Other talking points:

• Will China let their currency float?
• U.S. equities are “overdue” for a correction
• He’s been long the dollar for 5-6 months and it’s still working.
• Calls himself a “horrible stock market timer and trader”. This, from the guy who co-founded the Quantum Fund with George Soros, which saw returns of 4200% over the first 10 years.

hat tip Dollar Collapse.

Interviewer: It’s 1973, you’re 30 years old and you start co-managing Quantum fund with George Soros. Over the next 10 years it goes up 4,200%. You both become legends on Wall St. So why do you think you managed to get it so right, so often?

Towards the end he mentions the bubble in Treasuries. I’ve been thinking about this a lot lately. Anyone know if he’s actually short t-bonds yet?

I owned TBT (ultrashort 20-yr T-bond fund) briefly last year. Haven’t decided on whether it’s time to get back in yet. I strongly suspect the Fed will announce QE 2.0 this Spring, after their current programs expire and sh*t hits the fan (mortgage rates and foreclosures spike). But who knows? With our newly populist-pandering President, it should make for an interesting year, to say the least.

From 2007. Features Peter Schiff and Stephen Roach making calls that seem to be playing out today:

Guess what? The U.S. will hit the 40% mark in 2009:

Hayman Advisors provided a good summary of Bernholz’s research in their October letter (via FS):

There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations – all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government’s deficit exceed 40% of its expenditures.

It’s important to note that the dollar does have some built-in protection as the world’s current reserve currency. That lets us get away with a higher debt-load than we should be able to. The question is, how much protection does that offer?

Also, how long will the dollar remain the world’s reserve currency? As Bloomberg noted, the world’s reserve banks are shifting away from US dollars. They’re shifting to currencies from countries with sound(er) monetary policy and less debt. We’re really in uncharted economic territory.

“It can’t happen here”

Hyperinflation in the US is hard to imagine. It could never happen to us… right? Well, fiat money has always collapsed eventually. I wonder if people in those countries ever saw it coming. My gut says the vast majority never saw it coming, but every case is unique.

Hedging Against Hyperinflation

If we are on the road to hyperinflation, you’ll definitely want to be in commodities. Stocks may do OK, but generally don’t keep up with inflation during hyperinflation. The exception would be commodity producers, such as gold miners. Foreign currency funds are another way to play it. I did a writeup on two mutual funds I like as inflation hedges here.

Jim Rogers likes agriculture plays better than precious metals: Cotton, sugar, etc. I’m mostly using metals to hedge against inflation, but Mr. Rogers’ suggestions certainly warrant a closer look.

If you’re looking to read more on the topic, Peter Bernholz’s research is featured in his new book Monetary Regimes and Inflation: History, Economic and Political Relationships. Looks interesting, I’ll probably pick one up with my next Amazon order.

Hat tip to Michael Panzner. He has an excellent writeup on the risks here.

HSBC Bids Farwell To the Dollar – (Guardian) “The dollar looks awfully like sterling after the First World War,’ said David Bloom, the bank’s currency chief.”

US Debt Crisis May Cause “Fall of Rome” Scenario – (Bloomberg) Richard Duncan, author of The Dollar Crisis (2003) makes the case

America On Sale: Weak Dollar Boosts Stocks – (CNBC) “A weak dollar contributing to a strong stock market and economy may make investors feel like they’re living in some type of Wall Street Bizarro World. But for policymakers, the relationship is just fine for now.”

Brad Delong’s Takedown of David Levine’s Takedown of Krugman – (Delong) I don’t particularly agree with either side of the argument, but it’s fun to watch. h/t BR

Let’s Say RIP to PPIP – (Rolfe Winkler) “Sure enough, the winning bidder elected nearly the maximum available amount of non-recourse leverage, resulting in a 22 percent premium for the assets over bids that didn’t take advantage of leverage.”

Gata Says Fed Admits Hiding Gold Swaps – (GATA.org) “The Federal Reserve System has disclosed to GATA that it has gold swap arrangements with foreign banks that it does not want the public to know about. The disclosure contradicts denials provided by the Fed to GATA in 2001″.

The Elephant in the Room: Do NOT watch if you’re easily offended. By things like an elephant having his way with cartoon Gordon Brown. Or cursing. The following video is mean-spirited, crude, and funny.

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If you think the dollar will continue its downward trend, I wrote about some options for that scenario here.

via Barry Ritholtz

Economists were shocked by the relatively high U.K. inflation number for July 2009, 1.8%. By comparison inflation is -0.7% in the Euro area and -2.6% in neighboring Ireland. How could price inflation stay that high given the deep slump in the U.K. economy and the dramatic drop in commodity prices from their peak in July 2008 (the base month for this 12 month number)?

Perhaps it could have something to do with, you know, the dramatic depreciation of the U.K. pound. If you look at the individual inflation numbers for European countries, you can see that countries with the euro (or with currency pegged to the euro) have generally much lower inflation than those who have their own freely floating currencies. The exceptions being Switzerland and to a lesser extent the Czech Republic, but that reflects that the Swiss franc and the Czech Koruna has been much stronger than other small floating European currencies.

Some might object that while the pound is down dramatically since July last year, it has stabilized and even appreciated somewhat against the euro since its low late December 2008. But this shows just how these economists are deceived by their “perfect market” models.

Assuming “perfect markets”, prices adjust immediately. A 10% depreciation will immediately raise import prices by 11.1% so that prices are equal in all countries. But in reality, companies are reluctant to change local currency prices too often because they fear it could, for example lead to permanent loss of market share even though the currency fluctuation is only temporary. So as long as they think that the currency fluctuation might be temporary they will not raise prices, even though prices are unsustainably low in the long run. But eventually as the depreciation appears increasingly permanent they will raise prices. Alternatively, if the depreciation proves temporary they will not raise prices, but they will abstain from the price cuts that you would otherwise expect.

What this means is that the inflationary effect of currency depreciation has a lagged effect on price inflation. Meaning that even though the pound hasn’t depreciated any more this year, previous weakness still continues to create upward pressure on prices.

Eventually, the effect of last year’s brutal pound depreciation will pass through entirely, and assuming the pound doesn’t depreciate any more, this will cause relative inflation in the U.K. to fall. But the lagged effects of the previous pound depreciation, just like the lagged effects of the depreciation of the Swedish krona and other weak European currencies, could continue to put upward pressure on prices for many more months.

Visit Stefan Karlsson’s blog here.