Happy Hyper-Inflation ~ The Risk Averse Alert

Friday, January 01, 2010

Happy Hyper-Inflation

Well, you knew this was coming. (And if you didn't, then you must be the dumbest box of rocks on the planet!) Little surprise Dennis Kucinich would be the member of Congress to "launch an investigation into the Treasury Department's recent decision to lift the current $400-billion cap on combined federal assistance to Fannie Mae and Freddie Mac, opening the way for additional, unlimited funds through the end of 2012."

As noted Monday, "It is hard to imagine a more politically insensitive action. There surely is more to Treasury's decision than meets the eye." Plainly, I am not alone in thinking this.

Still, I have yet to read any credible explanation of what Treasury's intention might be given this policy change, let alone hinting at why the announcement was made when it was. Have no doubt, its stealth release surely isolates possibilities.

Any thought Treasury's move is part of "a mortgage-modification effort ... pushing for reductions in the principal outstanding on home loans overseen by Fannie and Freddie" simply does not hold water. Indeed, were this fairly assumed Treasury's intent, then it is likely Mr. Kucinich would not be launching an investigation.

Likewise, were there any fear of spooking credit markets, thereby justifying the curious moment at which Treasury's updated GSE bailout policy was announced, it rather seems such valuable political capital as stands to be gained in a policy proposal seeking mortgage principal reductions simply would not have been left to the imagination of outside observers. Instead, this intention would have been joined with the recent White House undressing of "fat cat bankers," and openly promoted in a further demonstration showing the Obama administration means business. Yet this has not been the way of things.

Now, how many millions of homeowners already have lost their homes in foreclosure? And for how many long months has the administration's "Home Affordable Modification Program" proven to be like so much swirling dust? Yeah, Treasury's GSE policy shift is intended to help trapped homeowners in an effort to reduce principal. That is rich!

Okay, so then what is the intention?

Well, how did I characterize last year's swindle? A game of financial chicken! THAT is what Treasury is playing with their Christmas eve policy announcement re: the GSEs.

"while there are plenty of reasons to believe that the modification program is fundamentally a failure, Treasury's Christmas Eve announcement is not a backdoor effort to expand the socialization of mortgage losses. Yet."
Tim Duy's Fed Watch, 12/28/2009

Throughout the history of the still unfolding global financial crisis there has been a lot of clamoring about "the socialization of losses," but scant little said about the prospective economic effect of this. Beyond taxpayers having to swallow investment losses they had no part in causing through some malicious act (which, contrarily, Wall Street investment banks cannot similarly claim, as revealed by much unwanted air play being given the matter during the closing days of 2009) there is a grave risk being promoted via unending bailout.

So, what systemic consequence of dead credit securities bailout beyond the abstract notion of "socializing losses" is being threatened? What hath the Monetarist Monkey bailout regime wrought (all the more made manifest with Treasury's Christmas Eve GSE policy announcement)?

In a word hyper-inflation. And there is more to this than meets the eye.

Consider that, the rush of capital overseas — freed via bailout and directed into financial assets made attractive by relatively sweeter returns furthered by local currency appreciation versus the dollar — has already made the Y2k tech bubble look tame by comparison. Thus, an additional, hot money capital surge (resulting from such full throttle bailout of mortgage securities as Treasury is threatening, following the past year's relatively light tap on the accelerator) can only serve to increase unwelcome risks of instability in targeted foreign economies (this via imbalances — physical and financial — created by a threatened flood of incoming capital whose underlying risk but continues to be grossly mispriced).

Yet above and beyond these "technical" matters one ought first consider the altered dynamic of the present moment affecting what traditionally has lent finance its credibility. Specifically, providers of finance are made legitimate via actions ultimately raising the power of those whom their capital serves to remain going concerns. Obviously, too, this legitimate objective further raises the power of those providing said finance to likewise, themselves, remain solvent, going concerns.

Looking back at the final act (the sub-prime mortgage build out) in the greatest Ponzi scheme the world has ever seen (structured finance) the focus on this "going concern" principle was lost. Likewise, absent any massive commitment seeking to make up for decades of disinvestment in physical economy it is relatively easy to claim that, present attempts to salvage via bailout securities which to this day remain technically insolvent similarly lack any credible focus on this "going concern" principle.

Thus, the attempt to buy time for currently untradable securities is not only simply postponing inevitable financial collapse. Rather more ominous is the fact these bailout policies — having made a great leap from the private- to the public-sector once capacity for inflating assets easily levered (by Wall Street and the City of London most emphatically) had been exhausted — now are rapidly ruining the credit of sovereign nations, including (most dangerously) that of the United States.

If ever there were an enterprise whose vitality as a "going concern" were critical to global stability, the United States of America is it. This fundamental, geopolitical fact principally is why bankruptcy reorganization of the global financial system were a preferred solution at this time.

One would be mistaken to think the world of finance can do whatever it well pleases — irrespective of how profound the negative resulting economic/financial impact — and think there will be no organized resistance among those who would rather remain going concerns than be swindled for some transitory gain, even were this but time to batten down the hatches as best as can be accomplished. Thus, present attempts to mask the destructive impact of trillions of dollars of worthless securities still clogging the global financial system rightly should be seen only as an exercise in faith destroying insanity.

Bankruptcy exists as a principle for very good reason! That is why resistance to going this route is largely serving to destroy the credibility of finance providers (including the U.S. Treasury) who rightly are seen only attempting to deny a badly imbalanced — broken — physical reality.

Thus, with credibility shattered, we already are beginning to witness changing relations among various global trading partners seeking to escape the maelstrom. Asia has been rapidly moving forward with regional development projects among key nations (China, Japan, Russia, India). This move coincides with some Asian nations recently calling for restrictions on capital flows into the region, because prospectively debilitating risks resulting from unchecked hot money are seen better avoided (lessons learned in the 1997-1998 period apparently remain fresh).

Likewise, the failed attempt to formalize in Copenhagen a global carbon casino speaks of the same loss of credibility among those whose game of unbridled, wildcat finance knows only its own service absent regard for greater vulnerabilities created.

It is this fading credibility of finance originating in the west that is elevating the risk of a hyper-inflationary blowout.

So, consider the U.S. Treasury's Christmas eve policy announcement raising the possibility of unlimited GSE bailout in this light. Treasury is in a position to free up a huge amount of capital that, naturally will seek return. Yet the last thing much of the world wants right now is more mispriced risk! Therefore, expect resistance. This in fact is the growing trend, and it likewise explains why U.S. equity markets outperformed their Asian counterparts in the 4th quarter.

The consequence of growing resistance to the wildcat finance regime is likely to alter the global financial and economic landscape in such a way as will invariably precipitate hyper-inflation. Effective trade war accelerating on both fronts — finance and physical goods exchange — stands to radically alter the availability of things we have to now taken for granted. All because some among us would rather all credibility be shattered than admit errors in principle precipitating this unfolding disaster. Sick.

As long as circumstance continues being governed by Monetarist Monkeys — liquidity freaks and austerity-minded fascists alike — whose knowledge of history fails understanding how the United States of America in fact was created in opposition to this very sort of tyranny, then one simply cannot avoid fearing such profound breakdown as features physical scarcity and social chaos whose likes have not been seen for a very long time (even centuries).

With the U.S. Treasury announcing its intention to ratchet up a game of financial chicken, posturing in a fashion resembling Hitler's last stand in his Berlin bunker (speaking of which, there's a conclusion yet spoken anywhere: what awful weakness — defeat — was revealed in Treasury's sly, Christmas eve announcement!), there is every reason to expect ample liquidity chasing an increasingly shrinking supply of assets whose value is perceived worthy of investment capital. Surely, U.S. equity will not be among assets deemed a suitable destination for global capital flows once the impact of Treasury's stupidity precipitates a collapse in the U.S. dollar (which invariably will happen as capital is driven away from the U.S. on account of the nation's incapacity to make good on existing financial claims being made readily apparent by increasingly reckless "bailout" of securities that in truth are better classified insolvent rather than thought — more aptly, pretended — impaired).

So, it is for these reasons a bankruptcy reorganization of the global financial system and a treaty regime enforcing fair trade among the community of nations becomes not only desirable, but extraordinarily urgent, because as we are witnessing via policy announcements from our terribly incompetent financial authorities the risk of a FLOOD of mispriced capital hitting the global economy is imminent, and resistance to this is only likely to grow.

Forecast 2010 by James Howard Kunstler
"The Center does Not Hold ... But Neither Does the Floor"

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