ECONOMY
The Real Cause Of Hyperinflation
Jordan Roy-Byrnes
Hyperinflation has nothing to do with economic demand; it occurs when a country’s bond market breaks. In other words, it occurs when a sovereign nation is no longer able to fund itself. Bonds fall (yields rise) to the point where the government has to print money or default. Rising interest rates cause the interest payments to consume too much of the overall budget. The government or central bank begins to print money to fund the deficit. Citizens start buying, knowing their currency is rapidly losing value. Demand has nothing to do with the cause or the onset of hyperinflation. Japan didn’t have hyperinflation in the 1990s because it didn’t have to monetize its debt; it had internal savings with which to finance its budget. The catalyst for severe inflation globally is the breaking of many bond markets. Japan, the UK and the US won’t be able to finance their budget gaps without monetization; their budget deficits are now larger and they come at a time of reduced global liquidity and reduced tax revenues. Monetization on a global scale will lead to severe inflation. The US is fortunate to have the largest and most liquid bond market, and other nations’ bond markets will break before America’s. Roy-Byrnes points out that precious metals outperform during times of credit stress, and says that as banks start lending and money moves into the economy, investors will want to be invested in commodities. The credit crunch is now affecting governments that took on private sector debts and ramped up their spending. Deflationary forces, which affected the private sector, are now plaguing the public sector. The inability of various sovereign governments to finance their obligations will result in severe global inflation, not bank lending or the rising velocity of money.
Volcker Criticizes Greek Budget Derivatives Abuse
Rainer Buergin
The “abuse” of derivatives to hide the size of Greece’s budget deficit highlights the need for regulation; so says former Fed Chairman Paul Volcker, while ECB President Jean-Claude Trichet believes derivatives still pose risks to financial stability. European and US officials are examining the role that investment banks may have played in Greece’s debt crisis, joining an outcry in the EU over whether swaps contracts helped conceal the size of its deficit. Goldman Sachs helped Greek officials raise $1 billion of off-balance-sheet funding in 2002 through swaps, which EU regulators said they knew nothing about until last month. Volcker recently spoke to the American Academy in Berlin, and devoted most of his speech to defending the principles of the “Volcker Rule”, which would ban banks from hazardous trading and impose limits on how large they can become, in an effort to help prevent a repeat of 2008’s financial crisis. Trichet recently said that “my intuition is that we are in a system that is much more unstable now.” Volcker said that there’s a growing consensus in Europe and the US on the need for resolution authorities that can wind up failing banks in an orderly way. “In a medical analogy, the arrangements would amount to euthanasia and a decent burial, not lengthy life support,” he said, adding that policy makers need to improve regulation by countering the speed at which banks develop new financial instruments. To do so, the US government should assign responsibility to a new or existing agency “for system-wide surveillance, backed by clear legislative directives and authority.”
Economists: Another Financial Crisis On The Way
Matthew Jaffe
A new report warns that financial regulatory reform measures must be beefed up to prevent banks from continuing to engage in the kind of high-risk investing that caused the near-collapse of the US economy in 2008. The report, commissioned by the Roosevelt Institute, was written by a group of leading experts, including bailout watchdog Elizabeth Warren. The US is caught in a doomsday cycle: banks use borrowed money to take massive risks in an attempt to pay big dividends to shareholders and big bonuses to management. When the risks go wrong, the banks receive taxpayer bailouts from the government. Without stringent reforms, another, bigger crisis is inevitable. The report blasts some US government leaders, Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner. It notes that in 2008-09, the US narrowly avoided another Great Depression, but the threat of the doomsday cycle remains strong and growing. Another financial meltdown could result in a calamitous global collapse. Major banks must increase liquid capital requirements; there must be stiffer penalties for executives of bailout recipients, and procedures in place to dismantle firms that grow too big. Ms. Warren wants an independent agency to protect consumers from abusive Wall Street practices: “…the financial industry has perfected the art of offering mortgages, credit cards and check overdrafts laden with hidden terms that obscure price and risk,” she writes. “Good products are mixed with dangerous products, and consumers are left on their own to try to sort out which is which. The consequences can be disastrous.” With the Senate Banking Committee poised to unveil its financial regulatory reform proposal, the report calls on Congress to enact reforms strong enough to prevent another meltdown. Senator Dick Durbin once said the banks 'owned' the Senate; the next few weeks will determine whether or not that is true.
Bizarre Spending Habits
Congressman Ron Paul
The US State Department is building a $1-billion embassy in London; the plans even include a moat! This has Congressman Paul wondering about his government’s use of funds, especially given the difficult economic times. Many are unemployed; those who are employed worry about losing their jobs as they struggle to pay bills. Meanwhile, Washington talks about increasing taxes, something voters were promised would not happen during the Obama administration. The US should be focusing on eliminating waste and preserving public funds rather than expanding the Federal budget. Most businesses have had to cut back in order to survive; the government should do the same. The administration has committed to doubling foreign aid, a promise that is likely to be kept despite the economic crisis. Paul asked Fed Chairman Bernanke about agreements with foreign central banks, and if he had discussed bailing out Greece, which he flatly denied. However, Bernanke recently announced the Fed will be looking into Goldman Sachs’ derivative agreements with Greece. Goldman Sachs has “too big to fail” status with the Fed, so it is conceivable that any Greece-related catastrophic losses at Goldman Sachs will once again be passed on to taxpayers. Perhaps most sinister are the revelations in Robert Auerbach’s Deception and Abuse at the Fed that $5.5 billion was sent to Saddam Hussein in the 1980s - money that allowed Iraq to build up its military machine to fight Iran prior to the first Gulf War, the same machine turned against Americans within just a few years. Bernanke says it is “bizarre” to think that Americans at the Fed could engage in this type of behavior, which some have called criminal. However, Professor Auerbach served as a banking committee investigator, and an economist at the Treasury Department and at the Fed. His claims are solidly backed by court rulings and other evidence. “We simply must keep pressing these issues and voicing our objections if we are ever to reverse our failed policies,” writes Congressman Paul.
