I've just been reading yet another link from the Fiendbear to John Riley
Chief Strategist at Cornerstone and his piece "If you liked Act 1, just wait until Act 2!"
The Fed’s response to the financial crisis has been more of the hair of the dog that bit ya. Virtually everything the Fed is doing is increasing debt, not decreasing it. It seems that the Fed’s theory is to keep the drunk drinking to avoid the inevitable hangover. As we have said many times, the longer you put it off, the worse the hangover will be. And we are due for a whopper, thanks to the bartender, I mean the Fed’s irresponsible actions.
Like it or not, and there is no way around it years and years of financial excesses have no choice but to result in a reversal of those excesses. The height of the excesses gives an idea on the depth of the aftermath. Its going to be bad.
The market tends to go from one extreme to the next. It takes years and bottoms out around 8 times earnings. The market has much more downside.
Act 2 will be characterized by rising inflation and a widening of the financial crisis. We do not expect a “V” bottom. The economy won’t rebound sharply from the lows.
We agree on that. He goes on to talk about the prospects for hyperinflation generated by the massive creation of money to bail out Wall street and the banks.
Fine as far as it goes, too much money chasing too few goods and services; another 10,000 chinese factory workers fired in the last week is a good sign of shrinking supply, in the toy market at least so the price of toys should be going up. Bet they are not, because toys are getting dropped off the list of "must haves" these days, along with cars, holidays, big screen TV's and even books, Amazon anyone? Merck and Yahoo are both firing staff, home builders the same, its across the board so if prices are going to rise, the question is where, who has pricing power?.
As the cenrtal banks theoretically open the spigot to stimulate consumption, and the banks suck at the public teat to balance their books, where is that money going to go and how will it result in hyperinflation? I can't see a mechanism for it.
In the last decade there has been very little inflation in the things that most of us buy, despite the fact that the money supply has been out of control for years. Point is that the top one percent have been capturing ALL that money, wages and middle class incomes have been flat to lower for that whole time, so we have no suddenly surplus income to drive inflation, and with closing businesses and rises etc put on hold, most of us are not going to have spare cash to over-pay for anything.
Meanwhile, the things that the rich people buy, luxury goods, art, antiques for example, have done VERY well thanks, and then there is the financial investment sector, now THAT has had massive inflation, along with real estate.
Ahah, you say, see THAT's where the money flows INTO the middle class via mortgages and refinancing for consumption. Wrong.
- That game is over, our appetite for debt is now zero, even if someone would lend me money to buy the newest latest wonderful thing that will make me as handsome and successful as Richard Gere, nobody is buying.
- The mortgage ATM sent the money round, but the ownership of the money never changed. The wealthy invested in mortgages that the middle class used to buy things, including houses, cars, holidays etc from, umm, oh, you know, the people who had also invested in the businesses that made those products and services. Vendor financing with a vengeance and with the idea that you get the goodies but you now owe a huge debt and you have to PAY!.
- Ooops, as with LTCM betting the farm that Russia would not stiff them for the money, the middle class is now finding itself unable to pay those bills and the whole debt-as-asset thing is unravelling.
So more money is printed. But how does it get to the bottom of the economy so that people start spending and pushing the inflation along?
- Wages? Nope, frozen and falling
- Debt? No, frozen and being either paid off or repudiated.
- Tax cuts for the middle and working classes? Wont help, we will just use the money to retire debt and rebuild bank balances.
- Commodities? Hah, seen the price of steel, oil, whatever as demand gets burned to a crisp?
I dont know what its called, but to me it looks like there are two options. One, the finance sector gets all this free money from thin air, uses it to "balance their books" ie, write it off against losses and cancel the paper that produced those losses, or we have a vast pile of money sitting in accounts somewhere that nobody wants to do anything with because the risks are too high throughout the system. Can we choke on money?
One thing is pretty obvious, the inflation of the last decade, the stuff that has gone hunting for mad profits from assorted Ponzi schemes, that stuff is being destroyed on the bonfire of the markets, whether governments want it to happen of not.
So, again, what is the mechanism by which all this money being created will permeate the system far enough and fast enough to create Riley's hyperinflationary prediction? School me, in plain English, please.