muses of the moment

April 12, 2012

Hyperinflation in debt part one

After reading this three-part post from GolemXIV, groovygirl finally really understands what hyperinflation in this new global economy looks like in real-time. And, the joys we have to look forward to.

Click here for Jesse’s link to part one, here are links to Part 2 and Part 3.

Golem explains how the banks (bank is a broad term now including regular banks, investing banks, insurance companies, brokerage houses, investment funds) turned the debt that they hold on their books into secularized debt that they could “sell” for more debt to invest in real (leveraged and accelerated) returns.

That debt is now money or a new currency for the bank. This “currency” is used within the shadow banking system. The banks “print” their own money.

Groovygirl caught on in part two how the process of “moving” this secularized debt from bank to bank within the market as “money” is very similar to how hyperinflation happens within a fiat currency system. Within a hyperinflation environment, more and more currency is created and it “buys” less stuff, and more needs to be created to compensate. That currency moves out of the holders’ hands as quickly as possible to buy things, increasing the velocity of the “currency”, until finally there is a loss of confidence and no one wants the “currency”.

Side musing: so, when John Williams says that hyperinflation is an inflation in prices and a deflation in debt, he is correct, that is the reality in the currency and economy. But that situation is caused by the hyperinflation in the debt or “currency” created in the shadow banking system all hidden from the real world.

These posts really helped gg understand how we will see the effects of a hyperinflation without the traditional road to hyperinflation (such as the Weimar Republic). (History doesn’t necessarily repeat, but it rhymes.) Hyperinflation in this “currency” will take place (and is taking place right now) within the shadow banking system. Now, that doesn’t mean that government policy of bailouts and QE will not force the shadow banking “hyperinflation” into the sovereign debt market and then onto the global fiat currency markets, forcing a real currency “revaluation” at some point. We already saw the first and second acts of that Shakespearean play (US Mortgage and European Debt Bailouts).

This explains why we are not seeing the traditional increase in the velocity of money associated with an increase in prices during the beginning of a hyperinflation. The velocity is happening in the “other currency” within the shadow banking system.

GG understood that the debt and accelerated leverage in the banking system was the key, but Golem using the word “currency” and explaining that the banks are the ones “printing the money” within the hidden shadow banks is the true connection.

GG awaits the next freeze (or loss of confidence in the shadow “currency”).

This post from Capitalcontext from May 2011 is kind of interesting. It outlines an elevated systemic risk based on formulas created that track movements in the shadow banking system. This was from May 2011, then June-August 2011 was when Europe hit the fan, and August to October drove MF Global down from the contamination.

So in conclusion, groovygirl still thinks that hyperinflation (as defined by inflation in prices and deflation in debt) is happening/will happen on the ground on Main Street, but the triggers are going to be the increase in the velocity and then loss of confidence of the shadow banking “currency”, not necessarily the global fiat currencies.

One more musing: under this “currency” hyperinflation, it seems to groovygirl that if the Volcker Rule (separating investing and banking houses, meaning that investing doesn’t have access to future bailouts) is enacted, this would for all practical purposes have the same effect as the last Volcker move in the late 80’s, crushing the hyperinflation or velocity in the currency. The hyperinflation in the shadow banking system “currency” would deflate rapidly because they lose the bailouts and confidence that the Fed will make whole any loser. It could be a controlled “currency” reset, but also a severe hit to the global economy. Now that doesn’t mean the Fed couldn’t create another fund that would do the same job of a bailout, but under another name.

Totallygroovygirlfriday continues her musings and thinking on-blog in part two of this post. Click here.

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1 Comment »

  1. […] is looking at all financial news with this new information. For detail click here for part […]

    Pingback by Hyperinflation in debt part two « muses of the moment — April 13, 2012 @ 1:25 pm


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