Not Your Father’s Inflation

“Profound ignorance masquerading as wisdom – all the worse from the mouths of the prestigious,  the PhD,  the Nobel prize winner….” – Unknown

It’s time to revisit British economist Peter Warburton’s April 2001 classic tome “The debasement of world currency: It’s inflation but not as we know it“.

Our friend from GATA, Ed Steer brought it to attention once again.

Three important paragraphs describe the situation as it was, and how it is now by all means necessary…with one minor adjustment…

Not much has changed.

“What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur.”

If they stop printing, interest rates will begin rising. This will lead to the classic positive feedback loop whereby the tap root of confidence triggers…

The dollars begin to return home.

The cost of servicing debt outstrips the ability to keep up the stealth attempts.

Yet all attempts will be futile, as a lasting credit freeze will cause too much damage to repair.

Literally, things grind to a halt. Building projects left standing, unfinished, stalled into perpetual stillness as the true nature of reality.

Credit was artificial. It created some reality. But held by the promise of perpetual flow. The Ponzi destroys everything.

The tide of debt defaults…

“On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the U.S. dollar, but of all fiat currencies. Equally, they seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets.”

The objective is masked by the profit motive. These ‘bets’ are sure things. Investment banks have become nodal points in a massive interconnected, transnational hedge fund gambling parlor backed by the infinite pockets of self-imposed monetary authorities with the (seemingly) unlimited expansion capability.

Not only do they always profit, but they maneuver to control the flow or directly accumulate the physical commodity. They own the warehouses. They finance and infiltrate the minors. They book the speculative trades, and thereby read and milk their positions at will.

From aluminum warehousing to JPM’s directly shifting its short bet on silver to a long bet on physical.

Doctrine achieves a political win because the otherwise scarce material resources seem to be ubiquitous and everlasting, while the true scarcity of materials is hidden by just in time practices and fragile complexity that directs its flow.

“It is important to recognize that the central banks have found the battle on the second front much easier to fight than the first.

Last November I estimated the size of the gross stock of global debt instruments at $90 trillion for mid-2000.”

Update 2015

• Over-the-Counter derivatives, notional amounts: $692 trillion at year-end 2014, per the BIS. For comparison, this figure was $72 trillion in 1998.
• Global real estate: $180 trillion, according to global real-estate services provider Savills.
• Global debt market, both securities and other forms of debt: $161 trillion at year-end 2014, per the Institute for International Finance’s Capital Markets Monitor. According to the Bank of International Settlements (BIS), debt securities make up $95 trillion of this total.
• Global equities: $64 trillion, per the World Federation of Exchanges.
• Global M1 money supply: $24 trillion at year-end 2013, per the World Bank.
• Gold: $6.8 trillion at year-end 2013, according to the Thompson Reuters GFMS Gold Survey.
• Silver — no more than $20 billion total above-ground 1000 oz investment grade bars plus primary miners (approx $5 billion)

Warburton continues…

“How much capital would it take to control the combined gold, oil, and commodity markets? Probably, no more than $200 billion, using derivatives.

Moreover, it is not necessary for the central banks to fight the battle themselves, although central bank gold sales and gold leasing have certainly contributed to the cause. Most of the world’s large investment banks have over-traded their capital [bases] so flagrantly that if the central banks were to lose the fight on the first front, then the stock of the investment banks would be worthless. Because their fate is intertwined with that of the central banks, investment banks are willing participants in the battle against rising gold, oil, and commodity prices.”

More incentive to collude on price levels, which given the disintegration of their capital base is obviously, unsustainable, thus requiring a perpetual motion type of finance.

“Central banks, and particularly the U.S. Federal Reserve, are deploying their heavy artillery in the battle against a systemic collapse. This has been their primary concern for at least seven years. Their immediate objectives are to prevent the private sector bond market from closing its doors to new or refinancing borrowers and to forestall a technical break in the Dow Jones Industrials. Keeping the bond markets open is absolutely vital at a time when corporate profitability is on the ropes. Keeping the equity index on an even keel is essential to protect the wealth of the household sector and to maintain the expectation of future gains. For as long as these objectives can be achieved, the value of the US dollar can also be stabilized in relation to other currencies, despite the extraordinary imbalances in external trade.”

And here we find ourselves, ensconced in this grand illusion. A hollowed out economy held together my a thin and evermore fragile veneer, predicated on hope and motivated by fear.

Signs of stress are visible everywhere we look. From shrinking bond market liquidity, the re-inflation of the home equity bubble, the $1 trillion student loan debacle, overextended equity absurdity, to the blatant, overt, and direct manipulation of nearly all commodities.

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