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Posts Tagged ‘Modern Monetary Theory (MMT)

Death, taxes… and inflation

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Tomorrow will see the release of the latest inflation stats for New Zealand, and they are expected to be bad.

Inflation is not a new phenomena created by the Industrial Revolution, paper money, or digits in a computer, whether backed by a central bank or a decentralised cryptocurrencies. No, even back in ancient times money was being debased:

Evea our kinsman Gratidianus failed on one occasion to perform what would be a good man’s duty: in his praetorship the tribunes of the people summoned the college of praetors to council, in order to adopt by joint resolution a standard of value for our currency; for at that time the value of money was so fluctuating that no one could tell how much he was worth. 

That was the Roman statesman and philosopher Marcus Tullius Cicero and he wasn’t writing an economic analysis but about some Roman magistrate taking credit for the work of others. Still it was an interesting, if vague and obscure, reference to possible financial problems in that Roman period (44 BC) and the frustrating thing was that there was not other evidence to support it.

Until now:

In part of an ongoing project, Butcher and colleagues analyzed the composition of the coins minted during these years. They used minimally invasive sampling techniques to prevent damaging the precious silver relics, bearing the heads of gods and Roman leaders, that were first introduced as currency in 211 BCE, valued at ten bronze assēs coins.

The researchers found before 90 BCE the denarius was composed of pure silver, but that dropped 10 percent only five years later.

“The denarius first dropped to under 95 percent fine, and then it fell again to 90 percent, with some coins as low as 86 percent, suggesting a severe currency crisis,” concludes University of Liverpool archeologist Matthew Ponting.

There were also other quantitative measures:

A massive increase in coin production also took place in 90 BCE, with 2,372 dies – the molds to make the coins – compared to 677 the previous year, and 841 the following.

You have to wonder what they’d have done with computers!

Still, it comforts me somehow to know that Grant Robertson is following in the footsteps of the Romans. Perhaps he should wear a toga during his press interviews tomorrow. Sadly we cannot expect anything from him as dramatic and effective as the solutions obtained from Gratidianus.

“It is all the more noteworthy that around the time Gratidianus published his edict, the standard of fineness rose sharply, reversing the debasement and restoring the denarius to a high-quality currency.”

Written by Tom Hunter

April 20, 2022 at 7:35 pm

I’ll take Manic Pixie Dream Girl for 5% inflation, Alex

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The latest statements out of the dairy companies show the biggest monthly leap in payout prices that I can recall, greater even than the big boom of 2013/14.

And farmers vividly recall what happened next; the biggest crunch dairy farmers have ever experienced, which is why I’m looking at their forecasts of similar pricing into 2023 and taking those with a grain of salt.

Everybody likes to see a steady increase in value for what they produce, a steady growth in wage and salaries or other income.

But nobody, at least nobody with a sense of the future, wants to see these sorts of rises because they’re not real in the sense of steady increases in the number of your customers or their increased valuation of your product or service, or perhaps just their steady increase in wealth that makes them less penny-pinching.

No, these sorts of price increases mean that something is very wrong with the system. That money is floating around out there and being thrown at assets and commodities because in our bones we know it can’t last.

Milk is not in that graph but it should be. Farmers had a good sense of what was coming before most economists did, when we saw the price pressures building in 2021. We know from our history that we’ll benefit from inflation before anybody else because commodities go first – but we also know that it will bite us (and everybody else) in the ass later on, as the pressure feeds into the costs of fuel, fertilisers and a hundred other things needed to run a modern farm. Today’s bumper profits and excess cash flow can vanish real fast under those circumstances.

Still, it’s better than being in the situation of a wage and salary earner, especially in the lowest brackets. Those poor bastards are getting screwed right now and it is going to get worse and all the increased minimum wage and WFF kerfuffle is not going to count for much.

That note about the suspension of trading in Nickel forwards is not due to some fundamental problem obtaining Nickel but because some Chinese billionaire and his giant Nickel processing company found himself stuck with an $8 billion loss on short positions he took.

This is going to get worse before it gets better and I hate to tell you this, but in the short-term there’s not much that governments can do about it. They have lit the fuse, as usual, but the it’ll be the marketplace that clears the crap out of the way in its usual, brutal fashion.

Written by Tom Hunter

March 12, 2022 at 12:32 pm

“The US currency will fall to zero”

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Over the next hundred years. At least that’s the working assumption they’re using for investment strategies over at the famous Berkshire Hathaway investment fund, (fund net worth $US 700 billion) according to the Vice Chairman of it, Charlie Munger.

This comment came in the middle of an interview that focused on the current inflation crisis in the USA.

Also this:

“Eventually the whole damn Roman Empire collapsed…. It’s the biggest long-range danger we have probably apart from nuclear war.”

Now I have to admit that Munger is not a figure I admire much, if at all, on the basis of his approval of the way things get done in China:

The ChinesCommunists did the right thing. They just called in Jack Ma and said, “You aren’t gonna do it, sonny.” 

Jack Ma is a former Chinese schoolteacher who co-founded the gigantic Albaba e-commerce firm. I wonder how Munger would feel if a US President did the same thing to him?. To be fair, in that 2021 interview he did say that he didn’t want the Chinese “system” in the US, just the financial bit of it, although he doesn’t seem to recognise that the CCP would probably “solve” inflation the same way they solve all their problems; repression.

But when it comes to things economic we should probably listen to him.

Then there’s this news, which is a surprise to me considering how productive the US housing construction market is.

As a result of these policies, a shockingly large price bubble appears to have formed in the real estate market. The average sales price of a home in the fourth quarter of 2021 was $477,900, compared to $403,900 in the fourth quarter of 2020 and $384,600 in the fourth quarter of 2019. That’s a $93,300 increase in just two years, by far the biggest increase ever recorded in just 24 months.

We all know what happens to bubbles right?

Stock up on gold perhaps? Plus food, fuel and ammo! 😉

Written by Tom Hunter

February 19, 2022 at 8:57 am

Inflation heading this way in 2022

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In effect we’ve already been seeing inflation in New Zealand for a year now, as the huge flush of government created / borrowed money, designed to keep businesses and people afloat, has flowed into a New Zealand economy that could not absorb it thanks to lockdowns and other restrictions imposed by the government to fight the great Chinese Xi Snot pandemic. It’s just that our inflation has mainly been in the form of insane increases in house prices across the nation, none more so than in Auckland (Refer to the chart at the end of this article).

But in the US inflation is not showing up in house prices – yet. Over there it’s crashing into people’s consciousness in the prices they’re paying for everyday products.

Inflation hit 6.8% for November, which is the worst mark since 1982 when the country was still recovering from the Jimmy Carter years.

That’s just the generic figure and its calculation quite deliberately misses some everyday things. For ordinary people the following is the real inflation they’re facing.

Incidentally that article points out that this shocking piece of economic news is the likely reason why the following happened…

Earlier in the week, news broke that the White House had been colluding with mainstream media outlets in order to change the narrative surrounding Joe Biden’s fledgling economy. That collusion quickly produced results, with outlets such as CNN, MSNBC, and CNBC complaining that the administration was being treated unfairly.

Inflation for some of these things are already flowing into NZ, starting with the price of petrol. But the rest will be along soon enough to add to our already unaffordable homes, as pointed out by Mr Reddell at Croaking Cassandra:

If house price inflation slowed to 1 per cent per annum, year in year out and incomes rose by 2.6 per cent per annum, in 20 years time the nationwide price/income ratio would be 5.85.

And if by some chance you think a price/income of 6 doesn’t sound too bad. well (a) you’ve just too used to latter day New Zealand, and (b) check the table on page 15 of the Demographia report for the metropolitan areas (most of them) with ratios lower than 6, in lots of cases much much lower. New York – never really thought of as a cheap place to live – shows at 5.9, Montreal at 5.6, Manchester (UK) at 4.8, Nashville at 4.2, Edmonton at 3.8, and on downwards.

Graph from an older post, A Distorted Economy:

Written by Tom Hunter

December 11, 2021 at 5:00 pm

I wish I could celebrate the payout increase

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They’ll be lots more dopey coverage of the recent surge in dairy prices, like this one from Radio New Zealand (RNZ as they style themselves now, Radio Aotearoa being a step too far for the moment).

Dairy prices up 3.7 percent as commodity prices reach record high

That article talks of global milk supply being constrained, but for those of us who dig deeper – and farmers have a great incentive to find out what’s going on – the terrible truth is that it’s simply another symptom of a global surge in inflation. Even that article hints at it by pointing out that every other commodity is surging in price also.

I don’t think there’s any question that this comes about because of governments printing money and stuffing it into economies that were only in recession because of lockdowns. Unlike the GFC era, when inflation worries abounded, the economies are not on their knees because of market problems. Back then the credit creation was filling real gaps, which is why inflation did not appear despite all those created trillions of dollars.

This time all that was needed was for government to take its Covid-infected foot off the throat and the economies would have roared back to life, as they were doing very well up to early 2020. Stuffing more money into a system whose production is still being held down may have sounded like classic Keynesian stimulus but was wrong for this scenario.

But aside from that general problem, the lead here is energy costs and that really is a supply constraint – as the Greens are gagging for. A few years ago I attended a Rabobank seminar on the global dairy industry and the guy giving it finished his discussion by pointing out a strange correlation for which no causal link had been established: oil and milk match eachother’s price rises and falls.

If that’s the case then this news is a double-edged sword:

Crude oil is up 65% this year to $83 per barrel. Gasoline, above $3 per gallon in most of the country, is more costly than any time since 2014, with inventories at the lowest level in five years.

Meanwhile natural gas, which provides more than 30% of all U.S. electricity and a lot of wintertime heating, has more than doubled this year to $5 per million Btu.

Even coal is exploding, with China and India mining as fast as possible. The price of U.S. coal is up 400% this year to $270 per ton.

The sword is a scimitar, as the drooling root vegetable known as “President” Biden is discovering.

That plea from Biden happened a couple of months ago and OPEC told Biden to go screw himself. Amazing to think that in January 2020 the USA was a net exporter of oil.

As that article points out, this is actually going to get worse in the Northern hemisphere winter:

Put it all together, as the weather gets colder,  energy costs will rise even faster. The increase in energy cost will raise the prices of goods produced from companies the use energy in the production and distribution of their products which will be passed along to the consumers.

As every farmer knows, we often get the benefit of being first in line for inflation, via commodity prices. But sooner or later those other cost increases, on fuel, fertiliser, power and machinery, arrive with a rush. Talk to any old farmer who remembers the First Oil Crisis of ’73 and then the crunch of ’74.

It’s arrived in New Zealand too, and the effects are already being seen, if not felt:

“The latest quarterly Labour Market Statistics show that on average wages went up by 2.4 per cent over the past 12 months. Unfortunately, inflation over that same period was more than double that figure, running at 4.9 percent, the highest rate in 25 years.

Fasten your seatbelts – and tighten them too.

Good grief, even the NYT has figured it out – and who’s to blame:

You can draw a direct line from a specific policy decision that Biden and congressional Democrats made this past winter to some of the inflation happening now.

In designing the stimulus that Congress passed in March, Biden’s administration went big, with $1.9 trillion in pandemic relief — on top of a separate $900 billion package that passed three months earlier. Put the two together, and $2.8 trillion in federal money has been coursing through the economy this year while economic activity has trended only a few hundred billion dollars a year short of what mainstream analysts would consider full health.

The dementia-riddled “President” must really be hurting the Democrats if even the NYT is throwing him under the bus.

Written by Tom Hunter

November 19, 2021 at 9:40 am

Money printer go brrrrr…….

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News out from NZ Stats this morning:

The consumers price index rose 2.2 percent in the September 2021 quarter, the biggest quarterly movement since a 2.3 percent rise in the December 2010 quarter, Stats NZ said today.

Excluding quarters impacted by increases to GST rates, the September quarter movement was the highest since the June 1987 quarter, which saw a 3.3 percent rise.

The 2011 kick was due to the National government increasing the rate of GST from 12.5% to 15%.

This one is due to “money printer go brrrrrrr……..”

Speaking of which, let’s go back a decade to the wonderful Clarke and Dawe comedy bit on the last time we indulged in “Quantitative Easing” to compensate for something that was only slightly less insane than government locking down an economy.

Written by Tom Hunter

October 18, 2021 at 12:15 pm

The Bitcoin House

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Read an interesting article today on the news out of the USA that some 30% of men are not employed in that nation.

What was unusual about the article was that it decided to ignore the usual angle of exploring why this is the case, instead focusing on how all these millions of American men actually live without a job.

One section looked at investments and aside from a doubling in retail stock market investment accounts there was also this:

Now crypto. You can laugh all you want, but the simple fact is that the price of bitcoin is up from $4,861 on March 12, 2000 to $47,763 today, or basically up 10X, (and remember it even hit $64,888.99 this spring).

Hmmmm. That’s an annual increase of 11.49% per year over twenty one years. Not bad.

The other day I checked out what our house is worth and was shocked and appalled to find out how much it’s increased in value in just the last year.

I’ve known for some years now how crazy things have been with NZ housing. I’ve been saying for a decade that this could not go on. Yet it has and although I thought I knew how crazy it has become I was still under-estimating the insanity.

Moreover when I ran the numbers over time I saw that our “investment” in house has increased by 11% per year on average for twenty years.

Written by Tom Hunter

September 19, 2021 at 5:23 pm

Inflation you say?

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Why are people surprised?

Back in 1993 the newly installed Clinton Administration was mad keen on a “stimulus plan” that would revive the US economy from the “terrible” recession of George H W Bush. The plan was classic Keynesianism but it was strangled in the crib for two reasons.

First of all the recession, which was a fairly mild one starting in late 1990, had already finished by mid-1991, as is usually the case. Things like unemployment lagged of course, which was why the MSM was able to make such a meal of it. The crown in the jewel were TV scenes of a four-wide line of job seekers stretching around a city block in the snow in early 1992, applying for jobs at some new Chicago hotel. Had it been filmed in Black & White by Dorothea Lange it could not have been better.

As a result, by the time Bill became President in January 1993 the entire economy was really picking up a head of steam on all fronts, and it was obvious to everybody and their blind dogs that no “stimulus” was needed.

Incidently, having done it’s job up to the election in getting a Democrat elected, the MSM promptly began painting sunny headlines about how well the economy was doing under the youthful leadership of Bill, even while everybody again knew that no credit could be given to an administration that had not passed any legislation, let alone anything that could affect the economy in less than six months.

Second was that Bill made a crucial mistake in appointing Senator Robert Byrd to lead the stimulus bill effort in the Democrat-controlled Senate and House. In addition to being a former Grand Kleagal of the KKK (and whose death years later would result in an ecstatic eulogy by then Vice President Joe Biden), he was also known as the Porkiest of the Porkmasters of Congress. There was hardly a highway, courthouse, outhouse or doghouse in his state of West Virginia that didn’t have his name on it as a result of the money he’d extracted from Congress. Even Democrats rolled their eyes at what a stimulus package in Bryd’s hands would mean.

The effort rapidly faltered and that was a good thing for the USA, which economy did not need a “stimulus” from the Federal government: the 1990’s would go on to be one of the great economic times in recent US history.

But lessons are not learned. While there might have been some justification for the 2009 stimulus spending plans in the wake of a financial meltdown far worse than that of 1987 (which also led to another such failed effort by the Democrat Party in the face of Reagan’s opposition), it was obvious by the end of that year that it had not spiced up the economy. Obama regularly bemoaned the reports that landed on his desk showing only moderate improvements, bluntly asking his experts and fellow Democrats why all the spending was having no effect.

But in the face of a government-induced lockdown of a roaring economy there was never a need for the insane amounts of spending to continue as the Chinese Lung Rot pandemic waned and the lockdowns and other restrictions were lifted. All that was required was for the government to simply allow the economy to come back to life, as it had in 1992/93 and earlier recessions. Yet each of the subsequent recessions of 2001/2, 2008/9 and 2020 have been met with ever greater stimulus efforts.

Yet, far from helping, there’s good evidence that government efforts in 2021 have caused unemployment to stick in the face of massive welfare incentives not to return to work. Then there’s the rapidly rising inflation in the USA, as all that created credit chases products and services that are not increasing as fast as the tsunami of money. The incredible number of business destroyed by the Covid-19 pandemic response will not be magically re-created by Federal spending.

So we have that graph of US debt, piling onto trillions of already existing debt, even as the spending it allows fails to do its Keynesian job.

This cannot end well, and is already not going well. As the economist Hebert Stein once wrote: “If something cannot go on forever, it will stop.”

Brace for impact.

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See Also:

Stagflation and Pretty Graphs – May 2021

This is not going to get better – Feb 2019

The Great Crash of 2034 – June 2020

$5,630,859,000,000 – August 2020

Written by Tom Hunter

July 17, 2021 at 3:00 pm