mardi 29 novembre 2011

Monetary inflation ad nauseam

When I started working in the finance area, in 2001, I had already serious doubts about the viability of savings in any paper form (stocks, bonds, cash, derivatives). Especially money saved on standard pension schemes seemed to me to be just lost money.
Perhaps two elements helped me:
- at that moment, there was a stock crash and plenty of accounting and speculation scandals being revealed
- I was working in the pension fund area.
Some people already had identified the following cycle:

  1. central banks expand money to please the god of Growth, by forcing very low short-term interest rates, below price inflation rate, or by other additional means;
  2. the policy stays for long and is influencing longer-term rates as well;
  3. standard investment returns become negative in real terms;
  4. individuals and institutions are lead either to have no savings, or to speculate in the hope of getting positive returns;
  5. credit expands to provide leverage for speculation;
  6. a new bubble inflates;
  7. the bubble bursts and the hoped positive returns are gone;
  8. there is a recession, the god of Growth is angry;
end loop;

At that time, it was essentially the Fed (the US central bank) doing that and it seemed already mad.
Ten years later, this loop is going well, at a faster and faster speed (from 1987: 13 years, then 8 years, then 3 years to current crisis).
The figures are a lot crazier as well. But: we have a process, and people trust processes.
But is it really an infinite loop ?
What will happen if a strong price inflation follows finally the monetary inflation ?
Will the central banks ignore it and continue as before ?
Now they are lending to 0 percent even with a price inflation above 3 percents.
Would they go on that way with 4, 5, 6 or more price inflation ?
  1. If yes (the soft line), they would just let price inflation run progressively to hyperinflation levels.
  2. If not (the hard line), they would induce a bond market collapse.
The soft line has an ideological upper hand since 20 years (no coincidence: since the Soviet Union has collapsed, Capitalism feels having won and having nothing anymore to fight against).
So I would bet for the scenario #1. Anyway, it doesn't matter a lot: whatever scenario happens, it will be a financial mess. If financial assets are preserved but money has no value anymore, or money is preserved but financial assets are destroyed (bonds losses, haircuts and consequences), the result is the same: financial assets have no value anymore.

For the moment price inflation seems not to react at all, even to the current massive monetary inflation.
So, perhaps, there is no problem at all: you can do anything, like debt monetization, and nothing bad happens, ever. Hurrah! If something doesn't happen, sure, it won't ever happen, isn't it ;-) ?
But my guess is, if it happens, it will be brutal. I am trying not to imagine too much how (famine, riots, democracy toppled by dictatorship ?). The scale of brutality in the end might mirror the scale of softness in the first step in the loop - the monetary easing.

But enough blah blah, here are graphics:

The Leader
- Switzerland (Swiss francs):
Small Switzerland has to follow the movement (with the Euro zone inbetween)
An article about the huge monetary bubble created by the Swiss National Bank for binding the Swiss Franc to the Euro can be found on the "Die Welt online" site here (in German).

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