Jul 13, 2012
Whatever is needed to paper over the excesses of the banking industry will be provided. Frankly, I could end the article right there but I doubt I will have convinced you of it. That said, by this time and the multiple dozens of trillions of dollars, endless scandals to protect certain well-heeled players (*cough* MFGlobal *cough* JPMorgan (NYSE:JPM) *cough*) and the denial of political sovereignty in the Euro-zone periphery has not been enough to convince you that deflation just will not be allowed, then absolutely nothing will.
Frankly, expressing with conviction the likelihood of a deflationary spiral at this late stage of the game is simply wish fulfillment and projection of wanting to be right rather than accepting reality as it is.
July 5th was at least the third instance of coordinated maneuvering by central banks the world over to prop up the debt-pact that is the European Monetary Union in the past year. The Federal Reserve is still fully in control of the situation, at least for now, and at this point if they get the timing wrong will result in hyperinflation because they are so woefully behind the curve that they will have to over-print to the point of confidence collapse or we will muddle through with a grinding 8-15% inflation for the next 10-15 years which will wipe out an entire generation of value investors just like in Japan after their bust in the 1990’s until now.
'The possibility that Ben “I Swear Milton Friedman I Will Not Let the Great Depression Happen Again” Bernanke is a complete blithering idiot is pretty remote. You may disagree with him or with central banking in general but to think him and the rest of the Federal Reserve Governors as stupid is just asking to have your money taken from you.
If anything the U.S. is running Japan’s playbook straight down the line, except that they are doing so at a point in time where they have consumed their pool of savings and will have to rebuild it while simultaneously bailing out a banking system infinitely more over-levered through the magic of rehypothecation and risk-price fixing, as in JPMorgan finally admitting that they have been mis-reporting CDS quotes. So, while the U.S. is in year four of the Japanese recipe for losing a generation, Japan is likely exiting theirs, albeit it at a glacial pace.
The current uproar over LIBOR is a consequence of these interventions and a prima facia example of what is willing to be done to preserve the system at all costs. Why anyone who follows markets is surprised by this is honestly beyond me.
Not all Credit is Created Equal
Again, the sub-title speaks for itself and, in effect, speaks volumes. Central to the deflationist argument is that because we live in an age of fiduciary media, or credit money, and credit is trying to contract as loans are defaulted on wiping out creditors’ claims to money that this is the same as all forms of credit are contracting and will create something akin to the liquidity trap of Keynes’ nightmares. But to make this argument one has to believe that the central banks will not perform the one function they were created for in the first place: to provide the banks with all the credit they needed to keep functioning if they over lent to people who couldn’t pay. Yes, the system is structured similarly to a Ponzi scheme but the difference is that Ponzi didn’t have a printing press.
If he did, he’d be Bernie Madoff .
Yes, the Fed and the E.C.B. are pushing together on a string. No, M1 is not multiplying through the system anymore. The multiplier has been less than one for 3 years now and it is likely never to come back unless the Fed radically changes policy, which would mean committing self-immolation. That would go against the first priority of any organization: self-preservation. So, basic logic and reading of human behavior dictates that when things look bleak someone will, “print, baby, print!”
LIBOR-Gate is simply another form of this behavior. The traders at Barclay’s (NYSE:BCS), RBS (NYSE:RBS) and others did what they had to do to survive the crisis of the summer of 2008. For anyone reading the monetary statistic charts and refusing to believe that there wasn’t a coordinated effort to calm the markets with fraudulent quoting of interbank lending rates during a time when it was well-documented that the banks were refusing to lend to each other is simply under-estimating the human capacity for self-preservation.
Dust to Dust
In the end we have exactly what we inflationistas have been saying for four years: commodity inflation and credit deflation. Hyperinflation will only arrive as a mistake or a blunder by the central banks, but not out of stupidity but rather out of faith in models which are wrong and when those models fail, they fail spectacularly causing massive interventions. The more likely scenario now that we have lived through four years of it is a grinding stagflation a la the 1970’s with rising energy, food and precious metals prices and a sideways stock market.
At this point there is so much money floating around that everything is up when looked at over the past 4 years: stocks, bonds, commodities, metals and energy (with some localized exceptions like natural gas in North America). That can only happen if there is more money chasing the same number of goods, i.e. the global money supply is rising faster than the value of the stuff we have built with it.
For this reason being long gold in a mix of physical metal and claims for it is an excellent long term hedge against the self-preservation instincts of the banking class. The Sprott Physical Gold Trust (AMEX:PHYS) is preferred over the SPDR Gold Trust ETF (AMEX:GLD) simply because PHYS is removing physical gold from the control of the bankers who have a vested interest in controlling its price. Given the internecine workings of the OTC derivative market it seems prudent to stay away from any gold instrument, no matter how popular, that has the possibility of having a synthetic short position held against it.