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How To Get Hyper-Inflation and Wing-Wham Un-Fund Liabilities …and Not Spill Your Drink

Economics / HyperInflation Aug 12, 2010 - 01:26 PM GMT

By: Andrew_Butter

Economics

Best Financial Markets Analysis ArticleI refer to the esteemed social and economic commentator P.J. O’Rourke’s learned treatise on, “How to drive Fast on Drugs While Having Your Wing-Wham Squeezed, and not Spill Your Drink”.

Substitute “create inflation” with “driving fast on drugs” and the delights of having your Wing-Wham squeezed with creating a pile of unfunded liabilities to be paid-off by a child you don’t acknowledge or aim to take care of, one fine-day, in the future.


On that subject, Dear Old Ben is looking a bit down in dumps these days, perhaps if someone squeezed his Wing-Wham that might cheer him up? Of course everyone knows (but there again they are too polite to say anything), that his big problem is he’s been trying to create inflation for the past two years or so, but he just can’t get it up.

There again Mohamed El-Erian says that the reason is that Ben has “run out of ammo”, which doctors say can be contributing factor for that particular condition.

He goes on to say that from now on what’s needed is "“structural” rather than “monetary” in nature", like no matter how much money you throw at the "problem", the only real solution is surgery.

The issue is of course that you can only create inflation by increasing the money supply (to lenders) and by giving them incentives to lend.

You do that by increasing the spread they can make using the old-3-6-3 routine (borrow at three, lend at six, and be on the golf course at three), except now that’s changed to 0-10-1 (borrow at zero, lend at ten, and shoot a hole in one).

For that “monetary magic” to work, you need to persuade people to borrow to buy things they know nothing about and to pay way too much money for things they can’t possibly afford.

If you can persuade enough people to do that, then you get a type of inflation called “asset price inflation” which is when too much money (in the pockets of ordinary people) starts chasing after a finite supply of “things”.

That conveniently is not considered “real” inflation, and what happens next is that for a time the people who you persuaded to borrow and buy see their “assets” go up in price and they liberate their “equity”, and go on a spending spree (great for THE economy). That explains why 85% of GDP growth since 2001 can be explained by changes in house prices.

But, like Abraham Lincoln once said the problem is, “you can’t fool all the people all the time”, and thus the sense of desperation is becoming palpable.

I noticed that one of the latest “good ideas” was to start selling off some of the $1.25 trillion of toxic debt that the Fed bought, and use the “profit” to buy Treasuries.

The unresolved question is who is going to buy that junk? And more to the point, who is going to be prepared to pay more than 50 Cents on the dollar for it?  One suspects the Fed paid 100 Cents on the dollar (they won’t say how much they paid), so by my calculation, they won’t be buying a lot of Treasuries via that route.

But if the Administration is serious about creating inflation with the intention of making it easier for all of the borrowers to pay off their debts (rather than letting an expanding economy compete for assets and create inflation that way), then they need to start “thinking outside the box”, like “structural”.

The Fed has clearly failed in their ”mission”  and there is no evidence that “more of the same” is going to do anything until there are some “qualified” borrowers who see a reason to pile on more debt (rather than pay what they have got off as fast as possible), and bankers who can be persuaded to take more of a risk than borrowing from the Fed at 0% and then lending that money to the Government via purchases of 5-Year and 10-Year Treasuries.

But no-worries, there is a good historical example of how to create inflation, that was the way that the Weimar Republic did it.

What happened there is that they needed to pay entrenched public servants, but they didn’t have any money (they owed tons of gold to the French), and they couldn’t raise money by either borrowing, or by raising taxes (there would have been a revolution). So they printed money, paid off the public servants, and BINGO…before you could say Kinder-Kraut....hyper-inflation.

So what needs to happen now is that the already bloated US public sector needs to be paid off in newly “printed” dollars, plus the “employment” problem can be solved by going on an aggressive hiring spree, and they have already started that process with teachers and union workers in the state-owned auto manufacturing plants.

To accelerate that process and get “bang-for-buck”, what needs to happen is that the public sector are offered a lump-sum, in lieu of their future (unfunded) liabilities - that would kill two birds with one stone.

So a garbage collector making $100,000 a year could be offered $1 million (of freshly printed QE-II money), as a one-off cash payment right now to settle future liabilities (pensions, health coverage, etc).

That would mean that there would be an increased competition with the private sector who would have to raise wages to retain staff (assuming that all the jobs that could possibly be outsourced from USA have already been outsourced), and then there would be plenty of people with pockets full of money to go out and buy things (and borrow to “gear” their future profits). 

But that’s not all, if the recruitment drive was energetic enough, it’s possible that the number of public "servants" who would be beneficiaries of this largess (along with all the workers in the financial sector who have already been beneficiaries of the last round of largesse), would become a majority in the electorate, and so the brilliant Congressmen (and ladies) who had engineered the “rescue” of the American Dream, would be re-elected.

Popular democracy in action....QED.  

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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