lundi 30 juin 2008

Inflation contre Déflation (la suite)

Hier je suis tombé sur un article fort intéressant de Aaron Krowne sur l'excellent site "Mortgage-Lender Implode-meter" et qui tombait à pic par rapport au débat "Inflation contre Déflation" que j'ai lancé sur le forum Gold index.

Ses conclusions sont assez proches des miennes mais je ne les avais pas aussi bien exprimé.

Il s'avère que le débat Déflation vs Inflation, qui n'est pas seulement discuté sur les forums Boursorama, est peut-être un débat assez vain, car la "vérité est ailleurs".

En résumé, l'inflation monétaire a déjà été créée, et lorsque les produits dérivés et la bulle immobilière fait disparaitre des milliards de dollars, il suffit qu'une partie des liquidités se replace sur les matières premières et les produits tangibles pour que l'on ait de l'inflation.

Inflation c'est tout simplement la hausse des prix à la consommation, et il est évident que l'on est face à ce phénomène. Il n'est pas sérieux d'argumenter sur la déflation lorsque se retrouve à la pompe à essence, face à la hausse des prix.

De plus l'inflation ne va pas se transformer en déflation du jour au lendemain.
L'inflation est un phénomène qui possède sa propre dynamique et que l'on peut difficilement enrayer une fois que l'on a créé les conditions qui l'ont générée. (d'où la métaphore du tube de dentifrice)

Après cette courte introduction, j'ai décidé de retranscrire intégralement l'argumentaire riche de Aaron Krowne, puisqu'il correspond si bien à ce que je tentais d'expliquer.

(Pour les non-anglophones, utilisez la fonction Google translate sur le coté gauche du blog)

Debate Over: It's Hyperinflation (and US Economic Collapse)

By Aaron Krowne,

The economy and to a great extent the world today is run by would-be economic seers and prognosticators, probably more so than ever before in history. I say "would-be", however, because their track records are rather spotty. This contradiction should be no surprise to anyone who has been paying attention to the plentiful (and well-deserved) criticism of the Fed's recent actions (and statements), but many have also noted that it seems the Fed and its economic peers and groupies never seem to "get it right". There is a structural problem here, I would say; I think it has something to do with the true objective of these people being political rather than predictive success.

The investment community, surprisingly, doesn't do much better, and I include in that the "contrarian" crowd -- and to some extent even the Austrians. This group has been preoccupied with an "inflation vs. deflation" debate for at least the last two years (myself among them), and it shows no signs of letting up. As I will argue below, I think there is now ample evidence to make the call one way or the other.

First, regarding prognostication, I want to share a little trick I use that works pretty well. All you do is look at the current picture -- putting aside at least for hypothetical purposes one's own pre-conceived ideas of the answer -- and make a genuine attempt to see the situation for what it is. By "current picture" I mean actual data, though one doesn't usually need to dig too deep into minutiae.

This is how the Mortgage Lender Implode-o-Meter came about and became such a success: with a basic understanding of the importance of housing finance to the US economy, I looked at a nascent trend of imploding, non-integrated mortgage lending shops, and said "that's the end of that game." I then made a web site about it, and people were shocked! Some caught on quickly, but amazingly (or not), the mainstream took well over a half year to finally come to terms with the total upending of the housing market (some still think the problem is just "subprime", sadly).

A handicap I think a lot of the commentators have is that they don't really invest or trade in a direct way corresponding to the theses they write extensively about. In other words, they don't "put their money where their mouth is". I always strive to do so -- and even when I don't, I approach the economic prognostication game with the secondary question "so how should I invest?" If I can't answer that secondary question, then I probably don't really know the primary answer either!

When I combine this discipline with looking at the current data in the most comprehensive way I can, and doing a little (NOT a lot) of extension of the current trends based on fundamentals, it rarely fails to point the right way. It may not be super-precise, but it is silly to position onesself so that day-to-day or even month-to-month precision matters.

To reiterate: the trick is to clear one's mind of bias and get the best reading possible on what is really going on now -- only then can one predict with any sort of accuracy.

Predicting the mortgage lending collapse was just one example. But I've pulled this trick before and again since: covering the big banks negatively and shorting them too, doing it all again when everyone said they were "bottoming out"; ditto home builders, and going long gold and silver even though the pundits and "experts" have been "calling the top" for years. There is more, but the current relevant areas for this article are essentially short US government finances (at all levels) and the dollar.


Getting back to the topic at hand, my current "contemporaneous tea-leaf reading" exercise focuses on the inflation question and government finances, and what I am seeing is not pretty. Inflation first.

As far as I am concerned, the "inflation vs. deflation" debate is over: we are already at hyperinflation -- even though certain markets and measures of credit exhibit deflation. If you want to quibble about the definition (how "hyper" the inflation actually is), go somewhere else: my point is that we have embarked on the path from which there is likely to be no return, given the way the system works. And the real kicker is: in response to the crisis, the system hasn't changed.

The big glaring data point backing this argument is oil prices. Oil prices in 2008 have shocked everyone, literally everyone, including me -- and that's saying a lot since I'm a "peak oiler," and already believed high and increasing rates of inflation were in the cards for purely monetary reasons.

All the usual culprits and whipping boys have been trotted out and the public seems OK with this. That's too bad because the one thing that is different this time; the only thing on the planet that could truly be the cause of the EXTREME price action in oil, are the actions of the Fed. In specific I mean holding interest rates at the ungodly low rate of 2% -- below even their own doctored inflation reading (which is around 4%); and hell, below even their core inflation reading, which is a percent lower or so.

So the US Fed has deeply NEGATIVE real interest rates for the first time since... well, since they LAST blew a horrible, stupid, gargantuan bubble (in housing).

But they've never been this deep, this negative, or coincided with this late stage of the dollar's waning role as a global reserve currency -- or with total dollar-based financial market collapse. I've even heard commentators on CNBC -- CNBC, of all places -- say "the US basically has no financial economy right now." This is the exact sentence I had only previously thought to myself and shared with a few close associates beforehand. You know it's bad when "bubblevision" lets something like that slip.

When you add up all these factors, the radical move in crude can only be seen as the natural consequence of the similarly radical and disastrous actions of the Fed. Global Peak Oil -- which probably really occurred back in early 2006 -- cannot explain the sudden parabolic move in oil in early 2008. Speculators? Manipulation? Please -- this isn't the first or only market to exhibit either -- and it's one of the most intensely-watched (not just by regulators but by the meddling and shameless US Congress and the clueless scandal-mongering mainstream media).

Oil Market Supply Backdrop Extremely Tight -- Major Production Peaks Likely Passed

Many Austrian-leaning commentators have pointed to the tepid to slightly negative monetary base growth in the last year as evidence that the Fed is "not inflating", therefore we could not be "experiencing hyperinflation". While this observation does have real practical implications, it misses a lot of what's going on, and I think it is a gross misreading of Austrian economics -- which is in fact completely compatible with what I am arguing here.

To illustrate I'd like to ask my friend Mike "Mish" Shedlock, who asserts that "we are in deflation," what he does when he pulls up to the gas station pump. Does he say "we are in deflation now -- just look how home prices are down about 20% from their mid-2006 peak. Therefore I demand you only charge me 80% of mid-2006 ($2.50/gallon) gas prices. So here is $2.00 for a gallon?" I don't think so. He probably intuitively senses that that wouldn't go over very well.

The basic reason this sort of Austrian "instant money quantity" reading is wrong is that plenty of money has already been created over the past 30 years, so there is really no need to "print" any more right now to get most of the bad effects!


A quick toy example illustrates the dynamic that is now in effect. Let's say there is $100 trillion of money, credit, derivatives, and all manner of exotic financial vehicles in the world (in fact the latest count of derivatives alone is over $1 quadrillion, per the BIS, just so you know). Now let's say we hit a credit crisis, and $50 trillion of that money/credit/derivatives simply vaporizes.

Some who label themselves "Austrian" would say "ah-ha, we've had 50% deflation"! Well, in a sense, maybe. In fact, as part in parcel of the same crisis, a not-negligible chunk of that financial money (for argument's sake, say $1 trillion) is likely to seek "safe haven" assets like government bonds, bidding down their yields. We have indeed seen that recently. This is actually seen as a "good thing", because it "naturally" lowers interest rates (providing banking system "relief"), and makes it cheap for government to borrow, much to the delight of our ruling guns-and-butter enthusiasts. Indeed, you could call it "deflationary", both in cause and effect.

Asset Backed Commercial Paper -- A collapsing/"deflating" market

But there is more to this picture. Let's say $1 trillion of the $50 trillion remaining instead heads for commodities. Now we have some real fireworks, because commodities are a small and relatively tight market (after all, there is a limit to the amount of real stuff being produced). And virtually no one says this is a "good thing" (commodities investors have learned to be quiet about it).

And the reason this phenomenon might happen much more than it would otherwise would be a central bank setting the main interest rate obscenely low -- especially NEGATIVE -- such that scarce, essential real stuff is a "no-brainer" bet.

So here you have deflationary causes producing dramatically inflationary effects. Seems counter-intuitive, but this is really nothing new: it is historically called the "flight to real goods", and it happens in every hyperinflation, ALONG WITH financial market collapse.

I believe what we are seeing here in oil, and to a great extent in most other basic commodities, is the FIRST EVER GLOBAL HYPERINFLATION. This is happening historically now and in such a big way because the dollar is the de facto reserve currency -- and the first-ever fiat global reserve currency -- so the Fed's actions are magnified beyond anything that has ever been seen before. They are also eclipsing the effect of the rest of the G7, which can't seem to decide if they will exercise restraint or provide cover for the Fed. They are basically puppets of the Fed (or have been -- there are signs of rebellion, especially from the ECB. I would say this rebellion is inevitable, and it will spread).

But interest rates in the West, if they do start going up by way of policy, probably will not go up fast enough to match the inflation they have already unleashed. And as long as the interest rates remain NEGATIVE in real terms (irrespective of manipulated CPI statistics), the problem will get worse. Hence the "hyper": continued negative real rates alongside collapsing paper money markets (along with supply and demand fundamentals) will keep the tailwinds on prices for essential commodities. Where else is the money going to go?


As far as the official attempts we have seen thus far to solve the problem "by other means" (that is, without admitting the fiat money system is rotten and ill-conceived to its core): the solutions put forth (and in some cases already implemented) are price caps, export limitations, increased margin requirements, jawboning, and (a-la Senator Lieberman) banning large-scale investment in commodities investment vehicles.

Some of these "solutions" actively exacerbate the problem (price controls, export limitations) by dismantling free markets. Some will fail to solve it and create problems elsewhere: margin requirements and banning investment in commodities vehicles fall in this category. They will simply remove the ability of the weak to benefit from commodity price increases and protect their wealth, PLUS make the problem worse shortly down the road by stymieing investment in commodities production.

And with regards to oil in specific, the greatest factor is out of the Fed's control: the behavior of the producers. They don't have to go into the Western markets in order to react in a logical and self-interested way to the deterioration of the dollar: they can simply leave more crude in the ground. There is already talk of this: the Fed had better watch it, or oil producer "portfolio allocation" will be added to the myriad of reasons there is less and less supply available for export to the US. Or, less sensationalistically, they could just keep burning more of the stuff locally, by holding subsidies steady.

So I hope with the above I have convinced you at least that something new and hyperinflationary in nature is going on with oil prices. If by some miracle prices were to correct back to $100, not only would it likely be temporary, but extreme inflation would probably show up in some other commodity, or even (God forbid) precious metals. The need to preserve these trillions of wealth from ailing areas of the financial economy is not going away any time soon. It is going to get worse. In fact, if the authorities had any brains, they'd encourage investment in precious metals to divert immense pressure from food and energy. No one ever starved from gold skyrocketing in price; though it did end a political regime or two.

It is interesting to note that this hyperinflation lacks broad-based participation, unlike what happens in the classic "flight to safety". This is rather unsurprising given the narrow manner in which the inflation has manifested -- namely, not in wages, but distinctly in prices people pay for things they cannot avoid buying (gas, food). Most probably don't even have any money to invest much of anywhere. They're just charging more gas on the credit card.

Instead, the proximate actors in this inflationary episode are foreign central banks, hedge funds, probably sovereign wealth funds, and other large investment outfits (including the pension funds Lieberman wants to impoverish, since you know, they're doing so well already). I think this lack of broad-based participation, especially stateside, has thrown many observers for a loop. But make no mistake: most of the dollars are participating in the flight to real assets (or will be soon).

And by the way, I should mention that a "dollar rally" such as we are allegedly in doesn't really matter unless it is also rallying against commodities, because all major currencies are in "competitive devaluation." Smoke and mirrors. There is no dollar rally, unless you're doing short-term trading of some garbagey fiat currency against the one that happens to be the most garbagey of them all. But I wouldn't recommend that endeavor.

The Fed really goofed in setting all this up, which is why I say the system has failed to change in any meaningful way in response to the crisis. Bernanke went to shocking extremes to attempt to stick to the old paradigm and status quo: the demented philosophy that lowering interest rates dramatically will cure all that ails the financial system. But this ailment, supposedly a lack of "liquidity", was obviously the symptom, not the disease itself. The disease is insolvency, relative to the debt strangling our economy. That is the key thing Bernanke refused to see. So he insanely lowered interest rates and pawned off the Fed's good china, hoping the prodigal sibling (Wall Street) would take the proceeds and get right back on its feet.

All this did was dig the Fed deeper, make barely a dent in Wall Street's problems (though buying a few months of time), and as we've seen, send hundreds of billions (if not trillions) careening into the commodities markets. Oops!

The ECB -- fiat money acolytes though they are -- have been slightly better though the crisis. They've been pawning off their own china as well, but at least they haven't done much lowering of interest rates -- so little additional fuel for a "carry trade" into commodities has come from their side of the pond. They are right to criticize the Fed: if you are going to directly plug gaps in bank balance sheets with Fed cash and "zero-risk" securities, what is the point of lowering the interest rate?

So I don't buy the argument that Bernanke is "in a box" -- trapped between lowering interest rates and hurting the dollar, or raising them and killing the domestic economy. This is a false dilemma because hurting the dollar was always stupid and reckless given the extent we rely on imports, and "saving the domestic economy" by keeping interest rates low was never going to work (if the Fed even thought it would, they were pretty naive). Nearly everyone (including Wall Street, for its capital "injections") is already paying far higher interest rates than 2%, so the Fed rate is a farce. It needs to be raised to kill off the dollar decline and "carry trade" into commodities and other currencies.


That is a good segue into some discussion of the domestic economy. As I mentioned way back up at the beginning of this rambling diatribe, I consider the government finances situation to be in utmost dire straits.

The situation is bad. We are already hitting record federal cash deficits even as economic stimulus checks, more Iraq war appropriations, and potentially some housing bail-outs are justing being thrown on the pile. And that is just for starters. To help plug the gap, the government has re-introduced 1-year bills, to get a quick fix of financing.

If this works, of course, it just postpones the problems for one year -- but even 1-year bills are not immune from the same diminishing bid for the dollar. See the Treasury Borrowing Advisory Committee's statements from late April. Borrowing year to date is on track to hit the $400-500 billion range they mention.

The trade deficit is supposed to narrow going into a recession but ours seems to be once again worsening because of the collapse of the dollar and hyperinflation in commodities (especially oil). Also, we don't make much that is fit for export. This all keeps the need for financing up and crowds out Federal government borrowing.

And now the pain is manifesting for state and local governments: the bottom has really fallen out from the lack of housing-bubble-derived income, and years of erosion in local revenue and economic activity in favor of Federal uptake has suddenly become apparent. Many non-Federal government finances are also being hit with losses stemming from the credit crunch. Pension funds are widely being re-figured as horribly under-funded based on more recent valuations. New Jersey is screwed; my own city of Atlanta just announced they are short $150M on pensions, and Vallejo, CA just went bankrupt largely because of the yawning burden of pensions and municipal salaries.

It is now getting so bad that the state and local governments are starting to appeal to the Federal government for help: major city mayors recently went to congress to testify about their infrastructure and financial crises (the two are really the same problem) and beg for help. The latest housing bailout bill proposes billions to allow states to buy up foreclosed properties. And this is likely just the beginning.

But the problem is: the Federal government doesn't have any money. It's already deeply in the red, as we just discussed. They can only provide money if they can borrow it, which is bound to reach its limits soon. Where no limits are obeyed, there will be much more inflation, much faster. Any borrowing the Federal government can do above and beyond the states is really only backed by inflation (the ability to print more money to pay off the debt), but the world is beginning to question why bonds backed by little more than inflation should really be considered 'AAA'. That system didn't work so well in the US mortgage market.

What really worries me is all this talk now along the lines of a "new New Deal". In other words, we'll just respond to all our problems with public works programs, all manner of bail-outs and hand-outs, and lots and lots of spending.

It's a nice thought, especially where infrastructure is concerned. But any attempt at anything like a New Deal now will simply run into the same financing problems that have gotten us into this mess in the first place. The US dollar reserve currency system is ending, so the same system of borrowing backed by the dollar obviously cannot be the solution. And a war will be no good for stimulus because, well, we already have one (and it's now the most expensive war aside from WWII, and gaining fast). Also worth noting is that many Depression-era programmes -- Fannie and Freddie, FHA, Social Security, to name a few -- are still in place. In fact, Fannie and Freddie basically are the housing market right now.

So despite all this support, our system is breaking down. There is something fundamentally wrong with it that needs to be fixed and reformed. I would argue that that thing is the monetary system (including both currency and banking). We simply cannot keep having all this borrowing and debt be such a structural part of our system. It always reaches a point of exhaustion and collapse. We need sound money, which places natural controls on government spending and dramatically curbs mal-investment and bubbles.

But no one wants to talk about this fundamental problem and how to go about implementing the fixes. Instead, the same old Great Depression non-solutions are being bandied about and offered up again. This is silly for another reason: the New Deal didn't actually get us out of the Great Depression. What got us out was World War II -- in part because of the stimulus factor, but more permanently, because it established the US's unique position as a global reserve currency. Obviously, neither is an option now.

Certainly US physical infrastructure needs to be overhauled, but who is going to procure the capital? Domestic sources are exhausted. And what foreigner would want to put money into US infrastructure -- even if they earned decent dividends on it -- while the dollar still has lots of downside risk?

So unfortunately, it looks like things will have to bottom out before possibilities like this open up. And that means getting a lot worse.

My big worry at this point is that the US economy, for lack of a more euphonious wording, is headed for complete collapse due to failure of infrastructure as the coup de grace of financial stress. Now we will see how critical that mundane thing, so taken for granted, is to even have an economy in the first place. And of course, you can add lack of manufacturing capacity to our the list of infrastructure problems.

Previously I thought "severe recession", and then "depression" to describe what we face, but neither now seems to do the situation justice. An aspect of the trouble now beginning to figure prominently is the failure of American cities to function as laid out in their current form... because of the new factor of people simply not being able to afford to drive their cars (especially from home to work). Kunstler has been writing about this for years. In return he was considered a carnival side show; a sort of amusing angry little man off in his own little world. But now it looks like he was right.

In the above, you can see gas prices skyrocketing, and we all know this is hammering everyone but the rich. Amazingly these prices are relatively stagnant compared to crude, but this situation probably will not last. Exxon and Chevron ("evil oil companies" they may be) are exiting the gas station business, with their tails between their legs. The next proprietors will of necessity not be so bashful about raising prices. In the second chart, we see transportation energy consumption actually starting to fall. This is not happening voluntarily, I assure you.

Again, there is little hope of this getting better before it gets much worse as long as the "solutions" proposed just exacerbate the underlying financial problems. Some of the dramatic collapse in the US's economic output has in fact already taken place; it has just been papered over with debt, and bogus accounting that marks up that debt as if it were affirmative wealth. A lot of that is about to be laid bare, as the real situation simultaneously gets a lot worse.

To end on a somewhat positive note, here is a sketch of a skunkworks program to save the US economy while there is still (possibly) a chance; or at least hasten the recovery:

  • End the Iraq war immediately. If this is not done, I expect within a year there will be open debate on having to leave involuntarily because we are bankrupt. We are now spending $1.1 trillion on the military in the budget (see Chalmers Johnson), and possibly as high as $1.5 trillion with war appropriations. This is obscene. The entire defense/homeland security complex is an orgy of corrupt overcharging and objectively pointless contracts. The war must be ended and the homeland security/military industrial complex downsized.
  • Stop trying to bail out the housing market; shift priorities to simply keeping people off the streets. Foreclosures should be turned into rentals, being effectively taken off the market. Begin phasing out bubble-blowing measures, like the mortgage interest deduction. Wind down the GSEs.
  • Begin transitioning to sound money. In addition to being good for our citizens, it will be the only way to attract foreign investment any time soon. And we will sorely need that investment for infrastructure. Get rid of the tax on gold and silver, which is really yet another inflation tax.
  • Wind down social security by allowing people to start opting out. Reduce medicaid and medicare to a level where they are not being heavily used for the middle class, at least for new enrollees going forward. In fact, any "welfare" geared towards the middle class is by definition a disaster, a conclusion fully evident in the data and experience of the 20th century, but a lesson somehow not learned at all.
  • Cut back or possibly eliminate Federal income tax. Most people should not have to pay it. As Ron Paul had said, this would only require us to go back to the 1997 Federal budget, which is easily doable by cutting the above-mentioned programs. Most people don't realize that the 16th amendment was never intended as a tax on the wages most people earn ("wages" were not considered "income" at the time). This would be a huge shot of stimulus and bolster the middle class. It would also give the states an opportunity to collect a bit more taxes so they could work on their infrastructure.

5 commentaires:

Anonyme a dit…

Alex, l'école autrichienne (et t'as posté un article de Ludwig von Misses sur l'inflation; t'as des vidéos avec Ron Paul sur le blog, etc.) dit que l'inflation c'est un problème MONETAIRE. C'est a dire l'expansion de la masse monétaire et du crédit. Eh bien, en ce moment on assiste pas a une expansion du crédit, mais plutôt a une contraction. Les prix augmentent = inflation c'est Keynes. Les économistes autrichiennes (Mises, Rothbard, etc.) nous disent quelles est la principale source de l'inflation, c’est les banques centrales qui augmentent la masse monétaire de manier disproportionnée aux PIB des pays respectifs.

PS: Alex, est-ce que tu regarde les commentaires sur ton blog? Tu réponds jamais :)

Anonyme a dit…

+ 1
pour le scénario d'hyperinflation

à méditer...

Alex Kerala a dit…

je réponds aux commentaires dès que je les vois.

Je suis en effet assez proche des théories de l'école autrichienne, c'est à dire que je pense que l'origine de l'inflation est la politique monétaire de la FED et l'expansion de la monnaie fiduciaire sous toutes ses formes.

Et on a pu en voir les conséquences dans l'enchainement des bulles (high tech, puis immobilière), puis finalement dans l'inflation proprement dite, c'est à dire des prix à la consommation (qui est d'ailleurs sous-évaluée par les modèles statistiques).

Mais en ce qui concerne ton affirmation sur la contraction du crédit, je n'en suis pas si sûr puisque le système est actuellement maintenu à flot par des injections de liquidités de la FED.

Et le débat porte sur le fait de savoir si l'on va assister à une poursuite de l'inflation ou au contraire à une déflation.

Michel a dit…


Bien que je sois d'accord que nous soyons en période d'inflation ; si cette situation perdure et se détériore (inflation 8% et +), la BCE (toujours si elle joue son rôle) continuera d'augmenter les taux, avec pour conséquence une réduction des liquidités sur le marché et une rémunération du crédit de plus en plus chère. Imagine les entreprises qui doivent renouveler un crédit arrivant à terme, pour le rembourser, il leur faudra très certainement contracter un nouveau crédit, mais cette fois le taux sera bcp plus élevé => chute rentabilité de l'entreprise voir risque de manque croissant de liquidité et insolvabilité => faillite => destruction de crédit et de la masse monétaire donc => Déflation. c'est ce qui aurait du se passer au USA si la FED n'était pas en train d'inonder le marché de liquidité et de maintenir les taux anormalement bas. Donc si nous nous trouvons bien en situation d'inflation, je pense également qu'elle devrait déboucher sur une crise déflationiste d'ici un an ou deux.

Alex Kerala a dit…


Le problème c'est que la hausse des taux ne sera pas assez rapide par rapport à la hausse de l'inflation.
Nous sommes encore dans une situation de taux d'intérêts réels négatifs, puisque l'inflation est sous-évaluée actuellement.

Il faudrait une hausse très substantielle et brutale des taux (comme Volcker l'a fait dans les années 80) pour que la dynamique inflationniste soit inversée.

Le problème c'est que les conséquences seraient incalculables pour l'économie mondiale (bien plus grave que dans les années 80, car les déséquilibres financiers n'étaient pas aussi graves à l'époque).

C'est pourquoi les banques centrales en sont réduites à "gérer" la crise, en injectant toujours plus de liquidités, qui finissent par atterrir dans les matières premières et les prix à la consommation.