The 'Helicopter
Economics Investing
Guide' is meant to help
educate people on how to
make profitable investing
choices in the current
economic environment.
We have coined this term
to describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is the
official blog of the New
York Investing meetup.
Economics Investing
Guide' is meant to help
educate people on how to
make profitable investing
choices in the current
economic environment.
We have coined this term
to describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is the
official blog of the New
York Investing meetup.
 | |  | |  | |  |
| Jameslist James Spotting |
Daryl Montgomery,
October 19, 2011
Britain shocked the markets on October 18th when it reported an inflation rate of 5.2%
for September. This was up from 4.5% the previous month and well above government
projections. Inflation isn't just rising there, but higher prices are a global phenomenon.
The world seems to be entering a new period of stagflation similar to the 1970s.
Stagflation is high inflation and low GDP growth. This is very evident in the UK where
GDP growth for the second quarter was only 0.2% — a full 5% lower than the current
CPI (the difference between the UK Retail Price Index is even greater). The only
surprising thing about the UK inflation rate is that the official rate is so low given the
amount of money printing done through quantitative easing in 2009 and 2010.
Despite the low growth and high inflation that has resulted from it, the Bank of England
(BOE) has just started another round of QE. BOE Governor Mervyn King recently stated,
"Without monetary stimulus — low interest rates and large asset purchases — there is a
risk that growth will stall and inflation fall below our symmetric 2 percent target." As of
September, the UK inflation rate has been above the bank's target rate for 22 months
in a row. This is happening even though unemployment is also at a 17-year high.
Central bankers have consistently maintained the inflation can't be elevated if the
economy is weak. They have apparently managed to do so because they don't let
real world observations intrude on their thinking.
Inflation is also rising elsewhere as well. On the European continent, the official EU rate
rose from 2.5% in August to 3.0% in September. GDP increased by 0.2% there in the
second quarter. Inflation has already been elevated in China and India for some
months. China's inflation rate in September was 6.1% with food prices increasing at
13.4%. The price of necessities is rising faster there than the price of other goods. This is a
common pattern in a number of countries. The yearly inflation rate in India was 9.0% in
August.
In the U.S., the CPI for September indicated a 3.9% year over year rise in consumer
prices. This rate severely underestimates actual inflation. According to the alternative
numbers produced by Shadow Stats, the current U.S. inflation rate is approximately
11% (Shadow Stats calculates its numbers with the formulas utilized by the U.S.
government in the 1970s and this is the only way to get valid comparisons of U.S.
inflation numbers across time). Official U.S. GDP growth for the second quarter of 2011
was 1.3% — well below even the government's reported inflation rate.
Even though a clear picture of stagflation is emerging globally, expect this to be
continually denied by mainstream news sources. Even yesterday in its reporting on U.S.
producer prices, one of the major news services stated, "the strong rise in wholesale
prices last month is unlikely to prompt a broad increase in inflation pressures given the
weak economy." This is actually pure misinformation. There is a long, long history of high
inflation throughout the world during periods of low economic growth or even severe
decline. One of the most recent cases historically was in the 1970s when inflation
skyrocketed in 1974 during the worst economic downturn since the 1930s depression.
Both Fed Chair Ben Bernanke and BOE Governor Mervyn King were around at that
time, but apparently can't seem to recall it. Perhaps if central bankers had better
memories, they wouldn't be repeating the mistakes of the past today.
Disclosure: None
Daryl Montgomery
Real e Finance means business
Author, "Inflation Investing: A Guide for the 2010s"
| Jameslist James Spotting |
© 2011 real e finance media.corp - all rights reserved
Can the EU Solve Its
Debt Crisis with More
Debt?
Daryl Montgomery,
October 21, 2011
Debt Crisis with More
Debt?
Daryl Montgomery,
October 21, 2011
European and U.S. stocks were rallying on Friday in what appears to be a liquidity
frenzy supplied by the central banks. The market is once again hopeful now that EU
leaders are beginning six days of meetings on how to save Greece and the euro.
Based on their previous track record, which has led to the current crisis, there is little
reason for long-term optimism.
Stock prices have not been the only thing rising lately. Interest rates have been too in
the credit- challenged Eurozone countries. While yields of Greek one-year
governments have fallen back to only 180%, they were as high as 189% on October
19th. Greek two-years are at a more manageable 77%. Rates keep increasing in
Greece despite the bailouts and this indicates the bailouts aren't nearly large enough
and will have to continue and get bigger to keep the country out of default. The
political will for ongoing and ever-larger amounts of bailout money doesn't exist in the
EU or does it?
While the EU voting public doesn't approve of spending more rescue money, the EU
has created the EFSF (European Financial Stability Facility) — a 440 billion euro fund to
help bail out its member countries that have debt problems and to bail out the banks
that lent them the money that allowed them to have those debt problems. Much
remains to be decided on how the EFSF will actually function. There is disagreement of
how to use it to bail out failing banks for instance (this is currently being referred to as
recapitalization since bank bailouts are also unpopular with voters). There is also a
proposal to leverage EFSF funds up to five times, so there will be more than two trillion
euros available. This idea is apparently a "helpful" suggestion made by the U.S.
monetary authorities.
While the stock market is showing almost as much enthusiasm for the leveraged bailout
proposal as it did for the great innovation of triple A rated subprime mortgages in the
mid-2000s, such financial trickery ended badly the first time and is likely to fall apart
even faster this time. Mainstream media coverage, at least in the U.S., rarely looks at
where the money is coming from for the EFSF. Technically, the money is being
borrowed. So in order to deal with a debt crisis that is wreaking havoc on the financial
system because of too much risk, more money will be borrowed and then that money
will be leveraged (a form of borrowing in and of itself) to magnify the risk of the new
borrowing. If this appears not to make any sense at all, that's because it doesn't. When
the default comes — and there is 100% chance that it will — the end will be much,
much worse.
A case can be made however that the EFSF money isn't really borrowed, but a form of
money printing instead. If governments borrow without the ability to actually pay
back the money without inflating their currency, they are printing money. EU countries
are already highly indebted just like the United States (Japan is in even worse shape).
The fact that there is a debt crisis in a number of Eurozone countries is confirmation
that the level of debt is beyond the point of no return. So a more accurate portrayal of
what is going on with the EFSF is that money will be printed, this counterfeit money will
be leveraged by borrowing against it and this will solve the problem of too much debt.
The world has already lived through a debt binge in the early 2000s. The current crisis
centered in Europe is simply a continuation of the unraveling of that debt.
Governments handled the first implosion with trillions of dollars of bailouts, by running
trillions of dollars in budget deficits, and by printing trillions of dollars of money. Debt
problems keep resurfacing however. Could it be that engaging in additional reckless
and irresponsible financial behavior isn't a solution for reckless and irresponsible
financial behavior? EU leaders may wish to ponder this before going forward.
Disclosure: None
Daryl Montgomery
frenzy supplied by the central banks. The market is once again hopeful now that EU
leaders are beginning six days of meetings on how to save Greece and the euro.
Based on their previous track record, which has led to the current crisis, there is little
reason for long-term optimism.
Stock prices have not been the only thing rising lately. Interest rates have been too in
the credit- challenged Eurozone countries. While yields of Greek one-year
governments have fallen back to only 180%, they were as high as 189% on October
19th. Greek two-years are at a more manageable 77%. Rates keep increasing in
Greece despite the bailouts and this indicates the bailouts aren't nearly large enough
and will have to continue and get bigger to keep the country out of default. The
political will for ongoing and ever-larger amounts of bailout money doesn't exist in the
EU or does it?
While the EU voting public doesn't approve of spending more rescue money, the EU
has created the EFSF (European Financial Stability Facility) — a 440 billion euro fund to
help bail out its member countries that have debt problems and to bail out the banks
that lent them the money that allowed them to have those debt problems. Much
remains to be decided on how the EFSF will actually function. There is disagreement of
how to use it to bail out failing banks for instance (this is currently being referred to as
recapitalization since bank bailouts are also unpopular with voters). There is also a
proposal to leverage EFSF funds up to five times, so there will be more than two trillion
euros available. This idea is apparently a "helpful" suggestion made by the U.S.
monetary authorities.
While the stock market is showing almost as much enthusiasm for the leveraged bailout
proposal as it did for the great innovation of triple A rated subprime mortgages in the
mid-2000s, such financial trickery ended badly the first time and is likely to fall apart
even faster this time. Mainstream media coverage, at least in the U.S., rarely looks at
where the money is coming from for the EFSF. Technically, the money is being
borrowed. So in order to deal with a debt crisis that is wreaking havoc on the financial
system because of too much risk, more money will be borrowed and then that money
will be leveraged (a form of borrowing in and of itself) to magnify the risk of the new
borrowing. If this appears not to make any sense at all, that's because it doesn't. When
the default comes — and there is 100% chance that it will — the end will be much,
much worse.
A case can be made however that the EFSF money isn't really borrowed, but a form of
money printing instead. If governments borrow without the ability to actually pay
back the money without inflating their currency, they are printing money. EU countries
are already highly indebted just like the United States (Japan is in even worse shape).
The fact that there is a debt crisis in a number of Eurozone countries is confirmation
that the level of debt is beyond the point of no return. So a more accurate portrayal of
what is going on with the EFSF is that money will be printed, this counterfeit money will
be leveraged by borrowing against it and this will solve the problem of too much debt.
The world has already lived through a debt binge in the early 2000s. The current crisis
centered in Europe is simply a continuation of the unraveling of that debt.
Governments handled the first implosion with trillions of dollars of bailouts, by running
trillions of dollars in budget deficits, and by printing trillions of dollars of money. Debt
problems keep resurfacing however. Could it be that engaging in additional reckless
and irresponsible financial behavior isn't a solution for reckless and irresponsible
financial behavior? EU leaders may wish to ponder this before going forward.
Disclosure: None
Daryl Montgomery
The truth and nothing but....