Trader Vic Explains Hyperinflation

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Hmm. If everyone, including the RBA, is so sure that a hyperinflationary depression is not likely, then what is legendary trader Victor Sperandeo doing saying the exact opposite?

If you don’t have time to watch the four minute segment on CNBC, his point is simple: long-term structural deficits in the US make it nearly inevitable that bond investors will cease funding US deficits and yields will rise, forcing debt monetisation by the Fed.

Yes, yes, it seems like an extreme scenario. But if you haven’t noticed, we live in extreme times. Lindsay Lohan is in jail. The President of the United States goes on “The View” to conduct a national therapy session with the Estrogen Class. And much of the world remains hog-tied by unproductive zombie debt.

Incidentally, Sperandeo says the hyperinflationary depression “trade” is precious metals. We would sort of agree. But it’s not really a trade. Buying Pets.com in 1999 was a trade. Buying precious metals in 2010 is insurance against financial catastrophe. Either you take this stuff seriously or you don’t. The choice is yours. But there’s clearly a lot at stake over whether this “extreme” view is accurate or just, as some claim, hyperbolic.

Speaking of hyperbole, have we over-stated our case about government debt? No, says Nassim Taleb in a BusinessWeek interview on what makes the financial system so fragile:

The massive one is government deficits. As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos, you can land two or three weeks late. How often have you landed two hours early? Never. It’s the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realized there was a huge bias in the way people estimate deficits and make forecasts. Typically things costs more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it.

The problem is getting runaway. It’s becoming a pure Ponzi scheme. It’s very nonlinear: You need more and more debt just to stay where you are. And what broke [convicted financier Bernard] Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers.

But wait, Australia doesn’t have this problem does it? A few readers wrote in and asked us to look at this column by Ross Gittins and re-evaluate our position on the severity of the debt problem in Australia. The argument is that if your household mortgage was just 6% of your income, you’d be quite happy with that ratio, so why the big worry when Australia’s public-debt-to-GDP ratio is just 6% of GDP?

Such a blasé attitude about debt is remarkable really, given a world that’s hobbled by reckless borrowing decisions taking by households, banks, and governments alike that leave such a massive economic hangover for years. But there are a couple of points to be made about the article. First, every single dollar spent by the government comes from your pocket or the pocket of a business. It’s money that necessarily reduces the money somebody could spend, save, or invest.

There is, of course, a philosophical issue too. If you choose to go into debt to buy a long-lived capital asset because you value the security of owning your own home, that’s your own financial choice. You live with it and whether you can pay the mortgage from your income – money you earn by your own labour. That’s a voluntary decision made by you and your household alone, which is appropriate, considering you and you alone are in the best position to not only determine what you can afford, but what you want.

The government is not a household. It does not have income. It has money which it has to take from someone in order to give to someone else, whom it deems more worthy. Whether or not you object to that arrangement (and obviously we do, since it’s theft), there is the added question of “more worthy” or whether the government is confiscating capital from the private sector and putting it some more productive use in the public sector.

You’d have to be living on the face of the sun to not realise how wasteful government spending has become. It certainly hasn’t been productive. But it must be paid back all the same. And the borrowing continues like a bad habit. Modern democracies do very poorly at limiting public spending. Imagine that, people voting themselves money that’s not theirs. It’s organised crime without the Tommy guns and wingtip shoes.

More topically, you have to ask yourself if turning a $20 billion surplus into a $40 billion deficit was an example of “worthy” spending that saved the economy from a recession by electrifying hundreds of houses, killing four installers, and building over-priced school buildings (what is so revolutionary about that anyway?). Mind you we don’t reckon the Liberal party would have behaved much differently. It’s already promising to extend government spending on paid parental leave in a transparent attempt to soften hard man Tony Abbott into a compassionate conservative.

But that’s exactly the point. Tolerating or endorsing government deficits and debt is akin to saying you believe that the government knows what to do with your money better than you do. That’s rubbish. It is in the nature of the Welfare state to consume an ever-growing share of private resources. It’s a virus and a plague and a monster and we should not endorse feeding it. Ever.

Besides which, the most serious debt problem in Australia is not yet the public debt. It’s private debt. By world standards, the Aussie household debt to income ratio is at the top of the charts. Specifically, the ratio of household debt to disposable income is 158%, according to this rather distressing article in Forbes.

What’s most distressing is the determined ignorance/indifference of most of the Australian media to take seriously all the evident signs that Australia has a debt-fuelled house price bubble. It’s not the first time we’ve seen it, although the level of condescension, arrogance, and vitriol directed at housing bears here is comparatively high. But then, the real estate industry probably throws a fair few advertising dollars the way of the newspaper industry these days and a lot of determined housing shills have a vested interest in talking up their own book.

But have we gone off the deep end ourselves and become too ideological? Too extreme? Too extremist?

To be fair, we’ve always admired the even-temperedness of most Australians. The country seems to take things in stride, never over-reacting or getting too fussed. But politically, or at least economically, this is probably a liability. Your good will is being exploited by the Keynesian dinosaurs clinging to their interest rates and orthodoxies from the past and prodding you accept creeping government debt and power in your private life. They are vermin and scum of the lowest order.

They would like you believe there is a sensible, socially conscious way in which government can improve your quality of life through a more just redistribution of the wealth generated by the private sector. But that is just a really well-tailored load of crap. It’s a ruse designed to keep you forking over money to people who keep wasting it on things they believe you should care about while putting up more speed cameras and taxing more and more goods and services to pay for their fat guaranteed public pensions.

That’s not to say there aren’t things you should care about. But we’ll leave those things up to you. It is, at least for a now, a relatively free country. It’s a common accusation that people who believe in the free market are not compassionate because they are against government welfare programs. More rubbish by the bullies in the moral police force. Pigs.

It’s easy to be compassionate with someone else’s money. That’s what we call the outsourcing of virtue to the State so you can watch the Masterchef finale guilt free. It’s much harder, for example to follow the Golden rule and do unto others as you’d have done unto you. Government debt is just a cheap way of trying to avoid the very real obligations we all have toward one another every day.

And with that, we’ll take back to our sick bed, which you may argue has affected our mind already. The doctor advises bed rest, lots of fluid, and less news consumption. We’ll take him up on all three, until Monday, where we promise to leave off chronicling the moral rot of the Welfare State and get back to how be financially free in an unfree world.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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38 Comments on "Trader Vic Explains Hyperinflation"

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Biker Pete
Guest

Deflation for the US, mild inflation for Australia.

Thanks for the reference to Gittins’ view on Australia’s debt, Dan:

http://www.brisbanetimes.com.au/opinion/politics/dont-take-the-bait-when-they-say-were-drowning-in-debt-20100727-10u6r.html?comments=183

It’s a breath of fresh air in the Cave of the Bear Clan.. ;)

Rob
Guest

I may be betraying my ignorance – I’m only a bush accountant.

Why do they always measure public debt (being Govt debt I understand?) against GDP? That seems to me like measuring my debt against my neighborhoods income. After all the government doesn’t contribute to GDP.

Public/govt debt should simply be measured against annual government tax receipts for a true measure that actually means anything.

Or to measure any debt to GDP then ALL debt, private and Govt lumped together against GDP sounds like a sensible measure.

Ned S
Guest

“That seems to me like measuring my debt against my neighborhoods income.” – The logic is that when your neighbour is your government, then your income is potentially your neighbour’s income perhaps?

Biker Pete
Guest

“…measuring my debt against my _neighborhoods_ income…”

Which US state has ‘bush’ accountants?!~

More seriously, why should my private debt be measured against government tax receipts? It’s _my_ debt. If I blow a couple of mil taking property loans I can’t afford, I doubt the Australian government will bail me out!~

Clearly Australian banks see private debt in property as low risk. :)

Ross
Guest
Please please please don’t debate Gittins. We could not have endured his “blase” attitude and his “it will all be all right in the mornings” patterned repeating rhetoric for the decades he has snaked around. Gittins needs to have his grovelling SMH post Keating apology nailed to his head. Yes debt did matter – sorry he said and – then he can’t help himself and goes back to writing the same tripe he always wrote. Gittins will never view this country’s current account as any matter of consequence, he had enough trouble taking on board the unsustainability of Keating government… Read more »
Biker Pete
Guest
HaHa… Always enjoy your stuff, Ross!~ I _rarely_ agree with Gittins on anything, but he’s right in this instance. He’s not arguing the US is AOK in this piece, rather that Australia’s debt is _no big deal._ Now we know that _both_ parties state they can get us out of debt in just three years. Both the Libs AND Labor have proclaimed we’ll be in surplus in just three (3) years!~ :) Rarely do opposing parties concur on any critical financial necessities. Both say it’s feasible. Clearly Gittins agrees with both parties. Now if Gittins stated that the US or… Read more »
Ned S
Guest

“have no-one make a call on the US” – What are you expecting Ross? For the US to say that if you won’t lend us more then we will default?

Ned S
Guest

There are some thoughts being bounced around that a GST/VAT could go a long way towards balancing the US books Biker. They are one of the few countries that haven’t actually played that card yet. And it’s a biggy. But immensely unpopular – And even more so in a country whose constitution was written by some Boston Tea Party participants I’d guess?

Biker Pete
Guest
“…a GST/VAT could go a long way towards balancing the US books Biker…” Their state taxes are quite a mishmash, Ned. Not as much a confused debacle as Canadian GST/PST taxes, but then Canadians get _so much more_ bang-for-their-buck than Americans do… . I confess I actually saw Obama on ‘The View.’ Just flicked the TV on and was transfixed. I’d never seen those women actually shut-up-and-listen!! Usually four of them are talking over each other and a fifth is loudly attempting to interject!~ Dan had an excuse for watching it (he’s ill), but I doubt his condition was much… Read more »
Don
Guest

I love this comment below Gittin’s usual tripe:

“I heard that in Economics examinations at Uni, they use the same questions each year, but just change the answers!”

:)

Biker Pete
Guest

Top marks for that one, Don!~

Looking at Karratha at the moment. You’d have to be confident in China’s expansion to jump into rentals there, but one of our tenants scores $200K+ pa on just two rentals there, so I’m just a little green with envy?!*

Anyone know anything about Gladstone? A developer just contacted us for a looksee. Might have to fly back to QLD for another look… .

* Having just laffed at the idea of anyone paying $57K rent pa in Sydney! :)

Ned S
Guest

You’re a good man Don!

I know I’m not the sharpest tool in the shop. So when it comes right down to it I still tend to revert to the 4 questions ‘wise ole mamma’ asked me when I wanted to whisk her little girl away:

* Do you have a job!
* Do you own a house!
* Do you have some money in the bank!
* Do you own a car!

Not sure what the fascination with automobiles was? – A cultural thing maybe??? :)

Ned S
Guest

Maybe I misunderstood and she said ‘cow’? :) :) :)

Biker Pete
Guest

Youngest (25) doesn’t drive. Haven’t quite sorted his excuse:
“Why drive, when you can call a limo?!~”

Think I’ll start spending the kid’s* inheritance… . :)

* Note position of the apostrophe, carefully… ;)

delory
Guest

Lets have another ‘decade-of-the-wild-party’. We could ramp up public debt north of 400% of GDP. The economy would ‘hit the wall’ just as the boomers park their motorbikes for the last time and move into medical and aged care facilities. The rest of us can then quietly move to New Zealand….Sounds like a plan ;-)

Ned S
Guest

“Sounds like a plan” – Well Plan A anyway. ‘Course as a boomer my vote for Plan B would be to up immigration of cute little 20 yo Asian aged care assistents to 2M pa??? ;)

Biker Pete
Guest

“motorbikes”?

Gawd, yer old mate is back, Ned!~ ;)

“…up immigration of cute little 20 yo Asian aged care assistants to 2M pa”

I second The Plan. ROFLMAO, legs-kickin’, etc… you know the scenario… :)

Ross
Guest
Ned, I wouldn’t punt on what will happen. If anything shifts in any major way it is going to be ugly. But they don’t have to worry as much about bond vigilantes if they all have skin in the game and the alternative is default and who would take on the UST? Many sabres rattling around China, they have no offensive game, passive aggressive is their best option. US pulling out of Yellow Sea war games is good for stability. I saw a aplausible report that pointed toward the fact that Cheonan might have been an accident and bad seamanship… Read more »
Ned S
Guest
“who would take on the UST” – I’d actually love to know Ross? Because someone certainly seemed to give them a hell of a bad shakeup back in September 2008 : http://seekingalpha.com/article/119619-how-the-world-almost-came-to-an-end-on-september-18-2008 “wouldn’t punt on what will happen” – Unfortunately I agree that it isn’t especially wise to be making a committed call on anything much re the global economy just yet. Geomilitary stuff – Damn silly for us to be aligned for mine. China is happy to buy our minerals. And couldn’t possibly see advantage in those minerals ending up in the hands of any nearer neighbour that just… Read more »
Ned S
Guest

Hmmm … And you imply I author disturbing mental imagery Biker? I’ve got this mental pic of Tamara turning up to take your Shiraz glass away and slap you down sometime real soon me ole mate? :) :) :)

The List – Very gratefully received when it comes my way – Ta. Let me know if there are any issues that remain in doubt. I’ll run them by my fav’ bean counter and scum sucking bottom dweller for second opinions. (I have a low opinion of FAs so shan’t be asking ANY of them! … :) )

Biker Pete
Guest

“I’ve got this mental pic of Tamara turning up to take your Shiraz glass away and slap you down sometime real soon…”

As I’ve often hummed (mainly in my sleep)… “let’s forget about Tamara…”

With you on FAs. They’re well-acronymed!~

Ned S
Guest

;) :)

vp
Guest
“First, every single dollar spent by the government comes from your pocket or the pocket of a business.” Not in Australia, it doesn’t. Australia is sovereign in it’s own currency, so taxes don’t ‘fund’ any government spending. It would be true under the gold standard, and in the Eurozone, but not in Aus, UK, US etc. “Besides which, the most serious debt problem in Australia is not yet the public debt. It’s private debt… the ratio of household debt to disposable income is 158%…” And this is because Howard and Costello ran budget surpluses, reducing the private sector’s ability to… Read more »
Ross
Guest
Ned, my reading of the deleveraging event was that it only got headed off by the liquidity injection and the seminal moment was the roll out of the sovereign swaps. If you sell USD assets trumped as collateral, however bad a haircut you take, you have to pay down the loan and unwind the derivatives (or get liquidated and the bank does it for you). To pay down the loan you need to buy USD and it gets short squeezed. Put a whole lot of USD’s into the system, provide them for free, and they have to do something with… Read more »
Stillgotshoeson
Guest

Comment by Ross on 31 July 2010:

Ned, my reading of the deleveraging event was that it only got headed off by the liquidity injection and the seminal moment was the roll out of the sovereign swaps.

Why in the deflation/inflation debate I think it may still be possible to have a bout of inflation before the deflationary effects kick in.. all this liquidity needs a home.. both will occur.. the highs and lows are unknown the timing is unknown the order sits on a tightrope.

Anon
Guest
Ross Gittins missed the point about a Nations Debt vs GDP. It doesn’t matter if Australia has less debt than most. The point is: any unneccessary government debt puts an unneccessary drag on economic growth – because the interest paid on it’s debt is ‘dead money’. This could instead be spent on government services, or taxes could be lowered – benefiting the people of the nation. Ideally, a federal government needs very little debt at all. The only debt it needs are the bonds used in ‘open market operations’ – less than 1% of GDP. Otherwise, it seems the governments… Read more »
Biker
Guest

“It doesn’t matter if Australia has less debt than most.”

Or less unemployment… or can balance the budget within three years… .

These facts are trivial. The whole northern hemisphere is better off. Asian countries are all better off. We are d-o-o-m-e-d. ;)

Realist
Guest
I share the sentiments of your argument Dan but I think the Australian psyche is somewhat simplistic when it comes to how we ended up floating gently through the beginning of this crisis. The governments ability to roll out that money, reserves and the borrowed funds, meant that life as we know it stayed the same and lets face t for a large part of our workforce things have even got better. This is not to say that the gorging on debt and fast flowing money is defendable but I think t is genuinely lost on most people that this… Read more »
Biker
Guest

Thanks, Ned. A very timely and appropriate link! :)

“…a one-year term deposit or 7.05 per cent on a five-year account for deposits ranging from $5000 to $5 million.”

I guess that answers the question re my son’s situation, with his 6.8% one- year term deposit ending soon.

The record level of Australian savings makes much of the previous blog to yours seem just a little silly… . The ‘national’ clearly isn’t in as much excretional as he might hope!~ ;)

Ned S
Guest

http://www.theaustralian.com.au/news/world/us-readies-missile-shield-to-protect-southern-europe-agaisnt-iran/story-e6frg6so-1225899639373

Oh good – The Greeks can now rest easy about Iran invading and pinching their national debt.

Ned S
Guest

Hey did anyone else see that top secret military report on Wikileaks where when GWB was told that ‘Iraq has no WMD’ should have read ‘Iran has no WMD’, he replied ‘Well, whatever the name of the place is, the fact remains, that Texas is running low on oil.” :)

Biker
Guest

Thought ‘Green Zone’ told the story relatively well, Ned. Wouldn’t normally have hired the DVD, but I won six months’ free DVDs through QuickFlix. :)

(Wonder how long Bolivia’s government will last, with well over a trillion bucks worth of lithium sitting idle there? Apparently they’ve harvested a mere 16kgs of it, enough to power a single EV… .)

Ross
Guest
For leveraged property investors here is a look at some of the competition. http://noir.bloomberg.com/apps/news?pid=20601087&sid=abJeYL4Mt3eQ&pos=4 Your bank hasn’t got the readies to finance the loans they made to you years ago, and the wholesale funding bonds that support the loan they made you is getting rolled over faster and faster. Beyond the collapse of the de-risked securitisation funding creationism, banks everywhere increasingly need to pull their funds from the same global capital/savings pools. It is not a matter of access to the funding pool but bidding for it while competing on a risk vs price basis. Perversely now the funding reality… Read more »
Biker
Guest

“…after a deeper look into the quality of the banks book and political risk…”

I’d guess lenders might be looking at the likelihood that a government might step in and guarantee the banks, in assessing risk, Ross(?)

Rising rates are a reality. Most old players like us factored in 9.45%+.
We were pleasantly surprised when rates fell by over 35%. :)

Frankly, with taxation supports very likely to remain regardless of which L party wins, it’s not investors who should worry. It’s any FHBs who decided the new furniture, new car, and new widescreen should follow the new house… . ;)

Ross
Guest

Cheonan report with pretty much what I was hearing earlier. Not much speculating on what occured. Follows the Russian report mainly.

http://www.globalresearch.ca/index.php?context=va&aid=20408

US Sea Of Japan manouvres had Russian flagship in SOJ and the tit for tat escalation had Canadians having to intercept Russian strategic bombers in their Arctic territory 2 days ago.

Spend it before it financially and physically erodes because we will never afford building replacements again … is the big danger with the US military.

Joe
Guest

Speaking of hyperbole!

And how is that pronounced.

Is it like they say in America (HI PUR BOLLY) or as they say in the UK (HI PUR BOWL).

Had an argument(well you know one of those married discussions) with the missus about this about a year ago.
She claims she won because she found some U.S web-site that had an audio or video clip confirming the U.S pronounciation, but I reckoned the debate was still open (more to the point I hadn’t conceeded defeat).

Anyone care to help settle it?

Ned S
Guest

I thought the hyper bowl was some place Yanks played football? ;)

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