Total Hyperdeflationary Economic Collapse?

[Guest]

Runaway debt inflation does seem to point to inevitable debt deflationary implosion, following Ponzi scheme dynamics. However, before the end is completely unavoidable, all available suckers must be tapped out. I can't help but think "emerging" economies are potential sources for new marks, especially China and India. The question is, can the world economy create enough new debt, especially USD debt, in new places, and fast enough, to generate one more upturn in the business cycle (a real one)? I don't know.

 

The other night, Jimi posted the following, which outlines a possible program to pull it off.

 

1. Head off deflation by dropping rates to zippo and ballooning the credit system.

2. Gun fiscal stimulus through deficit spending.

3. Keep the consumer alive to sustain confidence and avoid the deflationary collapse of the economy (see Japan ca. 1990s).

4. Buy breathing space for corporate America to restructure.

5. Pray to God they restructure.

6. Allow the dollar to fall to earth to put tacit pressure on the Europeans & Japanese to reform their bloated systems (see Roach essays ca. January 2003).

7. Pray to God that the Europeans & Japanese reorganize their bloated systems.

8. Bully everyone with protectionist threats to deregulate, liberalize & otherwise open their markets (see China Policy).

9. Pray to God that in the interim, domestic corporate spending returns to take the baton-handoff from the spent consumer.

10. Pray to God that Rest-of-World restructuring generates organic, self-sustaining domestic-led growth to supplement half a century of export-led addiction.

11. Watch miraculously as the Rest of World begins to run a current account deficit to a burgeoning U.S. current account surplus.

12. See the World enter into an era of sustained growth a la 1950s, with emergence of 2 billion large middle class in China/Indian playing the economic role of post WWII Western European reconstruction.

13. Permit U.S. inflation to achieve ~4%/year and stick it there for 15 years to divide the debt burden of LSD & Leather Pants Financial Era between creditors & debtors; debtors spend next 25 years systematically paying off creditors.

14. Watch tech-led U.S. export sector produce sustained strong domestic income-growing jobs, with renewed emphasis on development of human capital.

15. Complement of sustained U.S. current account surplus is U.S. capital account deficit, a function itself of high (~12%/Income) domestic savings rates as The Most Irresponsible Generation in History suddenly sobers up and realizes that it must save massively if it wants to afford any retirement.

16. A Great Transformation throughout the Asian continent sees the center of commercial and financial gravity shift westward as it has for three centuries since the emergence of modern capitalism (see Fernand Braudel).

17. The U.S. emerges relatively smaller, but stronger & financially healthier, if not humbler.

I give this "Workout" outcome about 15% likelihood.

The alternative, of course, is Hypertiger. I give it about 75%.

There's a 10% "WTFK" category.

 

As I see it, #10 is the key. Numbers 1-9 must happen to some extent for #10 to be possible, and only if it does occur, then 11-17 are realistic outcomes as well.

 

1-9: 1 and 2 are done.

 

#3 seems a real problem. With RE starting to skid, new American debt creation must come from somewhere until billions of Chinese and Indians are ready to come on line. A bad enough down turn at present, and then it definitely looks to me like the 4 month scenario for a major depression.

 

4 is done. Corpses have been able to borrow all they want for long term at low rates, taking us to #5. Regarding 5, pray harder. Given current corporate culture and managerial attitudes, this may be as problematic as #3.

 

#6 is in progress, maybe too fast. Watching the forex markets is most interesting because it is at least something of a window looking into the international system, giving signals beyond the politically motivated posturing and bullhorning. Pulling off this scenario will require all the major central banks to be on, and stay on, the same page for quite a while. Forex action over the next couple months should reveal something of the extent they are really all scheming together, or not. CBE was kind enough to throw out a figure, 1.35. This statement could very easily be pure bullshit calculated to suck in USD shorts. Doc points out it is ultimately always short sellers that fuel rallies. If Al and his buds at BOJ and CBE are worried about the acceleration of the USD collapse and wish to do another Circle Jerk, wouldn't they best prepare by sucking in as many new shorts as possible? While the motives may be different than when market makers and da boyz pull this stunt in equity markets, the market dynamics are the same. The Circle Jerk in June 2003 resulted in a USD rally lasting a few months. In any event, I see coordinated intervention well before 1.35 versus continued collapse with CBE only acting unilaterally in its own stated perceived self interest as a major tell on how cognizant, and afraid, the central banks are of a major hyperdeflationary debt implosion, and how willing they are to work together in the face of mutually assured destruction as the alternative.

 

7 and 8. I don't know enough about these for even a brief comment. My wild guess? Pray harder.

 

#9. I see this as very problematic, and it exposes a fundamental flaw with reflation. As has been discussed extensively on this site, "reflation" is just a somewhat respectable sounding euphamism for bubble pumping. At the same time, such pumping by its very nature provides incentive for corpses to NOT invest in real productive capacity, which is the kind of spending that is desparately needed, especially hiring. Insteady, they riverboat, hoping to stay above water (especially pensions), just like the rest of us do in our individual situations.

 

As bad as it sounds, keeping the jig alive essentially boils down to bringing a substantial number of new people into the Ponzi scheme. Doing so satisfies #10, by definition. However, in between this and the American consumer becoming maxed out, I believe some real business spending is absolutely necessary.

 

If somehow, some way, the plutocracy engineers one more real upturn in the business cycle, it should buy us a little more time, at least until 2010. I am definitely routing for it, though I really do not know if enough potential for new debt creation actually exists. In my opinion, the fundamental problem with the world socioeconomic order is monetary. Specifically, I see the core problems as state-issued currencies (central banking is just one variant of this) and usury.

 

Any thoughts?

[Hypertiger]

It is highly dependant on psychology and debt inflationary potential...

 

If they can engineer mortgage rates lower then at some point the refi sweet spot will will be hit...like forcing someone's head under the water then when they finally are allowed to breath huge, amounts of air are gasped...

 

Then there is the bias which appears to be the application of responsible capitalist thinking to a system that is based on absolute capitalist thinking...Trying to find solutions or think of solutions to solve a problem that has only 1 solution...what is the problem? debt inflation and the solution is debt deflation or is the problem debt deflation and the solution debt inflation...

 

Too little debt inflation and the system slowly loses energy and debt deflation shows up...Too much and the maximum potential of the system to produce debt inflation is reached...once the system reaches the maximum potential to produce the required amount of debt inflation to overpower debt deflationary forces it implodes...

 

Unless something is done to allow the debt inflationary potential to strengthen enough to overpower debt deflationary potential...to postpone the inevitable

 

for the past 23 years the methodical lowering of interest rates along with the reduction or removal of regulatory barriers to debt inflation when maximum potential is approached or it's effects become visible...

 

Rates can only drop so far or so fast...and fractionally reserved systems only grow weaker over time we are on the doorstep of the required amount of debt inflation needed to overpower debt deflation will become infinite or exponential hyperinflation forever...

 

Which is worse? driving into a brick wall at 10 miles an hour or 100? that is the kind of effects we are talking about...Well the ability to crash into the wall at 10 - 15 miles an hour was gone in the early 1960's and currently we are doing 75 miles an hour and by 2005 if everything follows the models we will be at the theoretical maximum potential... or 100 miles an hour...past that point the speed increases exponentially...In Germany it took a year to reach trillions of miles an hour...

[Guest sigmoidoscope]

I find myself agreeing more and more with HyperTiger. This is truly frightening (the fragility of the financial system, not agreeing with HT, LOL).

[Hypertiger]

 

It could have ended badly in 1958-63 now we are so far past the point of ending badly that it is beyond frightening...It is so bad I'm amazed I can even function on a daily basis...

[mjkst27]

 

It could have ended badly in 1958-63 now we are so far past the point of ending badly that it is beyond frightening...It is so bad I'm amazed I can even function on a daily basis...

didn't anyone with any systems knowledge realize there was a problem in 1960 when debt growth took on a life of its own, so soon after the creation of Bretton Woods? "uhhhh...something nogoodski"

[mjkst27]

I know, the system is doing exactly what it's supposed to do...

[Hypertiger]

There is a rumor that Kennedy was beginning to snap out of it...But he fell back to sleep in 1963...

[Guest]

The end of this is already written. The debt deflation scenario will no doubt come to pass. Though I believe the timing is much further out than 2005 as Hyper predicts.

 

Under the existing rules (30 year mortgages, 6 year car loans), the drain would have to start soon. Since it cannot and will not be allowed to happen, the rules must change.

 

Slowly increasing mortgage lengths to 40 then 50 then 60 years over the next twenty years could provided the needed debt escalation to forestall the implosion indefinitely while sidestepping that little problem of rates going to zero.

 

It's all in the marketing. The next generation won't know any better. AG will be dead.

 

Go long wheelbarrows.

[yellowfish]

I think they already gave up on number 3...

 

Next to nobody in 28-29 thought it could come down so hard and so fast either...

 

This time the crash will dwarf that little depression crash by like 100X, and of course nobody beleives it can/will happen now either. Please dont delude yourself into thinking this will be ala japan 1990s.....no way. Babylon may very well be razed in an instant.

 

I think HT is right a scapegoat for the collapse will be formulated (probably already has been) as the cover. IMHO it has to be a NYC terrorist attck. Dirty bomb or god forbid a full out nuke. The Matrix pulls the plug on the SM jamming, central banks raise rates, and the whole thing just comes unglued....like it was always intended to.

[threadbare]

Busted Flush, Thanks for that. The 50+ year mortgage is a real possibility, as you point out. The powers that be will do anything they can to postpone the inevitable but the timing of a deflationary collapse will depend on the quality of loans that are issued. Whether they're 30 40 or 100 years old, if you're not working, you don't qualify. The term "jobless recovery" will be revealed as the farse it is, when high unemployment eventually scuttles the economy and deflationary forces overwhelm the forces of hyperinflation. But you have a point, BF, it could take a few years.

[Guest]

I'd put away that spiked Jimmie Jones Koolaid and stop painting up those "The End is Near" signs. Save your brushes for another day.

 

You may be underestimating the Fed's power to prolong the hyperinflation scenario. To paraphrase Benny B, "The Fed has not yet begun to print".

There are many options still available which in the short term are politically palatable (though toxic in the long term).

 

We may soon be hearing about government "make work" programs at a minimum wage of $25/hour to pump employment and keep Joe6Pack servicing that low monthly 50 year mortgage all deficit financed by our trading partners, equally desperate to keep their economies afloat by selling to the consumer of last resort (Americans).

 

Just as the Fed absolutely will not allow the deflationary scenario here in the US, all our main trading partners (except China and India) are subject to the same deflationary risks. All Asian and European countries must commence printing their currencies at whatever pace is necessary to sustain currency equilibrium though purchases of US$ indefinitely. Clearly Japan does not have the political will to resist this scenario. If the EU for some reason refused to play ball, then all bets are off.

 

The endgame might be to keep the whole shabang afloat long enough for the Chinese and Indian economies to mature enough to pick up the debt inflation ball and run with it. Or maybe they just don't know.

 

One thing we all learned from the 2000 stock bubble. Illogical extremes will always continue much much farther beyond what the logical mind can possibly believe is tolerable.

[machinehead]

One thing we all learned from the 2000 stock bubble.  Illogical extremes will always continue much much farther beyond what the logical mind can possibly believe is tolerable.

That seems to be the lesson of the whole post-1971 fiat currency era, doesn't it?

 

During America's first 150 years, the price level was roughly unchanged. Stocks rose somewhat along with per capita economic growth, but not by a large amount.

 

For a denizen of the 'modern' era, it's surprising to come across references in the 19th century literature, mocking real estate as a poor investment.

 

In that era, real estate went up only if it were in the path of urban growth. Property whose density and use remained unchanged did not go up. In fact, it often went down.

 

"Investment" in our fiat currency era just means looking for bubbles. Find a trend and ride it, assuming that more and more liquidity will be pumped into it. Any economic 'value added' is quite irrelevant.

 

The extremes seem larger now than in the past, when a golden anchor quickly limited and popped bubbles. One day will occur an extreme so large that it fractures the foundations of the system, which have been recklessly centralized.

 

But as you say, not yet. Borrowing hasn't been carried to the "swill till you puke" point. But it will.

[Hypertiger]

German Hyperinflationary salvation

 

Dates

Feb 1920 to May 1921 Internal Prices 4.6%

May 1921 to July 1922 Internal Prices 634.6%

July 1922 to June 1923 Internal Prices 18094%

July 1923 to Nov 20 1923 Internal Prices 854,000,000,000%

 

Even the most wonderful scenario is over in 2006...

[threadbare]

Very interesting thread,

 

Machinehead's comment about riding bubbles is true, especially if interest rates remain low. There's an interesting phenomenon occuring at the moment. I see it when I wander the streets of Vancouver. It's becoming more and more apparent, that you have a choice when purchasing property there. You can buy an affordable (but still relatively expensive) apartment in a scary neighbourhood with high crime rate and other attendant social ills, or you can pay almost double to buy an apartment in an area that is nice, but no hell...just a little more scenic and lower crime rates. A 1000 sq ft. fixer upper house that a single member of the lower middle class could easily afford a generation ago, in that same area, is now $650,000. I kid you not.

 

Canada has a banking oligopoly. I think there's 4 banks to choose from. You have a wide choice of terms where mortgages are concerned, from really lousy and all in the banker's favour, to just slightly less sh**ty and confining. There are no 30 year fixed mortgages at any interest rate. The longest you can lock in your rate is for 10 years on a 25 year term. If and when interest rates ever do go up, there will be massive foreclosures. Much worse here than in the U.S., where you can at least lock in your rate, for the life of the mortgage.

 

The real estate bubble to ride, is the bubble of time, if you can wait 10 years in a hot market. In a severe depression hot markets are lucky if they remain luke warm. The proletariat (us) will be occupying poorly built neighbourhoods showing signs of both structural and social decay.

 

The ridiculous aspect to all of this is property that is truly scarce, in high demand and occupied by the upper 1 or 2 % could actually continue to inflate in value or see little in the way of decline. This is standard third world economic picture.

 

In the U.S. the fed will eventually blow all of its ammo to offset falling or static wages, but when that powder's exhausted, in an atmosphere of rising energy prices and a falling dollar, most real estate will plummet. The upper 2% income earners will buy up properties on the cheap and rent them back to the bottom 80%. It will work a lot like a HUD operated scam but won't necessarily be the result of a conspiracy, just the usual opportunists taking advantage of a conspiracy of dunces.

 

The traditional IMF fix for economies with runaway inflation is to hike interest rates into the high double digits. It's to the benefit of politicians and their numbered Swiss accounts to ease the way for the money mafia if they choose to impose strict austerity measures.

 

Expect higher to crushingly higher rates in 10 years.

[yellowfish]

I'd put away that spiked Jimmie Jones Koolaid and stop painting up those "The End is Near" signs.  Save your brushes for another day.

 

You may be underestimating the Fed's power to prolong the hyperinflation scenario.  To paraphrase Benny B, "The Fed has not yet begun to print". 

Don't you get it? The gig is all but up. Why in hell do you think we had 9-11 and all this terror bull hooey? They know it is over very soon and they are putting in draconian control measures to keep the restless unemployed (starving)populace under control when it collapses. India and China take over??? WTF are you guys smoking. They are not anywhere near ready to be brain washed into assuming massive debt levels to support the US economy. The world economy is hanging on by a thread and it is about to snap.

 

The writing is on the wall..you can dream and you can hope, but you better get yourself and your loved ones as mentally, physically, and spiritually ready as soon as you possibly can for the CRASH...and everything that comes with it. Look back in history at mankind?s legacy of dealing with crisis...not a pretty picture.