Have the markets already gone through their inflationary melt up phase? Are they now giving way to debt deflation, in which cash is hoarded and the price of all assets (tangible and otherwise) falls?
It’s true that gold prices tripled in the last eight years. The oil price went from a ho-hum mid twenties to nearly $150. And across the commodities complex, from energy to grains to base metals to precious, nearly everything went up.
But that was not hyperinflation. Nor was it merely a speculative bubble (something that’s becoming increasingly popular to say). This first up-leg in the commodity cycle represented the bottom of a 200- year trend in which tangible goods declined in real terms because production expanded faster than consumption (thanks to industrialisation). Now consumption is catching up with stagnant production (thanks to India and China.)
Hyperinflation is the end game of a fiat currency system. It results from the monetisation of debts by the central bank in attempting to deal with the consequences of a credit bubble. Or, to apply it to the real world in the form of a question: how do you think the Federal Reserve and the Treasury Department are going to recapitalise America’s financial sector? With Chinese savings? With Sovereign Wealth Funds?
Answer: the Fed exchanges what remains of its stock of Treasury bonds for garbage mortgage debt (there’s plenty more on and off bank balance sheets). Eventually, when it runs out, it will have to buy more bonds floated by the Treasury. And where will the money to buy those bonds come from? Where it always comes from when you have a fiat money system: out of then air!
In any event, the bailing out of the Government Sponsored Enterprises and the attempted recapitalisation of the U.S. financial system with magic money is just around the corner. It is where the dollar meets its date with monetary destiny. In the meantime, there’s probably one other reason the dollar is enjoying a nice rally. It’s the devil the world knows.
The euro is the new reserve currency on the block. It has problems. So does the Yen. The dollar is like that loud, obnoxious friend you occasionally take out for a beer. He’s gregarious, slightly over the top, and in small doses, kind of fun to be around. Plus, you know what you’re going to get from him. There’s a kind of comfort with what’s familiar, like an old couch with holes in it.
Markets and Money