Thursday, August 6, 2009

Inflation!

Since the markets were quiet today, I figured it would be a good time share this excellent documentary around inflation.

Make sure you watch the Zimbabwe section in part 2 if you don't have time to watch all of this.

Part 3 paints a frightening picture of what the future may look like based on historical hyperinflation comparisons.

What's also interesting is how real estate did not keep pace with the cost of living during Germany's bout with hyperinflation. Apparantly back then they realized it's more important to eat versus spending your money on a McMansion:)

AGRICULTURE(STOCKS AND FOOD), GOLD, AND SILVER are very important holdings at this point.

Enjoy!

Part 1



Part 2



Part 3

39 comments:

Anonymous said...

HYPERinflaton? Sweet! Better go out and buy a house NOW before (by definition) the wage-price spiral starts!

Assuming we get inflation at a rate 1/10th as fast as Zimbabwe, 5 years from now, rent will go from 1,000 a month to 200K a month.

At that rate, a house that costs 400K now, will cost only 1 million. Why so little, relatively speaking? By then all banks will fail, or they will be charging 150% interest (minimum). Thus, there wont be any megabucks to borrow against.

Even still, with rent at 200K a month, a house selling for the equivalent of 5 months rent is a major, major bargain.

Im sure you will figure out some convoluted way to say, somehow, houses wont explode in value - which is a crock but whatever. Rest assured however, if we have hyperinflation in the near term, buying a house now is the best deal you can ever make.

Jeff said...

Umm

Did you see the part in the video where housing prices still plummeted in Weimar Germany during hyperinflation?

If you don't have the money or a job to get a loan home values won't do sqwuat.

getyourselfconnected said...

Jeff,
You need to run and read the "Blatant Monetization" post at Market Ticker or a companion piece at Zero Hedge right now. That "great" 7 year bond sale last week after the terrible 5 year just may have been bought by the FED, and there may even be real proof! Amazing and scary all at once.

I am working on a post, and will check in later. I am sending an email this evening as well.

Jeff said...

Get

Thanks I will check it out!

Check this out. The housing bubble is toast:

Homeownership expected to drop for decades:


"About 57% of the 30.3 million housing units added from 2005 to 2020 will be rentals, Nelson says.

"So many of our federal and state and local policies are driven by the assumption that homeownership is inherently preferred over renting," he says.

The housing collapse may have an impact.

"We're returning more to what was normal in the 1960s," says Dowell Myers, housing demographer at the University of Southern California. "People didn't buy homes then as an investment. They bought them to raise families."

Renting also may be more appealing because:

• Households are smaller. The youngest of 79 million Baby Boomers will turn 56 by 2020 and many will be empty nesters who favor small homes. The 20-something millennial generation is at a peak age for renting.

"What we used to think of as the typical American family — married couple with children — is really not typical anymore," says Mark Obrinsky, chief economist for the National Multi Housing Council in Washington, D.C.

•It's tougher to buy. The subprime mortgage crisis is tightening credit availability.

•Some arenew to the USA. Most recent immigrants rent.

•Somewant to save energy. From tax credits to mass transit, going green is reshaping growth."


http://www.usatoday.com/news/nation/2009-08-05-rental_N.htm

Jeff said...

Get

Nice catch. just read the market ticker.. Holy crap thats bad.

What a fraud. This game is about over. Outright monetization. SOmething Bernanke said he would never do.

Frightening

CT-Hilltopper said...

Jeff...

Just remember, it was only a couple of months ago that we were discussing the possiblilty of having inflation and deflation at the same time, and the longer this whole thing goes on, the more I can see that happening.

Prices so low on things like houses (due to deflation) that it won't be believed, but the dollar will be devalued to the point where no one can afford them.

Peter said...

Jeff, I was meaning to ask you if you understand how the Fed purchasing bonds works? If you recall the other day I commented on how I was suspicious of the Thur/Fri bond offerings after Wed's horrible offering. My assumption of course was something was rigged as that is my natural reaction these days (darn I hate being a conspiracy theorist!). Sure enough, as per Denninger's post today, it seems like something was up.

Do you know where the Fed is coming up with the money to purchase these POMO auctions? Is it part of the $300bil they announced as QE or is it from somewhere else? If it is somewhere else then am I to believe that the Fed can monetize without announcing it?

But if the banks are using their money up purchasing bonds at auction last week why did this not pull liquidity from the stock market and cause a drop? Are the banks not pulling liquidity from the market because they know they will get the money right back from the Fed? Are they just never paying for the bonds and the money for payment comes the following week directly from the Fed?

Also, another question. Is it possible to have deflation with rising prices? Can we be in a position where prices are rising for everything because the dollar is tanking and foreign goods are more expensive, but US wages and housing are still dropping? If so then are we staring at deflation/rising prices/high unemployment? Is that like staring into an eclipse?

jeff said...

CT

Yup

Thats how I see it too. Just look at Zimbabwe. When you only have so much money, its much more important to spend it on food versus pissing it away on a McMansion.

We already had hyperinflation in housing from 2000-2007. It's called a housing bubble! Bubbles die and never reflate.

Speculators diving into real estate to protect against inflation are crazy.

There are much better hedges in commodity ETF's, gold, silver etc.

jeff said...

Peter

Where is the money coming from? IMO They are printing it!

Go check out this from Denninger. Zero Hedge was all over this today:

http://market-ticker.denninger.net/

The Fed is monetizing the debt. This is a slippery slope they are playing with.

Households do not have the ability to withstand any inflation right now as they lose their jobs and have nothing in savings.

I think we can have inflation/deflation at the same time. I think you nailed it. We will need to become self sufficient because anything outside the US will become unaffordable.

This is the worse case scenario. the fed should have just let the bubble collapse. They still may, however, we are facing inflation and starvation if they decide to print.

Higher costs with zero jobs = social chaos.

I pray for this country and everyone in it.

Peter said...

Jeff, QE is monetizing, is it not?

What I don't get is how are we to know if the Fed is printing money? They told us they were doing $300b in QE, so we know that is a set amount of monetizing. Is that the money used for these POMO purchases? If not can the Fed just hit a button on a computer and transfer new money to these banks to buy these treasuries?

How are we to know if the Fed is monetizing beyond the $300b? Do they have to announce it?

It is getting bad out there and I don't know how much longer it can last but the pigmen are working hard, so as impossible as it sounds it might take longer that we think. I think the rest of the world is not on stable enough ground yet to pull the rug out from under us. I think that is where it comes from, sure we have bad auctions but perhaps it starts when a total glut of treasuries hit the secondary market as China dumps and prices drop dramatically in a few days.

getyourselfconnected said...

Peter, I would defer to Jeff for answers, it is his blog, but the FED announced 300 billion is very seperate from this kind of exchange and they know it. I do think they will try to use the "it was the QE money, we swear" defense but evidence adds up.

Jeff,
email is out. Thanks for the interaction.

CT,
are you still out of it after your wild birthday bash involving the entire chippendales workforce? We still have no stories!

Jeff said...

Get

Feel free to chime in with opinions any time. This is an open forum where all opinions are welcome.

Peter

Get IMO has it right. The QE was public and transparent.

What they are doing now is turning on the printing press and printing behind closed doors.

The Treasury/Fed is basically printing money and giving it to the primary dealers(Goldman etc.) who then go ahead and soak up whatever treasuries are left that the rest of the world didnt want to buy.

Its a total sham and won't last long given the fact we are selling $75 billion more next week.

This is a horrifying develeopement and a potential end game scenario for our currency and the economy.

getyourselfconnected said...

Jeff,
I figured it was open forum, but I did not want anyone to think MY opinions reperesent this blogs final take (they almost always do anyway...).

I agree that this move is not good, I feel like I want to convert all of my "play" money to gold and silevr right now but it is not feasible. I will wait for the excuse which should come in two waves:
-8:30am we already told you we were doing this (uh, no)

-6:00pm to avoid systemic risk we know what we are doing, go watch American Idol without Paula Abdul

Allen S. said...

"Assuming we get inflation at a rate 1/10th as fast as Zimbabwe, 5 years from now, rent will go from 1,000 a month to 200K a month.

At that rate, a house that costs 400K now, will cost only 1 million. Why so little, relatively speaking? By then all banks will fail, or they will be charging 150% interest (minimum). Thus, there wont be any megabucks to borrow against.

Even still, with rent at 200K a month, a house selling for the equivalent of 5 months rent is a major, major bargain."

You might think that it would go that cheap, but in actuality its much worse than that.

My ex was there for 5 years for her job. The first year she was there her rent was 5,000ZD a month. In the last year she paid 3 Million ZD a month. It was crazy, prices were jumping every month. If I had to guess, I would say her rent now would be 20-30 Billion or so.

When the cost of shelter rises like that, you really can hardly put a price on owing the actual housing. Her company offered 1 Billion ZD on the simple, cinder block house she was renting, but no dice. Thought of the owner likely was that the spiral would continue, so he wasnt willing to take a mere 333X monthly rent.

And in hindsight, I guess he was right. If the going rate of rent is now 20-30 billion ZD a month, selling a house 5 years ago for less than one months rent really is "giving it away".

Allen S. said...

"I would say her rent now would be 20-30 Billion or so."

Check that. I was curious so I just shot her an email. She finished up last summer, and at the time she was paying 600 Billion ZD a month - wow.

Peter said...

Jeff/Get, thanks. So just to clear this up as it is boggling my mind a bit, when the Fed starts monetizing the debt they will not announce it? Why would they bother to follow the law, right?

I guess it is dumb of me to assume that when a country is going to devalue its currency it announces it publicly.

But if this is so then won't China and Japan act immediately and sell treasuries upon the first news?

This sounds really bad, but you know what, how many things has Jeff correctly written about that sounded so bad but they were completely lied about and ignored? I think we are all starting to sound like a bunch of crazies. I don't like being thought of as crazy, because I am not.

getyourselfconnected said...

Peter,
Did you get an email alert when Argentina collapsed? Did you read about the USSR falling until well into the process?
Currency devaluation is usually done in slow motion.

In a weird connection, currencies all over are linked to the dollar, so you may see items like this evening that preface the problem.

You can pretend to repay debt for some time, but that ime is now and it we may have to pay on cash. Which we can, but that would involve many changes.

Jeff said...

Allen

Thanks for sharing that story.

I wonder how many dollars that rent cost when it was converted back to US dollars.

I guess you would have to buy a house in gold now since the currency has officially become worthless.

What makes this so scary is that we are the worlds currency and we are trashing it.

Owning a house sure doesn't hurt right now. The problem is no one will be able to afford one as our currency collapses. So if you can't sell it whats it really worth?

There will be more pressing needs like feeding yourself with whatever worth you have.

I guess the whole worldwide system will have to be rewired.

What a mess. This is all so confusing. Sigh

Jeff said...

Peter

Thanks

No problem.

I feel like a looney toon myself sometimes. Things that I thought were impossible now seem possible.

I sometimes ask myself if this is all a dream at times.

Lets hope we find solutions and start paying down debt and slashing spending.

Herb said...

We already had hyperinflation in housing from 2000-2007. It's called a housing bubble! Bubbles die and never reflate.

I think you need to define the term "hyperinflation".

Definitions used by the media vary from an inflation rate over three years of 100% to exceeding 50% a month.

I don't think we came any where close to hyperinflation in housing (or oil last year). There was no panic in the streets.

Jeff said...

Get

FYI

I think Argentina's currency collapsed in a matter of a couple months.

Here is a post I did on it if you want to check it out. The currency collapsed 73% in a couple months.

http://thehousingtimebomb.blogspot.com/2009/06/market-manipulationargentina.html

Jeff said...

Herb

Thanks.

I understand.

Just was trying to make a point. No one has the ability to buy housing at these levels because the lending products that got prices up here(no doc, subprime) are gone.

If wages don't rise they still are still unafforable and prices should drop.

Perhaps I should have used the words speculative mania versus hyperinflation.

Herb said...

And remember, you can't flee the country with a house, but gold and silver are easy to transport.

Allen S. said...

"Jeff said...

I wonder how many dollars that rent cost when it was converted back to US dollars."

Jeff - from what I understand, her 5,000 ZD rent was basically $40 USD per month, and the 3 Million ZD was like $28 US. Also, these are not "official" rates. The real black market rates were worse.



"I guess you would have to buy a house in gold now since the currency has officially become worthless."

Actually they still use the currency, but to buy in ZD would be trillions upon trillions of dollars. Most often for anything other than street transactions, things are pegged to Pound Sterling or US Dollar as they are seen "ironically" as stable stores of value. Even for street transactions, the US dollar was highly coveted. The dollarization of that part of the world is amazing. Remember when the US Govt started introducing colors & security strips to the $100? The first time I saw one of those was in a street market in Addis Ababa!



"Owning a house sure doesn't hurt right now. The problem is no one will be able to afford one as our currency collapses. So if you can't sell it whats it really worth?"

It seems to depend on the speed of the collapse. I should say, I think "hyperinflation" in this country would not be like it was in Zimbabwe where it is totally out of control. Mugabe is a real nutjob and the corruption over there is just insane. He took what was once a relatively stable, local powerhouse, and trashed it in 15 years with his land reform.

In the US I would like to think our bout would be alot like Turkey. From what I understand, inflation there was about 70% a year - extremely high, but conceptually understandable and somewhat predictable. The Lira was devalued significantly to where 1 million, 10 million and 100 million Lira currency was common in everyday transactions.

At that point it got ridiculous to pay 3,500,000 TYL for a coke, so when the govt instituted economic reform, they pulled in the currency, lopped a bunch of zeroes off of it, and introduced the "new turkish lira". Eventually taking the old one out of circulation.

Last time I was there, it seems to have worked. Govt held hard and fast to the new econ regime, and inflation is now like 8%. Thus my hope is it would be something like that in the US. The foreign debtholders were kinda screwed, but what choice did they have (they were screwed either way). I would imagine after losing value at a rate of 70% a year, they gladly took a discount and 8%.

So thats my hope at least - we are in a much stronger bargaining position relative to the rest of the world than Turkey was. Thus its all a matter of how quickly this all happens.

Peter said...

Well, here we are today and not a single word about the Fed's monetizing move. What a shock.

I have to assume that this move has been cleared with China. Maybe that is why the dollar continues to drop every day, they have been advised the Fed is doing this and they are selling and hedging their dollar positions.

Get, I always assumed that we could not monetize like Argentina or Zimb. because we have actual laws here. My family is from Argentina, it is a banana republic, the leaders can do whatever they want. We used to have laws here in the US that prevented this.

So have we officially become a banana republic? My mom tells me how every year this country reminds her more and more of the way Argentina progressed.

Anonymous said...

OK I finally watched the piece to see how housing "plummeted" during hyperinflation. Notice how they said nothing about nominal amounts and only went in percentage terms? Thats because if rents go from 30% to 0.2% if the amount of nominal currency goes from 1 to 1,000,000,000,000 you are still paying MORE!

So not everything rises by equal amounts in percentage terms, but the point is all things go up. If the price of a sandwich goes from $1 to $1,000,000,000,000 its it really reasonable to assume a house that sells for $200K now will sell for LESS then? As shelter is a clear necessary item, something tells me, if people have $1,000,000,000,000 to pay for a sandwich (remember by definition there is a WAGE-price spiral in hyperinflation), they will pay say maybe $500,000,000 for a place to lay their head at night. Moreover, if the price of gold and silver are now billions of dollars per ounce, is the price of another precious metal like copper bound to stagnate? Could I not strip out the copper wire in one room of my house and fetch a mere $500,000 for it?

Full disclosure here, I rent but am only slightly concerned about this issue. I come to these sites because I think they are good souces of information. Yet when I see people contort and twist information to have a situaiton where yet even in hyperinflation, home prices go down - it really concerns me. It really makes me wonder about the intellectual honesty that takes place on a blog like this.

The fact of the matter is, if we have hyperinflation, home prices will go up...period. It is OK to admit this. This is not "betraying our cause" or any similar nonsense. It is merely stating a fact.

If you want to truly educate your readers, why not point out, "hyperinflation is a long shot, and if it happens, there are much much much better investments out there than homes. Still it is likely that the price of homes will go up."

See, the truth is not so scary is it? Inconvenient, yes, but it is the way it is brother. So if you dont mind, I would appreciate it if the next time this issue comes up you would show a smidge of intellectual honesty and state what is likely to happen to home prices.

jeff said...

Peter

I think there is a good chance of that the way things are headed man.

I think it would be a much lesser version, maybe something along the 10-20% annual inflation that Marc Faber suggests.

There are so many sides to this crisis. The recovery trade remains on. MArket soaring once again today.

Treasuries selling off as well. Rates keep moving higher.

jeff said...

Anon

Good luck to you brother.

Go ahead and put 5% down and buy one of these 500,000k Mccrap boxes.

Keep in mind that if hyperinflation doesn't happen in will be a result of higher lending rates ala Volker in the '80's.

How much is that house gonna be worth when interest rates are at 15%?

You obviously haven't spent time here. No one knows how this is all going to play out. I still think its a toss up as to how this all plays out. I have never said that hyperinflation is immenent.

I merely try and offer up ideas as to how this plays out. My point was housing did not soar during hyperinflation as other costs did.

I continue to believe housing is toast. Your house is worth what you can sell it for not what its worth on paper.

GL and enjoy that $4k mortgage payment!

Anonymous said...

"I merely try and offer up ideas as to how this plays out. My point was housing did not soar during hyperinflation as other costs did."

But did it "plummet" as you said, or did it "just not RISE as much as everything else" did?

Can you admit it was the former and not the latter?

flipdippy said...

Holy shnikes! I can't stand watching the tape any more today.

I'm going out to buy a 75k MB and I'm not putting a cent down! Obama said during his press conference he saved my ass, I guess I should repay him by leveraging up!

I can't believe people are starting to compare 2009 to the naz in 1999. In 1999 we had hopes technology was going to transform the world (which it did, but was a bubble nonetheless).

What other than printing benjamins is this bubble? The insider trading bubble? The short squeezing bubble? The hope bubble?

Long and strong alpo.

jeff said...

Anon

Fair. Yes I can admit that. I didn't mean for it to be taken literally but I can see how it could be.

It takes a lot of time and thought writing this each day and at times I write things that are taken out of the context of what I meant.

jeff said...

Flip

Its a crazy tape.

I wonder how much longer this lasts before it exhausts itself.

Traders are talking a lot about the 115-120 level being short term resistance.

Lets see how we close.

Herb said...

As shelter is a clear necessary

I think that if hyperinflation takes hold, there will be a lot of people moving in with relatives and a lot of people fleeing the country. This was certainly the case in the Wiemer Repulic days.

I seem to recall that 2 million houses in this country are second/vacation homes so right now there are actually more houses than are really needed.

Anonymous said...

"Flippydippy Said...

What other than printing benjamins is this bubble? The insider trading bubble? The short squeezing bubble? The hope bubble?"

I dont know about you but I am long in green ink, paper and printing presses!!!

jeff said...

Interesting close

Bulls couldn't hold the highs.

Treasuries sold of a little more.

$75 billion in auctions next week.

Yikes!

Peter said...

30+ comments. Great work Jeff. The market keeps running up but interest in your posts that are filled with reality, not BS, is increasing. What does that mean?

Gone are the days of under 10 comments. Long live Jeff!

jeff said...

Peter

LOL

Thanks.

Yeah this sucker keeps growing regardless of the market bounce. I can only imagine what happens if the market tanks!

Anonymous said...

"Herb said...

I think that if hyperinflation takes hold, there will be a lot of people moving in with relatives and a lot of people fleeing the country. This was certainly the case in the Wiemer Repulic days.

I seem to recall that 2 million houses in this country are second/vacation homes so right now there are actually more houses than are really needed."

Very true. In all likelyhood, these houses will be sold for scrap. Given the cost of copper, lumber, etc at that point, these second homes will go for a mere 1-5 billion dollars.

Herb said...

Can you imagine coming home from work one day to find that some has stolen your entire house?