Economic genius required---to explain these?

[tech/a]

Posted this on another forum but seems there are no geniuses--

Genius's.
While I understand the basics of these economic problems and how governments (Abolition of the Gold Standard---introduction of the FIAT policy) have arrived at the point there are some specifics I cant get a grip of.

So I need some genius Economic help to these specific questions.

(1) Where does all this money required to bail out these Companies come from---I believe its just printed and isn't actually a "surplus" as such.So wheres it come from?

(2) Where does this money go ---who gets it---who benefits---how is it used---what actually IS the debt being paid out?

(3) OK so these debts are paid out---who owes who for what?
Does the Government now own the companies bailed out? Do they have to pay back the debt---ever?

(4) OK so now the American government is in deeper and deeper debt---TO WHO? Whats to stop a never ending increase in debt?
How would this debt be paid back? Who would pay it back? If its never paid back then what.

(5) I understand that hyper inflation will devalue the monetary system of the country involved.At that point of collapse what happens to start it up again as Germany did?
Whats the process?

I cant find the answers hopefully here!

[fimmwolf]

1) "To facilitate the funding, the statutory ceiling on US public debt is being raised from $10.6 trillion to $11.3 trillion a rise of 6.6 per cent"

2) dunno

3) Does the Government now own the companies bailed out?
In the cases of fannie mae, freddie mac, and AIG the answer is yes. (they have been "nationalised")

Re: fannie & freddie:
"places the two companies into a "conservatorship" to be overseen by the Federal Housing Finance Agency. Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing."

4) national deficit ?? All countries have debt don't they?

5) There are 3 stages of inflation:
creeping
galloping 30% +
hyperinflation 1000% +

Our current inflation rate is 4.5%, so we are a fair way off hyperinflation at the moment.

[johenmo]

(1) Some countries have been known to keep printing. Zimbabwe is a good example.

(2) I don't know either - I presume the debt trail leads back to someone, somewhere or the wagon circle of debt between institutions.

(3) Depends on the terms - in some situations the Govt takes a stake (like Air NZ a few years back) or it's a "loan".

(4) My basic understanding is there is a juggling act between countries of debt - from import/export imbalances. And if the term lasts long enough and the loan balance doesn't impact too much then it may be written off. Like lending to your kids!! Not sure when you're lending to yourself. Perhaps put too simply and narrowly.

(5) Germany and Japan were rebuilt by foreign money after the war - Britain only finished paying off the cost in recent years. But if hyperinflation is at work then someone, sometime has to bite the bullet and stop spending. Foreign aid usually assists.

[theasxgorilla]

(5) I understand that hyper inflation will devalue the monetary system of the country involved.At that point of collapse what happens to start it up again as Germany did?

You are probably thinking of the post WW1 hyper-inflation. The answer is that a dictatorial government arrived and started placing all number of controls in place, and in addition fudged the books to make it look like the economy was doing better than it was eg. Jews lost citizenship, no longer counted as unemployed.

Behind the scenes and in reality wealth and earnings was being redirected toward preparing for the war effort. During the war all bets were off.

After the war the price controls were lifted and Germany got a new currency (deutsche marks).

http://www.econlib.org/library/Enc/GermanEconomicMiracle.html

It's an interesting economic case study but I don't know how much we can apply to this situation.

[chops_a_must]

You are probably thinking of the post WW1 hyper-inflation. The answer is that a dictatorial government arrived and started placing all number of controls in place, and in addition fudged the books to make it look like the economy was doing better than it was eg. Jews lost citizenship, no longer counted as unemployed.

Behind the scenes and in reality wealth and earnings was being redirected toward preparing for the war effort. During the war all bets were off.

After the war the price controls were lifted and Germany got a new currency (deutsche marks).

http://www.econlib.org/library/Enc/GermanEconomicMiracle.html

It's an interesting economic case study but I don't know how much we can apply to this situation.

Wasn't it due to the crippling debts imposed by the Allies?

[chops_a_must]

This seems to be the answer to number 5 as per Germany:

http://en.wikipedia.org/wiki/Dawes_Plan

[theasxgorilla]

No a direct answer to any question posed, but keep in mind that as inflation debases a currency it also lowers the real value of debt. I'm suggesting the US Gov or Fed actual knows what they're doing or what will happen, but I would be willing to bet that they know this fact.

[theasxgorilla]

Wasn't it due to the crippling debts imposed by the Allies?

Kind of. And here in lies the reason why I don't think the guy with the wheelbarrow full of money going to buy a loaf of bread can be applied to US right now or into the future.

In post WW1 Germany the country's social fabric was badly ruptured, such that there was a severe shortage of organised work and production and towns ended up being run by factions of local thugs...which is what the Nazi's ultimately grew out of (were). Imposing those debts on a country in that kind of situation should lead to what we saw.

The US doesn't have this problem. One must analyse beyond pure economics IMO.

[chops_a_must]

No a direct answer to any question posed, but keep in mind that as inflation debases a currency it also lowers the real value of debt. I'm suggesting the US Gov or Fed actual knows what they're doing or what will happen, but I would be willing to bet that they know this fact.

Yes, everything seems to be pointing towards them inflating/ devaluing the dollar, out of the situation.

[chops_a_must]

Kind of. And here in lies the reason why I don't think the guy with the wheelbarrow full of money going to buy a loaf of bread can be applied to US right now or into the future.

In post WW1 Germany the country's social fabric was badly ruptured, such that there was a severe shortage of organised work and production and towns ended up being run by factions of local thugs...which is what the Nazi's ultimately grew out of (were). Imposing those debts on a country in that kind of situation should lead to what we saw.

The US doesn't have this problem. One must analyse beyond pure economics IMO.
At the end of the day though, the solution is still the same.

Debt cancellation or equivalents is a big part of that.

[theasxgorilla]

No a direct answer to any question posed, but keep in mind that as inflation debases a currency it also lowers the real value of debt. I'm suggesting the US Gov or Fed actual knows what they're doing or what will happen, but I would be willing to bet that they know this fact.


Sorry, that should have read:

"I'm NOT suggesting the US Gov or Fed actually known what they're doing or what will happen"

Certainly not Minister, that would be preposterous! ;)

[cuttlefish]

but keep in mind that as inflation debases a currency it also lowers the real value of debt.

This seems the most sensible approach to them getting out of the situation - all Americans become poorer by world standards as their currency devalues but being the insular society they are this approach could be managed better than some internal failures. The challenge is managing an orderly decline of the USD and orderly inflation - highly unlikely to be achieved imo unless they step in and regulate.

[tech/a]

http://www.financialsense.com/fsu/editorials/gnazzo/2008/0917.html

Maybe of interest.

As I dont seem to be able to find answers I am going to see if I cant find them through either University academics or Economic Professors,I will let you know what replies (if any I get).

In the meantime My personal view is to hedge yourself with Gold and or Silver.
Quite possibly bullion.
Which is available from the Perth Mint.

[mayk]

Perhaps this might help

http://www.amazon.com/Creature-Jekyll-Island-Federal-Reserve/dp/0912986212

[bluelabel]

i cant answer q2, perhaps this bloke can. This is an interesting little watch all the way though either way.

http://www.chrismartenson.com/crashcourse

there is a part on debt, and inflation that should help a bit....maybe...:confused:

[tech/a]

i cant answer q2, perhaps this bloke can. This is an interesting little watch all the way though either way.

http://www.chrismartenson.com/crashcourse

there is a part on debt, and inflation that should help a bit....maybe...:confused:

Thanks Blue Ive actually sat through it a very good work.
But like most of these articles raise more questions than answers.
These are indeed very interesting times
and

This time IS different.

[prawn_86]

This time IS different.

Fortunately or unfortunately, this is the first of these types of situtaions i have been through with regards to the economy. Im not in a position to say if it is different or not, but im sure each time they would have said the same thing. Am I correct?

Tech, I also remeber you saying a month or so ago that things will recover as they have always done and charge onwards again.

Also, as far as im aware, the government actually owes the central bank the money (plus interest) it borrows. So invest in central banks ;)

[mayk]

Also, as far as im aware, the government actually owes the central bank the money (plus interest) it borrows. So invest in central banks ;)

from wiki

The Federal Reserve System (also the Federal Reserve; informally The Fed) is the central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public (government entity with private components) banking system.

Who are the private holders/components?

[prawn_86]

Who are the private holders/components?

**This is for US only, im not sure about the RBA**

The original families of the founders of the Fed. Big 'finance' names, Morgan, Stanley, Rockafella and the like.

[chops_a_must]

http://www.financialsense.com/fsu/editorials/gnazzo/2008/0917.html

Maybe of interest.

As I dont seem to be able to find answers I am going to see if I cant find them through either University academics or Economic Professors,I will let you know what replies (if any I get).

In the meantime My personal view is to hedge yourself with Gold and or Silver.
Quite possibly bullion.
Which is available from the Perth Mint.
Yeah.

Regardless, gold is the only trade I can see as worthwhile, as expressed in the printing money thread.

[Whiskers]

(2) Where does this money go ---who gets it---who benefits---how is it used---

Apparently the US has roughly done something similar early last century, ie nationalising a lot of debt and floated it off to the public at a later stage.

Likewise not an expert at the fine detail, but since the basic differance between accounting in private enterprise v accounting in gov is the former account for profit and the later account for the value of expenditure/consumption (of taxes and other national assets), the aim is to get it out of the profit and loss cycle of accounting where it keeps appearing as a liability and stow it away in some entity as a 'national asset' where it may only need to be accounted for in terms of a (future) value.

(3) Does the Government now own the companies bailed out? and
(4) OK so now the American government is in deeper and deeper debt---TO WHO? Whats to stop a never ending increase in debt?

It looks like the congress is demanding something of a mortgage on the company and some sort of a position/role in the senior management of those companies. I guess the best likeness would be something of a voluntary receivership and potential eventual liquidation.



But, while they may hope to recycle it all again, inevetably the more you recylce things the lower the quality of the end product.


The challenge is managing an orderly decline of the USD and orderly inflation - highly unlikely to be achieved imo unless they step in and regulate.

I agree, they have no choice but to regulate more heavily... if only to minimise the wrath of the rest of the world and hope that they can maintain the USD as an international standard.

[awg]

Thanks Blue Ive actually sat through it a very good work.
But like most of these articles raise more questions than answers.
These are indeed very interesting times
and

This time IS different.



i cant answer q2, perhaps this bloke can. This is an interesting little watch all the way though either way.

http://www.chrismartenson.com/crashcourse

there is a part on debt, and inflation that should help a bit....maybe...




If this guy is right, there are no answers!

chapter 20 will be very interesting

(the 2nd para is also a quote from a previous post, i am too stupid to work out the multi quote function)

[Temjin]

Posted this on another forum but seems there are no geniuses--

Genius's.
While I understand the basics of these economic problems and how governments (Abolition of the Gold Standard---introduction of the FIAT policy) have arrived at the point there are some specifics I cant get a grip of.

So I need some genius Economic help to these specific questions.

(1) Where does all this money required to bail out these Companies come from---I believe its just printed and isn't actually a "surplus" as such.So wheres it come from?

(2) Where does this money go ---who gets it---who benefits---how is it used---what actually IS the debt being paid out?

(3) OK so these debts are paid out---who owes who for what?
Does the Government now own the companies bailed out? Do they have to pay back the debt---ever?

(4) OK so now the American government is in deeper and deeper debt---TO WHO? Whats to stop a never ending increase in debt?
How would this debt be paid back? Who would pay it back? If its never paid back then what.

(5) I understand that hyper inflation will devalue the monetary system of the country involved.At that point of collapse what happens to start it up again as Germany did?
Whats the process?

I cant find the answers hopefully here!

Really great questions you got there Tech/A.

I suggest signing up for http://bigpicture.typepad.com/ (free) and http://www.rgemonitor.com/ on Nouriel Roubini's commentary. (free to register now and free access to premium content TEMPORARY during the credit crisis) I get a lot of my mixed and bits information from these two places, plus others like dailyreckoning.com.au and marketoracle.co.uk, plus www.safehaven.com (http://www.safehaven.com).

You should find answers to your questions from there.

Regardless, let me try to answer some of those questions, not exactly sure if I am right though. :)


(1) Where does all this money required to bail out these Companies come from---I believe its just printed and isn't actually a "surplus" as such.So wheres it come from?This is quite complex and I still have not fully understand the "details" on where they get the money from. I have read several articles that only briefly hinted where they are getting the money from. In theory, there is no "surplus". The money are pretty much "authorised" by the government by simplying increasing the amount of debt that they can "borrow" from the treasury. It's like, I need to borrow $700 billion, so let's type in the computer for that money and set it so I will need to repay it with this much interest over the terms I will set. Of course, there are rules behind the rates and terms and conditions of the "borrowing". But the government simply increased the threshold they could borrow by asking the congress to approve it.

It's like you own your bank and freely create money and promise to pay back yourself overtime, with interest that the federal reserve have set.

It's more complicated than this of course, but this is how i come to understand so far.



(2) Where does this money go ---who gets it---who benefits---how is it used---what actually IS the debt being paid out?This depends on which "bail out" you are taking about. The latest $700 billion (in theory, it's unlimited, blank cheque type bail out) would be used to purchase the "level 3 assets" off distressed financial insituations and dump it aside in another entity controlled by the government. Of course, the price of these "junks" would be ABOVE what the market would be willing to pay for them. The financial insituations will instantly get a fresh injection of cash from selling these junk to the government and get full benefits from it.

For AIG type bail out, the money is simply "given" to AIG to build up their capital base to prevent insolvency. For return, the government get 79.9% control of the company, have total rights over who to fire and when or how much dividends should be paid, and that money need to be returned in 2 years time plus 700 basis points (or so) over treasury rate. (which is actually quite high) By doing this, it allows AIG to sell their assets in time to repay the government plus any interest owned. The government will get benefit from the deal if AIG do manage to turn around over time.

I guess it's different for every case on how the money is used.



(3) OK so these debts are paid out---who owes who for what?
Does the Government now own the companies bailed out? Do they have to pay back the debt---ever?

I don't think these debts are really being "paid" out. The government simply took control of the companies (nationalised them) and make the companies "solvent" again by buying them out at an inflated price. Effectively, the US taxpayers are forced to write a cheque of, as an example, $1000 to pay for an asset that only worth $100 to the market.

The US government is now owner of the largest mortgage broker and the largest insurance company in the world.




(4) OK so now the American government is in deeper and deeper debt---TO WHO? Whats to stop a never ending increase in debt?
How would this debt be paid back? Who would pay it back? If its never paid back then what.To themselves. They are just borrowing the money from their own and as long as "Congress" approve it, no one can stop them from increasing it. Of course, there are huge implications on maintaining a huge budget deficit.You know the rest about the devaluation of US dollars and what foreign owners of treasury bonds would do.

The US Taxpayers will pay it back through tax revenues, over time.

In theory, if they set their interest rate to 0%, it gives them an almost unlimited ability to increase as much debt as they want, depending on the lending terms and conditions set by the Treasury. Of course, this cause a lost of confidences in their dollar value and again, you know what will happen over time.



(5) I understand that hyper inflation will devalue the monetary system of the country involved.At that point of collapse what happens to start it up again as Germany did?
Whats the process?Not sure on this one. It would BE A WHILE though before US would end up in a hyper inflation due to the size of their economy.

These are my understanding only, so correct me if I'm wrong. But I would like to know the answers to these too. I will ask the editor from http://cij.inspiriting.com/ on this, he seems to know pretty much about anything. :)

[Calliope]

Anybody interested in the true story behind the subprime mortgage debacle should look up Bird and Fortune on Google.

[tech/a]

Thanks Temjin a little clearer.
Like you I will persue the answers and I'm sure there are various takes and scenarios.

[Temjin]

Thanks Temjin a little clearer.
Like you I will persue the answers and I'm sure there are various takes and scenarios.

Sure man. :) Let us know if you can find clearer answers.

[refined silver]

Most people are pretty right, and most sites are decent too. My 2c worth.

1) Where does all this money required to bail out these Companies come from---I believe its just printed and isn't actually a "surplus" as such.So wheres it come from?
US Treasury creates bonds from nothing, loans them to Fed Reserve who loans to an ever expanding list of appoved borrowers.(Thats why Goldman Sachs and Morgan Stanley both changed their status yesterday, pure investment banks aren't allowed at the Fed's begging bowl.)

(2) Where does this money go ---who gets it---who benefits--- Paulson wants it all for Wall St, Congress is debating who else should get some how is it used to buy worthless **** on bank balance sheets that they can't sell anywhere else ---what actually IS the debt being paid out? very complex non-exchange derivatives which have a variety of euphemisms - "mortgage securities," "troubled assets," etc which have lost massive value, while some are swaps which have been triggered due to Lehmans bankrupcy which means counterparties have promised a truckload of money in case of default, but don't have.

(3) OK so these debts are paid out---who owes who for what? If the govt buys the toxic paper, the banks owe nothing, they have just "sold" the govt something. transaction finished.
Does the Government now own the companies bailed out? Only those they've injected capital into in exchange for equity such as 80% AIG and in effect Fannie and Freddie Do they have to pay back the debt---ever? Debt thats written off, or bought at reduced rates doesn't have to be paid back, but someone has to take the hit on the balance sheet

(4) OK so now the American government is in deeper and deeper debt---TO WHO? To whoever buys the bonds, up to now, to many foreign govts, but if foreigners don't buy, they print money themselves and owe it to themselves - national debt Whats to stop a never ending increase in debt? Nothing. Thats what will happen.
How would this debt be paid back? It can't. Theoretically it could, like Australia has, by running govt budget surpluses until its all paid back, but the US is way too deep in debt to do that. Also its obligations are rising - medicare, social security, this etc, while its tax base drastically shrinks with a recession Who would pay it back? The loans from the Fed window will never be paid back, just rolled over forever If its never paid back then what. The Fed has a horribly impaired balance sheet which for which its had to print money to cover. The USD drops.

(5) I understand that hyper inflation will devalue the monetary system of the country involved. Yes, thats whats coming, very serious inflation At that point of collapse what happens to start it up again as Germany did? Yes, exactly same situation - massive, unrepayable debts, lead to printing money to pay, which devalues the currency at an everincreasing rate.
Whats the process? To start over? Same as Germany, issue a new currency. Or same as Russia and many others, keep the old one and lop 3 zeroes off every so often, shafting anyone holding bank accounts with the old currency instead of hard assets at that time.

6. You didn't ask this, but I will. Will it work?No, the problem is way too big. The OTC derivs which are starting to unwind and fall over are 1.1 quadrillion dollars now. 1300 times bigger than the proposed bailout.

[MrBurns]

Most people are pretty right, and most sites are decent too. My 2c worth.

1) Where does all this money required to bail out these Companies come from---I believe its just printed and isn't actually a "surplus" as such.So wheres it come from?
US Treasury creates bonds from nothing, loans them to Fed Reserve who loans to an ever expanding list of appoved borrowers.(Thats why Goldman Sachs and Morgan Stanley both changed their status yesterday, pure investment banks aren't allowed at the Fed's begging bowl.)

(2) Where does this money go ---who gets it---who benefits--- Paulson wants it all for Wall St, Congress is debating who else should get some how is it used to buy worthless **** on bank balance sheets that they can't sell anywhere else ---what actually IS the debt being paid out? very complex non-exchange derivatives which have a variety of euphemisms - "mortgage securities," "troubled assets," etc which have lost massive value, while some are swaps which have been triggered due to Lehmans bankrupcy which means counterparties have promised a truckload of money in case of default, but don't have.

(3) OK so these debts are paid out---who owes who for what? If the govt buys the toxic paper, the banks owe nothing, they have just "sold" the govt something. transaction finished.
Does the Government now own the companies bailed out? Only those they've injected capital into in exchange for equity such as 80% AIG and in effect Fannie and Freddie Do they have to pay back the debt---ever? Debt thats written off, or bought at reduced rates doesn't have to be paid back, but someone has to take the hit on the balance sheet

(4) OK so now the American government is in deeper and deeper debt---TO WHO? To whoever buys the bonds, up to now, to many foreign govts, but if foreigners don't buy, they print money themselves and owe it to themselves - national debt Whats to stop a never ending increase in debt? Nothing. Thats what will happen.
How would this debt be paid back? It can't. Theoretically it could, like Australia has, by running govt budget surpluses until its all paid back, but the US is way too deep in debt to do that. Also its obligations are rising - medicare, social security, this etc, while its tax base drastically shrinks with a recession Who would pay it back? The loans from the Fed window will never be paid back, just rolled over forever If its never paid back then what. The Fed has a horribly impaired balance sheet which for which its had to print money to cover. The USD drops.

(5) I understand that hyper inflation will devalue the monetary system of the country involved. Yes, thats whats coming, very serious inflation At that point of collapse what happens to start it up again as Germany did? Yes, exactly same situation - massive, unrepayable debts, lead to printing money to pay, which devalues the currency at an everincreasing rate.
Whats the process? To start over? Same as Germany, issue a new currency. Or same as Russia and many others, keep the old one and lop 3 zeroes off every so often, shafting anyone holding bank accounts with the old currency instead of hard assets at that time.

6. You didn't ask this, but I will. Will it work?No, the problem is way too big. The OTC derivs which are starting to unwind and fall over are 1.1 quadrillion dollars now. 1300 times bigger than the proposed bailout.

Thanks for that, truly great post.

[Trembling Hand]

6. You didn't ask this, but I will. Will it work?No, the problem is way too big. The OTC derivs which are starting to unwind and fall over are 1.1 quadrillion dollars now. 1300 times bigger than the proposed bailout.

Refined Silver just on the Dervis sums (yeah again). Just bear(;)) with me. I know you know what you are talking about but that figure may need some teasing out.

1. Where did it come from. I suspect is adding the total exposure from balance sheets, bank reporting authority etc?? The problem with that is that would make it 1/2 the amount. Like this... Bank A reports $100 worth of derivatives on its balance sheet and Bank B reports $100 worth of derivatives on its balance sheet. that makes $100 worth of derivatives as there is two parties to every 1 transaction. I bet that is a total sum and therefore probably half the amount.

2. If one side defaults, without including the flow on and implosion after that, the ACTUAL value lost would be ONLY the margin put up. Not the nominal value of the derivative. So whats at risk is probably 5% or less of that figure. A simple example to explain what I am getting at. There is about 300,000 SPI contracts open at the moment. The value of them is 300,000 X $125,000 = $37,500,000,000 (37 trill ??)
Lets say all the longs default the amount actually lost would "only" be 3.6, Trill that is the margin put up by the other party.

Yes either way its still a Sh*t storm in the making but suspect we can knock a few 00 off :o

[brty]

TH,

That is billion not trillion.

And you know as well as I that if one side was placed in 'administration' the administrator would close the contracts. The loss is not necessarily the full amount of the margin, which has already been placed with the clearing house.

brty

[Trembling Hand]

TH,

That is billion not trillion.

And you know as well as I that if one side was placed in 'administration' the administrator would close the contracts. The loss is not necessarily the full amount of the margin, which has already been placed with the clearing house.

brty

Oh did I fail to mention that the SPI is know OTC :D

Bill, Trill, Squillion... to many hours looking at numbers :o:eek7:

[chops_a_must]

(5) I understand that hyper inflation will devalue the monetary system of the country involved. Yes, thats whats coming, very serious inflation At that point of collapse what happens to start it up again as Germany did? Yes, exactly same situation - massive, unrepayable debts, lead to printing money to pay, which devalues the currency at an everincreasing rate.
Whats the process? To start over? Same as Germany, issue a new currency. Or same as Russia and many others, keep the old one and lop 3 zeroes off every so often, shafting anyone holding bank accounts with the old currency instead of hard assets at that time.

Awesome post RS.

Just one point. Germany is still paying their debt off to some extent, yes? Because of the East half?

[refined silver]

Refined Silver just on the Dervis sums (yeah again). Just bear(;)) with me. I know you know what you are talking about but that figure may need some teasing out.

1. Where did it come from... I bet that is a total sum and therefore probably half the amount.

2. If one side defaults, without including the flow on and implosion after that, the ACTUAL value lost would be ONLY the margin put up. Not the nominal value of the derivative. So whats at risk is probably 5% or less of that figure.

Yes either way its still a Sh*t storm in the making but suspect we can knock a few 00 off :o

TH,

1.the figures are from the Bank of International Settlements (BIS) who collate and report them. Yep, you're right in one sense about halving it, that its two sides of one contract, but that's still total exposure.

2. The problem is that in bankrupcy notional value becomes real value, as the party who is owed, must write off the full value of what they expected to get paid. Most of the OTC derivs are swaps. CDSs, Forex and Interest rate swaps. I don't think OTC derivs use margin, they are basically privately negotiated contracts, all different, with no standards and therefore no exchange and no clearinghouse to pay up in case of default. (Not like the usual futures and options traded on exchanges)

You're right though, that we won't go down for the total full value of all contracts. The $700b is an attempt to buy as many as possible that can be washed against each other.

I wouldn't have a clue what the bottom line figure is for a unwind but when you look at most financial institutions balance sheets, and combine it big derivative losses, then add that credit has dried up, (if a bank loans at 10:1 against its assets, keeping 10% on hand for withdrawals, (called its Prime Assets Ratio - more like 2-4% now) it means if it takes a $1b loss, thats a $10b reduction in what it can loan out -thats why real estate is toast also.), then add in hedge funds, money mkt funds, brokerages etc starting to go broke, and panicked withdrawals from everything and we're still contemplating financial armageddon.

Mr Burns - Ta!

Chops - Ta also, although I hope you realise thats very out of character ;)

I was talking about Weimar Germany and WWI repayments, that was hyperinflated away and then currency default. Today's debt from integrating East Germany is way less, although it still knocked them about for a fair few years. I think they're on top of it now.

[chops_a_must]

Chops - Ta also, although I hope you realise thats very out of character ;)

I was talking about Weimar Germany and WWI repayments, that was hyperinflated away and then currency default. Today's debt from integrating East Germany is way less, although it still knocked them about for a fair few years. I think they're on top of it now.
I call spades spades and spuds spuds. ;)

I know they halted repayments of the debt for a long time after the currency collapse and other dramas, but it was only in reading about this again the other day that I found they seem to still be paying off that same debt to some extent.

[tech/a]

R/S thanks for the reply---making even more sense now.

Is it THIS thats coming home to roost NOW?

http://www.cornerstoneri.com/comments/TrillionDollarSecret.htm

[Temjin]

Thanks R/S, great post too!

Editor of CIJ just released this article today, it seem to fit the topic of this thread really well.

http://cij.inspiriting.com/?p=548



When ‘cash’ becomes confetti, inflation/deflation becomes irrelevant (http://cij.inspiriting.com/?p=548)

The financial and economic events of this month is amazing and history will one day judge September 2008 as one of the major turning points.
Today, if you follow the inflation/deflation debate on the Internet forums, blogsphere, etc, you will find this issue to be a highly divisive, polarising and at times, rather emotional debate. No wonder it is a highly confusing time for investors and traders.

For investors, it will be a big mistake to take sides in this debate. You may have certain inclination towards one or the other side of the fence, but do not dig in and get permanently committed to an opinion/idea. From our observations, some people have become too religious and emotionally involved to one side of the debate. They have become so religious that whoever belongs to the other side is regarded as an infidel. Such loss of objectivity will cloud your judgement.

First, for our newer readers, please take a read at What is inflation and deflation? (http://cij.inspiriting.com/?page_id=383) for our definitions of inflation or deflation. They are not the mainstream idea of price rise/falls.

So, will hyper-inflation or severe deflation be the endgame of this financial crisis?

We don’t know which one will be. But our guess is that it is probably the former. But that does not mean we are loyally committed to that position and bet our entire life and wealth on that. After all, life is more subtle than that either black or white. Because we cannot know with certainty what the future will hold until time has passed, it becomes a game of probability for the present.

Now, take a read at Understanding the big picture in the inflation-deflation debate (http://cij.inspiriting.com/?p=527),

So, the world’s fiat money system works under the ‘mechanism’ of credit. Because money has to be returned, it acts, in theory, as a check against abuse and rampant monetary inflation.
…
The fact that the global financial system is facing acute deflation threat shows that this credit-system ‘mechanism’ is working to protect the integrity of fiat money!
At the root of the deflation argument is the fact that we live in a credit-based economy. As long as this credit-based system is in place, any inflationary bubble will be ultimately deflationary. Please note that the word “ultimately” in the previous sentence is bold. The word, “ultimately,” is a very important qualifier. This implies that before the ‘ultimate’ deflation, we can have inflation in the interim.

So, to illustrate the point of this qualifier, let us conduct a thought experiment. For the purpose of argument, let’s assume that the credit mechanism is firmly in place.

Say, the US nationalisation of its financial sector transfers most of these toxic private sector debt into the public debt. Given that the US government already has a huge amount of debt, this means they have to raise even more debt. The only way for the US government to issue more debt is to issue government bonds, which is still borrowed money that has to be returned. We can see why this is still ultimately deflationary because no matter how much the US government borrows, it has to return them eventually (e.g. by raising taxes).

Now, let’s take a step further and say that the US government monetises its debt by selling the newly issued government bonds to the Federal Reserve. That’s in effect printing of money. Even then, some will argue it is still ultimately deflationary because it is still credit i.e. the government has to eventually buy back the bond from Federal Reserve.

Let’s take a step even further. Let’s say the government pays off that expired monetised debt by monetising even more debt. That’s like an individual borrowing from one credit card to pay off another credit card. Imagine what will happen if the government do that! Its debt will grow exponentially, which is hyper-inflationary. Still, it can be argued that it is still ultimately deflationary because all these government debt has to be returned.

At this point, let’s pause and think.

In such hyper-inflationary environment, it’s doubtful whether people will see government legal tender ‘cash’ as money any more. In Zimbabwe, during an auction of a car, ‘cash’ no longer function as money. Instead, petrol vouchers (denominated in litres of petrol) were used as a unit of account for the bids. In Vietnam, the recent high inflation of the Vietnamese currency leads to some instances whereby people no longer uses legal tender ‘cash’ as money in buying/selling land.

The point we are trying to make is that by the time the situation becomes that bad, all talks about inflation or deflation is irrelevant because, ‘cash’ no longer function as money for practical purposes. They become as good as confetti. Who cares about the inflation or deflation in the supply of confetti?

Please note that the purpose of this article is not to make an inflation/deflation forecasts in the prediction sense. Its purpose is to show you how dragging an idea to the extreme can lead to erroneous thinking. In this example, while it is true that deflation will ultimately happen theoretically in the context of a credit-based system, it is pragmatically irrelevant.

In effect, they rollover their debt over again and again and again forever.


Is it THIS thats coming home to roost NOW?

http://www.cornerstoneri.com/comment...llarSecret.htm (http://www.cornerstoneri.com/comments/TrillionDollarSecret.htm)

This is what Warren Buffet had been calling thosecomplex dervatives as the "Financial Weapon of Mass Destructions". Who knows how it will turn out, such a scary thought already. :)

http://news.bbc.co.uk/2/hi/business/2817995.stm (this is back in 2003 too!)

And I always enjoyed reading cornerstoneri, one of the best financial advisory firm around in my opinion.

[tech/a]

To my next questions.

So there is a real chance that we will firstly see an increase in inflation as the US (And in the US) attempt to keep up the ---print money---expand wealth to pay it back scenario.

(1) Whats this going to do to the US $.
and importantly as Gold/Oil and just about everything else is valued against US$s
We will be pulled along by their economic armageddon.

(2) Eventually there will be a real devaluation of the $ as it becomes so diluted in terms of buying power---and again commodities linked by the value of the USD will I presume become vastly cheaper as strong currencies can buy much more V the USD.

(3) The US would eventually become a place of interest in which to invest---imagine AUD being valued at 3X the USD.

In summary its this link between the USD and its use as the base currency and the fluctuations within it in the longterm which have me raising the questions above.

(4) In the end is this not pulling us into a WORLD economy ?
The new order.

[Junior]

(3) The US would eventually become a place of interest in which to invest---imagine AUD being valued at 3X the USD.



A place of interest in which to invest AND TRAVEL. I'll be snowboarding in Colorado every year if this scenario eventuates.

[Trembling Hand]

A place of interest in which to invest AND TRAVEL. I'll be snowboarding in Colorado every year if this scenario eventuates.
Just like NZ :D

[theasxgorilla]

To my next questions.

So there is a real chance that we will firstly see an increase in inflation as the US (And in the US) attempt to keep up the ---print money---expand wealth to pay it back scenario.

(1) Whats this going to do to the US $.
and importantly as Gold/Oil and just about everything else is valued against US$s
We will be pulled along by their economic armageddon.

(2) Eventually there will be a real devaluation of the $ as it becomes so diluted in terms of buying power---and again commodities linked by the value of the USD will I presume become vastly cheaper as strong currencies can buy much more V the USD.

(3) The US would eventually become a place of interest in which to invest---imagine AUD being valued at 3X the USD.

In summary its this link between the USD and its use as the base currency and the fluctuations within it in the longterm which have me raising the questions above.

(4) In the end is this not pulling us into a WORLD economy ?
The new order.

Where is the Euro in these scenarios? Are there are other scenarios involving commodities priced in another currency like the Euro?

[Spanning Tree]

Where does all this money required to bail out these Companies come from---I believe its just printed and isn't actually a "surplus" as such.So wheres it come from?

It's like a credit card. Get the money now but pay it back in the future. The government gets this money in the future by taxing people more.


Where does this money go ---who gets it---who benefits---how is it used---what actually IS the debt being paid out?Assets these failed companies own that depreciated will be purchased at inflated prices. This will put money into the system, increasing liquidity.


OK so now the American government is in deeper and deeper debt---TO WHO? Whats to stop a never ending increase in debt?
How would this debt be paid back? Who would pay it back? If its never paid back then what.The debt is mainly from Treasury bonds. The debt will mainly be paid back to Arab and Asian countries.

[rub92me]

Great questions and contributions so far. My question is: why are they spending so much money to try and sponge up the toxic derivative mess; wouldn't that money be far better utilised in buying up the underlying assets, which would drive up their price?
Say the total derivative value at risk is 500 trillion dollars. This value may be 1,000 times more than the underlying assets on which this pyramid was built.
Wouldn't it be far more effective to try and drive up the price of the underlying assets by 10% for starters? :confused:

[refined silver]

another 2c worth [QUOTE=tech/a;340518]To my next questions.

So there is a real chance that we will firstly see an increase in inflation as the US unavoidable. (And in the US) attempt to keep up the ---print money---expand wealth to pay it back scenario.

(1) Whats this going to do to the US $. Reduce its value as everyone has said
and importantly as Gold/Oil and just about everything else is valued against US$s To varying degrees most things will rise against USD
We will be pulled along by their economic armageddon.

(2) Eventually there will be a real devaluation of the $ as it becomes so diluted in terms of buying power---and again commodities linked by the value of the USD will I presume become vastly cheaper No. Their value in USD will soar, and rise less rapidly in other currencies, as SWFs seek to buy something real with their cash to get out of having all their holdings in USD. It could get mighty volatile as people price in economic collapse also. as strong currencies can buy much more V the USD. All currencies are inflating to various degrees, all countries are infected with OTC deriv problems, just nowhere near the scale of the US.

(3) The US would eventually become a place of interest in which to invest---imagine AUD being valued at 3X the USD. Yes. But the flip side, is the US will be owned by foreigners. End of an empire. Not sure the AUD will go that high!

In summary its this link between the USD and its use as the base currency and the fluctuations within it in the longterm which have me raising the questions above.

(4) In the end is this not pulling us into a WORLD economy ?
The new order. Possibly. Certainly a different order from whats been.

Temjin - Ta!

Chops - hadn't heard or read about that (about Germany).

[chops_a_must]

[COLOR="Blue"]
Chops - hadn't heard or read about that (about Germany).
I didn't know either until I started reading about it again:


After Germany’s defeat in World War II, an international conference decided (1953) that Germany would pay the remaining debt only after the country was reunified. Nonetheless, West Germany paid off the principal by 1980; then in 1995, after reunification, the new German government announced it would resume payments of the interest.

[Sunder]

So I need some genius Economic help to these specific questions.
I cant find the answers hopefully here!

There are some fantastic answers posted so far, but they've been scattered over many many different replies, and mixed in with links, and maybe some answers I don't think is 100% correct. May I take my shot at answering these?



(1) Where does all this money required to bail out these Companies come from---I believe its just printed and isn't actually a "surplus" as such.So wheres it come from?

You are correct, the money is just printed. So what it's doing is diluting the value of money already in existance.

So just say I have 10 apples, and there is $10 in existance. If everyone wants an apple, then each apple will sell for $1.

If I print more money so that there is $20 in existance, and everyone still wants an apple, then each apple will find it's new equilibrium at $2 each.

So when the fed prints more money, everyone holding existing USD loses a bit.



(2) Where does this money go ---who gets it---who benefits---how is it used---what actually IS the debt being paid out?


The money is used in various different ways. One way is for the government to buy bad debt. Say you're a bank with $100 Billion in sub prime loans. You ask to borrow some money from another bank, and the bank asks for collateral. You put forward your sub prime loan, and they laugh in your face. No loan, you're stuffed. Your creditors get to foreclose and you go under.

But the Fed is saying "We'll give you $85 Billion in T-Bills for those $100 Billion in sub-prime loans, and you can then use the T-Bills to borrow against". The Fed takes the risk of default, but if less than 15% defaults, they win. So it's not money for nothing, but rather putting confidence back in the market. (Figures totally made up. If the Fed paid 85c on the dollar, they're paying way too much IMHO)

In other deals, it's more about the rate of interest. The other bank might say "Yes, we'll loan you 100 Billion, but we're going to lend it to you at 200 basis points over cash, to factor in some extra reward for the risk we're taking". Unfortunately, if you've loaned it out at 150bp above cash, then borrowing it at 200bp above, is a recipe for losing money fast. So the Fed might say "Okay, we'll lend it to you at 100bp above cash, but in return, we're taking 89% of stock holder equity". (Freddie/Fannie)

Another one I won't go into much detail with, is where the Fed will loan against poor quality collateral, without excessive risk premiums.

Who benefits? Not usually the bailed out entity. The Fed has been very careful in avoiding the appearance of creating moral hazard. The people who benefited, are the share holders, who had the stock BEFORE it all started unravelling (and sold before the crash), and executives in multi-million dollar bonuses.

So in the present term, it doesn't figure out anyone benefits. It's like saying you had the party, and now the piper has to be paid. Nobody can, so the piper takes the kids. Everyone loses, except those who attended the party and pissed off.



(3) OK so these debts are paid out---who owes who for what?
Does the Government now own the companies bailed out? Do they have to pay back the debt---ever?



So far the Fed have demanded a stake in the companies that they've bailed out. The loan does have to be paid back, where it is clear it is a loan.





(4) OK so now the American government is in deeper and deeper debt---TO WHO? Whats to stop a never ending increase in debt?
How would this debt be paid back? Who would pay it back? If its never paid back then what.


The government isn't necessarily deeper in debt. In fact, the money that other countries are holding are worth less, not more, so in real terms, their debt is decreased. However, then people start dumping the USD, and the price of their exports go down (relatively) and the price of their imports go up (relatively).

So the US citizen cops the brunt of it.

Countries have repudiated debt before. I'm not sure if the US has. But those countries basically have their dollar go worthless. They have to trade in another country's currency, or gold. Look at Zimbabwe. In order to reduce their foreign debt, they just kept printing more and more money, to make their debt worth less and less. Even if their debt isn't held in Zimbabwe dollars, they print more money, trade it for USD, pay off some debt, then their dollar falls, their inflation goes through the roof, and the next people buying Zimbabwe dollars is wary.



(5) I understand that hyper inflation will devalue the monetary system of the country involved.At that point of collapse what happens to start it up again as Germany did?
Whats the process?


Basically, they stop printing money, put faith back in their currency (usually by taking 9 or 12, or 15 zeros off the end of their notes), and it's a slow and painful process.

Hope this has helped. I might not be 100% correct on all answers, but I am fairly well read, and I have studied economics, and I believe what I say here to be an accurate, if somewhat over simplified answer.

If anyone can contradict me with proof, I'm always keen to learn.

Cheers,

Ken.

[tech/a]

So just say I have 10 apples, and there is $10 in existance. If everyone wants an apple, then each apple will sell for $1.

If I print more money so that there is $20 in existance, and everyone still wants an apple, then each apple will find it's new equilibrium at $2 each.

Doesnt make sence---more money apples MORE EXPENSIVE!
But I see your point

[cuttlefish]

Doesnt make sence---more money apples MORE EXPENSIVE!
But I see your point

No - apples have the same value - they are not more expensive - the money has less value so you need more of it to exchange for the same amount of apples.

Supply/Demand - more supply of dollars - the more dollars chasing the same number of apples - the price of apples rises.

Value - an important thing to understand to preserve and grow wealth.
Wealth - an accumulation of 'things' that have value.

Price <> Value. Value is what is important.

In an inflationary environment money loses value.

Money is debt - debt is an asset depending on what side of it you are on.

[Glen48]

Banks are only a supermarket were you csan get money from and they need money to lend out to stay in business and need suckers to be in debt all their life to survive.
As things get worse and people can't make their repayments they feel the pinch up rates to get money in the door.

[cuttlefish]

You are correct, the money is just printed. So what it's doing is diluting the value of money already in existance.



Thanks for the post Sunder - seems like a pretty good summary of the situation to me. Just a comment on this point (because I'm still not 100% clear on it as well and a comment by Bernanke in response to a question where he stated that the fed has the authority to coin money also got me thinking more).

They could just 'print' the money - i.e. create it out of thin air - as I understand it from the 'coin money' comment I assume the fed does have the authority to this (what bounds there are around it and approvals required is another question). But my understanding is that the more common way they 'print money' is to issue debt - i.e. govt bonds - to foreign governments and private investors. Those investors pay money for the bonds and take on govt debt as a result. One is arguably less inflationary than the other (the direct printing of money without a corresponding debt issue is directly inflationary).

I'd be curious as to anyone's thoughts on the details of this aspect of the 'printing of money' - and also the affects of one approach vs the other.

[IFocus]

Good discussion guys thanks for the questions / answers

More questions

Looking at out comes whats the implications for Australia?

Do we get Hyperinflation or massive deflation?

What are the signs that one of these is coming or the trend has started?

Which asset classes are the best to hold?

[haunting]

T/A,

I will try to explain what I know, which could be very little or wrong, so be gentle with me if I am wrong. Happy to be corrected here.

1) printing paper money will generate something economist called "monetary inflation" - it is much easier to see it if you based the dollar on a fixed sum, say, gold as the basis for its value. Assuming you have 100 tons of gold, based on this 100 tons of gold you are allowed to print 100 million dollars. Effectively this gives each million dollar a value equivalent to 1 ton of gold. Now if for some reason you begin to print more paper money, instead of printing 100 millions, you choose to print 1,000 million - the value of your dollar in this case has declined, to pay for a ton of gold, it now cost you 10 millions dollars.

In short, you can't expand your wealth or your dollar value by printing more paper money because your asset backing, or the value used in measuring the paper value of your dollar has not increased. In this case, the total "treasury value", your gold, has not changed, but the face "value" of your dollar has changed, dropped by 10 times because you have issued 10 times more paper money.

If we broadly based the value of the US$ on its GDP, which is estimated to be at 14.5 trillion dollars, then, in theory, the USA can only print a corresponding amount of paper money based on the incremental value of its GDP (new wealth). If its GDP last year was growing at 1%, then, in theory, the USA could only print 1% of 14.5 trn paper money at most. That is assuming she has no deficit of any form, ie, she doesn't owe anyone any debt, no inflation, etc. But in reality, the USA has been borrowing heavily, and she is in no position to print any money at all because, if she has been a responsible debtor, she would have used the 1% GDP productivity gain in wealth to pay off her debt, reducing the overall interests she owes others. In this case, it is not happening, instead of tightening belt, she continues her borrowing by issuing more bonds (govt IOUs), providing cheap credits to encourage consumption (buying from China for example) to promote economic growth, in the process, increasing her debt by issuing more US$ to pay for the goods imported (mainly from China), which she has no additional wealth to back up (the increase in paper money) thereby reducing the value of its paper dollar. As a result, a bar of soap that used to cost 1 dollar to exchange has now cost more because the face value of the US$ has declined. The net effect here is inflation, generated by printing excessive paper money.

To answer your questions:

1) gold and oil and commodities in general are tangible "fixed" assets. In theory, their value doesn't change much due to their tangible value. It's like your real property, if the house were to cost 100K to build 10 years ago, chances are it will cost 100K or more to build now. It's value would only increase partly due to demand and partly due to inflation.

If the value of the US$ is declining, the value of gold and oil would usually move in an opposite way because of the investors' belief, say in gold's value as a form of universal currency because of its past. They use gold as a hedge for inflation. Oil goes up because of the belief that the demand will increase and the future supply is limited, this is probably has a bit to do with speculation, based on market economics. In addition, as a result of the declining US$, it has cost more to extract oil from the ground partly due to rise in cost and partly due to scarcity of easy oil suppy, hence, it is only logical to assume its price could only go up. This is the belief of many oil speculators.

2) Yes. There is a good chance that the US$ will decline. But the commodities will not decline in sync with the US$ though because as pointed out earlier, it would cost more to get them out in the first place. It is logical to assume most miners will not sell their commodity below cost. It is also logical to assume most commodities will go up in price if measured in US$, but still they are subjected to market forces such as supply vs demand.

For other currencies such as the Chinese RMB, if it is not arbitrarily pegged at a low exchange rate against the US$, it will probably behave like gold, going up in reverse to the US$.

3) Yes. The USA eventually will become so cheap that it is turning into a buyer's heaven. For example, the properties over there will be really good buys in a year's time. The cheap US$ will make US goods and exports very competitive, hopefully, through export growth and belt tightening, they can save and rebuild their economy. It will take a while to rebuild their credit worthiness in the world community though, when that happens, you will see the US$ rising strongly.

4) Yes. Australia is a major player currently because of our supplies of minerals and raw materials to the developing economies, countries such as China and India. But because of our size, we tend to be a trend follower rather than a trend leader.

A new economy order? Could be, but not so fast and not so easy. You can read up the history of US$ here: http://atimes.com/atimes/China_Business/JI26Cb01.html


Cheers.

[haunting]

T/A,

This is the second set of answers to your questions (the system won't allow me to combine both since they exceeded 10,000 chars):

2) the govt will use the 700bln to buy over the "bad assets" (bought at overly inflated price, but now there's no market for them) from the banks. The banks are unwilling to sell these bad assets because of their fear of being forced to grossly marking down these asset prices (mark to market), eroding their capital (which is crucial for the operation of the bank) - as a result of the sales.

Because of this fear, the banks are reluctant to sell these high value bad assets, instead, they are holding them in their books, in the process tying up their capital. What Paulson and Bernanke want to do is to buy over these bad assets at "a price" from these banks to relieve them of this burden and the tied up capital so they can go back to normal operation. Effectively this bailout is their attempt to create a market for all these bad assets, allowing the banks to pass the burden to a govt holding, hopefully say in a few years time when the economy improves, these assets can be sold at a much better price than the current market.

3) once the buyout has happened, the govt/people will own these assets. They will also own a percentage of the banks. Details not sure at this point. The banks will not have to pay back anything, since in this case they have sold the assets to the people. The people/govt own these assets until such time they can be sold. Some projections are saying out of the 700bln bailout, the govt can probably get back at least 500bln, costing a net about 200bln to the people in bailing out all these banks. The variables in this estimate however are quite many as it depends on: a) the purchase price; b) the future sales price; c) the state of the economy.

There will be a cost to the people, that is for sure. But this is unavoidable because without govt intervention, the banks will be "hiding" their bad assets for as long as they can, until they run out of options or capital, which by then, they will either have to declare bankrupt or be sold like WAMU - this scenario is more damaging to the investors, the bank customers and the economy as whole. A direct result of not doing anything is to see the freezing up of credit/lending by the banks because: a) they need to keep as much capital as possible, b) they don't trust other banks for fear they are in a worse condition.

To Paulson and Bernanke, it's a no choice scenario. The current situation will only get worse if they don't act now, or act fast. In a bigger picture, they fear the vulnerability of the US$ will be make worse by this freezing up, since every bankruptcy of a bank is a vote of no confidence in the USA and in the US$. They fear creditor countries such as China would react by dumping their US$ holding to reduce their wealth erosion.

4) to pay for all these debt, the US govt will issue bonds, basically they are IOUs to other countries. In this case, they are expecting countries such as China, the petro-nations, Japan to buy these bonds and extend credit to the USA. According to news, the FED itself has about 850bln (not sure) worth of credit, which is their very last reserve, so, in a way they don't have to issue any bond for the bailout, but they probably would want to keep some reserve for emergency, hence they are more than likely to issue more bonds. To issue IOU, they need buyers, which in this case, they need to get the ok from their potential buyers first, hence George Bush called President Hu not too long ago to seek out the Chinese reaction in their bailout. This is my speculation though.

To pay back the debts, the Americans will have to work very hard, produce more, export more, basically earn more money to pay more taxes to their govt so they can have a surplus to pay off these debts. Basically they need to grow their economy, make it stronger to generate more income for the whole country.This can take many years.

If they refuse to pay back these debts then the USA will end up something like Zimbabwe, a pariah in the international community. It will lose all its prestige and will cease to be a leading nation. It's currency will drop, hyperinflation will set in; and depending on what they have been importing, their people may starve if they have been relying on food import all these years.

In short, non-payment is not a very good idea.

5) for a large country such as the USA, hyperinflation will mean many of her citizens will be starving, some may even die in the extreme scenario. Less serious will see her people going through the kind of suffering the people in Zimbabwe are going through now. Shortage of goods, services, fuel, etc. Not a good life for sure.

To curb hyperinflation - simplistic view here is to devalue their currency immediately, cut back the circulation of paper money, or issue new notes, which is much simpler. After that, they need to rebuild their economy. To rebuild, it will need to do a lot of thing - cut back consumption, improve productivity, raise taxes, cut back social services, etc, basically they need to fix their books to make sure they are not over spending and they have surplus to rebuild their treasury. Long story.


Cheers.

[tech/a]

Thanks Haunting for your interesting reply.

Sunder

I now see the apples scenario!

Many are concerned about their wealth protection.
I'm intersted in the view of those here as to how best to---

(1) Protect that which we have--super and various other investments.

(2) Best grow our wealth heading toward later life.(I hate the idea of retirement---I get bored easily--and understand that inflation means my $$$s today will be worth very little in 30 yrs time!---so in my personal view having an income stream permanently is my own desire and design.

Of course I have a personal interest as I have 2 companies both involved in the Building industry---a SMSF---and numerous IP's---the usual things one does in pursuit of financial freedom.Oh and I got caught in the 18% interest blowout in the early 80s which cost me a lot more than $$s.

My own personal suggestions thus far to myself are.
Business.
Reduce or eliminate non productive debt that cant be locked down and quantified.Leases are OK.
Dominate my field of expertise---in times of uncertainty clients tend to go with larger more secure operators for larger $ items--which we specialise in.
Broaden market share and seek strong alliances.
Run lean and mean.
Look after key personel.

IPs
Decrease gearing to 20%
Keep rent roll to market levels.
Expecting some inflation in the coming years but not to the extent of the US.

SMSF
Invest in gold(Many ways from bullion/futures to stock) and oil.
Have cash working in areas of demand rather than sitting there eroding.

I'm interested in others views and ideas.
Thanks to everyone for their input.

[Macquack]

Thanks for the post Sunder - seems like a pretty good summary of the situation to me. Just a comment on this point (because I'm still not 100% clear on it as well and a comment by Bernanke in response to a question where he stated that the fed has the authority to coin money also got me thinking more).

They could just 'print' the money - i.e. create it out of thin air - as I understand it from the 'coin money' comment I assume the fed does have the authority to this (what bounds there are around it and approvals required is another question). But my understanding is that the more common way they 'print money' is to issue debt - i.e. govt bonds - to foreign governments and private investors. Those investors pay money for the bonds and take on govt debt as a result. One is arguably less inflationary than the other (the direct printing of money without a corresponding debt issue is directly inflationary).

I'd be curious as to anyone's thoughts on the details of this aspect of the 'printing of money' - and also the affects of one approach vs the other.

Good point Cuttlefish.

It appears to me that the government is the only organisation that is not allowed to create money.

Private banks can create money through fractional reserve banking. This is blantantly obvious by the fact that cold hard cash represents less than 10% of the total money supply. Private banks have created the other 90% as paper entries.

The fact that our bank balances are not represented by real cash does worry me.

[Smurf1976]

In Layman's terms it comes down to devaluing the currency.

So, the debts valued at $x are paid at face value. It's just that the Dollars they are paid with won't be worth much in terms of purchasing power.

In short, that's inflation.

Let's say you lend me $100,000 which is 2 years' average earnings (using round figures here). Then we get massive inflation. Then I repay your $100,000.

It all sounds fine until you realise that the $100,000 I've repaid you is no longer 2 years' earnings but it's now the cost of a bus ticket. You got your $100,000 - no doubt about that. But the money is worthless. You, the lender, just got shafted big time.

That's very simplified but it's basically what's happening to my understanding. China, Saudi Arabia etc will get their money, paid in US Dollars. It's just that those US Dollars will become just about worthless.

My greatest fear in all of this, and one that I do think will happen, is that other countries follow the US and devalue their currencies. That is, we won't see the Aussie Dollar buying 10 US Dollars. Instead, we'll see Australia and others similarly devalue their currencies in a race to the bottom in order to try and remain competitive with exports etc.

[cuttlefish]

IPs
Decrease gearing to 20%

I've never properly understood which way around people express gearing - by 20% gearing do you mean that you own 80% and the bank is owed for the other 20%? (i.e. 20% LVR).

[Macquack]

Of course I have a personal interest as I have 2 companies both involved in the Building industry---a SMSF---and numerous IP's---the usual things one does in pursuit of financial freedom.Oh and I got caught in the 18% interest blowout in the early 80s which cost me a lot more than $$s.

My own personal suggestions thus far to myself are.
Business.
Reduce or eliminate non productive debt that cant be locked down and quantified.Leases are OK.
Dominate my field of expertise---in times of uncertainty clients tend to go with larger more secure operators for larger $ items--which we specialise in.
Broaden market share and seek strong alliances.
Run lean and mean.
Look after key personel.

IPs
Decrease gearing to 20%
Keep rent roll to market levels.
Expecting some inflation in the coming years but not to the extent of the US.

SMSF
Invest in gold(Many ways from bullion/futures to stock) and oil.
Have cash working in areas of demand rather than sitting there eroding.

I'm interested in others views and ideas.
Thanks to everyone for their input.

Tech/A, in your position and with a plan like that, if you can't weather any potential financial storm, then their is no hope for the rest of us.

[tech/a]

I've never properly understood which way around people express gearing - by 20% gearing do you mean that you own 80% and the bank is owed for the other 20%? (i.e. 20% LVR).

C/F
Gearing is normally expressed in % geared (on loan).
20% in this case is other peoples money.

But Smurfie raises a very good point.One which has me thinking.
If I have $100,000 of the banks money today buying $100,000 worth of X today and in 5 yrs time I pay back that $100,000 which in terms of value in 5 yrs time is worth $50,000 (Say) then I'm better off having that money working for me in times of inflation.---Rather than paying it back as its worth today is less in BUYING terms than it is today.

My base asset say property in times of inflation will grow and the value of the loan in terms of buying power will decrease all due to the increase in costs of materials and construction!

Perhaps my plan above is best placed in times of Recession than times of inflation! Provided of course I can service debt!

Comments?

[Sunder]

But Smurfie raises a very good point.One which has me thinking.
If I have $100,000 of the banks money today buying $100,000 worth of X today and in 5 yrs time I pay back that $100,000 which in terms of value in 5 yrs time is worth $50,000 (Say) then I'm better off having that money working for me in times of inflation.

That's true, but just remember that interest rates is usually tied to inflation. So if inflation is 4% as it is at the moment, the cash rate is 7%. When inflation was 1%, interest rates were only 4%.

So while borrowing money and putting it in inflation proof assets is a good hedge, that's all it is - a hedge, it's not a money maker.

[Smurf1976]

C/F
Gearing is normally expressed in % geared (on loan).
20% in this case is other peoples money.

But Smurfie raises a very good point.One which has me thinking.
If I have $100,000 of the banks money today buying $100,000 worth of X today and in 5 yrs time I pay back that $100,000 which in terms of value in 5 yrs time is worth $50,000 (Say) then I'm better off having that money working for me in times of inflation.---Rather than paying it back as its worth today is less in BUYING terms than it is today.

My base asset say property in times of inflation will grow and the value of the loan in terms of buying power will decrease all due to the increase in costs of materials and construction!

An example.

You buy a house for $500K with 100% mortgage at 8%. In today's money that's 10 years average earnings to pay for that house. On top of that you have to pay interest on the loan.

Then we get a bit of inflation and income doubles. Now it's 5 years of average earnings to pay off the house. The downside is interest rates would likely have increased but you could protect against this with a fixed rate loan.

In short, inflation erodes the true value of debt measured in hours of work or anything else tangible. Hence it makes debt easier to repay in most circumstances provided that you don't get screwed by a spike in variable interest rates.

So buying houses (or anything else tangible and better still something that also produces income (rent, dividends)) ought to work well provided that you can ride out the storm and meet the loan repayments during a period of general economic trouble. Many can, those who lose their jobs or see business profits tumble could easily lose the lot due to being unable to meet loan repayments.

The one big downside I can see is that house prices are significantly influenced by buyers' ability to borrow. If inflation and interest rates spike then even with an increase in income, it doesn't necessarily increase the amount someone can borrow. House prices thus may not increase to the same extent as wages or general costs - people simply can not spend money they can't get hold of (in practice, borrow). Buyers in general would thus tend to not increase their bid prices to the same extent that general costs have increased.

All that changes once interest rates peak however. Then we should still have reasonably high inflation (since it's just after the peak) but with falling interest rates, the amount that can be borrowed rises. A bit of a time lag perhaps (measured in years), but there are the seeds of the next boom.

Another one that works well with high inflation is renewable energy. Apart from wind and biomass, most (in the order of 95%) of total life cycle costs are the upfront construction costs. Build it today and borrow the money at fixed rates. Then sit back as production continues at very low ongoing cost whilst energy prices rise with inflation.

If you look at some of the older hydro schemes (there aren't any old solar etc) then they now produce over 100% per annum income return on the original capital investment even though they were financially marginal (at best) when originally built. Inflation is, ultimately, the only thing that has made most of them financially viable at all.

So, anything tangible that generates an income (preferable without significant ongoing expenditure) ought to offer at least some profit from inflation as long as you can withstand high interest rates and general financial turmoil in the meantime.:2twocents