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Inflation… Or Deflation
Inflation… Or DeflationTyler Durden Sat, 05/15/2021 — 13:15
Authored by Charles Hugh Smith via The Daily Reckoning,
I see the same question in forums, threads, articles and emails: what can I do to protect myselfand my family from whatever lies ahead?
Given the uncertainties and extremes that are so evident, recognizing risk is a useful first step, a recognition that is very much out of fashion.
If we glance at the charts of margin debt (loans taken against one’s stock portfolio) which is at record highs, and short interest (bets that stocks will drop) which is at record lows, it seems the primary risk on investors’ minds is FOMO (fear of missing out) of all the fat, juicy guaranteed gains just ahead.
For the few still asking about the source of risk, the general answer takes one of two paths: inflation leading to hyper-inflation or a deflationary collapse of defaults and popping asset bubbles.
It’s easy to find pundits arguing for one or the other, but do we have the initial conditions, variables and functions we need to solve this problem and get a clear answer, inflation or deflation?
Consider two variables that are rarely visible in pundits’ arguments:
1) What will benefit the banks?
2) What will benefit the nation’s place in the geopolitical pecking order?
The Inflationary Camp
The inflationary camp holds that the soaring debt, public and private, can only be serviced if incomes inflate so households, companies and governments have enough income to make the payments on their soaring debts.
Since this is a self-reinforcing spiral — more inflation leads to more inflation — central banks will be forced to print their currencies into oblivion, i.e. hyper-inflation.
If they ever stop printing, the house of cards (soaring debt) will collapse.
This logic seems sound enough. But once hyper-inflation takes off and people are earning $250,000 a month and a loaf of bread is $250, how will banks profit from households paying off their once-stupendous mortgage (that required 30 years of monthly payments to pay off) with a single month’s pay?
Hyper-inflation will destroy not just the currency but the entire banking sector, which is politically powerful. Will the banks just sit by passively watching their wealth and income being destroyed by high inflation?
One suspects they will use their political power to avoid being ground into dust by hyper-inflation.
Who Benefits?
The banks would much prefer defaults that they can shift to the government (via bailouts) and deflation, where every monthly credit card/mortgage payment has greater purchasing power than the previous month.
Next, consider the consequences of hyper-inflation on the nation’s currency: it loses virtually all its value. Nobody will want to trade real goods for worthless dollars.
In terms of a nation’s economic power, its currency is the foundation, because if the currency plummets to near-zero then everything denominated in that currency also loses value on the global stage.
A reserve currency — a national currency that is widely held globally because it it’s expected to hold its value, and the market for everything denominated in that currency is extremely large and liquid — is the crown jewel of whatever nation (or entity, in the case of the EU) issues it.
Who would benefit from the destruction of a nation’s reserve currency?
Virtually no one. The nation would be impoverished. So why is hyper-inflation — the destruction of the currency — so broadly accepted as inevitable?
Linear vs. Non-linear
It’s also widely assumed that the Federal Reserve and other central banks control all the variables in setting bond yields, interest rates and inflation. But what if some variables are outside the Fed’s control? What if their claim of controlling all variables is mere PR?
We also don’t know what function inflation or deflation might manifest. Will it be arithmetic— 1 + 1 = 2 + 1 = 3, etc. — or geometric— 1 + 1 = 2 + 2 = 4 + 4 = 8 + 8 = 16?
This makes an enormous difference: arithmatic inflation is predictable — 5% a year, for example — but geometric increases lead to hyper-inflation and complete destabilization of the economy and society.
Very few pundits reckon the central banks and governments will choose default and deflation because these will be painful — but what could be more painful than wiping out the value of the currency?
If the wealthy elite own precious metals, farmland, manufacturing, government bonds, etc., then the default of zombie households and corporations (zombies defined as entities that have to borrow more to remain among the living), then why would they care?
Corporate bondholders and marginal lenders would be destroyed, but again, the wealthy need only avoid owning marginal debt to avoid the debacle of default losses.
Ace in the Hole
The politically powerful elites have their ace in the hole: they can demand politicians (who need their contributions to fund their re-election campaigns) bail out the banks, transferring the losses from defaults from private banks to the public sector, exactly what happened in 2008-09.
But once again, are the elites and government fully in control of all variables, or could they be assuming arithmetic functions when geometric functions might actually manifest?
Deflationary defaults can destroy bank assets just as quickly as hyper-inflation, as once buyers vanish (markets go bidless) then the value of assets pledged as collateral plummets to levels no one believes possible.
Entire highrise buildings are sold for the value of the elevator system. Yes, it happened in the Great Depression.
A little inflation or deflation is a good thing, manageable by the government and elite, but geometric inflation or deflation undermines the entire financial system, including the finances of governments and elites.
How do we calculate the probability and potential intensity of destabilizing social disorder?
Humans Are Only Human
It’s widely assumed that the U.S. could never experience the sort of massive, widespread social disorder that occurs in developing-world nations during crises. But humans are humans, and when put under pressure by high inflation/deflation and declining prosperity, people respond in ways that can very quickly escape the control of authorities.
If the consequential variables and functions are not measurable, then seemingly small disorders can spread throughout the entire society — or supply chain.
Where does all this leave us?
We know from studies of human psychology that humans don’t feel comfortable with uncertainty and seek a haven of certainty as quickly as possible. They will cling to anchored beliefs in the face of conflicting evidence and strengthen their attachment to beliefs when challenged. We’re wired for a decisive commitment to a belief structure.
Sustained indecision and ambiguity is uncomfortable. We want an answer, and if there isn’t one, then we’ll make one up or commit to an answer proposed by a pundit, even though that person has no better grasp of the initial conditions, variables and functions as anyone else.
Alternatively, if we can’t possibly answer the question of what happens next, we have to accept that this era’s uncertainties may not be resolvable.
This is an exceedingly valuable insight, as if we embrace this uncertainty, we can avoid defaulting to a rigid, brittle false certitude that can only lead us astray if events don’t follow the path we’ve committed to.
In other words, we all want certainty, but this isn’t possible because 1) the variables are invisible 2) the functions are unknown and 3) the “solution” (predicted path) depends entirely on the initial conditions, in which small changes completely change the outcome.
Faced with the knowledge that so-called fat tail risk (i.e. a geometric function replacing an arithmatic function, and small events triggering large consequences, i.e. non-linear dynamics) is real but unpredictable, then we’re forced to think through these supposedly low-probability risks and devise a response that we can implement because we already thought it out.
This is the difference between having a pre-planned response and panic.
Everyone Has a Plan Until…
Mike Tyson’s memorable quote offers great insight into risk and uncertainty: “Everyone has a plan until they get punched in the mouth.”
The average person considers the odds of getting punched in the face as very low. The martial arts student doesn’t follow the line of thinking that because the odds appear low, there is no need to learn self-defense. Rather, being prepared to defend oneself is a permanent state of readiness, perhaps rusty and imperfect, but there nonetheless.
Events that devastate the majority financially greatly enrich the few who bet on non-linear dynamics.
But that doesn’t mean we can’t embrace uncertainty and fat-tail risks and think through responses in advance, and plan a hedging strategy that accounts for possibilities from 1) nothing changes to 2) everything changes.
We don’t have to respond perfectly to be successful. We simply need to have prepared responses for contingencies from whatever we consider most likely to whatever we consider very unlikely but still possible.
The point here is that embracing uncertainty means we accept that the market might still punch us in the face, and we might make mistakes or fail to perform as we’d hoped.
But the process of planning layers of response may well help protect us from irreversible losses and bad decisions made in the chaos of fear and panic.
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Toronto Cancels Entire Summer Of Events Despite 1.6 Million Of City’s 3 Million Residents Being Vaccinated
Toronto Cancels Entire Summer Of Events Despite 1.6 Million Of City’s 3 Million Residents Being VaccinatedTyler Durden Sat, 05/15/2021 — 12:50
Despite widespread vaccination availability and even the U.S. CDC saying that vaccinated people no longer need to wear masks, Toronto has decided to cancel an entire summer’s worth of social functions.
The city has cancelled “all major in-person events for a second straight summer,” CBC reported on Friday.
As the city continues to fight off large numbers of Covid cases during the pandemic’s third wave (whatever that even means at this point), it has made cancellations all the way through Labour Day. Previously, provincial officials had been hoping for normalcy beginning in July or August.
That doesn’t look like it’s going to be the case. The city has cancelled events like the Canadian National Exhibition, Taste of the Danforth, the Caribbean Carnival and Salsa in Toronto.
The city is making the decision in May because organizers asked for “as much advanced notification as possible”. So now they have it: Toronto will officially have nothing going on during the summer.
Mayor John Tory said that he thought the city would be in better shape by late summer, but he wasn’t sure it would be safe to be “shoulder to shoulder” with large groups of people.
Darrell Brown, Executive Director of the Canadian National Exhibition called the news “devastating for the community and staff” who will now face layoffs. “At this point in time we’re living on borrowed money in the short-term and will be completely out of funds by December,” he said. The event has lost more than $70 million in revenue over the course of the pandemic and it generates $128 million for the Ontario economy each year.
Last year was the first time the event was closed since World War II. Despite asking the government for relief, it has only gotten $20,000 from Ontario’s small business relief fund.
Tory said: “I am working with the Canadian National Exhibition to help the fair through this difficult year and prepare for a bigger and better in-person event in 2022.”
Toronto, meanwhile, has delivered 1.6 million doses of Covid vaccines. The city’s population stands at about 3 million. Despite this, the city’s stay at home order will remain in place until “at least” June.
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Biden Phones Netanyahu After Israel Flattens AP Offices In Gaza — Has Yet To Condemn Attack
Biden Phones Netanyahu After Israel Flattens AP Offices In Gaza — Has Yet To Condemn AttackTyler Durden Sat, 05/15/2021 — 12:49
update(12:49pm): So far the Biden administration has stopped short of condemning the Israeli airstrikes on the Gaza offices of US-based Associated Press and other international media outlets, which flattened the 12-story Al-Jalaa tower, resulting in widespread outrage from journalists and media rights organizations across the globe.
Hours after the attack Joe Biden as reportedly phoned Israeli Prime Minister Benjamin Netanyahu to express Washington’s “concerns” and to convey the “paramount responsibility” to protect journalists.
#BREAKING Israel’s Netanyahu, US president Biden speak after Israel flattens AP news office in Gaza: statement pic.twitter.com/ItqTbUH1Sh
— AFP News Agency (@AFP) May 15, 2021This also as the death toll continues to soar amid unrelenting airstrikes — also as Hamas rockets continue to fly toward Israel — at over 140 Gazans killed since Monday.
Al Jazeera’s office in Gaza destroyed by an Israeli airstrike. The building also housed residential apartments and the AP bureau. This is the 6th consecutive day Israel has been bombing Gaza. The Gaza death toll is at 140, including 39 children. pic.twitter.com/2rNm9eMIaG
— IMEU (@theIMEU) May 15, 2021* * *
update(12:30pm): The White House has said it communicated its “concerns” to Israel over the safety of journalists after IDF airstrikes obliterated the 12-story office building that housed international media headquarters in Gaza, most notably the AP and Al Jazeera…
“We have communicated directly to the Israelis that ensuring the safety and security of journalists and independent media is a paramount responsibility,” White House press secretary Psaki wrote.
We have communicated directly to the Israelis that ensuring the safety and security of journalists and independent media is a paramount responsibility.
— Jen Psaki (@PressSec) May 15, 2021AP CEO Gary Pruitt previously said in a statement: “We are shocked and horrified that the Israeli military would target and destroy the building housing AP’s bureau and other news organizations in Gaza. They have long known the location of our bureau and knew journalists were there. We received a warning that the building would be hit.”
* * *
Israel has targeted yet another large office and residential tower in the Gaza Strip, but this time its warplanes have destroyed the 12-story building housing the media offices of the U.S.-based Associated Press and Qatar-based broadcaster Al Jazeera, the AP itself as well as Reuters eyewitnesses confirm.
The outlets have said that Israel issued advanced warning of the airstrikes of up to one hour before the attack on Al-Jalaa tower. Representatives with the AP and the building owner had reportedly pleaded with IDF officials to give more time to enable a safe evacuation and also to take out crucial media equipment.
Oh my god. The building where al Jazeera’s office is housed has just been taken down by Israeli airstrikes. There was a warning and evacuated. It houses offices and private homes. I can’t believe it. pic.twitter.com/Q4luRYk9H9
— Stefanie Dekker (@StefanieDekker) May 15, 2021However, eyewitnesses say they were not given extra time, but merely made it out with whatever they had in hand and with their own lives.
The building can be seen essentially collapsing in its own footprint, the same way that three prior residential apartment buildings did during days past. “The building was hit approximately six times before collapsing in plumes of black smoke, which engulfed the entire neighborhood,” international press reports noted.
⭕ LIVE footage of the moment an Israeli air raid bombed the offices of Al Jazeera and The Associated Press in Gaza City ⬇️
— Al Jazeera English (@AJEnglish) May 15, 2021
🔴 LIVE updates: https://t.co/RvtP1lEX1x pic.twitter.com/RBO1ZiDAl0The moment Israel bombed Al-Jalaa tower in Gaza housing international media outlets including Al Jazeera and AP. Reports and media personnel were not even allowed time to grab their equipment before evacuating the building #GazaUnderAttack #Palestine pic.twitter.com/jR2oMDyr68
— Marwa Fatafta #SaveSheikhJarrah (@marwasf) May 15, 2021“The strike on the high-rise came nearly an hour after the military ordered people to evacuate the 12-story building, which also housed Al-Jazeera, other offices and residential apartments. The strike brought down the entire structure, which collapsed in a gigantic cloud of dust,” AP writes.
“There was no immediate explanation for why it was attacked,“AP adds.
The IDF in a later follow-up statement alleged the media offices contained Hamas military intelligence units…
After providing advance warning to civilians & time to evacuate, IDF fighter jets struck a multi-story building containing Hamas military intelligence assets.
— Israel Defense Forces (@IDF) May 15, 2021
The building contained civilian media offices, which Hamas hides behind and deliberately uses as human shields. pic.twitter.com/zeDjEquePDThe devastating attack brought swift condemnation by various international media organizations and advocates, with a number of prominent journalists expressing their shock, saying they “can’t believe” the media building was so blatantly targeted by Israel’s military.
AP president Gary Pruitt issued a statement saying “we are shocked and horrified” at the “incredibly disturbing” attack wherein “we narrowly avoided a terrible loss of life.”
WATCH: The owner of al-Jalaa tower pleads with an Israeli officer on live TV to let journalists collect their gear before he bombs it.
— Middle East Eye (@MiddleEastEye) May 15, 2021
Moments later, Israeli air strikes demolish the #Gaza building that housed several international media offices used by AlJazeera and MEE pic.twitter.com/a5PRzQNOkC“Journalists who worked there had been reporting on the Israeli attacks on Gaza,” Al Jazeera said in a social media statement. “Targeting journalists is a war crime.”
An Israeli airstrike destroyed the Al Jazeera office in Gaza. The Israeli military warned they would hit the building that houses media organizations including the AP.
— AJ+ (@ajplus) May 15, 2021
Journalists who worked there had been reporting on the Israeli attacks on Gaza. pic.twitter.com/fZVo3TFEoO
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