Aaron Task of Yahoo’s Tech Ticker talks with Elizabeth Warren about the mind-boggling bonuses at taxpayer-supported financial firms (basically all of them). I got to meet Aaron at Buttonwood this week. Nice guy. They’re putting out great interviews lately.
I’m at day 2 of the Economist’s Buttonwood Gathering, a conference on “fixing finance”. Lots of stuff to write about. Expect multiple pieces over the next few days. So far I’ve seen Soros, Summers, Geithner, Elizabeth Warren, Stephen Roach, and others.
There’s been very lively discussion in the panels. Earlier today there was a debate on whether financial innovation is good for economies. Jeremy Grantham and Richard Bookstaber represented the anti-FI argument, and Myron Scholes and Robert Reynolds presented the pro-FI case. Both sides made good points, but Grantham’s argument was most convincing, to me at least. An immediate poll showed that his side won handily, 75/25. More details on this soon.
My main critique so far is that there’s very little discussion about the Fed’s role in creating crises. Larry Summers predictably dodged all Central-bank related questions. Jeffrey Sachs had some excellent comments about Greenspan’s reckless monetary policy, and Goldman’s questionable use of the discount window. The topic popped up a few other times, but there seems to be an almost willful avoidance of it.
Niall Ferguson has the most interesting quote of the conference. It was in reply to a question from the audience about sustainable solutions to this crisis:
The problem of being a declining empire has no solution.
Thanks again to Seeking Alpha for the press pass.
Economist Peter Bernholz is an expert on the subject of national hyperinflations. He has studied all the major cases of hyperinflation since 1980. His conclusion: The tipping point occurs when a government’s deficit exceeds 40% of its expenditures.
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.
From his Oct 10 column:
The truth is that the falling dollar is good news. For one thing, it’s mainly the result of rising confidence: the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it’s falling again now that the fear is subsiding.
The dollar is falling because of reckless economic policies like those Krugman advocates. Yet he actually thinks it’s falling because of confidence? It’s the exact opposite. Foreign banks are dumping dollars because they have no confidence in us. They’re switching to Euros, gold, and other currencies. New foreign reserves were 63% dollars in 1999. Today that number has fallen to 37% (see bottom).
We are losing our status as the world’s reserve, and it is most certainly not a good thing. Having the dollar as the world’s reserve brings extraordinary benefits. And we’re giving them all up, just to save bankers butts’ and attempt to stimulate our way to prosperity.
Consider this Bloomberg article: Dollar Reaches Breaking Point As Banks Shift Reserve.
Unless we change course immediately, the dollar will keep falling. Krugman doesn’t get it. He continues to advocate horrible fiscal policy. Excerpt from Bloomberg piece:
“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”
Sliding Share – The dollar’s 37 percent share of new reserves fell from about a 63 percent average since 1999. Englander concluded in a report that the trend “accelerated” in the third quarter. He said in an interview that “for the next couple of months, the forces are still in place” for continued diversification.
