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The trigger for a Hyperinflationary shock

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The trigger for a Hyperinflationary shock

Podcast with Gonzalo Lira

Link to here: http://tinyurl.com/GEI-LiraHyp

===============================

 

In this conversation between Michael Hampton and Gonzalo Lira in Santiago, Chile, the two discuss the shock event which could trigger a sudden move into hyperinflation within the US. Mr. Lira argues that there is already enough money in the system to trigger a "Shazaam moment." And Mr. Hampton argues that there is a third alternative to default and hyperinflation, and that's Haircuts and sharing the pain, the pathway that the UK has started down. The discussion gets lively as the two put forth opposing points of view, and they agree that hypenflation, if it comes, may play out differently than many expect. For instance, will property be a good investment in a hyperinflation scenario?

 

The trigger for a Hyperinflationary shock:

http://globaledge.podbean.com/2010/09/10/t...ationary-shock/

 

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Charts

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TLT / T-Bond etf ... update

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DXY / US Dollar ... update

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TNX / Bond Yields ... update : TNX vs. DXY

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SPY / S&P500 etf ... update

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GLD / Gold etf ... update

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Compare - Where did the money go? - See Below

 

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LINKS:

Gonzalo Lira's Blog :: http://gonzalolira.blogspot.com/

Prior GER Podcast.. :: http://tinyurl.com/GER-hyper10

HPC Clone thread.. :: http://www.housepricecrash.co.uk/forum/ind...howtopic=150911

" Chris Martenson.. :: http://www.chrismartenson.com/forum/hyperi...continues/44345

Thread on S's NNW. :: http://neuralnetwriter.cylo42.com/node/3468

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THE STORY ...

Was not one of money fleeing Bonds and fleeing the Dollar - since the USD actually rose while bonds went down.

Nor was it one of money fleeing bonds for commodities in general -only precious metals surged.

 

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Recent: TBonds/Stocks/US$ : Silver/Grains/Oil

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The guy is just mixed up.

 

Why are the rich going to flee the USA to some place of great opportunity when they have it sweet in the USA at a time when there is widespread economic chaos around the world and the USA is the worlds number one super power and largest economy on earth?

 

The situation in Chile was where a nutter was destroying the economy for the benefit of his worker cronies where the private owners were being destroyed.

 

The idea the USA is about to suddenly go down the gurgler is a bit nuts or just wishful thinking.

 

 

 

 

 

 

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Great interview, well done DrBubb. His argument sounds credible to me. Even if there is no hyperinflation, I'm confident that the run in commodities has a long way left to run. The rate of decline in the purchasing power of money is increasing in a parabolic fassion, which indicates that high inflation, which could then turn hyperinflation will be the outcome.

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Was a little disappointed to hear Gonzalo insist, about half way through, that it IS hyper-inflation, rather than give more of a reasoned approach on how it might be hyper-inflation.

 

G outright states that 10% odd inflation in CPI would be hyper-inflation, the early stage.... even as asset prices declined. Of course there are alternative theories out there that can give an explanation for this. Taking an international approach; nationally, local assets can depreciate against the local currency, AND globally, the local currency itself can depreciate against other currencies.. this would lead to price distortions and upwards pressure on such things as imported commodities and consumables.... ergo up to 10& inflation in CPI, but how can hyper-inflation be deduced from this?

 

There was no real comparison and parallels drawn between what happened in Chile and what is happening in UK/ US etc.

 

Run on the US bond market? So the panic out of treasuries involves all the banks and fat cats running to buy up all the baked beans etc in town? :lol: The elephant in the room is Japan, and any comparison with its bond market always seems to get ignored by hyper-inflationists.

 

The idea of haircuts is worth further exploring [G doesn't seem to want to see that a populist political movement in the US is leading to austerity not continued stimulus.... with a massive influence on both main parties, especially the Republicans]. Haircuts at the national level. And at the international level. imo this haircut will involve a structural change in currency/ trade, which could require the dollar being linked to gold, in order for surplus currencies to appreciate. this would lead to say a 30% haircut on the real value of their foreign reserves.... but also rebalance trade which is very much in everyone's interest.

 

It was interesting that G thought that further stimulus/ printing was not required, and the existing stock of money was sufficient to cause hyper-inflation. I find this a bit incredible though given that we are in a debt deflation, which is looking to gooble up as much money as it can.

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The guy is just mixed up.

 

Why are the rich going to flee the USA to some place of great opportunity when they have it sweet in the USA at a time when there is widespread economic chaos around the world and the USA is the worlds number one super power and largest economy on earth?

 

The situation in Chile was where a nutter was destroying the economy for the benefit of his worker cronies where the private owners were being destroyed.

 

The idea the USA is about to suddenly go down the gurgler is a bit nuts or just wishful thinking.

 

Everyone is gonna want to be in New Zealand where we will experience a population explosion shortly. Just my prediction.

 

The USA may be the worlds number one super power but how can you maintain that with so much debt?

 

Great interview find Dr B. :D

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Wishful thinking.

 

How can you have a podcast on hyperinflation and not mention velocity? Look on the internet; there's been plenty of examples of hyperinflation - all in economies running a fiat currency

 

The podcast completely ignored the velocity of circulation of the moeny supply. It's highly unstable by the way. You can't understand the cause (singular) of hyperinflation unless you get your head around this fact. Printing cash doesn't create hyperinflation straight away if cash is being hoarded (low velocity). But, as I say, velocity can quicly change. Velocity is NOT a constant.

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:lol: The elephant in the room is Japan, and any comparison with its bond market always seems to get ignored by hyper-inflationists.

 

Japan had a substantial savings. US/UK do not. How many times does this need to be repeated?

 

Good podacst Dr Bubb.

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Japan had a substantial savings. US/UK do not. How many times does this need to be repeated?

 

Good podacst Dr Bubb.

Unfortunately, it's repeated ad nauseum like some mantra. I think it's a bit simplistic to dismiss comparisons to Japan just by saying things like "they had savings", and "they exported their inflation". Consider the amount of money moving from US equities to treasuries now....the facts are that individual investors and institutions are pouring into US treasuries. Also, it's not in the immediate interests of Asian countries to see the US bond market "blow up", and they will continue to support it... for now.

 

In Japan, we may have the future of developed economies concretely before us right under our noses. Surely, this is worth exploring. Why doess Japan not even register on the hyper-inflationist's radar? Because they are not looking at the real world for their clues, but inwards to abstract certainties. :lol:

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Thanks for the feedback, everyone.

(I think Gonzalo will be pleased to hear some of those comments above, and I will suggest that he read this thread- and maybe even post a reaction here.)

 

I had to cut some bits. For example, we had a longer discussion about the issue of "how do they get the money into people's hands." I still don't understand why GL did not react to my repeated questions on this by simply answering:

 

+ It is likely Congress will do its bit in creating hyperinflation by sending out cheques when things get really tough, and people are struggling to buy food, energy, and other essentials - they won't want to stand aside and see people (voters!) starve,

 

+ One way that foreigners might recycle their dollars back to struggling Americans, would be to take their shrinking dollars and buy US stocks, and this will benefit Americans who have bought stocks at cheaper prices before they see the price rises. Personally, I think that this dumping of currency for stocks is common in hyperinflation scenarios, and the stock profits taken by Americans would help to fuel rapid inflation in the price of essentials.

 

Also, I am not disputing GL on property prices falling in Chile - afterall, he lived through that incident, and I did not. But it seems a bit unbelievable that Chile could experience some months of 20-30 PER MONTH inflation, and that Home prices would DROP in escudo terms. Part of this result may be explained by the fact that rising inflation pushes interest rates up, and property is generally pushed DOWN by rising rates, but it seems like sustained hyperinflation would eventually trigger some buying of property as a real asset that will still be around when the hyperinflation is over. Those with cash that is rapidly losing value may see "cheap" property as an alternative to perishable wasting assets like food. (The story about someone offering to swap a property for a dodgy car is amazing. And I wish now I had asked, WHY would someone make that swap?)

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Steve Netwriter has got a good thread on Hyperinflation on his website:

http://www.neuralnetwriter.cylo42.com/node/3427

 

Here's an excerpt, which I hope he will not mind that I have posted here:

 

Mish: We've still got a net contraction....for 5 quarters running, even counting government spending, we've had a net contraction in credit. That's deflation.

 

So, I guess he's talking money supply. That's deflation.

 

Mish: If $2 trillion didn't do it, why would $500 billion or whatever?

 

Mish: What is quantitative easing going to do in the face of $54 trillion worth of debt out there?

 

Mish: The Fed prints another trillion, it's just sitting as excess reserves.

 

I love the idea of "excess reserves"

 

Mish: Consumers are deleveraging, students with debt coming out of college with no way to pay it back, no jobs...

 

Mish: If all this debt could be paid back, for the next decade, we're facing structurally high unemployment....it's impossible to get inflation out of this mix.

 

He could well be right. A shrinking economy, with reducing debt.

 

But, this is the critical statement:

 

Mish: The hyperinflation case, if one wants to make one, and I'll make one right now, is congress sends everyone $60,000, that would probably do it, but is congress likely to do that?

 

Mish: All this talk about the Fed being able to drop money out of helicopters, that's not the way it works.

 

Mish: It's all backed by debt....

 

Mish: And not a bit of this could be construed as inflationary in any way I can think of.

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But, this is the critical statement:

 

Mish: The hyperinflation case, if one wants to make one, and I'll make one right now, is congress sends everyone $60,000, that would probably do it, but is congress likely to do that?

So is that it? Is that what the hyper-inflation case rests on? Are people so gullible to take this threat at face value, and see it as credible and not incredible? I've been calling this the Bernanke bluff for years. It's a bluff because they can not actually do it... there are legal and political constraints on what the Fed can do. Where does this idea of omnipotence come from. :blink:

 

Some might say it's all a schoolboy fantasy, but I couldn't possibly comment on that. :lol:

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Wishful thinking.

 

How can you have a podcast on hyperinflation and not mention velocity? Look on the internet; there's been plenty of examples of hyperinflation - all in economies running a fiat currency

 

The podcast completely ignored the velocity of circulation of the moeny supply. It's highly unstable by the way. You can't understand the cause (singular) of hyperinflation unless you get your head around this fact. Printing cash doesn't create hyperinflation straight away if cash is being hoarded (low velocity). But, as I say, velocity can quicly change. Velocity is NOT a constant.

Velocity is a name for the speed of a process by which the money moves through the economy, or gets hung up in banks.

 

The critical thing is to understand that banks are taking very cheap money (costing maybe 0.25-0.30% from their depositors), and parking it in Treasuries, where a 10 year Note earns about 10 times their funding cost, before the profit or loss from capital gains on holding a longer term instrument. Clearly, this HUGE YIELD PICK-UP, gives banks a strong incentive to park their cheap money in Treasuries, rather than taking the "commercial gamble" of lending it out to corporate or individual borrowers.

 

Loads of bankers, and other institutions are now happy to take this "low velocity" gamble. I reckon it is better to understand the factor driving bank behavior, rather than simply referring to the Velocity of money, as if it were a purely abstract concept.

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So is that it? Is that what the hyper-inflation case rests on? Are people so gullible to take this threat at face value, and see it as credible and not incredible? I've been calling this the Bernanke bluff for years. It's a bluff because they can not actually do it... there are legal and political constraints on what the Fed can do. Where does this idea of omnipotence come from. :blink:

 

Some might say it's all a schoolboy fantasy, but I couldn't possibly comment on that. :lol:

As I mentioned in the podcast, I used to believe that there was no need to worry about hyperinflation UNTIL Congress passes some truly rah and reckless laws that distribute cheques directly to individuals. In other words, my idea was that the Congress is operating the hyperinflationary helicopter, not Ben Bernanke, or the Fed.

 

But Mr. Lira's articles forced my to reconsider that idea. I now think that there may be sufficient money already in people's hands to trigger a powerful HYPERINFLATIONARY SHOCK, which could put the US on the path to hyperinflation. But Congress still has a role, if Congress never spends out those "$60,000 cheques", or never introduces massive Food Stamp, and/or Gasoline Stamp programs, the initial Hyperinflationary shock may ignite a brief burst of price rises in essential commodities. But that spurt may soon "burn itself out", if Comgress fails to "add more fuel", by engaging in some sort of emergency bailout to get money in the hands of those citizens who are suffering from the price rises.

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I am not disputing GL on property prices falling in Chile - afterall, he lived through that incident, and I did not. But it seems a bit unbelievable that Chile could experience some months of 20-30 PER MONTH inflation, and that Home prices would DROP in escudo terms.

 

1. He says on his blogg he was "too young to experience it first hand"

 

2. As far as i am concerned he clearly tells us why asset prices collapsed in local currency:

 

http://gonzalolira.blogspot.com/2010/08/hy...-will.html#more

 

Chile experienced hyperinflation, brought about by the failed and corrupt policies of Salvador Allende. Though I was too young to experience it first hand, my family and some of my older friends have vivid memories of the Allende period—vivid memories that are actually closer to nightmares.

 

The causes of Chile’s hyperinflation forty years ago were vastly different from what I believe will cause American hyperinflation now.

 

Salvador Allende was a hard-core Socialist, it’s clear that Allende wanted to implement a Maoist-Leninist regime, with himself as Supreme Leader.

 

One of the key policy initiative Allende carried out was wage and price controls. In order to appease and co-opt the workers, Allende’s regime simultaneously froze prices of basic goods and services, and augmented wages by decree.

 

private companies—forced to raise worker wages while maintaining their same price structures—quickly went bankrupt: So then, of course, they were taken over by the Allende government, “in the name of the people”. Key industries were put on the State dole, as it were, and made to continue their operations at a loss, so as to satisfy internal demand. If there was a cash shortfall, the Allende government would simply print more escudos and give them to the now State-controlled companies, which would then pay the workers.

 

the situation in Chile deteriorated in ’72 and into ’73, the stock market collapsed, the housing market collapsed—everything collapsed, as people either

 

cashed out of their assets in order to buy basic goods and staples on the black market,

 

or

 

cashed out so as to leave the country altogether.

 

No asset class was safe, from this sell-off—it was across-the-board, and total.

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the situation in Chile deteriorated in ’72 and into ’73, the stock market collapsed, the housing market collapsed—everything collapsed, as people either cashed out of their assets in order to buy basic goods and staples on the black market, or cashed out so as to leave the country altogether. No asset class was safe, from this sell-off—it was across-the-board, and total.[/i]

 

Seems to me he cannot join the dots. Or he is just looking for attention for his films.

Perhaps it is not easy to get the data...

But I think he should have a look at interest rates during that episode, and see what impact they had upon housing.

 

I can imagine that there were rent controls (holding revenues down), while mortgage borrowing costs sky-rocketed,

making the ownership of a mortgage-financed property, which was tenanted to a rent-controlled tenant, a cash-draining

situation. The holder of such an "investment", would have to cover the cash shortfall, from his own (limited) resources.

 

This would explain why someone might want to swap a negative Cash Flow apartment, for a dodgy student-owned car.

 

 

 

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Perhaps it is not easy to get the data...

But I think he should have a look at interest rates during that episode, and see what impact they had upon housing.

 

I can imagine that there were rent controls (holding revenues down), while mortgage borrowing costs sky-rocketed,

making the ownership of a mortgage-financed property, which was tenanted to a rent-controlled tenant, a cash-draining

situation. The holder of such an "investment", would have to cover the cash shortfall, from his own (limited) resources.

 

This would explain why someone might want to swap a negative Cash Flow apartment, for a dodgy student-owned car.

 

Maybe it is just simpler? If the government are going to fully implement maoist leninist thinking as per GL you will not be allowed to own property. So you run for the hills while you can.

 

http://gonzalolira.blogspot.com/2010/08/hy...-will.html#more

 

Allende wanted to implement a Maoist-Leninist regime, with himself as Supreme Leader.

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So is that it? Is that what the hyper-inflation case rests on? Are people so gullible to take this threat at face value, and see it as credible and not incredible? I've been calling this the Bernanke bluff for years. It's a bluff because they can not actually do it... there are legal and political constraints on what the Fed can do. Where does this idea of omnipotence come from. :blink:

 

Some might say it's all a schoolboy fantasy, but I couldn't possibly comment on that. :lol:

 

 

Read about the hyperinflations of the past on the net. How many of these hyperinflations have been prompted by posting the equivalent of $60 000 to households.

 

Answer: none.

 

If you've studied hyperinflations you'll know that they're certainly not caused by a sudden increase in wages either.

 

1970s wage price spiral is NOT hyperinflation

 

Hyperinflations are caused by a currency repudiation, which leads to a sudden surge in velocity. Cash previously printed by CBs to combat 'deflation' suddenly enters the real economy and.......kaboom

 

(no need for mocking /moronic smilies)

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... How can you have a podcast on hyperinflation and not mention velocity? ...

The podcast completely ignored the velocity of circulation of the moeny supply. ...

:blink: What do you think is a flight from bonds/cash into commodities? Sounds like major velocity to me.

 

Japan had a substantial savings. US/UK do not. How many times does this need to be repeated?

Apparently infinitely. Another fact that gets ignored is that a currency event in the USD will ripple through ALL western currencies while it is fairly irrelevant what Japan does on its own.

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... Why doess Japan not even register on the hyper-inflationist's radar? Because they are not looking at the real world for their clues, but inwards to abstract certainties. :lol:

<_< Surely you have been following news from Japan recently? It seems to me that Japan is already on the radar of quite a few people for it becoming more and more unsustainable and unstable. The jury on Japan is still outstanding. The US problem might trigger a Japan fiasco.

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Read about the hyperinflations of the past on the net. How many of these hyperinflations have been prompted by posting the equivalent of $60 000 to households.

 

Answer: none.

 

If you've studied hyperinflations you'll know that they're certainly not caused by a sudden increase in wages either.

 

1970s wage price spiral is NOT hyperinflation

 

Hyperinflations are caused by a currency repudiation, which leads to a sudden surge in velocity. Cash previously printed by CBs to combat 'deflation' suddenly enters the real economy and.......kaboom

 

(no need for mocking /moronic smilies)

 

 

I concur with this. For some reason, some posters wish to invent convoluted, contradictory and incomprehensible scenarios while dismissing common-sense and proven models. It's a type of hobby I suppose.

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... I now think that there may be sufficient money already in people's hands to trigger a powerful HYPERINFLATIONARY SHOCK, which could put the US on the path to hyperinflation.

OK, that is some progress.

 

But Congress still has a role, if Congress never spends out those "$60,000 cheques", or never introduces massive Food Stamp, and/or Gasoline Stamp programs, the initial Hyperinflationary shock may ignite a brief burst of price rises in essential commodities. But that spurt may soon "burn itself out", if Comgress fails to "add more fuel", by engaging in some sort of emergency bailout to get money in the hands of those citizens who are suffering from the price rises.

Now we're at the question how HI could be sustained after a first trigger. And, given that you might already have had a look at FOFOA's/Steve's posts, the answer is clear: the US itself is totally bankrupt if costs suddenly go up 50% or similar, so, the only way out (to avoid extrem immediate pain) is to print. That's is how a vicious circle can start. The political will is what people like Mish/Prechter/AAK etc. just totally ignore or simply misjudge. Especially in the US there will be no political will to create extreme pain in the population and in government. Otherwise, they could as well balance the budget right now.

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