True enough, the term inflation is employed rather haphazardly. We should understand there is a difference between price increases in a particular market (oil for example) due to any number of market specific factors (geopolitics etc.) and general price inflation, which is driven by a decline in the price of the currency in question (goods and service/currency unit). Currency price changes are driven, most fundamentally, by the same overarching forces that drive the price of any asset or good...supply and demand. The focus tends to be on currency debasement/supply increase (absolutely one of the two key factors) while demand, or confidence in the case of currency, is often overlooked or an afterthought. Note, demand/confidence is the factor which can change suddenly and dramatically; much like the sharp fall of a stock following news which surprises the market. Note, a collapse in demand for/confidence in a currency can absolutely occur amid general economic collapse, as evidenced many times through financial history, which will leave central banks both mystified and powerless. Unless another even more extreme speculative mania can be fomented, by pushing short rates to new lows, there are only two options for resolution of monetary distortions; deflationary collapse or inflationary collapse. Given that central banks pushed short rates to zero during the last bout odds are we on approaching inevitable resolution of four decades of massive monetary distortion. Accelerating debasement and confidence collapse are likely the safe bet. Tangible assets offer refuge for those who act early but somebody, meaning most everyone, must hold the financial paper all the way down (in real terms), it won't just conveniently go away; other than to the extent that central banks "buy" the paper by conjuring currency out of thin air through nothing more than accounting entries.
I'm going to get my Substack active soon. Fundamentals of general price inflation might be a timely opening topic. BTW, I'm a new to your Substack.
Welcome! You've joined with a bang. I can't respond to every point you made but a few stand out. You wrote, "somebody, meaning most everyone, must hold the financial paper all the way down (in real terms)." This stuck out because just yesterday I was listening to a Hugh Hendry interview and Hugh said, "I want people to stay invested! They have to be fleeced!" I think you're both saying the same thing. If monetary repression is going to be effective, people need to be invested.
Your point about lack of demand for a currency is fairly fascinating. I admit that I hadn't quite considered that angle before. I'm aware of the dynamics that keep the dollar constantly bid no matter what monetary madness we engage in, but I hadn't considered how demand could fall off for another currency and cause its collapse.
Finally, I think you're right about the 40 year cycle coming to an end. I already have a draft of a piece about cycles and why we might be approaching the end.
I think you have a solid idea for an article, I would read it. Cheers
I was simply noting that someone must hold all that paper all the way down. Sometimes in the financial media they suggest that somehow net selling occurs allowing investors to get out of harms way. There obviously can't be net selling because for every seller there must be a buyer (and someone must lose on derivatives/hedge positions as well). Central banks on the other hand can "buy" financial assets using new money conjured out of thin air. In effect what they do is take financial paper out of the market and replace it with increasingly debased currency. They aren't offering anything of real value because fiat currencies aren't promises of anything (literally IOUnothings ultimately). They aren't liabilities of central banks in any practical sense, despite the fact that central banks account for them as liabilities.
I should also note when I said demand for a currency falls I didn't mean to suggest demand completely vanishes, although in the terminal stage of a hyperinflation that can be true. People will exchange the currency at some rate. As with any asset the demand function as a whole shifts, meaning the quantity of goods and services required to buy a currency unit changes along the entire demand curve.
I look forward to reading your piece on the end of the 40 year secular boom/bust. All secular collapses are deep and long (decades to recover), but I suspect that which inevitably lies ahead may prove to be the worst in modern financial history, and truly global.
You're right of course, in every transaction there is a buyer and seller. Somebody has to hold equities.
I hope that you are wrong about your gloomy prediction, but afraid you could be right. The debt bubble we have is insane, and this stuff is going to have to get unwound one way or another. I am hopeful that there will be one more hoorah in the markets (perhaps a multi-year hoorah) before the shit really hits the fan but as Doomberg always says, we shall see.
Indeed, ultimate timing and magnitude are only known once in the rear view. However history tells us monetary distortions are always wrung from the system, painfully, at some point. The reason I'm anticipating a secular resolution next is short rates were driven to zero, hence central banks can't foment an even more extreme mania by driving short rates meaningfully lower in nominal terms. The multi decade avoid hangovers stay drunk "strategy" is over.
I totally get your view, re can't go any lower than zero. I agree. However, my take has been that central banks still have one tool left. They can buy equities. My loosely held vision for the next few years is that some point (probably) soon there's going to be the beginnings of a cataclysmic crash. CBs will panic, QE ultra mega infinity, rates to zero, etc. It won't work, but then they'll announce they're buying equities and that's what will turn it. We'll have one more mega bubble and then a crash and at that point the CBs will really and truly be out of ammo. They will throw EVERYTHING at the markets and it won't work, and we'll get the economic horror you've described. That's my general take on it anyways.
I absolutely agree, central banks will resort to extreme debasement "buying" all sorts of assets, but it won't work. Resultant general price inflation will decimate debt markets, which are where the bulk of financial wealth resides.
Studying the German hyperinflation of the early 1920's is telling. Fixed rate debt instruments were of course a total disaster. Stocks did skyrocket in nominal terms but ultimately collapsed in real terms.
Tangible assets offer refuge under such conditions, particularly liquid tangibles (assuming government entities don't take them from you).
True enough, the term inflation is employed rather haphazardly. We should understand there is a difference between price increases in a particular market (oil for example) due to any number of market specific factors (geopolitics etc.) and general price inflation, which is driven by a decline in the price of the currency in question (goods and service/currency unit). Currency price changes are driven, most fundamentally, by the same overarching forces that drive the price of any asset or good...supply and demand. The focus tends to be on currency debasement/supply increase (absolutely one of the two key factors) while demand, or confidence in the case of currency, is often overlooked or an afterthought. Note, demand/confidence is the factor which can change suddenly and dramatically; much like the sharp fall of a stock following news which surprises the market. Note, a collapse in demand for/confidence in a currency can absolutely occur amid general economic collapse, as evidenced many times through financial history, which will leave central banks both mystified and powerless. Unless another even more extreme speculative mania can be fomented, by pushing short rates to new lows, there are only two options for resolution of monetary distortions; deflationary collapse or inflationary collapse. Given that central banks pushed short rates to zero during the last bout odds are we on approaching inevitable resolution of four decades of massive monetary distortion. Accelerating debasement and confidence collapse are likely the safe bet. Tangible assets offer refuge for those who act early but somebody, meaning most everyone, must hold the financial paper all the way down (in real terms), it won't just conveniently go away; other than to the extent that central banks "buy" the paper by conjuring currency out of thin air through nothing more than accounting entries.
I'm going to get my Substack active soon. Fundamentals of general price inflation might be a timely opening topic. BTW, I'm a new to your Substack.
Welcome! You've joined with a bang. I can't respond to every point you made but a few stand out. You wrote, "somebody, meaning most everyone, must hold the financial paper all the way down (in real terms)." This stuck out because just yesterday I was listening to a Hugh Hendry interview and Hugh said, "I want people to stay invested! They have to be fleeced!" I think you're both saying the same thing. If monetary repression is going to be effective, people need to be invested.
Your point about lack of demand for a currency is fairly fascinating. I admit that I hadn't quite considered that angle before. I'm aware of the dynamics that keep the dollar constantly bid no matter what monetary madness we engage in, but I hadn't considered how demand could fall off for another currency and cause its collapse.
Finally, I think you're right about the 40 year cycle coming to an end. I already have a draft of a piece about cycles and why we might be approaching the end.
I think you have a solid idea for an article, I would read it. Cheers
I was simply noting that someone must hold all that paper all the way down. Sometimes in the financial media they suggest that somehow net selling occurs allowing investors to get out of harms way. There obviously can't be net selling because for every seller there must be a buyer (and someone must lose on derivatives/hedge positions as well). Central banks on the other hand can "buy" financial assets using new money conjured out of thin air. In effect what they do is take financial paper out of the market and replace it with increasingly debased currency. They aren't offering anything of real value because fiat currencies aren't promises of anything (literally IOUnothings ultimately). They aren't liabilities of central banks in any practical sense, despite the fact that central banks account for them as liabilities.
I should also note when I said demand for a currency falls I didn't mean to suggest demand completely vanishes, although in the terminal stage of a hyperinflation that can be true. People will exchange the currency at some rate. As with any asset the demand function as a whole shifts, meaning the quantity of goods and services required to buy a currency unit changes along the entire demand curve.
I look forward to reading your piece on the end of the 40 year secular boom/bust. All secular collapses are deep and long (decades to recover), but I suspect that which inevitably lies ahead may prove to be the worst in modern financial history, and truly global.
You're right of course, in every transaction there is a buyer and seller. Somebody has to hold equities.
I hope that you are wrong about your gloomy prediction, but afraid you could be right. The debt bubble we have is insane, and this stuff is going to have to get unwound one way or another. I am hopeful that there will be one more hoorah in the markets (perhaps a multi-year hoorah) before the shit really hits the fan but as Doomberg always says, we shall see.
Indeed, ultimate timing and magnitude are only known once in the rear view. However history tells us monetary distortions are always wrung from the system, painfully, at some point. The reason I'm anticipating a secular resolution next is short rates were driven to zero, hence central banks can't foment an even more extreme mania by driving short rates meaningfully lower in nominal terms. The multi decade avoid hangovers stay drunk "strategy" is over.
I totally get your view, re can't go any lower than zero. I agree. However, my take has been that central banks still have one tool left. They can buy equities. My loosely held vision for the next few years is that some point (probably) soon there's going to be the beginnings of a cataclysmic crash. CBs will panic, QE ultra mega infinity, rates to zero, etc. It won't work, but then they'll announce they're buying equities and that's what will turn it. We'll have one more mega bubble and then a crash and at that point the CBs will really and truly be out of ammo. They will throw EVERYTHING at the markets and it won't work, and we'll get the economic horror you've described. That's my general take on it anyways.
I absolutely agree, central banks will resort to extreme debasement "buying" all sorts of assets, but it won't work. Resultant general price inflation will decimate debt markets, which are where the bulk of financial wealth resides.
Studying the German hyperinflation of the early 1920's is telling. Fixed rate debt instruments were of course a total disaster. Stocks did skyrocket in nominal terms but ultimately collapsed in real terms.
Tangible assets offer refuge under such conditions, particularly liquid tangibles (assuming government entities don't take them from you).
Is this you on Twitter? https://twitter.com/UnhedgedCapital
Nope, this is my Twitter.. I guess I should post a link to it on Substack
https://twitter.com/TheUnhedged
I love this post. It is a great way for me to categorize it within my own head!
Nice, glad you like it! Yeah we definitely need to expand the vocabulary we use to talk about inflation