THE HYPERINFLATION MEME TURNS INTO A NIGHTMARE….

Nothing has represented the rise of the hyperinflation meme more than the price of silver has over the last few years.  At every twist in the market the rise in precious metals and silver in particular, has been used as the cornerstone of evidence of “money printing”, debt monetization and raging inflation that was guaranteed to ravage the US economy.

But as Treasury bond yields crater  (and prices surge), the dollar rises and precious metals collapse, the hyperinflation theory is turning into a nightmare.  As of tonight, the price of silver has reached a -48% decline since their April highs – just shy of where I referred to it as a bubble and said it was an excessively risky market….

Unfortunately, millions of people have bought into this meme and “invested” their hard earned money in the false analysis of the doom sayers who sold this hyperinflation theme to an unwitting public.  It’s all another case of misunderstanding the modern monetary system as much of this theory was predicated on complete falsehoods regarding the actual workings of our monetary system.  And now millions of people are getting hurt.  It’s a shame.  And it didn’t have to happen.

Hyperinflation was never coming.  It’s still not coming.  But the theory was easily misunderstood and even easier to sell.  What’s most frustrating about the hyperinflation meme is that it was not sold to the American public by Wall Street or bad salesman.  Rather, in most cases it was sold by average joes and boutique firms looking to cash in on what they thought was rigorous and accurate analysis (usually based on Austrian economics).  But as we’ve seen time and time again here, misunderstanding the modern monetary system is bad for your portfolio’s health….

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. And since someone will inevitably bring up my long-term bullish call on gold, I should probably point to my recent call that gold would consolidate to the current levels:

    “There’s no formula for understanding the point at which a wobble becomes a death wobble in the marketplace, but it’s my opinion that the current correction is a healthy correction that will hopefully continue consolidating down to healthier levels. By consolidating, we can actually create stability in what was becoming an unstable market.”

    http://pragcap.com/gold-avoiding-a-death-wobble

  2. I see further drops in silver and gold perfectly possible. Silver could easily go to 14, even 10 USD, more if recession is coming.

    It was the short of the year. As for buying cheap… I would prefer to buy oil when it has dropped enough, as its fundamentals are much more stronger than precious metals, safer bet, precious metals could well be in a long downside cycle after exploding. See, you can be bullish on something long term (oil) while knowing that prices can implode in the medium term with bubbles. It’s a matter of understanding macro in general, and yes, the monetary system.

    The problem of these guys is that they don’t understand we are in a deflationary environment, and these booms are illusions created by temporary growth expectations and speculative hot money due to still high liquidity in the system. Instead they get sold on crazy theories. Deflationary environment with cost push inflation means higher frequency of cycles in the commodity market with higher volatility in prices, but overall prices are going to drop at point because the system is in a feedback loop where high prices trigger even slower growth.

    But well, it’s a shame, but some people only can learn if they experience pain.

  3. For every buyer there is a seller, for every dollar won there is a dollar lost. Markets are amoral. There is no altruism, there is no ethics, there is correct analysis and decisions and incorrect analysis and decisions (and sometimes your analysis is wrong and you get lucky nevertheless). Markets are war within the context of legal (not moral). It’s dog eat dog. Know your business or lose your money. Buyers in the precious metal bubble didn’t know their business; their analysis was crap. The .com bubble, the real estate bubble; all bubbles have patterns, and one thing you can count on is buyers at the top will all cry about how it isn’t fair, and oh I trusted this person, or whatever. Trusting anyone was your first mistake.

    We can dispose of the markets altogether and develop a society which focuses on win/win relationships, or we can continue the win/lose of the markets. However there is no in-between. In a pipe dream, the former would be wonderful. In this cesspool, know your business. Til the former, no one should be crying about buying silver when it was bubbling over. What were you thinking?

  4. Yes, the fault is of this silly branch named “Austrians school” and its abuse of bad and false logic. But the mith are more atractive for profane people than the truth

  5. There is an assumption here that the rise in gold and silver was all down to the hyperinflationary meme. While I am sure this played a part there may be other factors involved. Key indicators for me are the price of copper and coal which is declining and the flow of capital into Brazil which seems to be reversing. This suggests to me that not all is well in the BRIC economies and part of the trigger for changes in gold and silver reflect that. There have been indicators that central banks have been leaning against the rise in gold by increasing their lending, and a reversal was always on the cards.
    What we should be asking now is where does that hyperinflationary meme drive capital now. If as I suspect it is not really a hyperinflationary meme by the markets, but rather a move towards safety you could argue that we should expect bubble like characteristics to develop in other safe assets. That may be US treasuries, agency debt or safe corporate bonds. At the same time we may see the dollar rise and inflation really begining to dive in the US as capital comes home from the BRIC’s. That would leave the FED in a difficult position without being able to do unsterilised QE. The risks may now have moved from a stagflationary environment to a full on deflationary environment in the US. This makes the FED exit even harder and risks large moves if the rest of the global economy does get its act together. My worry would be that we get an unstable increasing oscillation wave in the markets with increasing volatility and popping bubbles, while the real economies languish even further into trouble.There are limits to what even the FED can do in the face of capital destruction and a slowing velocity of money.

  6. It is not worth trying to separate out the growth story of the Brics from the inflationary hedge story of pm’s because both trace back to disappointing returns from historic Western markets/equities and a need to find yield/gain outside of those markets where neither looked as though it was going to deliver returns required to fund pensions etc .Enter the bright new shiny things on the block with every other new fund of the last few years being devoted to diversifying you into Brics and commodities.
    Now enter the reality that Brics depend as much on the developed markets for growth as ever and enter the story that growth in those markets is being crowded out by the need to service debt.Exit the leveraged end of those bright new shiny diverification stories bleeding from over exposure to chasing returns inappropriate to the parameters for safe guarding capital.

  7. Silver is a trade. As long as governments and the CME constantly intervene, I see this as positive long term (Manipulation is Fear). $1.4 Quadrillion in an unregulated non-transparent Derivatives market says precious metals are good long term. Raising the debt ceiling annually tells me this is a good trade on the long side. I love Bailouts, and stimulus, and TARPs, for PMs.

    I keep a core holding in physical, but in the last year or so have been selling on strength, buying dips.
    It’s been wonderful.
    I don’t need to be right today, or tomorrow, but long term out a decade (my timeline for a huge move is more like 4-5 years) precious metals will be THE safe haven.
    I don’t think you should have a huge percentage of your portfolio in PMs, but 15% at a minimum is good insurance for me. I am still building towards that 15% and today is a great day to get closer.
    I will also buy some today at maybe $29? when the dealer gets his shipment this afternoon…He has been OUT of silver since last Thursday in our little podunk town….a first here, but apparently more common in big cities. And of course I will have an eye on selling some of it when the price reaches the $40s again.
    Again….simply wonderful.

  8. Silver is dead man walking. I expect a consolidation, a nice rally where the silver yahoo’s breath a sigh of relief and the buy the dip crowd piles in and than one final lights out plunge.

  9. We could get hyperinflation after the coming deflationary crash if the major governments ever adopt inflation as an explicit policy, and do what it takes to achieve it. Desperate politicians are capable of anything, and if global unemployment rises to German 1933 levels, they will be maximally desperate. Even desperate enough to create massive inflation, which could run away from them and get out of control.

    There are also many other paths desperate leaders can take when faced with what is to come. None of them are pretty.

  10. ” it was not sold to the American public by Wall Street or bad salesman. Rather, in most cases it was sold by average joes”
    You skiped half of congress, glen beck and most of the presidential candidates.
    Of course anyone should be free to say whatever they want, expect the elected officials.

  11. Oanda has some nice tools displaying investor sentiment.

    This first page shows long/short ratios of currency pairs and gold & silver (vs USD and JPY):

    http://fxtrade.oanda.com/analysis/open-position-ratios

    You’ll notice just how extreme the silver & gold ratios are. They have been this extreme for a while now, relatively unchanged by the downturn:

    http://fxtrade.oanda.com/analysis/historical-positions (click on XAG/USD or XAU/USD)

    On this next page you’ll see both open orders and, more interestingly, open positions:

    Gold: http://fxtrade.oanda.com/analysis/forex-order-book#XAU/USD
    Silver: http://fxtrade.oanda.com/analysis/forex-order-book#XAG/USD

    (Try different chart types for a different sense of things – Cumulative, Non-cumulative, Net)

    In sum, for open positions, blue = pain, orange = gain. In particular note the large blue mass on the top right section of the open positions chart (cumulative setting). This represent long positions which are underwater. This section has been massive since both metals fell. The blue at the bottom left are shorts below the market price.

    Taken together, the amount of loss/gain in the open positions and the amount of sentiment of the long/short ratios paints quite the picture – it looks like the majority still believe the metals are coming back and are holding on. If you ascribe to the theory that the market hurts the most amount of people it can, then either the majority are about the defy the odds, or Mr Market is about to enjoy feasting on their assets. Granted, this is simply one company’s stats, but I doubt it’s all that different from the general sentiment out there, from what I’ve seen. It also doesn’t show net sales, but you use what’s available. In any case: Tools to use, and info to ponder.

  12. Gold and silver are more related to inflation in China and India, not US or Europe. The sell off is more about fear over Asia cool off. Hyperinflation is a reality in Asia. Gold and silver are still up 40% from a year ago, up 400% since 2002. It’s a healthy correction, not a bubble breaking up. Silver will be a great buy at $20.

  13. Cullen I enjoy your articles but I have a question. Do you believe the USA will eventually default on it’s bonds?

    The USA has $15 trillion in debt and a GDP that is roughly the same size. Moreover our debt is growing at $1.5 trillion or more per year while our economy sits stagnant. Either we hyperinflate or default because there is no way on earth that money gets paid back.

    You are betting on default?

  14. There is never any need for default, according to MMT, of a sovereign currency issuer. Inflation can be a danger.

  15. no, the usa is not experiencing hyperinflation, at the moment, it experiencing stagflation.

    and so, your saying your point, that hyperinflation will never occur. has been proven because gold has a bad month while in the midst of a 10 year bull run.

    lol.

    never is a very long time.

  16. Out 14.6T of debt, about 4.6T is “intragovernmental” – the “debt” the left hand owes to the right, so to speak: http://www.treasurydirect.gov/govt/reports/pd/mspd/2011/opds082011.pdf. So, the real debt is about 10T.
    But more importantly , currency issuer debt is not a debt that needs to be paid-off. In fact, this debt comes along only because the non-govt sector wishes to save in your currency. Unless you understand this, you wouldn’t understand where the error in your reasoning lies.
    You say that you like Cullen’s articles. Are you sure you read the most important one:
    http://pragcap.com/resources/understanding-modern-monetary-system ?

  17. Regardless of the month, the year, the decade, the analysis…all big move up commodity charts end up looking the same when the dust settles.

  18. I think people believe in the hyperinflation meme because the official numbers don’t accurately describe what they are seeing.

    It’s important to realize that it doesn’t take high levels of inflation to erode our way of life. High levels of unemployment with student loans, 3% inflation, the reduction in income security, continuing escalating health costs, reduction in government safety by themselves will lead to a less innovative economy, reduced levels of household formation, and all the societal ills that these things cause.

    Hyperinflation is not needed. We focus a lot on numbers, but we need to remember that GDP, CPI were created to measure our standard of living. Numbers, however, incapable of describing how we actually live.

  19. I sold my gold at $1820 and silver at $47, thanks to partially Cullen’s advice, so I am not a gold bug.

    But attributing the rise only to (hyper)inflation fear is not the full picture. There are further motivations for precious metals / gold buying:

    – systemic baning crisis (safety of savings as opposed to deposits)
    – risk free asset (safety as a replacement of UST)
    – negative real interest rates (negative opportunity cost of safe asset)
    – increase in central bank reserves (a shadow reserve asset)
    – EM central banks buying / BRIC & Asian inflation

  20. Fantastic article Peter, very easy to understand. Thanks for sharing, much appreciated!

  21. The dollar is rising since we’re still the best bet in a bad bunch. Obviously when the dollar rises, gold falls. Everyone can see that the Fed is running out of bullets so that makes the dollar look like a safe-er place to be.

  22. Trixie your so benign this morning…you must have found that church this sunday.

    ….oh no…did I just open pandoras box.

  23. I won’t believe in God until I see a giant crucifix orbiting the earth. Or until my hair dryer starts talking back to me. None of which has happened.

    Better? ;)

  24. There’s actually a very simple gauge for (hyper-)inflation: When e.g. the US or any other country issues a new banknote that has a face value of twice or triple the value of the largest existing banknote. Or when the stamp for a letter doubles or triples in price overnight. And even that didn’t happen in the inflationary 1970s.

    I don’t say hyper-inflation is out of the question but it depends on how desperate governments become in the future.

    Gold and silver went up and peaked this year. No wonder when speculators can borrow at 0.25% or 0.50% and go long silver, gold. But those winners became overbought and then those winners become the new losers. That happens with every asset class that’s has gone up too much. Are Treasuries the next losers ?

    I am a gold bug because the purchasing power of both gold and silver WILL go up in the long run. But currently I am short both gold & silver.

  25. jjames…it’s a 12 year bull run.
    It’s been proven because it’s hasn’t occured.

    Like parents you keep waiting for their child with potential to stop doing heroin. Your Hyper Inflation Child has been using for 30 years. He’s in a defaltionary Hole and you keep thinking one day he’ll get Hyper. But’s he’s asleep in dream land.

    I’m not sure who’s got the problem the child or the parent. …many just yelled BOTH. He is not because he hasn’t thus we must conclude today he is not..maybe, just maybe later…but the argument for the Hyperinflation in the past was for today. This target keeps moving for you guys and your yearly wrong, monthly wrong, and daily wrong but it will happen. Like New Mexico St. getting the BCS bid over an SEC champion in the title game. Yes..you never know.

    CR-said he thinks Gold is consolidating in a bull market. Not popping and dying.

    Have you seen this site….there are no subscription fees or dues..just one guy(and a sweat shop of economists in L.A) offering solutions to help YOU. To offer guidance and action. From where I sit. I’d pay less attention to what you think Cullen said and what he’s done. Or How he can help you. He’s not against anyone. Hes’ got no axe to grind. If hyperinflation occurs….he will lay out in advance why. If…and why would he do this. Because he has no axe to grind..he’s here to help. I don’t know why people come here to hate on one of the few guys who is offering solutions.
    SOMETIMES HE REMINDS ME OF THE FIRE DEPARTMENT WHO ANSWERED THE CALL IN LOS ANGELES DURING THE RIOTS. THEY CAME TO HELP SAVE LIVES AND THE CITY AND OCCASIONALLY GOT SHOT AT? YET HE TAKES TIME TO TALK AND HELP THE SHOOTERS ALSO.

  26. Peter D

    I agree that our monetary system works in manner that can be counter intuitive. But that doesn’t change the simple arithmetic.

    Eventually the debt will grow so large that the USA is forced to default or hyperinflate. That’s it. There is no third solution.

    Personally I don’t think the government will default on it’s bonds.

  27. There’s no such thing as defaulting. We owe the debt to ourselves and it is fully denominated in a currency we can print. So there’s no such thing as paying off the debt or not being able to meet our obligations. You’re thinking in terms of a household or business, but the analogy doesn’t apply to a sovereign currency issuer.

    We could most certainly hyperinflate. But that’s a very different phenomenon than defaulting. Hyperinflation has tended to occur in countries that experience productivity collapse, loss of war, loss of monetary sovereignty (foreign denominated debt for example) or regime change. None of those instances apply to the USA. So, looking at aggregate govt debt levels can be very misleading. It doesn’t necessarily mean we will have high inflation…..

  28. “Eventually the debt will grow so large that the USA is forced to default or hyperinflate. That’s it. There is no third solution.”

    How exactly do you arrive at such conclusion? Not only is it wrong mathematically, there is plenty of actual counterexamples. Out debt-t-GDP was much higher after the WWII and yet we neither defaulted nor hyperinflated. Japan has debt-to-GDP of 200%. British debt-to-GDP was 250% during Napoleonic wars, and yet they went on to finish the industrial revolution and their debt-to-GDP went down substantially.
    You sure you even understand the math behind the Intertemporal Govt Budget Constraint? If your economy grows at a faster rate than your debt then you may never need to run surpluses at all and still your debt-to-GDP goes down (here is something to help you along: http://www.docstoc.com/docs/78894253/pn_11_02)

  29. “Unfortunately, millions of people have bought into this meme and “invested” their hard earned money in the false analysis of the doom sayers who sold this hyperinflation theme to an unwitting public. ”

    This could be written about stocks as well.

  30. Trixie-

    I never push any thing… make no mistake my reference to church was just a reference and not anything more. I have my personal views on some things. But I would not be surprised to see someone take your idea of an orbiting religious symbol as a way to extract votes or money from the populace.

    I enjoy your comments and spunk.(they only use the word spunk in western movies)

    I pick up LVG, and JWGs content. Insightful and intelligent. Me..it’s emotion and stupidity. You…good stuff with personality. So I note the calming Trixie that awoke this morning. Hope you have a good week Trixie.

  31. I agree with that. I think the USA will have very low inflation or even deflation for many years. But eventually the debt will grow so large that the bond market will crack and at that point the monetary floodgates will open.

  32. “”We owe that debt to ourselves, it’s intergovernmental””. Yeah. Sure. But still someone has to cough up the dot/print the money, that $ 14 trillion. Do you really think the FED will “”print””/issue so much money ?

    Yes, the US is a currency issuer but there’s a limit to what they will issue. Perhaps they will issue 4 trillion or 10 trillion but 14 trillion ? I very much doubt it.

    No, I think the US will default on its debts and restructure its debts.

  33. James Grant (Grant’s interest rate Observer): “”Deflation is a credit destruction event””. And a lot of debt won’t be repaid at all. On top of that consumers are trying to deleverage and that’s deflationary as well.

  34. So, Willy, if you go and write on a piece of paper “I owe Willy2 (myself) $100T”, do you now need to issue $100T to extinguish it?

  35. And I was talking only about $4.6T in intragovernamental debt, not 14T. Sometimes I wish people actually, you know, read comments before replying.

  36. James Grant has been hilariously wrong in his analysis in recent years. The author of the interest rate observer doesn’t even know what moves interest rates…..

  37. Peter D

    You are correct, debt to GDP can rise to unbelievable heights without a default… as long as an economy is growing. But the economies of the 1st world are no longer growing. If the USA continues to stagnate while it’s debt continues to grow eventually we’ll be forced to default or inflate.

    At 200% debt to GDP and years of no growth Japan will get there first. I don’t see them getting to 300% debt to GDP. Certainly not 400% debt to GDP. No way.

  38. It is as bad as you think for gold bugs – many purchased during 2000 and again 2008. Also this is not a big correction – it fits similar corrections in 2008, 2006 and this downturn represents a buying opportunity for them. I agree that Johnny come lately who bought during 2010/2011 will be burned and likely sell at a loss,

    Also you really can’t win with a gold bug hyperinflationist because 9/27 (tomorrow) is options expiration on Comex so the downturn completely fits their view of gold suppression by the government and the big banks.

    My view is we dead cat bounce in line with the 9/27 option expiration. Then we see a flurry of written responses to gold naysayers like Cullen concluding these naysayers were wrong. This will suck a few more people back into gold, before it more fully corrects with the remainder of the commodity complex and find a bottom to completely frustrate these late to the party gold investors.

    It is pretty simple forecast and we will know within a few days if precious metals rally if it holds any water.

  39. “But the economies of the 1st world are no longer growing.”

    This is news to me. US even now is on track to grow at about 1.7% for 2011. And the surest way to stop growing right now is to deprive the economy of the money that it demands – for example, by slashing the Federal Deficit.
    The only reason to really stop growing (and Japan’s problem is first of all demographic – and this is not true for the US) is the lack of real resources. The best thing we could do is to throw as much money as possible (with 0 regard to debt-to-GDP and only with regard to the best possible science) at the problem of switching to renewable energy and addressing the climate change.
    Finally, if the economy is no longer growing then there would no be real reason for the debt to grow. The causality runs from private sector’s savings desires to debt. So, while savings desires may fluctuate a bit, they are likely to stabilize if the economy is no growing. Japan will not go to 300% debt-to-GDP not because it is “unsustainable” or any such nonsense, but simply because there is no good reason for them to do so.

  40. The world has been built on debt over the past 20 years +. That debt is now going bad.

    Mr Bernanke (does he understand MMT I wonder?) knows that AT ALL COSTS he has to avoid the debts from dragging the economy into a defaltionary depression. So, as we have seen to date, he is very happy to create new base money to pay the banks full value for their bad debts. To a lesser extent the same has happened in Europe already, and may happen again.

    Once you grasp that the whole dollar system is based on the survival of that debt, then you realise that there is no upper limit to how many new dollars will be created to ‘save the debt’.

    Bernanke isn’t stupid (but he does have the usual central banker’s blind spot). So, we will get QE3, maybe QE4, I’m sure it will prolong the agony for a few years.

    Sadly, and inevitably, the world notices how the dollar is being abused by its issuer, and so the slide in the dollar index continues, and the pace will accelerate.

    Eventually, in an instant, there will be a panic-driven rush out of the dollar, probably a run on treasuries, and then a run on banks, and finally a run on the cash itself, as people rush to buy real assets.

    That is hyperinflation: simply a total loss of confidence in the currency (for whatever reason).

    My challenge to MMT folk, and our host: I admit that if the Fed et al change their ways, and restore some confidence in the dollar, then hyperinflation can be avoided.

    Mr Roche states: ‘Hyperinflation was never coming. It’s still not coming.’

    How can you be 100% certain that a fiat currency will not suffer a catastrophic loss of confidence? All other fiat currencies have done.

    Time will tell, but I reckon dogmatic blindness to a possible event is dangerous to one’s wealth.

    And re a comment from Peter D….you think GDP data is indicative of genuine economic growth? You think China’s empty cities represent real growth. It’s just a giant ponzi scheme.

  41. Peter D
    The US economy may be growing at 1.7% but recent news suggests that it could also be in contraction. However for arguments sake I’ll give you the 1.7%.

    If the economy grows at 1.7% and the government runs a budget deficit that is 1.7% of GDP the debt isn’t growing any faster than the economy that supports it. In theory that system could last indefinitely. However if the economy grows at 1.7% and the government runs a budget deficit that is 10% of GDP sooner or later that economy will collapse under a mountain of unserviceable debt. That’s what countries in the 1st world are doing. Japan runs a budget deficit of +/- 10% of GDP every year in an economy that has been flat for 2 decades.

    It is a mathematical certainty that at some point the world’s bond markets will crack.

  42. “you think GDP data is indicative of genuine economic growth? You think China’s empty cities represent real growth. It’s just a giant ponzi scheme.”

    What do you mean genuine economic growth? You have clear definitions or something more cosmic in mind? 1.7% is very little, we should be doing something like 3% just to keep up with population. And who mentioned China?
    Better ask: is all this debt real debt or not? I say, your comment indicates that you got the causality of our problems exactly backwards. Large debt might – I repeat, might – indicate problems in economy for a currency issuer, but it is not the cause of these problems. If your economy is unproductive, then you might have large debt, but the problem is that your economy is unproductive, not that you have large debt. Capice? With 20% un- and underemployed, do you think our problem is 70% debt-to-GDP (heck, I’ll even give you 100% debt-to-GDP) or the fact that you have 20% or population that could work and make a living but doesn’t?

  43. “However if the economy grows at 1.7% and the government runs a budget deficit that is 10% of GDP sooner or later that economy will collapse under a mountain of unserviceable debt. “

    As per my reply to Gary_UK below, this gets the whole causality wrong. Large debt is not what causes your economy to grow too slowly. If anything, there are times as now, for example, when you should be piling debt just to move your economy along. Rogoff and Reinhardt tried to prove that large debt is usually a drag on the economy and failed (had to revert to dirty tricks to “prove” their point.)
    Again, if your economy sucks it is not because of debt, but quite possibly in spite of it. And it will collapse not “under a mountain of unserviceable debt” but under a mountain of unemployment and output gap.
    And bond markets don’t fund a currency issuer. This is again such a basic misunderstanding that I am not even sure why I keep hammering something to you, when it is obvious you did not take time to even go thru Cullen’s treatise and wrap your head around it. Bonds are bought with money already spent. Money is NOT spent out of bond purchases.

  44. “With 20% un- and underemployed, do you think our problem is 70% debt-to-GDP (heck, I’ll even give you 100% debt-to-GDP) or the fact that you have 20% or population that could work and make a living but doesn’t?”

    THIS.

    Let’s find solutions that put people back to work. THEN we can have the conversation about deficits, lack of business “confidence”, and why protesters no longer have the time to protest. But my guess many of these manufactured “issues” largely go away on their own. Then I can go back to find Peter Frampton look-a-likes on Facebook and stop trolling this site. Everyone wins. Trust me on this.

  45. Peter D

    You are incorrect. Large debt (particularly when it’s used for consumption) is exactly what caused the US economy to contract. In our case the debt from the housing bubble caused our economy to collapse. Without government deficit spending that is equal to about 10% of our GDP we’d be in a technical depression right now. And of course the government can’t keep it up forever because sooner or later the bond market will crack.

  46. Consumer debt, yes. National debt, no.

    “the bond market will crack”

    You keep saying that. If you wouldn’t mind, can you please elaborate?

  47. 1550’s is where the major trend line appears for gold = rebound (moderated). Definitely buying.
    Cullen you seem to be very anti-silver, rightfully so because its bubbly move to 50$ based on hyperinflation fears etc, however it seems to me that silver is still very well linked to gold and that the real fundamentals behind it (same as gold’s) are still intact. What I mean is if you are bullish for gold, then you should be for silver as well…right?

    Cheers.

  48. I have argued that gold never entered the same level of disequilibrium that silver did. Silver got bubbly and crashed. Gold is undergoing a rather healthy correction IMO.

  49. Trixie

    For some reason the thread got so deep that I couldn’t reply to your comment.

    You wrote…

    ==“the bond market will crack” You keep saying that. If you wouldn’t mind, can you please elaborate?==

    Eventually the debt piled up by a country grows so large that it becomes impossible to service. Japan is at 200% debt to GDP and their bond market is still humming along just fine. But they continue to pile on debt much faster than their economy grows. If they kept borrowing they would eventually get to 250% and then 300% and then 350%, etc. etc.

    I assume that at some point before 300% (maybe much sooner) they will no longer be able to pay the interest on their debt. That’s the end game of either default or hyperinflation.

    Every country that racks up national debt faster than it’s economy grows eventually faces the same 2 choices. In the 20th century nearly every country (maybe every country) that went down that path hyperinflated.

  50. Yes, ok, I see what you are saying. I need to jet right now but will be back later this evening, and I’ll see if I can take a stab at this. Because it brings up a couple of my own questions. Very new to MMT myself, and I look forward to getting my face slammed into the keyboard. Sadly, it’s how I learn. :)

  51. DR01D – you’re missing the all important point, the issue of debt (treasuries) need not even happen. US could add $1 trillion dollars of deficit spending tomorrow and offer no corresponding “debt”(risk free interest savings), it would require changing a useless and outdated “gold standard” law that requires debt/savings instruments be issued. Artificial problem solved.

  52. Awakened Sheep

    You are correct because in reality there are no rules. The Federal Government and the Federal Reserve could get together and make a new law that empowers Congress and the President to spend all the money they desire without limits or incurring any debt.

    If that happened the President could authorize Congress to print $60 Trillion dollars to pay off every credit card, student loan, home mortgage, business loan, Municipal and Federal bond. Every penny of US denominated debt would be paid off in full with $60 Trillion dollars in new money.

    You are right, they could do that and it would mean the total collapse of the dollar.

  53. Trixie… Nah economics is a little bit complicated but in most cases super, super easy. Sometimes it seems confusing only because economists use their own crazy language. 8-)

    The whole thing boils down to one basic idea. Over the Loooooong term no country has the ability to consume more than it produces. In the short term anyone can borrow and live beyond their means but in the long-term they can’t. It’s that simple. Nobody will ever find a way around that problem. If countries want more consumption they need more production to pay for their consumption. Money printing doesn’t change anything.

  54. The indisputable problem is private sector debt, not public. Adjust for that and what Gary_UK says starts to make sense.

  55. DRO1D,

    how do you come with 300% being the place where Japan cannot pay the interest. At 0-1% IR it is no big deal. Say it is 1%, then they have to pay 3% of GDP as interest. And how much do they get from taxes every year? Say at least 10-20%. So no big deal.

  56. “Impossible to service”

    What, do they run out of zeros on their keyboard……

  57. “If only currency were capital, then prosperity could be printed”. Anonymous. If that can indeed work for one nation, can it
    not work for all nations? Could it not work for individuals, each printing his own commitment to “gladly pay you thursday
    for a hamburger today?” (Wimpy)

  58. InvestorX

    As far as Japan is concerned I think I remember reading that if interest rates went up just 1 or 2 percent interest payments would consume most of their federal budget. And that’s at their current level of debt which is increasing all the time.

  59. Hamish

    Exactly. They can always print more zeros and eventually they will. Just look at Zimbabwe or Weimer Germany. It’s how it always ends.

  60. “Over the Loooooong term no country has the ability to consume more than it produces.”

    So, DRO1D, here you basically admitted that the real problem is spending in excess of capacity and not debt per se. High debt might be indicative of spending in excess of capacity and yet it might not. Debt (when issued in your own currency) could be a symptom but not the cause of your problems, . Which has always been MMT position, you just failed to realize that. Read Cullen’s paper (again, if you haven’t done so), or read Warren Mosler’s 7DIF (http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/) or many other MMT blogs and you’ll that this is always what MMT claims to be the issue.

  61. Investor X

    This is from an article on Japan.

    “Even at the current low rates – 0.16pc for two years, and 0.49pc for five years – interest payments already match 10pc of tax revenues. This is twice the average for OECD rich states. A sharp jump in yields would be ugly.”

    http://www.telegraph.co.uk/finance/financialcrisis/7620444/Fitch-warns-of-debt-shock-for-Japan.html

    You’d think with interest rates that low interest payments on debt would be negligible. That’s not the case.

  62. Peter D

    Money printing doesn’t change anything. It’s that simple. If the Pilgrims had created a printing press instead of farms they would have starved.

    There isn’t any foolproof way to measure the prosperity of a nation. GDP is useful but it only provides a vague notion as to what’s actually happening.

  63. DRO1D, you’re wasting everybody’s time. You started saying that public debt was a problem. When showed that you were wrong, you quickly switched your position to alternatively, that private debt was a problem, that spending in excess of capacity was a problem, and now you talk about printing money not being helpful.
    Printing money can be good and it can be bad. When economy needs more money it can be good. When it doesn’t, it would be bad. Private sector’s growing desire to save in currency requires money printing or recessions will occur. Private sector’s declining desire to save in currency requires money unprinting (taxation) or inflation will occur.
    DRO1D, you came here with airs of know it all and keep showing that you have much to learn. How about starting now.

  64. Peter D

    Rest assured the government is not about to balance it’s budget. As the economy deteriorates there will be a call to action and sooner or later you will get all the government deficit spending you ever dreamed of. At first trillions per year, then trillions per month and finally trillions per day.

    … and we’ll see how that works out.

  65. “Rest assured the government is not about to balance it’s budget.”

    If you had half a desire to learn and not repeat things that you heard somewhere and don’t understand, you’d know that balancing the budget would be a catastrophe (just read the freaking link I supplied to you http://www.modernmt.net/2011/09/14/deficit-and-deceit/?utm_source=rss&utm_medium=rss&utm_campaign=deficit-and-deceit.) Poke around this site to learn how hyperinflations (what you’re talking about) occur. They are never a result of just “printing money”. Never ever. But you’re so smug in your “knowledge”, that you prefer to keep trolling this thread with half-assed assertions that add nothing to anybody’s understanding.

  66. I keep buing silver on big corrections and did so again the last few days. Same with gold.

    Treasuries are backed by “the full faith and credit of the United States”.

    That just doesn’t give me any warm fuzzies. Rates can not appreciably rise in the US or in Japan or it is game over. A Paul Volcker can’t come along now. Both we and Japan are stuck. It is a question of time before it hits the fan. In the menatime I have two choices: hold US treasuries and dollars (perhaps other currencies)or gold and silver. I have chosen other currencies of countries with better debt ratios but similar freedoms and precious metals.

    I will be wrong or Cullen will be wrong. This isn’t personal, it’s merely looking at the world and drawing two different conclusions.

    I read this website because I learned long ago that I can be wrong. I really enjoy everyone’s commentary because 99% of the people here are very thoughtful.

  67. Right. Grant thought in the 2nd quarter of 2009 that government bonds were in a bubble. But he is right when it comes to deflation. (=credit destruction).

  68. Cullen:
    Thanks for the link to the paper on MMT, very educational indeed.
    I have a few questions:
    When the Fed lowers interest rates, does that mean a corresponding reduction in government spending? Do you know approximately how much interest payment has been saved by the government since the financial crisis? Has this savings been offset by spending/stimulus?
    On a similar line of thought, on the foreign holdings of US Treasuries, such as China: even though the Chinese government claims they have lost money in their investment due to the debasement of the USD, aren’t they also reaping a bonanza in the price appreciation on their UST holdings?

  69. Hi Humble,

    It’s best to think of govt interest as a perpetual stimulus. This adds to the deficit to the penny. So, when the Fed cuts rates and interest rates decline they are essentially reducing the amount of interest income that is paid to the pvt sector. You can see the history of interest payments here:

    http://research.stlouisfed.org/fred2/series/FYOINT/

    China holds UST’s to maturity in all likelihood, but yes, they’re saber rattling for silly reasons anyhow. If they want to stop accumulating USTs then they need to alter their foreign trade policy. But they won’t do that because American corporations essentially employ millions of Chinese citizens. So, don’t listen to the Chinese complaining about America. They’re just misconstruing the facts.

  70. GDP as a measure was invented to suit the desires of those who like ‘easy money’, the Keynesians, and those who believe governments have a role in the economy.

    Governments just meddle, with purely political aims, and more and more people get used to what look likes ‘free money’ from their government sugar daddy. Trouble is, there is no such thing.

    And so here we are today, very near the end of the road, as the taxed can no longer support the leeches.

    Debt, unemployment, recessions, whatever: it’s coming down.

  71. Janszen thinks the country is bankrupt which is an utterly absurd notion. In response to the balance sheet recession he says:

    Richard Koo refers to his condition euphemistically as a “balance sheet recession.” That’s banker-speak for using public funds to try to close an output gap created by the collapse of a credit bubble that enriched creditors without holding them to account. As we see later in this analysis, Japan’s experiment with applying Keynesian stimulus for decades rather than for a brief period to close an output gap as Keynes intended, will be among the great economic failures that befall the world in the coming decade.

    Left-leaning economists deploy semi-scientific language to argue that we need to use public funds to prop up the economy until it becomes self-sustaining. They ignore the fact that the policy only works if the private sector can be primed to borrow more money into existence than it is retiring via debt repayment, else the dependence on deficit spending becomes structural and the spending perpetual, at least until the nation runs out of credit in a decade or two.

    There’s simply no such thing as the USA running out of credit. His entire analysis is flawed…..

  72. Cullen Roche

    ==There’s simply no such thing as the USA running out of credit.==

    You are 100% correct. When push comes to shove a determined government and central bank can create what is essentially an infinite volume of credit/debt. But the worry is that they’ll do exactly that. And because the money is being “invested” by the government we won’t get a corresponding dollar for dollar increase in real output. The US economy will be redirected towards Solyndra, Ethanol and Fannie Mae.

    World War II demonstrated that the USSR had enormous output potential. But during peacetime it became a sea of malinvestment. On paper their GDP probably went up at a respectable, steady pace but that didn’t mean very much.

  73. Cullen Roche

    ==Except my conclusions wasn’t depression (Keen), stagflation (Janszen) or hyperinflation (Schiff) so I actually got it more right than they did==

    To be fair to Keen the USA would be in a technical depression right now if the government wasn’t running a 1.5 to 2 trillion dollar budget deficit.

    As for Janszen according to the MIT Billion Prices project inflation is running at 4%. http://bpp.mit.edu/usa/ With wages stagnant a 4% inflation rate feels like stagflation for a lot of people. He’s not completely off base.

    Ok Schiff was clearly wrong about hyperinflation. If Japan has taught us anything it’s that we can expect YEARS of mild inflation before the imbalances get large enough to trigger a currency collapse.

  74. I guess why I like all three of these guys (admittedly they aren’t perfect) is because they correctly identified the problem.

    Years of unproductive, malinvestment would crash the US economy. Everybody in the MSM was focused on the latest unemployment report and GDP figures.

  75. Inflation is running at about 4% because of oil prices and some pass thru to food prices. It has nothing to do with govt deficits. Being right for the wrong reasons doesn’t count.