May 2009


From Bloomberg

May 27 (Bloomberg) — The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.

Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.

“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

Federal Reserve Bank of Philadelphia President Charles Plosser said on May 21 inflation may rise to 2.5 percent in 2011. That exceeds the central bank officials’ long-run preferred range of 1.7 percent to 2 percent and contrasts with the concerns of some officials and economists that the economic slump may provoke a broad decline in prices.

“There are some concerns of a risk from inflation from all the liquidity injected into the banking system but it’s not an immediate threat right now given all the excess capacity in the U.S. economy,” said David Cohen, head of Asian economic forecasting at Action Economics in Singapore. “I have a little more confidence that the Fed has an exit strategy for draining all the liquidity at the appropriate time.”

Action Economics is predicting inflation of minus 0.4 percent in the U.S. this year, with prices increasing by 1.8 percent and 2 percent in 2010 and 2011, respectively, Cohen said.

Near Zero

The U.S.’s main interest rate may need to stay near zero for several years given the recession’s depth and forecasts that unemployment will reach 9 percent or higher, Glenn Rudebusch, associate director of research at the Federal Reserve Bank of San Francisco, said yesterday.

Members of the rate-setting Federal Open Market Committee have held the federal funds rate, the overnight lending rate between banks, in a range of zero to 0.25 percent since December to revive lending and end the worst recession in 50 years.

The global economy won’t return to the “prosperity” of 2006 and 2007 even as it rebounds from a recession, Faber said.

Equities in the U.S. won’t fall to new lows, helped by increased money supply, he said. Still, global stocks are “rather overbought” and are “not cheap,” Faber added.

Faber still favors Asian stocks relative to U.S. government bonds and said Japanese equities may outperform many other markets over a five-year period. “Of all the regions in the world, Asia is still the most attractive by far,” he said.

Gloom, Doom

Faber, the publisher of the Gloom, Boom & Doom report, said on April 7 stocks could fall as much as 10 percent before resuming gains. The Standard & Poor’s 500 Index has since climbed 9 percent.

Faber, who said he’s adding to his gold investments, advised buying the precious metal at the start of its eight-year rally, when it traded for less than $300 an ounce. The metal topped $1,000 last year and traded at $949.85 an ounce at 12:50 p.m. Hong Kong time. He also told investors to bail out of U.S. stocks a week before the so-called Black Monday crash in 1987, according to his Web site.


Tried to hang on yesterday, but, just couldn’t take the risk. Today…up +7%.



Credit destruction was the hallmark of the current crisis. In times of credit contraction, the demand for money rises. Money, essentially becoming an insurance policy that can pay out on any future risk. Insurance policies require that the risk be pre-indentified, then a premium charged, with the risk offset.

Credit, is an insurance policy that money will not be required for the maturity contracted, and a premium [interest] charged. When uncertainity dominates, insurance is no longer written, or written only at very high premiums.

So it was with the credit crisis. Money, liquidity, was the insurance required, from the highest creditor, the US Government, and money fled to the short-end Treasuries, sitting idle [hoarding]

The demand for money has resulted in unprecedented dollar infusions into the financial markets. The result now being that credit, once again is starting to flow.


LIBOR spreads [inter-bank lending] are down from crisis levels.


Treasury Bills [90 day] from going negative, viz. you paid the government to hold your money, we can again make a little yield.


TED spreads, tightening.


Bank loans, starting to move off the bottom.


Bank reserves, at all time highs, due largely to the Federal Reserve paying interest on those reserves. That is as close to free money as they will ever see. The release of reserves will occur when the Federal Reserve rescinds interest payments…

All-in-all, the signs are that the institutional demand for money is starting to abate. Credit will once again become money. The growth in the credit as money, returns dramatically the volume of money within the system, highly inflationary.

The 10yr is thus reflecting, amoungst other things, the realization of an increased money supply, and falling demand for money.


With regard to the maintainance of a balance of payments, if a country wishes to import more, they must export more. If they cannot export more manufactured, semi-manufactured goods or services, then they must export common shares, bonds, and various other securities.

What happens though if the number of notes [fiat currency] is increased by one or both of the contracting [trading] partners?

The prices of the commodities and hence, the balance of payments must adjust. Assume that the US, wanting via WalMart, to import Chinese manufactured goods, refused to increase the notes in circulation. Then, either the price of US exports must drop, or the difference be made up via securities. Now, if the price of US exports drops in relation to Chinese manufactured goods, then a greater quantity of goods will be required to balance the payments. Less goods are available to sell in domestic markets.

That the US tends to produce higher value goods, with higher technology etc, you had the interesting problem of China, a developing economy, not being able to afford US production, and to lower the price might have incurred economic losses.

Increase the notes in circulation. Through this artifice, the balance of payments could be balanced. By increasing the notes in circulation, the goods held for sale, become cheaper, thus a greater volume are demanded.

Paradoxically it was China who increased their note circulation. China printed Yuan in receipt of dollars from their exporters, and purchased with the dollars, US securities. Thus the balance of payments, balanced.

Essentially China entered a credit transaction with the US, foregoing present consumption for future consumption. The products that the Chinese desired, were in point of fact dollars, foreign reserves. The Asian debacle of 1997 and the collapse of the Tiger economies was a currency collapse driven by a lack of foreign reserves against US dollar direct and indirect investments.

Thus, to purchase more dollars, the Chinese had to sell more manufactured items. Thus, drop the price of manufactured goods, or increase the money supply. The money supply was increased, and the purchase of US dollars and assets increased.


“Today the Federal Reserve printed $7 billion dollars and used it to buy an equivalent amount of 7 and 10 year Treasury bonds. As I publicly asked before, if Mr. Fed can’t rig the price of an asset by buying it with printed money, why should anyone else buy it?”


The 10yr Note, is the rate that the mortgage market watches. Thus, any increase in interest rates, will be passed onto new buyers, and existing holders of a mortgage who are on a variable rate. It, means falling prices in the real estate markets.

Obviously, investors are selling the 10yr Note. Why?

The answer is not simple, and I have already started the basis of an answer via the Balance of Payments posts, which will continue.


The Tobins Q-ratio, has, in the past signalled the bottom of equity bear markets. The following chart is an average of the Q-ratio.


So while the current [as of Dec 2008] ratio = 0.62, which is higher than previous lows of 0.34, nonetheless it seemed pretty low. When however plotted as a ratio of itself, the signal is less optimistic.

Thus, before this equity bear market is over, if, the Q-ratio is the valid signal of undervaluations, and hence the time to buy, we will see the lows of 666 on the SPX breached, and new lows established.


Current economics, assigns a positive credit rating on countries possessing a credit balance of payments. A country with a debit balance of payments by contrast is either unwilling, or, unable, to stabilise the value of it’s money.

The confutation of this assertion lies within Greshams Law which states; that any circulating currency consisting of both “good” and “bad” money (both forms required to be accepted at equal value under legal tender law) quickly becomes dominated by the “bad” money. This is because people spending money will hand over the “bad” coins rather than the “good” ones, keeping the “good” ones for themselves.

The second reason being the Quantity Theory of money, which states; In economics, the quantity theory of money is a theory emphasizing the positive relationship of overall prices or the nominal value of expenditures to the quantity of money. The increase in the quantity of money within the economic system can have two outcomes; increase in output or increase in prices. Theorists assert the latter, arguing that fluctuations of the money supply is more likely to cause changes in the price level as the economic system has reached it’s capacity and cannot facilitate further growth.

Taking money based on Gold [Silver] as the first example. If, imports are favoured over domestic production [for any reason] the outwards flow of money will reduce the quantity of money available for use, viz. in circulation. Thus the demand for money, remaining constant [assumption] the value will rise. This is effect the same as falling commodity prices. Falling commodity prices, encourage exports, thus, money flows back into the country.

In the second example, where a fiat currency predominates, we have a different outcome.

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