Tuesday, November 29, 2011

Hyperinflations and Spiraling Depressions and Why They are the Same

Something just struck me and it surprised me nobody has written about it yet.  Perhaps it is so obvious and I'm an idiot writing this down, kind of like the guy doing a mathematical proof of 1+1 = 2.

Part 1: The only reason ECB is unwilling to monetize the debt (print money to buy sovereign bonds) to any meaningful degree is because of Germany's hyperinflation during the Weimar era.  The only reason the Fed is very willing to monetize the debt to any and all degrees (through quantitative easing) is because of America's spiraling depression in the...Great Depression.  The stigma attached to both events is what's driving our central banks today.  That and economics I suppose.

Part II: Suppose the ECB says fuck it and prints enough euros to buy enough sovereign debt to get the yield to whatever the ECB think they should be.  I'm sure Bernanke has a formula for just this type of event.  This will most definitely drive up inflation; its degree is dependent upon the European economies.  Should they be Japanese and full of malaise, then inflation should not be too bad.  However, if their economies are relatively robust and kicking, +10% inflation is not out of the question.  Indeed in America where most Americans still believe to be in a recession, inflation is already running at +3% at a relatively tame standard of measurement and is running more than double that if inflation is calculated the way it was in the 90s.

Granted, best case scenario will go like this: ECB prints, inflation runs at a tepid 3%.  As the economy improves, ECB begins to tighten money supply + raise interest rates just slowly and surely enough to both stop creeping inflation and letting the economy continue to improve.  This is the Goldilocks scenario, the soft landing, the motherfucking unicorn. 

Now instead suppose ECB says fuck you to all the countries and deflation sets in as everyone scrambles to get out of any product that does not have a famous American face on it.  Savers and old people rejoice as living frugally is now hip.  Quarters replace dollars at the strip club.  99 cent store owners all over the world are now number 1 clients of hedge funds.  Eventually, Herbert Obama Hoover (and his Hoover counterparts in Europe) step down and drink themselves to death saying how did I do a worse job than Bush.

It is my proposition that both will result in equal hardship in the aggregate population in the developed world.  The first is more disproportionally placed on savers and old people.  The latter is placed on younger people.  In easier terms, you want inflation if you owe people money (young people).  You want deflation if you loaned other people money (savers/people on fixed income, annuities).

Really, deflation and inflation is the same thing at extremes.  In the former, everything's real cheap, but you don't got a lot of money.  In the latter, everything's real expensive, but you got a shitload of money.  I just don't believe in free lunches and we took out this debt.  Regardless of whether we can print more money or not, the goods and services backed by those fiat cannot be created out of thin air.


By the way, if you are frustrated by this market, it is because you read too much.  Your brain is consumed by the noise.  In this secular bear, the overarching theme is debt (as it always is).  Unfortunately, we are trying our hardest to put off the pain to actually pay back this debt, thus leading to a long drawn out bear with vicious cyclical bull rallies.  We are at an inflection point again.  I would like us to break the March low to something ridiculous, like SPX 300 which would mean everyone defaults, takes the loss, and is forced to start over, allowing us to set the base for the next secular bull.  Until this elephant in the room is taken care of, we will be trading in the extended range from the year 1999-now.  All bets are off if QE3 is implemented.