Weimar vs USA: The Fall Of The Second Empire Of Debt

While being distracted by the developments of this insolvent European sovereign or that, coupled with increasingly prevalent episodes of deposit confiscation, is all the rage these days, the fundamental problems summarized by these three simple words, too much debt, remain. And as has been explained over and over, while confiscation of wealth merely shuffles the various dollar (and euro) signs on the table with the spoils going to the wealthiest, there is no resolution of the underlying problems plaguing a world that has tens of trillions of excess debt.

As is by now is well-known, there are two ways out of such a conundrum: default, or inflating the debt away. What is also well-known is that as long as the US preserves legacy reserve currency status even by the tiniest of threads, inflation through debt deluge-funded money creation will always be chosen outcome. Just as was the case in Germany in the 1920s. In fact, as the following video shows, the parallels between where the US is now, and where Weimar Germany were just before everything took a turn for the parabolic, are a few too many for comfort. The only major difference so far is that in Weimar, the creation of massive rampant inflation was what economists would call, “successful.”

Source: Visionvictory

Guest Post: Preparing for Inflationary Times

Submitted by Jeff Clark of Casey Research,

“All this money printing, massive debt, and reckless deficit spending – and we have 2% inflation? I’m beginning to believe that either the deflationists are right, or the Fed’s interventions are working.” – Anonymous Casey Research reader

The CPI, in our view, does not accurately measure inflation, which accounts for some of the discrepancy our reader is pointing out. However, the proper definition of inflation is “an increase in the quantity of money,” which we’ve had in spades. We’ve not experienced the concomitant increase in prices, which is what we’re addressing in this article.

It’s logical to assume that when you create more of something, you dilute the value of what’s already in existence. That’s exactly what has happened to the US dollar since the 2008 financial crisis hit. Economics 101 says this should lead to higher inflation – yet official Consumer Price Index (CPI) levels remain benign.

It’s this unexpected development that led a reader to pen the above quote. Is the inflation argument dead? If so, does that mean gold’s big run is over? It’s a timely question since the current selloff in gold is largely attributed to low inflation expectations.

This is the first installment in our in-depth series of examining the next big catalysts for the gold price. This month we’re looking at inflation. While a low CPI may be puzzling in the midst of massive, global currency abuse, there are three realities about inflation that convince us it’s not only coming, but will catch an unsuspecting citizenry off guard.

Let’s take a look at why we’re convinced inflation will be one of the next big catalysts for the gold price…

Reality #1: History shows that high levels of debt and deficit spending eventually lead to inflation.

This statement makes sense on the face of it, but seminal research has been done that confirms it. A country simply cannot escape high inflation when carrying oversized debt levels and/or running massive deficits. Sooner or later, these sins catch up to you, regardless of what the current thinking may be.

Debt. The first of these historical studies is detailed in the book, This Time Is Different by Carmen Reinhart and Kenneth Rogoff, who’ve extensively researched the impact of high debt on inflation and gross domestic product (GDP).

Based on a comprehensive study of global incidences, Reinhart and Rogoff gave the following conclusion:

  • Debt levels over 90% of GDP are linked to significantly elevated levels of inflation.

When specifically studying US history, they again observed that:

  • Debt levels over 90% of GDP are linked to significantly elevated inflation.

When US debt levels met or exceeded 90% of GDP, inflation rose to around 6% – roughly triple current levels – vs. the 0.5% to 2.5% range when the ratio was below 90%.

However, with regard to timing, they state:

  • There is no apparent pattern of simultaneous rising inflation and debt.

In other words, inflation is a clear and definite result of high debt levels, but it’s not a day-to-day link. This likely explains the current lag between high debt and a low CPI reading.

So are we nearing that 90% mark? Bud Conrad, chief economist of Casey Research, estimates we’re currently at approximately 110%. Further, he projected from his research in December that…

  • Using my assumptions, gross debt to GDP crosses 120% in 2014. That is well past the danger point of 90% that Reinhart and Rogoff cite. What’s scary is that my assumptions are not even close to a worst-case scenario, so the situation could be much worse.

Bud does not expect to see much more deflation. One reason is because…

  • In essence, much of the deflationary pressures have been cleared out. Going forward, there should be fewer outright losses from bad loans, and thus less deflationary pressure. For that reason (and many others), I expect higher inflation sooner rather than later.

Deficit Spending. Peter Bernholz is widely considered the leading expert on the link between deficit spending and hyperinflation. He conclusively states from his research that…

  • Hyperinflation is caused by government budget deficits.

The US budget deficit totaled $5.1 trillion during Obama’s first term in office. The longer deficits last and the bigger they are, the closer a country moves toward very high inflation levels.

The Congressional Budget Office (CBO) recently reported, however, that the 2013 deficit will drop to $845 billion. Good news, right? Not exactly, because the reduction is largely a result of higher taxes. The CBO was therefore forced to admit…

  • The fiscal tightening from higher taxes and lower spending will slow economic growth to an anemic 1.4 percent by the end of 2013, causing the unemployment rate to edge back higher.

It turns into a vicious cycle, because if unemployment grows, money printing will continue and even increase. The CBO further admitted…

  • Deficits are projected to increase later in the coming decade, however, because of the pressures of an aging population, rising health care costs, an expansion of federal subsidies for health insurance, and growing interest payments on federal debt.

If deficits grow – or even just remain elevated – we inch closer and closer to the hyperinflation Bernholz warns about. Breaking this cycle will be very difficult, if not impossible… at least not without serious consequences.

These studies present clear and direct evidence that spending more than is brought in and continually adding to the national credit card leads to higher inflation. Sooner or later, this type of reckless behavior catches up to an economy. The sobering reality is that avoiding moderate to high levels of inflation in our current fiscal state would be an historical first.

Unfortunately, that’s not the only inflationary fear we have to contend with.

Reality #2: History shows that inflation can occur suddenly and grow rapidly.

Not only is higher inflation a near certainty, history tells us that once it grabs hold, it can quickly spiral out of control. Given our crumbling fiscal state, we must consider the possibility that price inflation could kick in abruptly and rise rapidly.

Amity Shlaes, a senior fellow of economic history at the Council on Foreign Relations and a best-selling author, provides some examples from the past century of US inflation that was at first subdued but then abruptly rocketed to alarming levels. Look how quickly inflation rose in just two years from “benign” levels.

According to Shlaes, US inflation was 1% in 1915 (based on an earlier version of the CPI-U). Within just two years, it soared to 17%. As she states, it happened because the Treasury “spent like crazy on the war, creating money to pay for it…”

In 1945, the official inflation rate was 2%; it accelerated to 14% in 24 months. Inflation registered 3.2% in 1972 and hit 11% by 1974.

It’s clear that the arrival of inflation can be sudden, and that prices can quickly spiral out of control. Given the profligate amount of money being printed by many countries around the globe, we could easily become victim to rapidly rising inflation. If we matched the increases in the chart, our CPI would register 11%, 15%, and 19% respectively, by February 2014.

Regardless of the timing, though, this is a clear warning from history: expecting the CPI to remain low indefinitely is a dangerous assumption.

Reality #3: Most developed-world governments need inflation.

It is a fact that high inflation reduces the real cost of servicing debt. Our debt levels have grown so high that the only politically acceptable way to deal with them is to inflate the currency. Politicians and central bankers have no incentive to stop, and thus will continue until disastrous price inflation emerges. Just because it hasn’t occurred yet doesn’t mean it won’t.

Other political solutions simply aren’t realistic. There is no amount of politically acceptable increase in tax revenue or austerity measures that can meet existing and future obligations. Printing money is the only viable solution. Once you internalize this, an understanding of the most likely consequences becomes clear.

Even if deflation in select asset classes persists or we get another deflationary event like 2008, we can rely on central bankers to concoct more rescue schemes financed with freshly created money. Perhaps just as likely is that the economy does improve and all the money that’s been held back enters the system and sparks inflation.

Conclusions

Based on these realities, we can draw some well-grounded conclusions about the coming rise in inflation.

  1. The onset of higher inflation isn’t certain, but the outcome is. These realities make clear that higher inflation is virtually ensured at some point. It’s thus imperative we prepare for it.
  2. What we use for money will experience a significant – perhaps catastrophic – loss of purchasing power. As shown, this is not speculation, but a process of cause and effect observed repeatedly throughout history. As a result, you will likely use some of your gold and silver to protect your standard of living – that is, after all, one of its purposes. The point here is to make sure you own enough ounces to offset a significant decline in purchasing power.
  3. When inflation begins rising, precious metals will respond and move to higher levels. We don’t know if this is the next catalyst for gold, but we’re confident it will be a major driver of future prices.
  4. Keep in mind that gold tends to moves in anticipation of inflation – think of it as inflation insurance. By the time inflation is “high,” the big moves in gold and silver will have most likely already occurred.

Stay vigilant, my friends, because higher inflation is coming – and as a result, so are higher gold and silver prices.

Currency Wars For Dummies

When it comes to global currency warfare, one can read countless books (all of which professing to be the definitive reference guide for a process that started in the… 1930s), or one can fast forward, save lots of time, skip all the repetitive verbiage and simply observe the following charts which summarize the key things “one needs to know” about the dead-end that the globalized monetary system has found itself in since 2008, when the entire world decided that the only way to “fix” all of the world’s problems is simply to print a countless amount of paper money.

What Is A Currency War?

 

What’s Actually Strong/Weak?

 

 

Who Uses What Currency Tools? (click image for full-size legible chart)

 

And Just How Big Are The Interventions?

 

Not all currencies can depreciate at the same time. At least one currency has to appreciate if all others depreciate. But everyone is trying it – as global rates have the lowest standard deviation on record (i.e. everyone is lowering rates and keeping them there).

 

On a global scale, competitive devaluations are therefore impossible and may even pose a risk of escalation towards protectionism.

 

Maintaining a non-cooperative equilibrium is a challenging exercise. Not only will every individual partly have to constantly monitor what everyone else is doing, but in addition, there is a constant risk of escalation into protectionist policies. Trade disputes are already on the rise. The number of WTO dispute cases in 2012 was the highest in 10 years.

Finally, the extensive use of macro prudential policies and capital controls as observed in recent years poses the longer-term risk of misallocation of resources.

 

Source: Goldman Sachs

Guest Post: How Big Is The 'Bailout' Of Cyprus (Hint: Trick Question)

Authored by Antonis Polemitis and Andreas Kitsios, originally posted at Cyprus.com,

Most publications talk about the 10B or 17B Cyprus bailout.   Let’s take a pop quiz on the right answer:

(a) 17B Euros (89% of GDP)

(b) 10B Euros (52% of GDP)

(c) 2.5B Euros (13% of GDP)

(d) -3.0B Euros (-15% of GDP)

(e) -7.5B Euros (-39% of GDP)

Now let’s work through the answers, in steps:

 

(a)  The 17B figure was calculated assuming the bailout would provide 7B for the banks.    The final number provided not a single Euro for the banks who were asked, against the approach taken in the last 147 banking crises worldwide tracked by the IMF, to find the whole 7B out of their depositor base.   So, part (a) is wrong.


(b) The remaining 10B is described as a bailout of the government.  Of this 10B however, 7.5B is being used to refinance maturing debt.

This debt, I would guess, is mostly at this point beneficially held by ECB.   This is just an assumption, but we know that 75% of it was held domestically, largely by the banks.   This was probably the first collateral pledged by the banks via the ELA, so ultimately if the Central Bank and the government default it will ultimately fall on the ECB’s balance sheet.   The 25% is probably traded internationally and, again outside of Cyprus hands.

So, the 7.5B is being lent to Cyprus in order to be paid right back to Europe.   That is not charity, that is ‘hiding their embarrassing losses until later when someone else is in office’.    If moral hazard requires clueless Cypriot retail depositors to pay for their banks’ decision to lend to the insolvent Greek government, then presumably it also applies to the financial wizards at ECB that lent to the insolvent Laiki, despite having full access to their financial information.

That leaves 2.5B of fresh financing for the government which I will concede is new money, though until we see the Memorandum and the terms under which we receive this money, I am not too excited about it.    Cyprus could raise this amount domestically so long as it did not have to do it overnight (which it does not – it is to fund deficits over the next few years).

 

(c) Does that mean that 2.5B is the right answer?  Not really, see below.

 

(d) At least 5.5B of the ELA taken by the banks (I suspect it is more) was for losses in the Greek branches of the Cyprus banks.    These branches have 15B of deposits that presumably could have also been haircut, along with the Cyprus-based deposits, to make up for the losses. Yet, under tremendous time pressure, they were sold to a Greek bank (very suspicious), while the liabilities (the ELA) stayed in Cyprus and are now, beyond all logic, is being #b85b5a; text-decoration: none;”>transferred to the Bank of Cyprus.

We can call this: “Cyprus Contribution To Recapitalization of Greece, Part II”.    And since Greece is insolvent and illiquid without EU assistance, it is really assistance to the EU.

Given that, it is perfectly fair to subtract it from the EU’s assistance back to Cyprus.   That takes us to -3B

 

(e) The Greek PSI (write off of Greek government debt, implemented by the EU) impacted Cyprus, as Greece’s neighbor, in a wildly disproportionate manner.   Cyprus banks took 4.5B in losses there.

One could have imagined a solution at the time that partially compensated Cyprus for these losses.  In any case, it was a contribution by Cyprus in reducing Greek public debt and given Greece is backstopped by the EU, it reduces the EU debt load, so that is how we get to -7.5B.

Cyprus has certainly contributed to Greece’s bailout on a per-capita basis at a level vastly exceeding any of the nations that are putatively suffering from “bailout fatigue”.   Cyprus, voluntarily or not, has contributed around 5% of the Greek public and private debt reduction, despite being 0.2% of the European economy, so a rate of 25x the European average, plus or minus.

 

The apparent “thank you” from the EU, is to try to talk down the main basis of the Cyprus economy (financial services) and aim to destroy the rest of the otherwise fairly healthy Cyprus economy by sucking all liquidity out of the system, literally overnight.

I would grade (d) or (e) as correct answers.    But I don’t see any version of the numbers where Cyprus is not a net creditor to the EU bailout regime, as opposed to a net beneficiary.  Cyprus should be fighting to block the ELA transfer to Bank of Cyprus at this stage…

Is Fukushima Radiation Causing the Epidemic of Dead and Starving Sea Lions In California?

Painting by Jonathan Raddatz

 

Associated Press reports:

At island rookeries off the Southern California coast, 45 percent of the pups born in June have died, said Sharon Melin, a wildlife biologist for the National Marine Fisheries Service based in Seattle. Normally, less than one-third of the pups would die.

 

It’s gotten so bad in the past two weeks that the National Oceanic and Atmospheric Administration declared an “unusual mortality event.” That will allow more scientists to join the search for the cause, Melin said.

 

***

 

Even the pups that are making it are markedly underweight ….

 

***

 

Rescuers have had to leave the worst of them in an effort to save the strongest ones, she said.

 

***

 

Routine testing of seafood is being done by state and federal agencies  and consumer safety experts are working with NOAA to find the problem.”No link has been established at this time between these sea lion strandings and any potential seafood safety issues,” NOAA said in a statement.

Given that the FDA has refused to test seafood for radiation, we’re not that confident that the government is looking that hard to see if Fukushima fallout is the cause.

Reuters notes:

From the beginning of this year through last Sunday, 948 sea lion pups came ashore in Santa Barbara, Ventura, Los Angeles, Orange and San Diego counties, according to figures from NOAA.

 

“There really isn’t an oceanographic explanation for what we’re seeing,” Melin said. “We’re looking at disease as a possibility and also at the food supply, and it could be some combination.”

CNN reports:

This is an unprecedented crisis for the species in this state says the Pacific Marine Mammal Center.

 

***

 

“So we are seeing exponentially higher numbers” [Keith Matassa, who runs the Pacific Marine Mammal Center in Laguna Beach said].

 

***

When you say off the charts, this is what you’re talking about.

CBS News reported last week:

”They’re very sick,” said Keith Matassa, who runs the Pacific Marine Mammal Center in Laguna Beach. His team is nursing 115 sea lions back to health. “A normal sea lion at this age — 8 to 9 months old — should be around 60, 70 pounds,” said Matassa.

“We’re seeing them come into our center at 20 to 25 pounds, and really they look like walking skeletons.”

AP notes:

Biologists knew last spring that this year’s supply of anchovies and sardines could be limited, Boehm said.

 

“These two species of fish are an extremely important part of California sea lions’ diets, and females simply may not have been able to nurse their young sufficiently, resulting in abandonment, premature weaning and subsequent strandings,” he said.

 

Besides anchovies and sardines, sea lions also eat squid and other ocean creatures.

Time reported in April 2011:

Few people want to see the ocean’s anchovy stocks wiped out by radiation either. That’s just the scenario that seemed to be developing, however, when reports coming out of Japan revealed that elevated levels of cesium-137 had been found in anchovies in the waters off Chiba, near Toky0—a direct result of the ongoing crisis at the Fukushima Daiichi power plant.

 

***

 

In the big-fish-eats-little-fish way of the ocean, the radioactive contamination eventually gets passed up the food chain, concentrating in fats which get consumed and stored, until the isotopes finally come to rest in the very largest creature at the top of the food chain ….

Huge die-offs of sardines were also reported in the Chiba area of Japan after Fukushima.

Moreover, the Vancouver Sun reported in January 2012 that 94 per cent of the anchovies and 92 per cent of the sardines sold by the Japanese to Canada contained radioactive cesium. Some of the fish were caught in Japanese coastal waters; but others were made many hundreds of miles away in the open ocean.

(Note: there may be additional reasons for fluctuations in the numbers of anchovies and sardines other than radiation.)

Moreover, radiation from Fukushima was directly deposited into the kelp off the Western coast of North America … especially in Southern California.

Fish that eat the kelp have also gotten exposed to the radiation … as have the animals that eat those fish.

NOAA reports:

Sea lions … feed on the fish that live in kelp forests.

(Images here.)

There are numerous other routes in which the Fukushima radiation could be getting to the sea lion pups.  We noted last year:

A 1955 U.S. government report concluded that the ocean may not adequately dilute radiation from nuclear accidents.

 

MIT says that seawater which is itself radioactive may begin hitting the West Coast within 5 years.

 

In 10 years, peak radioactive cesium levels off of the West Coast of North America could be 10 times higher than at the coast of Japan.

 

As we’ve previously noted, Reuters reports that Alaskan seals are suffering mysterious lesions and hair loss:

Scientists in Alaska are investigating whether local seals are being sickened by radiation from Japan’s crippled Fukushima nuclear plant.

 

Scores of ring seals have washed up on Alaska’s Arctic coastline since July, suffering or killed by a mysterious disease marked by bleeding lesions on the hind flippers, irritated skin around the nose and eyes and patchy hair loss on the animals’ fur coats.

 

***

 

“We recently received samples of seal tissue from diseased animals captured near St. Lawrence Island with a request to examine the material for radioactivity,” said John Kelley, Professor Emeritus at the Institute of Marine Science at the University of Alaska Fairbanks.

 

“There is concern expressed by some members of the local communities that there may be some relationship to the Fukushima nuclear reactor’s damage,” he said.

Here’s a picture of one of the injured seals:

 

We reported yesterday that a new scientific paper shows that the Fukushima radioactive plume contaminated the entire Northern hemisphere during a relatively short period of time ….

 

Radioactive fish are also being found off the West Coast.

 

A California-sized island of debris from Japan is also hitting the West Coast.

 

And West Coast residents have also been exposed to Fukushima radiation from the air.  See this, this and this.

Unfortunately, the nuclear accident is nowhere near contained.  Japanese experts say that Fukushima is currently releasing up to 93 billion becquerels of radioactive cesium into the ocean each day, the reactors have lost containment, and groundwater is flooding into the stricken reactors (delaying clean-up).

And things may get worse for California, instead of better .

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