The human mind is a very curious thing. People say one never learn something on someone else mistakes. The same way the human mind apparently just can’t grasp a pure concept until it’s experienced from the first hands. You can watch in the movies, read, talk about wars, inflation, flooding, fire, civil disorders, raising kids - but it doesn’t help. That differs a person who read books from a really experienced person.
Let’s examine this on a simple example - hyperinflation.
A lot of people know everything about hyperinflation, talk about hyperinflation and many of them claim that USA now is experiencing hyperinflation.
Let read this source:
The Zimbabwe Stock Exchange (the ZSE) is the best performing stock exchange in the world, the key Zimbabwe Industrials Index up some 595% since the beginning of the year and 12,000% over twelve months. This jump in share prices is far in excess of increases in consumer prices. While the country is crumbling, the Zimbabwean share speculator is keeping up much better than the typical Zimbabwean on the street.
CNBC logic fails to explain the coincidence of a rising ZSE and collapsing GDP because it entirely ignores the monetary side of the economy. At this point Austrian economics makes its contribution to our story. According to Austrian Business Cycle Theory (ABCT), the peak-trough-peak pattern that economies demonstrate is not their natural state, but one created by excess growth in money supply and credit. New money is not simply parachuted to everyone equally and at the same time — it is sluiced into the economy at certain initial “entry points.” From these entry points, a number of initial goods are bought by recipients of new money causing a rise in price for these initial goods relative to other goods.
While this article is concentrating on the topic of money dis-allocation, I use it to show a completely different point. In hyper-inflationary economy all prices are going up. And all salaries are going up, as well as pensions. If the money are flooding the system they are floating all boats.
Yes, we know that food and energy prices are rising. Let see what non-food prices are doing in that unfortunate land:
The council noted that much of the increase was attributable to the non-food component of the basket, which grew by about 23 percent between November and December. The food component of the basket only increased by about four percentage points to Zim $441,000 (US $126).
On Friday, the government said it would triple the salaries of 190,000 soldiers and teachers. But even those government workers still badly trail inflation; the best of the raises, to as much as $33 million a month, already are slightly below the latest poverty line for the average family of five
So, if you are fortunate to be a teacher your salary is tripling from time to time.
Now let get back to USA:
The rise of gasoline prices to more than $4 a gallon has caused a similar swift response on used car prices, but in the opposite direction. According to Mike Parker, manager of a used-car business, the price of a second-hand Chevrolet Suburban tumbled down by up to $8,000 in six months.
I’m sorry but this doesn’t pass my hyper-inflationary smell test. In hyperinflation the price of Chevrolet Suburban must go UP by $8,000, not DOWN by $8,000.
It could be only two things - it was a typo and the price of Chevrolet Suburban went UP by $8,000 or we are not in any kind of hyperinflation. Which one it is - you decide
3 Comments
Today the market made its choice. It was possible that Mon-Tue was a bottom, but today the market action scratched that.
Now the minimum will be made by capitulation, i.e. a one-day sharp drop of 3% or more with VIX at 27 or more. That will be the day to cover all shorts (unless you are short-and-hold)
There is high inflation. Certainly not hyperinflation which is a completely different animal.
Butt of course inflation is an aggregate. Which means that although there is no hyperinflation in the economy as an aggregate, you could argue that there is hyperinflation in specific corners of the economy. Iron ore and steel price appreciation could very well be categorized as hyperinflation. Even oil prices are in hyperinflation according to some definitions.
The International Accounting Standards stab at hyperinflation:
“The Standard does not establish an absolute rate at which hyperinflation is deemed to arise - but allows judgement as to when restatement of financial statements becomes necessary. Characteristics of the economic environment of a country which indicate the existence of hyperinflation include: [IAS 29.3]
* the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;
* the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;
* sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short; and
* the cumulative inflation rate over three years approaches, or exceeds, 100%. ”
http://www.iasplus.com/standard/ias29.htm
Notice that the definition they chose goes to the root of hyperinflation: total lack of trust in the currency and high expectations of devaluation of the currency (hot potato paper money).
” The IPTF has issued a report of discusisons with SEC staff on the IPTF’s recommendations of which countries should be considered highly inflationary through 31 December 2007. Those countries are:
* Angola,
* Myanmar, and
* Zimbabwe.
”
Zimbabwe is the typical text book case of hyperinflation. Greenspan is a novice compared to Mugabe’s printing prowess.
I find it hard to believe that Zimbabwe’s stock market is ahead of the hyperinflation rate like they state in the article. They may be ahead of official inflation numbers, but that doesn’t mean squat.
Jetlag, this is an extremely valuable input.
>>> the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency
I’d prefer to stick with just this one definition for all practical purposes.
For example, the Spring panic on rice markets is most likely explainable by the hoarding in various places of the world. Rice is abundant, but families preferred to get rid of money and buy something to protect purchasing power. Once every family stored enough the panic faded.
As food is an international commodity, it was enough to produce inflationary panic in some countries to have a global inflationary wave of increasing food prices, spreading to all food in general.
I’m pretty sure that the amount of food stored by families all around the world is at all-time high.
I heard one rice expert who said that next year the rice production will be the all-time record. Producers are preparing to significantly expand the fields. That will be most likely enough to produce a huge decline in rice prices.
Post a Comment