Posts tagged hyperinflation
Gijsbert Groenewegen | Groenewegen Report
Posted Jul 1, 2011
Increasing credit risk will cause much higher interest rates across the borders
The Belgian/French bank Dexia, with a ¤4.3bn or $6bn+ exposure (according to S&P’s Corp) to government debts in Greece, has back stopped (guaranteed) $17bn in municipal bonds in the US according to an article in the WSJ. As a result of the problems in Greece interest rates of municipality bonds in small towns in the United States used to finance municipal facilities like schools, bridges, ice rinks etc are being pushed up. S&P warned last month of a possible downgrade of Dexia’s investment- grade credit ratings. It looks indeed like Lehman revisited when one of the victims of the CDO crisis in the US was a small town in Norway which had bought “triple A” CDO s. And don’t forget the exposure of AIG to the housing market through the Credit Default Swaps (CDSs) that were never going to be called because of the triple A status of the CDOs, and how it almost bankrupted Goldman and others.
While other investors are stepping in to buy those bonds, they are demanding sharply higher yields as compensation for the increased risk following a possible downgrade of Dexia’s credit rating. As a result, borrowing costs for some municipalities are now the steepest since the financial crisis. Some cost of borrowing are tripling and quadrupling in a matter of weeks.
Dexia is obliged to buy as much as $17 billion in municipal bonds if investors withdraw during the remarketing or rollover process. Some $400 million has already been taken back though in those cases, allowing Dexia to increase the interest rate paid by the municipalities whilst at the same time it can demand an accelerated pay back schedule. Some municipalities are trying to replace Dexia with other banks though the refinancing is likely to lead to much higher interest rates in some cases from 3% to 12% which increase borrowing costs by tenth of thousands of dollars which in turn leads to very high fees for the related facilities.
With the QE2 ending on June 30 (the Fed has bought 85% of all treasury issuances this year!!) and higher credit risks higher interest rates could bring down the markets. If we break above the 4.80% level on the 30-y Treasury bond we will break out of the downtrend since 1981 and could see much higher interest rates with all its obvious consequences for the financial markets and economies.
Martin Armstrong’s history has shown his mastery at truly understanding the laws of economics. He has predicted many of the pivotal economic events over the past few decades and has developed a highly sophisticated PI-cycle forecasting system, capable of cutting through the bullshit; becoming more aware of what is really going on in the world of economics.
On July 31, 2010 Armstrong published a newsletter issue titled Staring Into the Abyss in which he detailed his latest predictions for our future. I have transcribed this newsletter, from its type-written form, so it will be searchable and more useful to the community.
Staring into the Abyss
by Martin A. Armstrong
When all is said and done, no matter how we spin the story, we are in the final stages of the collapse of Western Society as we know it. By that I do not mean the sky will fall and people will be running through the streets naked fighting over 2 week old bread. That did not even happen with the fall of Rome, nor with Communism in China and Russia. It is possible that our political ruling class become so desperate that they take the tyranny path to extort every dime from the people hoping to hold on to fleeting moments of past glories. When it is all said and done, we will ask how was this citadel of the earthly powers of man fallen, and laying motionless and prostrate on the ground before all the great empires that have expired before it. The answer will be the same. Debt and fiscal mismanagement. Our greatest problem has been our arrogance and presumption that we have conquered history and the laws of practical economics do not apply.
When empires die, the clash between private and public assets swings into hyperactive mode. Those who see the Dow crumble and fall to 1400 because that is what happened in 1929, fail to ever understand that such an event took place because of deflation that was created by the fact that the dollar rose to extreme levels when everyone else was defaulting in 1931. This is why Roosevelt confiscated gold and devalued the dollar by raising gold from $20 to $35. Money was still something tangible. Today, we are looking at a massive sovereign debt default on a worldwide level.
Under a situation from the European view in 1931, the only thing to survive was tangible assets. That is not only gold, but shares in corporations with tangible value. velocity is always the key for as it declines due to people hoarding money you get deflation. When people are afraid the money will become worthless (paper or debased coinage) they spend it faster before it depreciates and that creates hyperinflation at the other extreme. It all depends on where the confidence resides – with government or within the private sector. We are headed into the later.
I have been working at full speed to get this book complete. I have passed the 300 page mark and I am deeply in debt to those assisting me from outside to get me the reference material I need to ensure this is more than just an opinion, but also authoritative.
Adam Smith in his Wealth of Nations wrote in his final volume about Public Debt and what he asked was why people had ever considered lending money to government was safe or that their debt was somehow quality. I have been working on this issue in great detail. Smith stated that never had any government ever paid off its debt and that was in 1776. He was correct. I am assembling all the defaults that are a subject that no one seems to want to talk about.
Yet, there are stark and monumental conclusions that emerge from such a long list of defaults. Society does not end as the doomsday crowd portray. This seems to be just their desire or opinion. Many seem to wish disaster upon the world for they feel cheated and did not become rich with the crowd. But those sorts of claims are truly the exception. The fall of Rome ended in disaster as people fled cities and the population of Rome itself fell from 1 million to just 30,000. That was what the Romans called suburbium and why we still today call moving out of the city to the suburbs. The flight took place because of the collapse of the Rule of Law and unprecedented taxation that set in motion a migration that eventually lead to feudalism. (more…)
Ever since the beginnings of fiat money, economies have pulsated between polar opposites: paper and tangibles. The Romans started out with pure gold and silver coins; but with the decline of their economy, they diluted the precious metal content until there was virtually no precious metals in the coins.
There comes a point where it becomes painfully obvious that a society cannot function without economic discipline; meaning there must be controls on the issuance of money. The most reliable method known of today is to make all paper money backed by precious metals, or to use precious metal coins themselves for commerce.
We are in the final phases of the paper-promise-based economy; the point at which perceptions can no-longer be papered over to continue this fiat game. Confidence is lost, without which you cannot operate a system of paper-promises. This is where natural law re-asserts itself and real value overtakes fantasy value in the minds of people everywhere.
It happens quickly, when the game is finally up; there are many examples of hyper-inflation throughout history to give you an idea of how it turns out. The velocity of money increases dramatically when hyperinflation hits, meaning people quickly spend the money they have while it still has value; this causes prices to further escalate in a vicious cycle. In Weimar Germany, when all of the chickens came home to roost, their Papiermark was 1 Trillion to a single US Dollar.
Just imagine what would happen if a significant number of the trillions upon trillions of US Dollars in the system today were mobilized to purchase tangible assets. When you factor in the tremendous amount of money creation taking place throughout the world, the prices of these tangible assets will necessarily go up tremendously when the money hits the real economy.
Reliable sources indicate that the MOPE (Management of Perception Economics) cannot last much longer. The game is likely up in late 2009, going into 2010. We are likely to see a year of perilous decline in the value of the US Dollar. It will be an incredibly bad year for the ill-prepared.
The Final Definition of Inflation According To the Law of Relativity
Inflation equals money squared.
Eventually no speed of creation of money can maintain the economic stabilizing graviton and according to the law of physics we all fall into the Weimar black hyperinflation hole.
The wormhole at the “process event horizon” (the fall of Lehman Brother and the pending fall of CIT) is from commodity money to commodity money.
The wormhole travels through economic pain and suffering.
YOUR SAFE SHIP IS GOLD BULLION for the transitional trip from commodity money through Weimar hyperinflation and back to commodity money.
As sure as E=MC squared rules in physics, hyperinflation, the black hole of the Bernanke electric money printing press, is here and now accelerating to the speed of light that even at that speed must fall into the black hole in the distorted (by Bernanke) of the financial space – time continuum.
There is no escape from the hyperinflationary result of the infinite quantity of money being created to fill the void of value in the now more than one quadrillion dollars worth of value-less OTC derivatives created from 1991 to 2009.