Outside the Box

Memo to Central Banks: You’re debasing more than our currency

October 26, 2012

I can only pass on Societe Generale’s work to you once in a while, but the piece for today’s Outside the Box is important enough that its author, Dylan Grice, worked hard to convince his bosses to let me share it with you. Dylan is one of my favorite investments analysts, as well as just an all-around nice guy.

In a change from his usual fun-loving demeanor, Dylan issues a serious warning here.

I am more worried than I have ever been about the clouds gathering today (which may be the most wonderful contrary indicator you could hope for...). I hope they pass without breaking, but I fear the defining feature of coming decades will be a Great Disorder of the sort which has defined past epochs and scarred whole generations….

So I keep wondering to myself, do our money-printing central banks and their cheerleaders understand the full consequences of the monetary debasement they continue to engineer?

He runs through some of the Great Debasements of the past, starting with third-century Rome, running through Europe’s medieval inflations and the French Revolution, to the monetary horror story of Weimar Germany in the 1920s.

His key point is that inflations and hyperinflations don’t just hurt money, they hurt people and the societies they live in. Inflating money is less trustworthy money, and so people doing business trust each other less. Plus, those who are farthest from the source of artificially created money suffer the most (the “Cantillon effect”).

And now the social debasement is clear for all to see. The 99% blame the 1%, the 1% blame the 47%, the private sector blames the public sector, the public sector returns the sentiment the young blame the old, everyone blame the rich yet few question the ideas behind government or central banks ...

I’d feel a whole lot better if central banks stopped playing games with money….

All I see is more of the same – more money debasement, more unintended consequences and more social disorder. Since I worry that it will be Great Disorder, I remain very bullish on safe havens.

In just 10 days we will see how the US elections turn out. Depending on what happens after, the US will either remain as one of those safe havens (and perhaps become even more of one) or those of us who reside here will need to start thinking more globally. I know a lot of thoughtful people who are already contemplating (if not acting on) plans to make sure their life savings maintain their buying power through the coming decade. I remain optimistic that we will set ourselves on a course that ends in a safe harbor, although the sailing will be quite volatile. What Dylan describes are the unintended consequences of people who think they understand macroeconomics and who are well-intentioned but whose policies can be most disruptive.

Sunday night I head for South America. I always enjoy traveling there, and I am interested to see what I can learn, both about how Brazil, Uruguay, and Argentina are doing and what they are thinking when they look north. I really do find that I learn much more than I impart on these trips.

Election night will find me in a bar drinking non-alcoholic beer in Cafayete in the far north of Argentina, where the California polls won’t close till almost midnight. It might be a long night. Maybe I can set up a twitter account from there. Might be fun. There will be lots of friends on hand to share the times and commentary. I will be back in Texas that Sunday to write my letter, and I’ll be thinking about how the results will impact all of us everywhere.

Have a great weekend. And I am off to cast my absentee ballot! You make sure to vote too!

Your wishing I was in Illinois so I could vote several times analyst,

John Mauldin, Editor
Outside the Box

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Popular Delusions
Memo to Central Banks: You’re debasing more than our currency

By Dylan Grice, Societe Generale

At its most fundamental level, economic activity is no more than an exchange between strangers. It depends, therefore, on a degree of trust between strangers. Since money is the agent of exchange, it is the agent of trust. Debasing money therefore debases trust. History is replete with Great Disorders in which social cohesion has…

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Nov. 22, 2012, 8:21 a.m.

Great piece!  It is now so easy to see why this past election was so divisive.  It is also clear that the time to prepare for rising inflation is now while the Global economy is entering or in recession because when growth returns, watch out inflation is going to soar!

Mike Kelly

Oct. 31, 2012, 9:52 p.m.

In the context of this article how do you explain Japan over the past twenty years?

Dallas Kennedy

Oct. 30, 2012, 8:18 p.m.

As interesting as this inflationary trip down memory lane is, the developed world today is pretty unlikely to see massive price inflation any time soon; the credit dynamics and demographics run strongly against it. We’re likely instead to see a continuation of what’s happened over the last five years, on progressively larger scales: mild to moderate overall price inflation; artificially low interest rates (financial repression); credit rationing and low growth; combined with depressed, post-bubble asset prices; more and more pervasive credit haircuts, debt write-downs, restructurings, and outright bankruptcies, including governments at all levels.

It is true that the Fed’s debased monetary policy since the 97-98 Asian crisis, of flooding the world with dollars, has caused a surge in commodity prices, since most commodities are priced in dollars. Half of the world’s dollars circulate outside the US. We hear well-founded complaints from other countries in the dollar-based trading system, even in the developed world, who’ve managed their affairs better, but are forced to deal with the dilemma, inflate or not? It’s the bad outcome when you have “globalization” based, not on a neutral currency like gold, but one particular nation’s currency. Then that nation’s monetary policy, good or bad, is forced on everyone else.

In the developing world, the outcome is worse: sharply higher food and energy prices, leading to unrest and revolutions all over.

P.S. Punk, not disco - I was there! :)

bob love

Oct. 30, 2012, 3:57 p.m.

Mr. Grice’s analysis may help explain the high and rising level of hatred for America among much of the rest of the world [especially those who abhor thieves], since America is literally stealing from the entire world ... with the poor of the world on the very bottom of the monetary Ponzi scheme which the FED is playing. America [in so far as it tolerates the FED] can no longer claim to be the home of the brave .. but rather of the brazen.

Scott Dietz

Oct. 29, 2012, 1:52 p.m.

I appreciate the concern greatly and anyone who doesn’t is either deluding themselves or a fool.  That said.  All of the prior debasement epoch’s have occurred with only one country doing so.  Here we have ALL major countries doing so in concerted effort (John, your competitive devaluation race on steroids!) - therefore against what does a hyperinflation take hold?  Keep in mind inflation or deflation is a repricing of the medioum of exchange against something else.


Oct. 28, 2012, 7:15 p.m.

Thank you John for sharing Dylan’s excellent analysis of current monetary policy and it’s unintended consequences.  I would like to add one more for your consideration.  Taxes.  The idea of taxes being required from most of the population to pay for what is needed creates a certain commitment from all to making sure things are done correctly and that the money is handled with care and responsibility.

This issue had been building for awhile, but took off on a logarithmic scale at the passing of the TARP bailout.  Our government “spent” over 800 billion dollars that came from nowhere.  Where did they get it?  Did taxes go up to pay this? No.  Shortly thereafter they “spent” another 800 billion dollars to “stimulate” the economy.  Did taxes go up to pay for this? No.  Any reasonable man paying even passing attention to this activity would think, why do they need my little contribution in taxes?  If they can pull over a trillion and a half dollars out of thin air, then I am a chump to keep working and sending a check to Uncle Sam on April 15th…just print my share too and let me keep my money.

So in my view, that is another side effect of the debasement circle between the treasury and the FED, i.e. the Treasury prints bonds and the FED prints money to buy them with.  Then the Treasury prints more bonds to pay the interest on the original bonds.  The FED prints money (actually commas and zeros) to buy those new bonds, and then prints more money to remit the “profit” it makes back to the Treasury on the interest it’s been “paid” on the original paper.  I mean, come on, how gullible do they think we are?  Per Dylan’s reference to Keynes, “the process of wealth-getting degenerates into a gamble and a lottery.”  The gamble now is, do I work or lay out and wait for a check from Uncle Sam?  If a majority of people think working and paying taxes is a fools game, everything falls apart.  Welcome to unintended consequences 101 Mr. Bernanke and Mr. Obama.

Walter Stolber

Oct. 28, 2012, 2:43 a.m.

Walter Stolber, Switzerland
Interesting paper. Obviously, some analysts (ie, John Mauldin`s paper) are expecting deflationary developments, probably most economists (including this one), however, would subscribe to inflationary dangers as highlighted by Dylan Grice. Apart from the outlandish creation of fiat money by central banks in US, Europe and Asia, it is “expectation of the general public” which will ultimately decide what will happen. Rising real estate prices for example in Germany, a country with a history of stable real estate prices for decades, are solid indicators for peoples` expectations: rushing out of the euro into perceived less risky investments such as real estate, gold and/or art has become a widespread concern. Capital flight not only from southern to northern countries has become common place.  People`s trust in monetary institutions and the political establishment in Europe is running low eventually,diminishing further with passing days. The result,an increasing velocity of money which will ultimately set an inflationary spiral in motion infesting the world at large; originating either in Europe, Asia or in USA.
In fact, even in Switzerland perceived as relatively stable, more people start asking questions about inflationary prospects. First, because their personal inflationary experiences rarely tally with the official statistics. The zero consumer price inflation officially shown for the last year is absurd.  Second. The policy of the Central Bank (SNB) to stabilise the sfr currency by buying unlimited amounts of euros for trade purposes,is a risky monetary adventure comparable to the risky fiscal policy limitations for public indebtedness. Once trust in the operation will evaporate, the whole monetary house eventually faces demise.
Signals for such a dismal outcome are here to be observed and acknowledged lest, you belong to the political class with a 4- year term horizon and capabilities to distort facts and/or to the class of able speculators be it at Wall Street or elsewhere.

Frank Mitchell

Oct. 27, 2012, 9:29 p.m.

No wonder Grice’s employer didn’t want a wider public to see this. It contains no analysis. Just a lot of blather about how inflation is mixed up with bad things—and a lot of unstated assumptions about how inflation is the big problem we face. “Thinkers” like this are responsible (in part) for the current mess.

Gary Morgan

Oct. 27, 2012, 3:20 p.m.

It appears most comments are missing an absolutely key point: it is not about whether we suffer inflation or deflation at all.

Deflation will win the war eventually, the only variable is whether or not we get to deflation via currency collapse (confusingly called hyperinflations).

Currency collapses have nothing to do with ‘normal’ inflation, rather they show that the real world has cast aside the monetary world temporarily.

Mr Grice is too polite, he knows full well that currency collapse is a 100% certainty for America, Japan and no doubt the UK. How else will they clear their debts?

Batten down the hatches, know that every word out of Bernanke’s mouth is a lie, his QE is merely to fund the USG (via the primary dealers), and cause a weak dollar. And you have seen nothing yet compared to what is to come by way of monetisation, it will make your head hurt.

Only one way to protect yourselves: physical gold.

Good luck.

Jeff Martin

Oct. 27, 2012, 12:02 p.m.

From a theoretical standpoint, this argument makes sense; but in light of how the world economy has changed over the past 30+ years, it makes little sense today.  Since the late 1970’s, just about all economic growth has been the result of consumer borrowing.  In an effort to break the union stranglehold on the manufacturing economy, businesses made a tactical decision to export labor, import inexpensive goods, offer cheap credit and advertise consumerism as a patriotic endeavor. It worked…and the banks were willing participants. Money supply is not a determinant factor for inflation when consumers are over leveraged and wages are stagnant. The only wage inflation has been in the high income wage bracket and those citizens cannot cause real inflation. Until the consumer deleverages and wages actually rise, the only significant inflation will be raw materials that are traded on futures markets…those can be manipulated with enough cheap money from the Fed window.

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