Trader Vic Explains Hyperinflation
Hmm. If everyone, including the RBA, is so sure that a hyperinflationary depression is not likely, then what is legendary trader Victor Sperandeo doing saying the exact opposite?
If you don't have time to watch the four minute segment on CNBC, his point is simple: long-term structural deficits in the US make it nearly inevitable that bond investors will cease funding US deficits and yields will rise, forcing debt monetisation by the Fed.
Yes, yes, it seems like an extreme scenario. But if you haven't noticed, we live in extreme times. Lindsay Lohan is in jail. The President of the United States goes on "The View" to conduct a national therapy session with the Estrogen Class. And much of the world remains hog-tied by unproductive zombie debt.
Incidentally, Sperandeo says the hyperinflationary depression "trade" is precious metals. We would sort of agree. But it's not really a trade. Buying Pets.com in 1999 was a trade. Buying precious metals in 2010 is insurance against financial catastrophe. Either you take this stuff seriously or you don't. The choice is yours. But there's clearly a lot at stake over whether this "extreme" view is accurate or just, as some claim, hyperbolic.
Speaking of hyperbole, have we over-stated our case about government debt? No, says Nassim Taleb in a BusinessWeek interview on what makes the financial system so fragile:
The massive one is government deficits. As an analogy: You often have planes landing two hours late. In some cases, when you have volcanos, you can land two or three weeks late. How often have you landed two hours early? Never. It's the same with deficits. The errors tend to go one way rather than the other. When I wrote The Black Swan, I realized there was a huge bias in the way people estimate deficits and make forecasts. Typically things costs more, which is chronic. Governments that try to shoot for a surplus hardly ever reach it.
The problem is getting runaway. It's becoming a pure Ponzi scheme. It's very nonlinear: You need more and more debt just to stay where you are. And what broke [convicted financier Bernard] Madoff is going to break governments. They need to find new suckers all the time. And unfortunately the world has run out of suckers.
But wait, Australia doesn't have this problem does it? A few readers wrote in and asked us to look at this column by Ross Gittins and re-evaluate our position on the severity of the debt problem in Australia. The argument is that if your household mortgage was just 6% of your income, you'd be quite happy with that ratio, so why the big worry when Australia's public-debt-to-GDP ratio is just 6% of GDP?
Such a blasé attitude about debt is remarkable really, given a world that's hobbled by reckless borrowing decisions taking by households, banks, and governments alike that leave such a massive economic hangover for years. But there are a couple of points to be made about the article. First, every single dollar spent by the government comes from your pocket or the pocket of a business. It's money that necessarily reduces the money somebody could spend, save, or invest.
There is, of course, a philosophical issue too. If you choose to go into debt to buy a long-lived capital asset because you value the security of owning your own home, that's your own financial choice. You live with it and whether you can pay the mortgage from your income - money you earn by your own labour. That's a voluntary decision made by you and your household alone, which is appropriate, considering you and you alone are in the best position to not only determine what you can afford, but what you want.
The government is not a household. It does not have income. It has money which it has to take from someone in order to give to someone else, whom it deems more worthy. Whether or not you object to that arrangement (and obviously we do, since it's theft), there is the added question of "more worthy" or whether the government is confiscating capital from the private sector and putting it some more productive use in the public sector.
You'd have to be living on the face of the sun to not realise how wasteful government spending has become. It certainly hasn't been productive. But it must be paid back all the same. And the borrowing continues like a bad habit. Modern democracies do very poorly at limiting public spending. Imagine that, people voting themselves money that's not theirs. It's organised crime without the Tommy guns and wingtip shoes.
More topically, you have to ask yourself if turning a $20 billion surplus into a $40 billion deficit was an example of "worthy" spending that saved the economy from a recession by electrifying hundreds of houses, killing four installers, and building over-priced school buildings (what is so revolutionary about that anyway?). Mind you we don't reckon the Liberal party would have behaved much differently. It's already promising to extend government spending on paid parental leave in a transparent attempt to soften hard man Tony Abbott into a compassionate conservative.
But that's exactly the point. Tolerating or endorsing government deficits and debt is akin to saying you believe that the government knows what to do with your money better than you do. That's rubbish. It is in the nature of the Welfare state to consume an ever-growing share of private resources. It's a virus and a plague and a monster and we should not endorse feeding it. Ever.
Besides which, the most serious debt problem in Australia is not yet the public debt. It's private debt. By world standards, the Aussie household debt to income ratio is at the top of the charts. Specifically, the ratio of household debt to disposable income is 158%, according to this rather distressing article in Forbes.
What's most distressing is the determined ignorance/indifference of most of the Australian media to take seriously all the evident signs that Australia has a debt-fuelled house price bubble. It's not the first time we've seen it, although the level of condescension, arrogance, and vitriol directed at housing bears here is comparatively high. But then, the real estate industry probably throws a fair few advertising dollars the way of the newspaper industry these days and a lot of determined housing shills have a vested interest in talking up their own book.
But have we gone off the deep end ourselves and become too ideological? Too extreme? Too extremist?
To be fair, we've always admired the even-temperedness of most Australians. The country seems to take things in stride, never over-reacting or getting too fussed. But politically, or at least economically, this is probably a liability. Your good will is being exploited by the Keynesian dinosaurs clinging to their interest rates and orthodoxies from the past and prodding you accept creeping government debt and power in your private life. They are vermin and scum of the lowest order.
They would like you believe there is a sensible, socially conscious way in which government can improve your quality of life through a more just redistribution of the wealth generated by the private sector. But that is just a really well-tailored load of crap. It's a ruse designed to keep you forking over money to people who keep wasting it on things they believe you should care about while putting up more speed cameras and taxing more and more goods and services to pay for their fat guaranteed public pensions.
That's not to say there aren't things you should care about. But we'll leave those things up to you. It is, at least for a now, a relatively free country. It's a common accusation that people who believe in the free market are not compassionate because they are against government welfare programs. More rubbish by the bullies in the moral police force. Pigs.
It's easy to be compassionate with someone else's money. That's what we call the outsourcing of virtue to the State so you can watch the Masterchef finale guilt free. It's much harder, for example to follow the Golden rule and do unto others as you'd have done unto you. Government debt is just a cheap way of trying to avoid the very real obligations we all have toward one another every day.
And with that, we'll take back to our sick bed, which you may argue has affected our mind already. The doctor advises bed rest, lots of fluid, and less news consumption. We'll take him up on all three, until Monday, where we promise to leave off chronicling the moral rot of the Welfare State and get back to how be financially free in an unfree world.
Dan Denning
for The Daily Reckoning Australia
- Aussie Stocks Situation Presents Good Buying Opportunity For the Fearless Trader
- Dr. Woody Bock’s Essay: The Future Evolution of the Debt-to-GDP Ratio
- Why I Would Have Raised the Interest Rates
- Millions of Zimbabweans Face Starvation due to Nationalisation caused by Hyperinflation
- Australian House Prices Are Severely and Seriously Unaffordable
