the reasons why the sheer size of the notional amounts involved isn't causing the authorities more alarm (one assumes that if it IS causing alarm, we are deliberately not told). however, the actual risks taken are often opaque, paper that is actually supported by risky assets, or more than uncertain cash flows is masquerading as investment grade paper as soon as it's imbued with credit insurance, and otc derivatives contracts involve a chain of counterparties with concentration so high that every single major player has the potential to destabilize the system in case of default.
this i believe may be one of the main reasons why easy Al's middle name is 'moral hazard'. he has graduated to the art of the pre-emptive bail-out by now whose moves on rates and activities in the repo markets are constantly dictated by crisis situations involving the fickleness of market liquidity. it has been suggested that huge amounts of debt rollovers had to be completed in January, and that the surprise cut was mainly motivated by the potential for crisis the situation harbored. liquidity in the corporate bond market had done a disappearing act after all. this sounds eminently plausible to me.
essentially ever more frequent crises are battled with ever more excessive credit creation, and monetary policy is permanently in ad hoc mode.
not a comforting thought. |
