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Why governments are looking for higher inflation and low interest rates to extinguish the unsustainable debt burden built up by generations spending more than they earned

Why governments are looking for higher inflation and low interest rates to extinguish the unsustainable debt burden built up by generations spending more than they earned

By Bernard Hickey*

It's time for me to commit heresy again by pointing out the dirty little secret of the developed world's economic policy makers.

They are trying to engineer a modest burst of inflation to quietly devalue the debt crushing the life out of their economies.

This strategy ever so delicately rewards borrowers and punishes savers.

It's not something central bankers and finance ministers will talk about openly, but behind closed doors this tactic is now being discussed and described as 'Financial Repression'.

It's a pretty sneaky trick and it goes something like this: the least disruptive way to get rid of debt is to reduce its real value by ensuring interest rates paid to term depositers and bond holders are lower than inflation.

This reduces the purchasing power of the savings by the time they are withdrawn and means borrowers can service the debt as their incomes rise in line with inflation.

Some savers might wonder how it's possible to ensure interest rates are lower than inflation rates.

There's a couple of ways central bankers and governments can do this and it's nothing new.

This strategy was successfully used during the 1950s and 1960s by the American and British governments to erode the real value of the debts they incurred from their own people during the Second World War.

At one end of the interest rate spectrum central banks cut official cash rates to zero or almost zero. That's what has happened since 2008 in Britain and America, despite consumer price inflation running at anything from 1% to 5%.

At the other end of the interest rate spectrum governments and central banks can force down bond yields through a variety of measures.

Central banks can print money and use that money to buy government bonds, which forces down bond yields. This is a process known as Quantitative Easing and is something the US Federal Reserve and the Bank of England have done to the tune of around US$2 trillion since 2008.

This week they both moved closer to fresh rounds of QE to help repress interest rates and boost inflation just enough to wash away the debt over the long run.

From the point of view of politicians and central bankers this strategy of printing money, repressing interest rates and rolling over the terms of existing debt is much more attractive than an almightly day of reckoning whereby debt is restructured, bank shareholders are wiped out and bank bond holders are forced to turn their bonds into shares.

The dramas convulsing the bond markets in Europe this year are a type of this 'day of reckoning' which is very disruptive for banking systems and financial markets. Many investors are calling on the European Central Bank and the 17 Euro-zone governments to enact their own policy of financial repression fueled by money printing to buy government bonds and boost inflation.

The debate about whether to use financial repression or to allow a massive debt restructure is a fascinating one because it often pits richer and more powerful special interests against the broader and poorer public. Increasingly, this debate pits an older generation of rich savers against a younger generation of borrowers.

Savers obviously want to be repaid in full and in a currency that allows them to buy the same or more when they do spend the money. They want borrowers to knuckle down and repay with interest.

But when borrowers have too much debt and are unemployed that repayment with interest can be impossible. At that point the two sides have to come to an agreement about how much of the debt needs to be written off to make it sustainable. That, essentially, is the predicament now facing Europe and America. How do they make the debt go away without crashing the system?

The least painless and simplest way is Financial Repression.

It avoids an ugly confrontation between savers and borrowers.

It also happens over such an extended period and in such an unobtrusive and insidious way that both parties can imagine they are sticking to their sides of the bargain.

So this is the solution the grown ups of the economics world have chosen and the events of this week confirmed that.

Ultimately though, a relatively timid period of inflation above interest rates may not be enough to wipe away debts currently ranging from 300% to 900% of GDP across America and Europe.

There's also the looming problem of unfunded healthcare and pension costs for a retiring swathe of babyboomers that will weigh on the young in the next 10-20 years.

The only solution that would reset the global economy and ensure the young are not crushed to death under these massive debts in years to come is a massive and almost immediate dose of inflation. It would wipe out a lot of the savings of an older generation, but do it in a way that didn't wipe out the economy completely.

This would be anathema to a generation of policymakers obsessed with lowering inflation to encourage saving.

But it may be the only way out the young will accept, if only they could vote for it.

----------------------------------------------------

This article was first published in The Herald on Sunday. It is reprinted here with permission.

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84 Comments

Thank you Bernard.

"There's a couple of ways central bankers and governments can do this and it's nothing new".
Oh yeah and the Barclay LIBOR rort is at the heart of the total scam....
http://www.marketoracle.co.uk/Article35468.html

Thanks Bernard,
I thought it was fairly obvious that the BOE in particular is following the route you describe of a little bit of inflation, a competitive currency, and low borrowing costs not just for the regular punters, but the government as well, to fix its debt problems and help it move through to a stage where financial services, their strong point, will not pay as well as it did in the last 20 years.
Within the UK, or the US for that matter, it is not too difficult to have a faustian bargain between savers and borrowers. There is grumbling in the Telegraph, or on CNBC, but nothing of real note. Japan has had a similar understanding for over 20 years, that has actually kept their country in pretty good shape through their supposed lost decades.
It's also clear why the Euro zone is having the difficulties agreeing to such a path. They do not so much have debtors and creditors within each country, but rather have Germany as the creditor, and most other countries are the debtors. Because the debts are unpayable in Euros, the Germans will in the end have to agree to some debt relief in some form, or have the Euro break up, in which case they also lose.
For New Zealand, our solution has been to keep borrowing more from foreigners to pay the interest on the last debt, along with selling whatever can be sold or pawned. We have swapped a little private debt for more government debt.
Even though I'm very much a saver rather than spender personally, I would rather see NZ follow the British example than our current method, which is sustainable only to the point where nothing is left to sell or mortgage.

"...a massive and almost immediate dose of inflation"
Serious mistake Bernard...try figuring out how you stop the beast!
And how do you prevent the wealth departing the country at the click of a Mouse!
Nope....have to rely on the ongoing thieving through debasement which is what we have had in Noddyland for decades....remember the Chocolate Fish story!

what is the chocolate fish story?

You must be so young plan B....chocolate fish,  were 3 pennies each and that was the same price as a double cone ice cream!....now you need a mortgage to buy a choc fish and they are half the size! Thankyou to all the pollies who strove so hard to bring about so much debasement of the currency..what a great lot they were...knighthoods all round.

Maybe you have it around the wrong way. Low interest rates are a responce to too much debt and a drop in consumption, they want the unwashed to keep buying their stuff, and they couldn't afford  it when the interest rates where high.   You think the government could really get anything right?  Inflation is destroying disposable income making rent and consumption hard to pay, the 40 million Americans on food stamps will tell you all about it. What is really happening is a massive tranfer of wealth, like the old trick with the walnut half, which one is the power generation under? look its been in the bankers pocket all the time. Inflation is not inflation if wages are not going up and the money supply is shrinking, we are just getting poorer and run by morons. Destroying saving will never be a solution.
 
http://wallstreetexaminer.com/2012/07/04/bernanke-my-goal-is-to-wreck-so...

Why stuff about tinkering with a system that is clearly failing?
We have two choices
1. Going the way of Japan with its Zombie economy, and other like countries who prefer zero inflation, where nothing much happens, where ambition is stifled. risk taking goes unrewarded, where all the masses can do is wait for things to get still cheaper as the producers go broke.
Or
2. Where we have a good dose of inflation, which drives people to spend, gives producers a big push, and creates a healthy dose of extreme fear and greed - which is good for the soul.
The capitalist system needs growth, profits and inflation to work. So let's get going and get the wheel turning. Sure there will be casulties on the way, but there will be casulties if we all just sit around and start nodding off.
I would rather have 20% inflation and the problems that brings then 5% deflation and the really nasty problems that brings.
Having experienced both inflation and deflation, inflation is the better medicine to take. It puts steel up the collective backbone- something that is sorely needed.
 

“When the development of a country becomes the byproduct of the activities of a casino, the job is likely to be ill-done.”  Read more
 
It gets more complicated in so much as the intergenerational dichotomy between the wants and wishes of NZ savers and borrowers is not the problem being addressed directly by central banks such as the BoE and Fed.
 
They are trying to manage an orderly deflation of the deposit less shadow banking system.
 
Most importantly, it also explains why Goldman IS right, and the Fed has no choice but to shift to a "flow" reserve creation format, at least until such time as the balance of shadow liabilities is offset by generic liabilities: i.e., deposits.
 
However, there is a rub. As we noted previously, shadow banking is simply an inflation buffer: since there are no deposits, there is little risk of the "money" contained in the banking system from furiously vacating and be used to spur purchases of everything from 1,000x P/E/ stocks, to overvalued housing, to just being packed away safely in a mattress. In other words, the Shadow Banking system is circular as the money contained therein is self-contained.
 
Not so for deposits. Just ask any banker, central or otherwise, especially in Europe, who has had to deal with the threat of bank runs.
 
The biggest paradox is that as the US financial system takes more and more steps back, and reverts to a more conventional system (look at Europe as a paradigm of what is coming), the risk that incremental money creation by the Fed will eventually spur inflation rises exponentially, as more and more "money" ends up residing within conventional bank deposit accounts.
 
Read Article

Failing it is indeed but far more than you seem to be able to comprehend.
Annual growth at 4% needs more energy at 2.5%, hence why in 2006 when crude oil output peaked its price has got so high.....we use price to determine demand and oil's is in-elastic...
but nothing like a vested interest piping up, eh?
5% deflation is good for those on fixed incomes such as OAPs as long as banks dont fold....and wipes out the PIs......Im all for wiping out the stupid and greedy.
regards

So the babyboomers' love of buying property for retirement through leverage was the right thing then????
Surely not!

At times of high inflation and record low interest rates - a couple of low-geared extra property titles are ........................
 
Complete the sentance yourself.  
 
Stop that Laughing Out Loud Ollie.

Now step back one and all, and think on Big Daddy's nailing of the problem.
 
"The capitalist system needs growth, profits and inflation to work. So let's get going and get the wheel turning".
 
Growth, Big D, is exponential, and relies on extracting and processing parts of the planet. So it stops at the point, where the underwrite can't 'double' anymore. What do you think the key ingredient is, Big Daddy?
 
Virtual wealth is easy. Take an existing house. You sell it to me, I sell it to someone for a profit, they sell it to someone for a profit, and we all go out and spend our profits on?  Goods and services; parts of the planet. What relativity did our spending expectation have in relation to said parts? 
 
Only one;
 
Scarcity vs dollars = bidding-war = inflation. That's for essentials. For non-essentials, expect the reverse - toys will be worth less, en route to 'worthless'.
 
We have already peaked the essential underwrite, Big D - good luck with that restart. Even if you forgave ALL the global debt, the growth system is not capable of continuance; why is it that folk can't (don't want to?) see that?
 

"For non-essentials, expect the reverse - toys will be worth less, en route to 'worthless'."
 
PDK - in so few words you sum up the trend - that is now unstopable. I gave you a tick!
 
In the eyes of the 1% - we are merely 'peasants'. 
 
Everything that we NEED is already increasing in value at ridiculous rates.
Try selling unused 'toys'.  - Like last-years must-have 'toys' that we WANTED so much. These are already decreasing in value at alarming rates.
 
PDK - I gather that your home is very self sufficient. Way-to-go! Whilst the gear is still affordable. Electric car? Browns Gas? 

I see little sign of things increasing at ridiculous rates, power for instance seems pretty flat...my kwh isnt going up for instance....
Council rates maybe? yes, interesting that where there is a Govn sanctioned monopoly rates can and are increasing above core inflation...
So what in your life is climbing?
Toys, now I agree but it depends....I just bought a new TV after 15 years, had 25%+ off....I intend to see this one for at least 10....ditto fridge had 20%+ off....all more energy efficient.  Wont be buying another  [new] car, petrol probably wont be affordable by the likes of me in 10 years....
EVs make no sense economicially btw.....$65k v $20k and last half as long.  $45k in the bank earning interest will buy quite a bit of petrol.....better to set your life so you dont need one...which is what I have done.
regards
 

"toys will be worth less, en route to 'worthless'." aka russia after the wall collapsed.....lots of great examples.....however they had GDP collapsing at up to 25% per annum at one stage...
regards
 

Powerdown- I don't quite follow your argument-as your explanation is too academic .  I would genuinely like you to explain it again but in laymans terms this time.
Whatever you mean, I believe that hyperinflation is inevitable sooner or later for the simple reason that politicians will have to live up to their promises one day whatever the bankers say.
(and the bankers have proven to be seriously wanting, to say the least)
In my view the only way the polticians promises can be fulfilled is for them to inflate the monetary system as the "easy" way out of non-stop fumbling stagnation.
There is theory on one hand and realpolitiks on the other. 
Realpolitiks always wins.
 

You miss so much.....for instance do you think the original Great Depression could  have been avoided? 
(probably not)
Why did it occur?
(to much debt used to cause a share market bubble)
Can you yet see the paralleles with today?
regards
 

Big D - try this:
 
http://www.zerohedge.com/news/chris-martenson-trouble-money
 
Read it well, carefully an slowly. Then this:
 
http://www.energybulletin.net/stories/2012-04-09/capital-debt-and-alchemy
 
There are several orders more of negative pigs (the expectation that you will be able to trade in goods/services, making a profit, in 30 years, to pay off your mortgage, is a naggative pig) currently held, than there are - or will ever be - positive pigs to underwrite them.
 
Energy is the key - the maximum supply-rate, globally, marked the maximum supply of positive pigs. Only variable was 'efficiencies' (that includes the results of using the 'unlimited' human brain) and you can only be 100% efficient at best, starting from wherever you are currently.
 
We're in overshoot. So even if you re-booted, growth is still impossible.
 
http://www.albartlett.org/
 

"The greatest shortcoming
of the human race is our
inability to understand
the exponential
function."
- Prof.
Al Bartlett

 

And what do you rely on in your game, again? The exponential function, and exponential increases in the supply of energy - for the tenants to do stuff to gegerate 'wealth' to pay you. Get it?

BigDaddy liken the exponential function to the doubling in price of one of your investment properties. At a given interest rate you double the price over X years.
 
Growth works the same in relation to resources. Finite resources are required for growth to occur, the rate of consumption of those resources doubles with the rate of growth. Some reckon there is not enough room left to double again and it is a fair assumption.
 
Take Lead for instance. At current rates of consumption there is only 19 years of lead left, if you double growth then there is only 8.5 years left. Lead is an essential ingredient in most batteries, so how is that going to impact on growth when it runs out? Alternatives to Lead are also running out, but will run out even more quickly once we switch consumption to say Cadmium instead of Lead.

Actually I seriously dis-like analysis of this Martenson form, its basically scaremongering and doesn't offer much value. There is every reason for countries to gear up for sustainability, however just thinking about exponential doubling times doesn't make sense.
You can construct a negative analysis of literally any resource by projecting it onto an exponential curve. The reason is simple, even if you 'understand' the exponential function you can't perceive the problem until you are one doubling period away from full consumption. This provides an instant formula for a scary analysis of anything, it doesn't tell you much constructive stuff however.
 

It isnt Martenson as such but maths.   It offers huge value in that it predicts future prices and problems mathematically some years out. The fact that you seem unwilling to accept that means any analysis you do is faulty....which indicates a political set of blinkers...you need to get rid of those.
Doubling times is hughly constructive, for instance it predicts china's problems....they have a 10% annual growth target, that means doubling every 7 years...where will they,
a) Sell to?
b) Get materials from?
c) Get energy from?
d) Get food and houses from?
Really think they can they double again? I think not....therefore it should be telling you not to keep skin in the game as its a sure loser.
What you mean is it doesnt give you a constructive future you want.....so guess what you ahve to start again from scratch...too scary for most ppl.....
Thats why I see left and right as the same problem......they dont want to see or act on the paradgym shift that has/is occuring. Their solution is not to look hardly competant is it.
regards
 

Nic - actually, it tells you a helluvu lot.
 
It tells you that a growth-based system has to fall over at the 50% mark.
 
We are running a growth-based system, 80% reliant on the energy from fossil fuels. BAU balls-in-the-air has never been bigger, and infrastructure decay (by time and by quantity) has never been greater.
 
Oh it tells you something. We physics types worked out that the fiscal system would be in trouble, and why.

The numbers say otherwise. Rate of population growth has been declining for 50 years and nothing has been done about gearing up for sustainability yet. History also shows a different picture also, where is the track record of empires acting sustainable? That simply isn't the way humans work, greed will gazump sustainability every time. I notice you side step the Lead stats, which along with half a dozen other key minerals also show we are blowing the chance we had to do something before it is too late.

Appears logical 'Financial Repression' of inflation over a long time could work; so private debt can be paid down.
But if people use the low interests rates to borrow more for non productive purschases, wont this increase debt and worsen situation.
The government would need to place limits on non productive borrowing and provide incentive when borrowing for export earning, employment generating money earning investments.

"if people use the low interests" yes, this is what has happened over the last 10 to 15 years.
Not private debt though, but Public/govt debt....Govns dont really care about private debt in their voodoo economics model/outlook....
Your last sentence says growth, thats 1 of the 3 ways out of this.  The ways out are,
1) Inflate (print)
2) Grow
3) Default
2) Growth is off the cards, the raw material inputs are getting scarce so will be a signficant input cost to an economy....The world's economy cant function like that.
1) Sure but really its not under-written by the economy because of afore mentioned input costs.
3) That leaves default, depression and deflation....
Deflation will kill those with substantial debt...
regards
 
 
 
 

Actually BH I dont agree, you take the absolute position and not relative....,
"They are trying to engineer a modest burst of inflation to quietly devalue the debt crushing the life out of their economies."
Think its more like desperately trying to avoid a depression, ie deflation, so what they are doing is relaitve inflation ie countering deflationary trends....
Now sure if they can do the impossible magic trick and get us away from the brink of a second Great Depression Then Yes.  Everyone (pollies etc) is saying they/we need growth at 5%+ in order to pay it off...such growth brings with it inflation, but that's a later worry....
regards

"The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation".
Lenin
Each week you sound a little more like a closet totalitarian Bernard. 
 

The term 'Financial Repression' was not invented by Bernard. It is a topic widely considered by those in power for many - many decades.
Have have a 200 page Swiss document on "How Governments Reduce Debt" - sitting beside my bed. Interesting bedtime reading.
 
Google Financial Repression. Dare you to do it. Wham - 6 years worth of reading>>>>>>
 
Bernard only reported the fact  His headline to this post was : -
 

Policy makers dirty little secret
Please dont shoot the messanger.
 
Just be grateful that Bernard brought it to your attention. Believe that 'Financial Repression'  is real. And take urgent action to minimise your personal financial exposure.

So Govts reduce debt through financial repression but their tax take is still not enough to cover deficits. Govts will have to find ways to tax everything that moves while ya'll being "repressed" - here's a take on what is going on in the Obama camp.
http://www.youtube.com/watch?v=-wIfI2whjiM
I can't see a way out of this mess.

or the bigger mess coming.....classical ways out is to do a FDR....Keynes however commented that (in the 1930s depression) we have resources to do it.
today?
regards

BERNARD says:
The only solution .... is a massive and immediate dose of inflation, because
It would wipe out a lot of the savings of an older generation, and
It may be the only way out the young will accept, if only they could vote for it.

 
ARE YOU SERIOUS:? you should go to the bottom of the class. Put your dunce's hat on.
 
What you are advocating is episode II of the 1980's and 2000's periods of excessive inflation.
The beneficiaries of those times are the ones you have been railing against.
Who were the beneficiaries of those times Bernard? Answer me.
 
A massive bout of inflation would increase the price of those 100 sqm $500k boxes to $1 million
The beneficiaries would be the all owners of property.
Plus, all property owners exposed to a mortgage would receive a double prize.
 
The youngest of the generations, genY and genZ, those not yet in the property market would be where? Answer me Bernard.
 
What is needed FIRST is an immediate savage bout of DEFLATION to force the "bailees" who are still leveraged to the hilt and holding on courtesy of the central banks, to deleverage, to capitulate, to puke their assets out, face their day-of-reckoning. Thus, level the playing field and give genY and genZ a chance to get on board. Your solution excludes them FOREVER.
 
As to the levelling of the playing field via sudden deflation, just look to Ollie Newland's experience above. He didn't like it. Didn't enjoy the fall at all.

icon,
It seems to me we have present day case studies of Bernard's and your solutions. Yours sounds pretty much like Greece and Spain as prescribed by Germany. A black hole depression with unemployment at 25% and youth unemployment at 50%; all nicely termed "austerity", or living within your means, except there no longer is any means.  The only get out for them actually is that Greece and Spain are sold to the Germans at fire sale rates; and only then really unpayable debts are written off. Assuming this solution passes muster past the French and Italians who would be next, its not a pretty outcome. I suspect the French and Italians will encourage something like sense to prevail in the end.
Britain is relatively advanced on Bernard's solution. Inflation has been 5% for 3 years or so. Unemployment I believe is 8% or so- highish, but given the real hits to financial services, not bad overall. Wages will be growing to reduce real debt. QE means the government deficit is effectively paid for with new money, so no real new debt to the country, so they are not having to sell themselves in a fire sale. The property market is solid enough. The QE means the pound is very competitive. As an example,despite the global recession, the British car industry is the healthiest it has been in decades.
Young Greeks and Spaniards are heading to London, not the reverse, to show what the respective youth think of the policy alternatives.
NZ has a third way. Sell or mortgage everything; leading to a huge and unsustainable current account deficit; where we don't own anything. Not a great advertisement for our youth either.
Bernard's British solution sounds the most appealing to me.

If you think hyper inflation is bad then you have no idea what damage a massive deflation bout would have. Depression would destroy the country and the economy from top to bottom and spare no one. Half the country would be in the street and the other half would be frozen in a financial hell hole. It may suit the anarchists and neo communists but no one else. Be careful what you wish for.

Big Daddy - a serious reply.
 
Don't -ever - mix 'what you want' with 'what is/is not' possible.
 
There are 7 billion people on a planet that - in physics terms (economics is a man-made, temporary, growth-phase-only construct) - can probably carry 2 billion. Perhaps less. We went past that overshoot in 1980 (Will Catton wrote Overshoot then - did you read it? Never too late; even if you ultimately reject something, it pays to read them all) so it was never going to be comfortable. 
 
What I suspect we have now, is a cohort who know what is happening/coming. They will include the bankers, and naturally enough, they will be moving to be the ones holding the parcels - the remaining parcels - when the music stops. It's human nature, can't blame them. Survival of the fittest - or is that 'fattest'?
 
Again - just because you don't want "Depression", if there isn't the resource-supply to support growth, then depression is what you will get.  Nobody wants to visit Oncology either - but reality overrides wish, every time.
 
You're the one doing the wishing - some of us started out in life examining the physical realities, and planned our lives accordingly. I knew from the age of 20 (1975) that the Limits to Growth would be hit in my lifetime. You sound like you first decided on a course of action that suits you, and then expected  the planet to deliver. Which is the more  realistic approach?
 
Oh -and calling people labels/names doesn't alter facts. Steerage and First-Class alike drowned. I'm way beyond political name-calling - we all breathe the same air. This to do with facts and physics.

20 in 1975, that explains a lot about our aged resident hippy PDK!
 
Big Daddy is right, PDK and Iconoclast are just way off base.   The world needs to get on with increasing productivity and innovation, creating improving living standards etc, not obsessed with some arbitrary determination of the value of assets and how to maintain the integrity of such a system while ruining the living standards of entire continents all in order so that a few bondholders, who didn't have the intestinal fortitude to invest in real assets, don't lose their shirts!
 
PDK, iconoclast: what is the point of having cheap assets if no one has any money or a job??
 
PDK, no laws of physics are going to be broken anytime soon despite what you may think!!!

ChrisJ - If I need confirmation that I was on the right track, the fact that you backed him would confirm it.
 
Productivity - and I've pointed this out before - is a combo of 'efficiencies', and a drive towards zero wages. Kindly learn to identify the two parts, and state to which you refer. Zero-wages is just a scrap over who gets what from a zero-sum cake.
 
Innovation is part of efficiencies. No more, no less. As you can't be more than 100% efficient, and in practice won't ever get there, efficiencies are of definable scope and of diminishing return.
 
You and BigDaddy are the ones who arbitrarily define the 'value' of assets. I just tell you what the underwrite is!
 
You're watching  - and it's about to accelerate - the biggest 'destruction of capital' in global history. Where/when'if it stops, I'm not sure. Probably somewhere closer to the underwrite.
 
It amazes me that folk can take a capital gain, and expect that there will be a bit of the planet waiting in the shops to exchange it for. It's negative pig homework time for you.

But real assets will still exist PDK!
 
Do you really believe that the value of a piece of paper is going to be so important to Governments that in the medium term they will send their people to the edge of desparation and their countries to the brink of destruction??  Highly unlikely.

CJ -absolutely, real things will exist.
 
The problem is that folk expect that their 'wealth' (largely '1's and '0's held electronically, not bits of paper - one comment here recently pointed out that several trillion could be carried on a data stick, which I suggested meant the trillions were worth 50c) will buy real things.
 
The overshoot of that currently-held expectation, is several orders of magnitude. Folk with 'retirement savings', 'investments', etc, have an expectation that they can 'spend' them.
 
Sure, bricks and mortar will still exist. But - what if you take out a mortgage, and expect a tenant to earn enough to pay it back for you. That requires available energy. If it's not available, no work, no income, no rent payed, broke landlord, mortgagee sale, re-boot lower, rinse-and-repeat. All debt requires an underwrite FROM THE FUTURE. Remember that. A 30 year mortgage requires 30 years of energy-supply.
 
http://www.energybulletin.net/stories/2012-07-07/resilience-through-simplification-revisiting-tainters-theory-collapse-part-1
 
http://www.zerohedge.com/news/chris-martenson-trouble-money
 
You're thinking. Better than some.    :)

You are correct, we wont be able to break the laws of physics, and indeed pdk doesnt think otherwise unlike yourself.  Hence "increasing productivity and innovation" and "living standards of entire continents" will fail and drop...depending on how you define those, ie more bling or even the level of bling we have is going bye bye that doesnt mean less happiness for those without mental health issues.  Of  course you with all your property gambling are a vested interest in keeping the game going. 
 
regards
 

What exactly is there a shortage of???
 
We have limitless energy resources (thanks to the sun) and everything else can be produced from that!!!
 
 

CJ - wrong, right there.
 
Something happens to every kilowatt that comes our way. Much does photosynthesis (we can't live without the biosphere, despite our arrogance). Much is radiated - a balance without which we'd fry of freeze. Basically, you're right, though - a steady-state society could do it. A growth-based one can't.
 
http://www.youtube.com/watch?v=Q9xoFCS33kg
 
I absolutely champion solar energy (wind and hydro are secondary solar, the sun causes them) but it only does heat and electricity. Rumplestiltskin was a good kid's story, but alchemy on any meaningful scale is not a 'goer'. And you still need conductors for the power, batteries for the cars, rare earths, bitumen-equivalents, fertiliser, plastic-replacement, and you still have to effect the change using the existing system.
 
Unfortunately, it can't maintain itself now - as Tainter predicted - and where do you get the energy to drive the morph? That had to be well underway before peak.
 
There are so many limits - resource peaks, depletion rates, pollution accumulations, that we won't address them and maintain a growth-based fiscal system.  We may give it a heave, the way we pitch in to a snow event or similar, buy not within a functioning fiat fiscal system - it'll be goodwill, barter, and need.

"Steerage and First-Class alike drowned. I'm way beyond political name-calling - we all breathe the same air. This to do with facts and physics."
 
This is an excellent way to describe the current situation. Thank you.
I suspect we will just continue to muddle through until another crisis, the like of which we cannot yet comprehend, will sort the matter out one way or the other.  
 

Big Daddy - what a pity. You didn't look at those links, did you. Why not?
 
It takes more than one night - even with reasonable intelligence - to digest what I gave you.
 
If you had bothered, you'd realise that 'muddle through' is again an emotion, not a reaity. And yes, we CAN comprehend (you sound, sadly, like 'denial' there) the 'like' of the crisis. .
One way or the other? Think about that phrase. I mean: Think!!!!!

Bigdaddy - there are examples of inflationary and deflationary depressions throughout history (talk to the US and Germans about their different experiences last century), and deflation doesn't necessarily mean a depression.
However, financial repression has been the obvious tactic employed by central banks since this crisis broke, no surprises there - why would the US for example ever contemplate default when it could repay every bond held by the Chinese with a few key strokes.
The ONLY question is, will they manage it successfully or will they not ? Many times throughout history central banks have mis-managed this process into elevated inflation, or worse, hyperinflation with nasty consequences. No one knows because no one has ever seen money printing/QE/ financial repression on the scale as this one, and across some many major nations at one moment in time. No one knows, and that's what's so scary.
My guess based upon the fact that's there has been zero deflation in the past 50 years (the only year's of unlimited money printing & the only period in history dating hundred of years), is that they'll mis-manage it to the upside in inflation, before the eventual collapse (but the latter's probably many years away yet). 
 

BH - you provide the best reasoning for long term property investing I have ever read on any website.

powerdown:  i did indeed read the articles and with respect they are a re-hash of hoary old theories that have circulated for centuries in one form or another.
Conspiracy theories, the end of oil, the coming collapse of the capitalist system, the hidden agenda of the financiers etc etc have been well flogged but have never fully eventuated e.g.  Minsky‘s financial instability theory or the Theory of rational expectations
These theories and ones like them rely on predictable outcomes without allowing for emotion or human weakness or unexpected events to intervene.
Economic theories are computer generated answers based on a supposed logic when in reality guesswork would be just as effective.
"Thinking" is a waste of time unless re-thinking is done on a daily basis and corrective measures taken immediately if and when required.
Unforseen events constantly alter pre-conceived outcomes. Emotion and logic do not make good bed fellows.

I guess fools have been around for centuries too. There are a lot more of them now, though....
 
I wonder how many buildings are made without fossil fuels. I wonder how many tenants incomes rely on fossil fuels. I wonder....    never mind.
 
Anyone who compares the distant past (hand/horse/ox labour and well under 1 billion people) with today is if there a possibility of relativity, is deluded. Interesting question is whether they're self-deluding, but deluded, they are. Anyone who doesn't understand the direct relationship between energy and wealth is deluded too. Or dumb. Or - as my physics Prof suggests - cognitively dissonant.
 
Now, there's a thought.
 
 

End of oil....read up on say the ASPO  association of the study of peak oil. 
"hoary old theories" Look at both sides, ASPO and who is in it, oil geologists, and the data they provide as proof....V frankly some in the oil industry, other vested interests, nutters and talking (empty) heads...
So consider the quality and quantity of evidence from both sides, but sure make your own mind up, adults do that.
"hidden agenda of the financiers" occams razor, the agenda for me is the simplest, make money for yourself who cares who goes down in the process.  Anything else such as a conspiracy would have to be on a huge scale and you cant keep something like that a secret.........
Minsky's work aka Steve Keen is un-fortunately proving very accurate.  Un-fortunate in that its predicting a big shake up/collapse but sure make your own mind up, adults do that.
Rational expectations, Ive never seen that justified.  The biggest thing against it is, in the "market" is a buyer and seller....one has to be wrong....
"daily basis"  When you are in cash, yes its liquid, it can be moved at the stroke of a keyboard. When you are in housing which is ill-liquid ie takes weeks to sell, I dont agree. Ditto shares, (my weakness) usually takes some days.....both have to have a buyer......in the crash of 1929 there were no buyers, hence the share market dropped to 10%, a 90% loss.
  Though I think "daily basis" is faulty...you need to be looking months and years out...the stokebrokers or other "professionals" have a (say) 20 week time frame.....and can sell in micro-seconds. And the the market is rigged, us plebs have to wait 20mins or pay to see changes, you cant compete on their terms so dont play.  I sold all my shares 2 years ago as I see a depression and huge asset price losses.  When this shake up is finished, sure inflation will be a real risk....then its time to move cash into an asset....
regards
 

The interesting thing about the Big Daddy comment, was that he understands the need to keep thinking, but doesn't understand absolutes.
 
Or doesn't want to.
 
If I'd been on the Titanic, I'd have been thinking strategically, until the end. No point in hanging round on the ship - that is not a survival strategy, merely a staving-off of the inevitable. Getting something together, and floating away early, would be the plan - a bundle of deckchairs perhaps? I'd never have made the mistake of thinking the sinking wasn't happening. That's denial.
 
I guess, at the end of the day, he learned his skill-sets in the period where everyone thought that virtual trading (buying and selling existing items for 'more', is virtual trading) could be indefinitely underwritten.
 
So beyond the point where the underwrite fell short, he is out of his depth.
 
So to speak.

BH - have you tried running the numbers on this game? If you are talking sovereign debt, lets walk though an example of the worlds largest consumer the good old US of A;
Federal government cash deficit = 1.3 trillion p.a. (although the GAAP deficit is much larger at 5 trillion).
US ferderal government cash debt to date = 16 trillion
So their debt is increasing by 8% per year, therefore inflation, just to keep the debt even in real terms steady would have to be 8% p.a.
Mmmm, looks like they have heaps and heaps more money printing to do yet, as in real terms their debt is still growing (so much for regression attempts so far to date)... I guess the FED will have to monetise the entire federal government debt then (which is what I have been saying for ages). Yippeee, that will work.... of course countries with high inflation rates don't actually necessarily get high growth rates as investors don't like inflation... and its real investment that creates the jobs etc...
For the record, I agree though, thats exactly what the plan is (thats why I think this decade will be more like the 1970s than the 1930s). Like most of the plans they come up with I can't see it working (mainly due to unintended consequences), in fact as Jimmy Rogers says, it will make it worse in the end.

Speaking of dirty!:
"All a declaration does is let us see that two things have happened – that he put forward a bill and, secondly, he received a fair chunk of money from Independent Fisheries."
http://www.stuff.co.nz/national/politics/7243101/Cosgrove-upfront-over-mates-donation

Standard party line biggotry against people who wear red ties. How much longer will National be allowed to use the previous government as an excuse for having no ideas?
 

The time to do changes was while in a boom....but that would have cost votes....sure National would have been at best no worse....
regards

There is no diffo between the big two - except for the question of ownership.
 
Both extol growth.
 
Both are therefore a waste of precious remaining time.

Mmm. Let's see now. High inflation, low interest rates. Right then, better go buy me some property ... what problem was this solving, Bernard?

FYI from a reader via email:
Hello Bernard,

 

I admire and agree with your efforts to get the politicians to adopt policies which will give hope for the young and stop the turning of our country

into a rest home as we lose so many to Australia etc.

 

However, your provocative idea to inflate our way out will not work, as you well know, because the political cost of losing the value of your savings for such a large part of the electorate will not be considered by any party. 

 

I assume you are being provocative to try and break the politicians and opinion makers out of their slumber. All power to you for that but I think any new policies have to be more targeted at the problem, and the twin problems, to my way of thinking are private debt and lack of competition in the core economy. 

 

Private debt is really just high mortgages on overpriced property as Hugh Pavelitich, yourself and others have pointed out. The real problem is political: how to provide cheaper housing for young people without existing owners losing value or creating negative equity in their property. They lose value and you lose votes. It is as simple as that.

 

My suggestion is that we do the right thing which is to open up land and enforce a break-up of the Fletchers ' monopoly', so their is more competition in land and building products.

 

This will lead the market down, by benchmarking a lower replacement cost for all existing housing which will lose value ,as it it should do because it is overpriced. However, this will be unpalatable to enough people to make it politically impossible, unless, you can soften the blow by compensating them. So I would  change existing titles to greater density or strata titles or give people attached sections. Density and strata titles are appropriate for the bigger cities, but the smaller places will need density or attached sections. By attached sections, I mean people are given a section or percentage thereof as compensation in places where density or strata titles are not sensible.

 

As we have taken fifty or so years to get ourselves in this stupid position, we should allow twenty to fifty years for this policy to work ourselves out. A

quick solution is not appropriate as we do not want a wildly fluctuating or flooded market. All we need is confidence that a fair solution will eventuate.

 

My idea for density or strata would be to follow the tried and true instead of this mania for the original. Why re-invent the wheel. Who gives a toss about winning town planning or architects awards in crappy competitions that no one will remember in ten minutes time, let alone ten years. The tried and true

seems to be be courtyard fronts, iron railing fences, tall and narrow windows, higher studs for lower floor living and lower for higher floor sleeping, lanes behind for vehicle access, garages with lofts above for extended families, geometric and regular street layout etc. I just look at this in the old terraces and housing of London,Paris and Berlin which has stood the test of time. Our in-fill housing is a halfway house which is too ugly to be allowed to continue. No one really likes it - well ,at least among my circles - so why do we continue to do It?

 

So, to my way of thinking, we open up land by way of density, strata and green fields which is the right thing to do for our country's future, we then hold our nerve, and when we see how the market is developing and adjust the density and strata as need be to compensate.

 

I would like to know what you think, as I do not care if I am wrong, as long as we find a way forward. The property ladder  has had the bottom rungs knocked out, the better off are trading amongst themselves in smaller and smaller circles i suspect, so that one day there will be no fresh blood and a catastrophic collapse will happen. We should manage our way out now rather than waiting for that to happen, as there may be not enough young people in the country to take advantage of the collapse!

 

My gut feeling is that you do the right thing - open up land and create competitive forces in building products - and we will find the right way forward.

 

Regards,

 
Ian

Ian
Many thanks. You're right that I'm being a tad provocative. But
remember, most voters are now either borrowers or have no property.
And property owners often are borrowers and benefit from inflation.
But you're right. The 'grownups' probably aren't keen.
But we may not have a choice. When this stuff happens internationally,
we will get caught up in the fallout.

I like your ideas on land supply and building issues, although I'm
less sure about the Fletchers monopoly. If anything, we need a house
builder with a lot more scale than less.

cheers
Bernard

"As we have taken fifty or so years to get ourselves in this stupid position, we should allow twenty to fifty years for this policy to work ourselves out".
 
um
 
limits-to-growth.org/
 
We haven't got '50 years', we probably don't even have 10. And - the growth-based global fiscal system is in question.
 
Endless growth of suburbia is both unsustainable, and now un-do-able. Housing itself is cheap - I can prove that. Farming - the oil-based BigAg model - will crash. Has to. That leaves a lot of land needed for food, at the same time the virtual earning (most CBD earning is virtual, BH being an example) of the CBD-inhabiters will dwindle. Repatriation of the greater rural area will cascade. Has to.

FYI from the emailer in return:
Bernard,

 

Thanks for the reply. The point about Fletchers is that monopolies, if you agree Fletchers is a monopoly, are bad for competition. It is human nature to abuse a monopoly position; we , typically, would all do it with some very clever rationalisations. However, this aside, the outgoing boss of Fletchers, Jonathan Ling,  made a great point that they could do things much cheaper and quicker if there were only four or five standard designs. When you think of it, that is pretty much what we had/have in the old and leafy suburbs because there were not that many different designs for villas and bungalows. 

 

For a quantitative easing to occur wouldn't you have to model a few scenarios so that the voters aren't scared. Why not just free up land by green fields, density and strata? Or both?

 

Regards,

 
Ian

And the return of serve:
Ian
I agree competition is good and that we need a few common designs to
reduce costs.
I also agree we need to free up land and get houses built.
cheers
Bernard

Actually if you look at Steve Keens coverage of supply and demand analysis, he points out that a monopoly price is exactly the same as a competitive market price. Also looking at actual data it appears the consumer power is strong enough that a monopoly often can't simply set prices (maybe better to say that customer gauging is not a great business strategy), things may genuinely be more expensive in a competitive market where there are many, many more overheads to pay for.
So I suspect that the main thing monopolies are in general terms 'bad for' is competition.
 

ECB / EU death wish.
"No sense of urgency. Amazing.The odds of euro crackup are rising by the day."
http://krugman.blogs.nytimes.com/2012/07/07/ecb-death-wish-continued/
The graph is (one of) the interesting point....and for all the right wingers? (which is funny by itself) ppl who think the the Govn will save us, the only option left to do that is to print, baby print.  So the spanish 10 year debt is 7%, it can but go significantly up if that happens and the Govn(s) will be chasing their own tail until there are no private investors left....piigs they go boom....
Oh and did anyone notice Ireland is getting sh**** over the greeks being let off so much? 
For those who think its hyper-inflation time, well to me its more like a mid-air stall of an aircraft followed by a death dive.  If we see these rates spike, and that happens in at most a 6 months time frame there wont be time for much hyper-inflation to occur...before we swing the other way....
I know which way I have bet....
regards
 
 

Did you read that article on zero hedge about the collapse of shadow banking? Shows why hyperinflation isn't happening yet, but will happen.

only if we learn to spell Neutral correctly...

Since Bernard is well embedded in the Labour Camp, I think he is getting us ready for the scenario under Normanomics when the next Labour/Green Govt is formed in 2014 where inflation will go berserk as Norman's helicopter spreads the dollars around to the masses to spunk up the wall.
 

So lets spread fear and falsehoods eh.........
It (this game) wont last that long ie 2 years...just cant see it.......
 
regards

Bernard,
If the oldies have all the wealth then who owns the debt? You can't have it both ways. So the youngn's got all this debt. Don't say the oldies are taking on mortgages as they retire.
Does it matter in the end if your savings are wiped out quickly or slowly thru inflation?
If inflation is going to wipe out debt then watch house prices roar.

Food.

When you strip away the cost or subsidies and energy to produce then its more even if not in NZs favour. The world is becoming short of food on three grounds, a) lack of fossil fuels, growing population and lack of fresh water....
"Not selling" meat is always a luxury.....though I dont buy lamb for health and taste reasons....
regards

You take the prize snippy

Bernard, well it has taken some time and prompting but you here confront the greatest theft of wealth in human history viz. from savers to spenders (and the debtors friend, bankers) since 2007, and ongoing. And I never cease to be amazed at how gullibile most of you economists are in accepting growth and inflation stats that spring out of government organs around the world - even those from China!
Better late than never though I suppose, well done.
Ergophobia 

This isnt about savers but those who have already saved....
and because banks are middle men that saved money is only safe as long as the debtors are solvent.....let the debtors go bankrupt and the saved lose their capital.
In terms of gullible, that is to say  condescending at the least if not insulting....the "oh great" ergophobia has an opinion that almost anyone else doesnt agrees with so everyone else is wrong, or stupid etc etc.
In terms of accepting stats, as if you have any stats youself, or real proof on the degree of errors, you are blind guessing....and accusing us of simply accepting the stats.....which if you bothered to read what many in here write you would know is not the case.
regards

I find most of the above comments unhelpful. Talk about missing the point!
 
Quantitive Easing is the first step that governments use - and we in NZ follow like lambs-to-the-slaughter
 
Bernard is not the bad guy - he simply reports the full Financial Repression fiasco - in all of its sad detail.
 
Read  http://www.nber.org/papers/w16893
It will cost you US$5. Well worth it.
 
I have my US$5 information and my rudder now steers me nicely.

Bernard you say "This strategy was successfully used during the 1950s and 1960s by the American and British governments to erode the real value of the debts they incurred from their own people during the Second World War." You are right, the value of the investment of those who lent for the war effort was reduced.  Much of that debt would also have been overseas borrowing.  But in those days it was all Government debt.  The people had very little debt as such.  And there was the Arbitration Court that gave people automatic increases in line with inflation so that their purchasing power was maintained.  Very few people get salary increases today so I cannot see how your idea would work today.  Now while there is a good argument for less consumption, I tip my hat here to Steven and PDK, I don't think that should apply to growth per se.  There is much to be developed (goods that don't need oil to be produced, energy etc) that would help and keep the economy growing.  And if goods were manufactured here, instead of being bought from China, then they would cost more and so people would be encouraged to have things repaired instead of throwing them away as we now do.

"You are right, the value of the investment of those who lent for the war effort was reduced.  Much of that debt would also have been overseas borrowing. "
pretty sure you are wrong....do you have any proof?  URLs?
Most of the debt I think was domestically sold war bonds...at least that is my understanding for say the USA unless you can furnish some evidence of this isnt so?
"The people had very little debt as such." This was after the GD, so yes if my grandparents were anything to go by they saved and hence could buy war bonds....
regards

You "tip your hat" to us yet only it seems for the bits that suit you.....you cannot cherry pick because of context, classical politicos.....thats been done for 60 years and thats why we have such a mess.
"There is much to be developed (goods that don't need oil to be produced, energy etc) that would help and keep the economy growing."  Develop one time use resources, where do we go next time when these are all gone?  Forget growth....its history fo the last 250 years ,even 10,000 years that no longer applies, now its powering down.
So its not a case of a "good argument" its simply how it will be....
"Made here and repaired" is very old fashioned...You need an appreciation of production engineering today.  Sure goods would cost more but really where the advances have come from is carefully designing all the parts to last a set length of time all equal to keep costs to a minimum.  So when you repair a part the chances are the others are all close to worn out, unless is a fault...so if its worn, its proable you waste more in repairing it than you will save...The other side of the coin is making something minimally uses less energy to make and often less energy to run....
There will be far less "things" they will cost far more on 3 counts, they will be made here and be made to last....and be worth repairing....but will probably consume more energy in their use.....so we have to be selective.
regards
 
 

Sometimes you talk sense Steven

ho hum....so when I say something that you like its sense? or what? 
regards

Surely the weakness of this proposal is Gold, which could not inflate in the 50's and 60's. A 'sudden burst' of inflation would be accompanied by a surge in the price of Gold, as savers lose confidence in fiat money and thereby threaten the very existence of it.

FYI from a reader via email:

Good morning Bernard,
I liked article. Your “heresy“was long overdue.
However, I know you are not kidding yourself, so you must be scared they’d burn you on the stakes so you have toned down your “heresy” to digestible, sellable, printable bites:   “...The debate about whether to use financial repression or to allow a debt restructure often pits richer and more powerful special interests against the poorer public....The two sides have to agree on how much debt needs to be written off. “
Ha, as if there was a choice! Financial repression (i.e. inflation and ZIRP) works in ADVANCE to the inevitable, namely the Big Reset, or what may be inconspicuously called ‘debt restructure’. Only the daft masses believe (if they are not totally drowned in vacuous apathy between America’s Idol and what goes as ‘news’) that this will be a choice they have. TPTB will NOT allow, CANNOT allow a choice.
No, I’m afraid, history is repeating itself and there will be no choice for stupid savers. “Powerful special interests” are the biggest debtors of all, the government(s) and they will make sure of that. They push on the supply side of fiat (gee, they have to ‘finance’ US$ 4.4 BILLION of governmental need DAILY!!! and we borrow NZ$350 mill of that stuff per week ), but in the end even helicopter Ben will fall on his arse because the demand side will renege his monopoly money and hyperinflation (nice how you title it discretely and discreetly  ‘huge and immediate dose of inflation’) will be the big cleanser of the debt economy(ies) of the last 41 years. Look at what the BRICs are trading in, look how the Swiss tell Uncle Sam and the European stooges to shove Iran embargos up wtsds, look how the SWIFT exclusion backfired.
The other interest, the “richer”, are leaning back and watch what they have seen coming for a long time. They do not need to worry about something that cannot be averted. Rich super hulks, the old money, have their inter-generational empires firmly secured. They’ll come out on the other side unscathed. If they live.
So, all in all, I agree, but I do not agree that “that doesn't wipe out the economy”. It will be the biggest financial AND economic cataclysm humans have ever witnessed (had a look at the Baltic Dry recently?)
Hope you’ve got your pantry stashed.
Regards
A

This has been going on since the GFC, just another example of socialising losses. You get to choose the lesser of 2 evils:
1) leverage up on heaps of debt and speculate on a bubble asset (generally housing), secure in the knowledge that when the inevitable crash happens, the govt and central bank will at least try to bail you out via guarantees, low rates, free money etc etc etc
2) be prudent and save your money, secure in the knowledge that your interest will (after FULL marginal tax and inflation is deducted) be whittled away to nothing over time.
i still maintain option 2 is more sensible, but the govt is doing everything in its power to ensure its not. The best analogy is a family situation in which the kids are rewarded for eating sweets and punished harshly for eating greens. In the long run the whole family is screwed, but at least Dad can be popular and win parent of the year before it all turns to custard. Welcome to gutless "yes man" govt. Goodbye western civilisation.

Bottom line, and historically, writting off all the debit, right or wrong is not going to happen ...
It doesnt matter what is the 'correct path'...there is reality and what is right.
There is not a Bank , Finanial instutution or a politian that wants to take the rap for the far reaching consquinesnses of this.
Historically the inflationary path has always been taken, BH example after WW2 is classic...again after the 80s, and after 29....
Its almost as if BH has been reading an old economics text book of mine by Stewart and  Macfarlane