#194. Where hyperinflation really threatens


Right now, the outlook for inflation – or, conversely, for deflation – is one of the hottest topics of economic debate. Some observers contend that the sheer scale of financial intervention triggered by the coronavirus crisis has made soaring inflation inevitable. Others argue that, on the contrary, the weakness of the underlying economy makes deflation the greater risk.

The real threat, without a doubt, is inflation. This isn’t, though, going to be a re-run of the world’s last brush with hyperinflation in the 1970s and early 1980s.

Back then, soaring oil prices triggered sharp rises in consumer costs and an associated surge in wages. The problem now is that the financial system has out-grown the underlying economy to a dangerous extent. This means that hyperinflationary risk lies not in consumer prices, or in wages, but in the matrix of assets and liabilities created by an increasingly financialised economy.

What this also means is that conventional measures of inflation aren’t going to provide much, if any, forewarning of inflationary risk. This in turn is going to give policymakers every reason for not courting unpopularity by raising interest rates.

Rates will have to rise, of course, and the real prices of traded assets will fall, but it’s likely to be a case of slamming the policy door after the inflationary horse has bolted.

Two economies, one problem

This is an unusually complex issue, so we need to follow a clear analytical path to reach useful conclusions. The best way to start is by drawing a conceptual distinction between ‘two economies’ – a real economy of goods and services, and a financial economy of money and credit.

These ‘two economies’ have grown dangerously far apart. As we’ll see when we get into the numbers, the economy of goods and services had, even before 2020, been growing at barely 2% annually, whilst the financial aggregates of assets and liabilities had been expanding at rates in excess of 6%.

Prices act as an interface between these ‘two economies’, so it’s likely that inflation will mediate the restoration of equilibrium between the financial system and the underlying economy.   

The fundamental issues are simply stated, and involve three essential principles.

First, nothing of any economic value or utility can be produced without the use of energy. This means that the economy is an energy system, and is not, as is so routinely and so mistakenly assumed, a financial one.  

Second, whenever energy is accessed for our use, some of that energy is always consumed in the access process. This ‘consumed in access’ component is known here as the Energy Cost of Energy (ECoE). Because this fraction of accessed energy is required for energy supply itself, it is not available for any other economic purpose. This means that surplus (ex-ECoE) energy is the basis of economic prosperity.

Third, money has no intrinsic worth. It commands value only as a ‘claim’ on the material or ‘real’ economy of goods and services.

With these principles understood, we can examine the ‘real’ economy (of goods, services and energy) and the ‘financial’ or ‘claims’ economy (of money and credit) independently of each other.

If, through monetary expansion, we create present or future financial claims which exceed what the underlying economy of today or tomorrow can deliver, the result is an overhang of excess claims. Since these excess claims cannot be honoured, they must, by definition, be destroyed.

Of assets and liabilities

Before we can get into the mechanics of where we are now, we need to be clear about the meaning of ‘assets’ and ‘liabilities’.

Let’s start with the ‘real’ economy, comprising governments, households and businesses. From this point of view, assets can be divided into two categories.

Defined or ‘formal’ assets are monetary sums, such as cash holdings, and money owed by others.

Equities, bonds and property are undefined or notional assets. Their aggregate ‘valuations’ are meaningless – these asset classes cannot, in aggregate, be monetised, because the only people to whom they could ever be sold are the same people to whom they already belong.

In fact, the prices of traded assets of stocks, bonds and property are an inverse function of the cost of money, so rises in these prices are a wholly predictable consequence of pricing money at low nominal (and negative real) levels.

Unless the authorities are prepared to countenance the hyperinflationary destruction of the value of money, its price – meaning rates – will have to rise.

This, in turn, must cause asset prices to plunge.

It’s axiomatic, though scant comfort, that the bursting of bubbles doesn’t, of itself, destroy value. Rather, it exposes the destruction of value that has already taken place during the period of malinvestment in which the bubble was created.

Furthermore, if the value of a house slumps, or a company’s share price crashes, the house and the company retain their underlying value or utility. The real problems created by an asset price crash are problems of collateral.

This is why our focus needs to be on liabilities rather than assets.   

The nomenclature here can be a little confusing. Debts and other financial commitments are the liabilities of the government, household and business sectors, but they are the assets of the financial system itself. This is why, during the 2008-09 global financial crisis, non-performing or at-risk debts were known as “toxic assets”.       

The crisis in figures

With these basics clarified, we can analyse trends in the ‘real’ and ‘financial’ economies. For this purpose, we’ll be looking at a group of twenty-three countries for whom comprehensive information is available. Between them, this group of countries accounts for three-quarters of the global economy, so can be considered representative of the overall situation.        

As you can see in fig. 1, energy used in these economies increased by 49% between 2002 and 2019. Over the same period, however, their trend ECoE rose from 4.5% to 8.3%. Accordingly, surplus energy increased by 43%.

This was mirrored in a 39% increase in these countries’ aggregate prosperity. Throughout this period, rising ECoEs steadily undercut the rate of increase in prosperity. Accordingly, annual rates of growth in aggregate prosperity have fallen below the rate at which population numbers have continued to increase. This, as the centre chart shows, has resulted in a cessation of growth in prosperity per capita.

This has happened despite the inclusion in this group of China, India and ten other EM countries. In more complex, more ECoE-sensitive Western economies, prosperity per person turned down a long time ago. The average American has been getting poorer since 2000, the inflexion-point in Britain occurred in 2004, and Japanese prosperity per capita stopped growing back in 1997.   

Critically, though, aggregates of financial claims have grown much more rapidly than the pedestrian expansion in aggregate prosperity. Between 2002 and 2019, when prosperity increased by 39%, debt grew by 136%, and non-debt financial assets by 234%.

The result, as shown in the right-hand chart, has been the insertion of an enormous wedge between financial claims and the underlying economy. If you wanted to find hyperinflationary risk on a map, this chart gives you the co-ordinates.

At constant values, the increase in prosperity during this period was $19 trillion. Debt expanded by $116tn, and total financial assets by $262n. In effect, then, each dollar of incremental prosperity was accompanied by $6 of net new debt and $7.60 of additional other financial assets.

This is a good point at which to remind ourselves that these ballooning financial “assets” are the liabilities of the ‘real’ economy of governments, households and businesses.   

Fig. 1



The following charts amplify the picture by showing rates of change, in the real economy metric of prosperity, and in the debt and assets components of the financial economy. Annual growth in prosperity averaged just under 2% between 2002 and 2019, and has been on a declining trend. Financial assets, on the other hand, expanded at an annual average rate of 6.2%.

Fig. 2


To be sure, we haven’t – yet – seen a replication of the dramatic rates of expansion in financial commitments witnessed during the GFC. Now, though, the response to the coronavirus crisis is likely to have accelerated the pace at which we’re taking on financial obligations at the same time that prosperity has taken a beating.

The financial support provided by governments is only one part of the crisis picture. At the same time that governments have incurred enormous deficits to support the incomes of households and businesses, the granting of interest and rent ‘holidays’ has created enormous deferred financial obligations, which in our terms are ‘excess claims’.

Back in 2002, financial assets equated to 298% of prosperity. By the end of 2019, this ratio had expanded to 598%. Taking together both the pandemic hit to prosperity and the rapid expansion in financial commitments, it would be by no means surprising, pending final data, if this ratio was now in excess of 700%.

Ultimately, what we’ve been witnessing is a dramatic escalation in financial claims on what is now a contracting economy. This, rather than consumer price or wage pressure, is the source of the inflationary pressure that jeopardises the system.

How will we know?

As we’ve seen, then, inflation risk isn’t going to be flagged in advance by conventional measures such as CPI and RPI. These measures are sometimes criticised on the grounds that innovations such as hedonic adjustment, substitution and geometric weighting result in the understatement of changes in the cost of living.  The big problem with these indices, though, is that they exclude both changes in asset prices and the effects of asset price changes.

The conventional broad-basis measure, the GDP deflator, is really no better than these consumer prices indices. In theory, system-wide inflation is meant to be captured by comparing a volumetric with a financial calibration of economic output. Like GDP itself, though, this deflator is subject to the cosmetic inflation of apparent ‘activity’ by the expansion of financial claims.

In an effort to measure comprehensive inflation, a system is under development, based on the SEEDS economic model and known as RRCI.

Preliminary indications are that RRCI averaged 4.1% through the period between 1999 and 2019, markedly exceeding a GDP deflator of just under 2%. This differential (of 220 bps) may not sound huge, but its application to a global economy said to have expanded at 3.4% through this period leaves precious little “growth”. Last year, estimated RRCI inflation worldwide was 5.5%, markedly higher than the GDP deflator (1.2%).

Preliminary data for 2020 indicates that RRCIs moved up dramatically in a small number of countries, such as Britain and Ireland, which also happen to be ultra-high-risk in terms of the relationships between their financial exposure and their underlying economies.

More broadly, RRCI suggests that systemic inflation has been rising markedly, both in the sixteen advanced economies (AE-16) and the fourteen EM countries (EM-14) covered by SEEDS.

Fig. 3



What and how?

Even RRCI, though, isn’t likely to give us a clear warning about the true magnitude of hyperinflationary risk. To get a handle on the scale and possible timing of this risk, we need to think about two issues. One of these is spill-over, and the other is futurity.    

Where spill-over is concerned, the risk is that rises in the prices of traded assets may induce consumers to increase their recourse to credit in order to boost their spending to levels commensurate with their perception of increased wealth.

If someone’s home has increased in theoretical value from, say, $400,000 to $600,000, is there any reason why he or she shouldn’t ‘cash in’ part of that gain’ using secured or unsecured credit, which, in any case, remains cheap?

Likewise, is there any reason why a company whose stock price has soared shouldn’t go on an acquisition spree, preferably buying lower-rated companies to enhance ‘growth’ perceptions, and boost earnings per share?

These spill-over risks are additional to the basic risk of supply and demand imbalances in the market for everything from stocks and houses to classic cars and works of art.

The more fundamental issue, though, is futurity, which for our purposes means our collective or ‘consensus’ picture of the economic future. This is far too big a topic for detailed examination here. What it means, though, is that investors might favour seemingly costly stocks if they anticipate brisk growth in earnings; house-buyers may be prepared to bid up prices if they anticipate perpetual expansion in property markets; and lenders might be relaxed about extending loans to borrowers whose incomes, they assume, are going to grow markedly. 

Despite the coronavirus crisis, faith in a ‘future of more’ seems unshaken, and there are assumed to be ‘fixes’ for all issues. The consensus assumption remains that everything from vehicle numbers and passenger flights to corporate earnings and automation are poised to go on growing indefinitely, and that there are technological solutions even for environmental risk and energy constraint.

Looking ahead, it isn’t difficult to see asset price inflation carrying over, first into consumer prices and then into wage demands. This is the point at which policymakers realise, belatedly, that policies of ultra-cheap money are, by their nature, inflationary.

The real risk, then, isn’t just that reactive (rather than anticipatory) rate rises cause asset prices to slump, but that these blows to confidence simultaneously expose the delusions of false futurity.            


115 thoughts on “#194. Where hyperinflation really threatens

  1. Excellent again, Dr. Tim. I think I am right in recalling that it was Irving Fisher (1867-1947) who was one of the first to carefully tabulate and create indices of inflation, and was quite vocal in arguing that inflation was a monetary phenomenon. In other words, the reason prices were going up every year was precisely because there was too much money sloshing around the financial system.

    Today this seem obvious, but at the time people didn’t see the link between the money supply, the quantity of money outstanding and inflation rates. Fisher taught us to focus on returns that were real. Your focus on SEEDS and declining prosperity is a further nuancing of Fisher’s pioneering thoughts, and likely better at explaining the “real world”.

    We need to remember that Irving Fisher is also famous for being caught out very badly by the 1929 stock market meltdown (“stock prices are at a permanently high plateau”). He lost $10 million – which in today’s inflation adjusted values would be close to $175 million. For the rest of his life, he survived off personal loans from his sister-in-law, loans that he could never pay back.

    The massive inflation in the price of financial assets in recent years has, as you say, entirely distorted many peoples views of the harsh reality of the ever-increasing cost of living, as they feel that their nominal wealth cushions them from the higher prices of “essentials” like the cost of bread, fuel, local taxes, etc. when in fact it does not. My core area of work is dealing with the entirely misunderstood area of retirement income planning; I meet far too many individuals who believe that the rising valuation of their defined contribution pension fund inevitably means security in old age. That simply isn’t true, for reasons you will well understand.

    A rude awakening for the now retiring “boomers” from now on, I think, and this is a key reason I still appreciate annuities as the optimal retirement income product choice for retirees. Annuities are the only financial products in the world that can definitely provide a lifetime income. It’s possible to outlive the income from every other investment, regardless of how conservative or risky it might be.

    I think, and am experiencing, that there will be a rotation away from purely stock market based retirement income products, and that this “reversion to the mean” will happen quite suddenly when we experience a sharp fall in equity prices; we shall see!

    • That quote was by Milton Friedman, who was wrong. He disagreed with his mentor on this one. Friedman believed that monetary velocity was relatively constant, which is not the case…among other problems.

    • It was definitely Irving Fisher! Quoted in the New York Times 16 October 1929.

    • Hmm. I stand corrected. I was siting Friedman (1970) The Counter-Revolution in Monetary Theory.

    • Found our mistake – I was referencing “…always a monetary phenomena.” note “permanently high plateau.” Thanks!

    • Does the payout of an annuity depend on a functioning broad stock and bond market? I still wonder if those markets will exist in current forms, when gross fossil fuel energy production begins its terminal decline. We may be there now.

    • ” …annuities as the optimal retirement income product choice for retirees. Annuities are the only financial products in the world that can definitely provide a lifetime income.”

      Spoken like a true annuity salesman.

      Ask any poor former Equitable Life annuity holder what he thinks about that statement. With the emphasis on ‘poor’.


    • Do your comments on the value of an annuity (DB pension) hold true if the index linking is restricted to 2.5%per annum. I can quickly see then being stripped of their value.

    • First off, I’m not “a true annuity salesman”; I merely stated that I believe that they remain the optimal retirement income product in my opinion. Whilst anyone is free to disagree with me, the fact that annuities offer a guarantee and are a contract make them unique. I admit the point about the distinct lack of protection for cost of living increases; 90%+ of annuities arranged today are fixed, or level, in payment. I’m fortunate that many of the people I deal with can afford either a fixed percentage escalation to the income each year or RPI-Linking, both of which are expensive options. The thing is, even with “limited price indexation” (the 2.5% you refer to), defined benefit (“final salary”) pensions are of great value to pensioners, none of whom should lightly throw away the guaranteed income stream for life. DB pensions in payment are very similar to annuities bought with private pension funds (taxable) or “free assets” (tax-free, in most cases).

      As Dr. Tim would surely agree, in defined contribution pension plans (which are rapidly replacing DB schemes), funds flow into the pension plan from the employer, the employee, or both, and are invested in the volatile stock and bond markets, and the gains are tax deferred until the income is received – but nowhere is there any mention of a guarantee. Instead, your retirement future is subject to the random ups and downs of the stock and bond markets.

      The Equitable Life problem of 20 years ago did not concern annuities already in payment, but over-generous promises (not guarantees) that were not funded or reserved for properly.

      This is not the place to take up the pros and cons of annuities and/or drawing down from invested funds (I have many clients who do both); I was merely setting out that the risks to those invested, and nearing retirement age, are substantial and that for the majority with DC pensions, I believe that annuities remain, and will remain, an excellent choice.

      Finally, it is interesting to note that annuity rates have improved 8% to 12% so far in 2021 as longer dated bond yields have risen. May I suggest that this is indicative of inflationary pressures?

  2. Hi Dr. Time – thanks for the new article! Some strong food for thought. I see the likelihood of short term inflation, but still think we’ll quickly return to deflation in the absence of significant political changes. I’m going to read this article again, but my first thoughts are:

    The inflation of the 1970’s occurred against a very different backdrop – one of a supply side shock in oil. This may be coming, but it is not here yet. Further, the fundamental situation of the west was one of generally low debt, a strong middle class, growing working age population from the baby-boomers, and structural changes to technology providing strong generational headwinds, and also increasing wages and employment participation. Now we have high indebtedness, a weak middle class, decreasing demographics, technological stagnation, and decreasing wages/gig economy/partial employment.

    I agree with your first conclusion that our present situation is bubbles, or asset inflation. I also agree that rates will rise. I think there is a hard limit on how high rates can rise based on (1) levels of indebtedness, (2) stock valuation predicting negative returns on P/E basis, (3) stock average dividend ~1.6%. With relatively little increase to the 2-2.5% bond rates it seems like the stock bubble would collapse. 2%-2.5% was previously thought of as a catastrophic low, not a catastrophic high. Inflation yes, hyperinflation, no – since the economy would collapse to a lower level of activity quite quickly.

    Your correct analysis of the stock market misses something about the banking system since 2008 the way I see it. Major international banks have shrunk during this time because many financial gimmicks of the 2008 runup are either no longer profitable or the risk premium is too high. Most US dollar denominated collateral in the global/shadow/eurodollar system is beyond the control of the US FED whose mandate ends at the US border (notwithstanding some instruments such as dollar swaps with a limited number of other central banks). The pressure in the shadow banking system has produced a scarcity of dollars, as evidenced by the persistent repo-market pressures of the last several years. Increasing amounts of dollar denominated collateral such as corporate bonds are decreasing, not increasing, in their value as collateral on repo markets.

    The monetary policies of central banks, in particular the FED as global reserve currency, currently do not of necessity increase the quantity of money in the real economy. The FED may count reserves held at the FED as money in their calculations – but banks must still loan based off these reserves. That loan is let with interest, increasing indebtedness in the system. They may or may not lend. They still have to cover their risk premium. A borrower has to be convinced they are purchasing an asset which will hold value – or make an investment which will produce a future stream of revenue. Based on the energy situation and diminishing returns in general there are few places to truly invest in plant/equipment for real economic returns. The only thing that increases is debt.

    I’m curious – since most US dollar denominated collateral exists in the eurodollar system which is opaque, how do you include off-shore financial activity in your analyses?

    I definitely believe hyperinflation is possible. But to get there we’d need to change the Federal Reserve Act in the united states to either (A) let the FED permanently purchase assets besides treasuries directly rather than just creating reserves for broker/dealers, (B) exotic proposals such as using the FED’s balance sheets to fund digital accounts for citizens, (C) some other MMT activity that involves the creation of currency which is not backed by any obligation to repay.

    Japan has engaged in 24 rounds of “stimulus” since their crisis over the last several decades. They have not succeeded in producing inflation – rather a horizontal boom and bust. I predict our trajectory will look closer to this: Wild asset spikes and crashes on a background of deteriorating fundamentals. This could be followed at any point by the political changes which would result in the end of the fractional reserve banking system, the US dollar reserve currency, or the laws surrounding the limitations on central banks.

    Looking forward to the conversations here!

    • The REPO market, hmmmm, wasn’t it blowing up in the fall of 2019 until the spring of 2020? Didn’t most of the issues of the GFC begin in the REPO market?

    • Interesting argument. I was thinking more a long the lines of short term deflation followed by hyperinflation. There are really smart people on both sides.

    • @Mr. House
      I haven’t got time to read the article at the moment, but my observation is that what we are seeing is cost driven increases in prices almost across the board, along with price increases in luxury goods (such as Ford pickup trucks) driven by the artificially low cost of debt. The Wolf Street graph on the price increases in Ford F150 vs. the Toyota Camry is a stunning example of the magic that free debt can do.

      The cost driver was already the result of complexity. I had a copper pipe break and begin to leak water. The physical act of cutting out a section of pipe and inserting a new section probably took 10 minutes and required the purchase of about 2 dollars worth of equipment. But to locate the break, which was not visible, and then gain access to it, required the disassembly and then reassembly of a kitchen designed to look good while being dysfunctional in terms of repair. I see that dynamic also in ‘everything digital’. I bought something recently which carried a 10 year warranty on the materials, 5 years on the labor, and 1 year on the electronics. And now the electronics are everywhere, but at hidden behind the buttons we push.

      On top of all those factors, the Pandemic has led to extraordinary and extraordinarily wasteful practices in places like supermarkets and doctor’s offices. Even the New York Times has featured articles pointing out that we have known (from Chinese studies early in their Pandemic) that we just don’t pick up the virus from surfaces. It is breathing indoor, unfiltered air from infected people that spread the virus…not people walking in the woods or on the beach and not sitting in a chair in a doctor’s waiting room which was previously occupied by an infected person.

      All of these example are either cost driven or driven by the insane interest rates.

      Don Stewart

  3. Tim,
    Enormously clarifying and well-laid out, thank you.

    I assume that the rising rates will be a function of market reactions, not CB actions, since rising rates will quickly make most tax revenues devoted to debt service, leaving little for defense, social security, etc.?

    • I’d tend to agree with you. Eager to hear Tim’s thought, but I think the primary pricing mechanism is the repo market, where interbank lending assigns a risk premium to underlying collateral, and is based primarily on liquidity as reflected in the need to process transactions in the real economy. I think this is the functional connection between the real and speculative economy. Most of the rest is futurity/expectations and signaling.

  4. Dr. Tim,

    OK so far…until something pops the bubbles. Whether it is higher rates, demand collapse, natural resource bottlenecks, domino bankruptcies, or?? Collateral will be for sale, first slowly, then I’d expect a rush for the exits. Stocks have seen this many times before, and governments are increasingly willing to step in to slow declines. Ditto mortgages and junk bonds. But what about real property?

    Seems to me that debt default deflation (asset sales) will be competing with the inflation pressures from excess money printing. Currency devaluations will be inflationary and countries will likely compete with beggar thy neighbor efforts to support exports. Not easy for me to suss out how these pressures will resolve.

  5. blondbeast,
    Your posts are very helpful, you obviously have spent a lot of time working on understanding the financial system. Steve Ludlum pointed out to the readers of his Economic Undertow blog many years ago that the Fed cannot “print money,” by law it is permitted to only make loans against certain kinds of premier collateral, and that if CBs ever started making unsecured loans like banks did, it would soon be the end of the currency. This does, however, essentially lock in a system or feedback loop of guaranteed asset price increases with ever greater credit undertaken / rolled overkeeping money tied up in assets, rather than sloshing around in the economy.

    You also mention many valid points about the eurodollar market, which, I believe, Jeffrey Snider at Alhambra Partners has taken pains to educate people about. Acc. to Snider, the size of the ED market dwarfs the domestic dollar market and makes a mockery of the Fed’s pretense of controlling the monetary system. I confess to not understanding the connection with the repo market, but gather that that is where the rubber meets the road, and that problems there are extremely serious.

    Please keep posting your observations and insights. It’s hard to see wages going up when labor productivity is going down because of declining surplus energy, just one reason why it is hard to see hyperinflation outside of assets unless we have guaranteed income and other forms of MMT created by a sovereign government without being borrowed into existence from banks (like Lincoln’s greenbacks), but at some point, even with near zero interest rates, the declining availability of consumer funds to make discretionary purchases must eventually make more and more corporate revenues devoted to debt service, with less for dividends, stock purchases, equipment replacement, R&D, wages, etc.

    Several energy analysts appear to believe we are now on the cusp of seeing annual declining total oil production at rates of 4 – 6% per year. It would seem that, if nothing else works, a couple of years of this would burst the current futurity consensus as ever growing numbers of investors and speculators realize that – surprise – the economy is an energy system, not a financial one – severely curtailing the number of greater fools available for the momo game.

    • Thanks! I’ll try my best. Really just trying to struggle through and explore ideas and learn. If you follow Snider I’d also recommend Dr. Lacy Hunt. Former FED regional bank leadership, now a fixed income portfolio manager. He makes a number of good points about the limitations of the FED, what changes may produce hyperinlfation, and what he sees as the long term deflationary issues that lead his “bond bull” portfolio (i.e. anticipating bond rates to go down, which makes the price of previously purchased bonds go up).

      I can also recommend Hussman of hussmanfunds.com, too.

    • Hunt and his long-time partner Van Hoisington have been right on lower US long dated treasury yields for many years. They have free quarterly reviews on their website: hoisington DOT com
      The 1st qtr one is out now.

    • Interesting, but – at a brief read – based on GDP which, as we know, increases when liquidity is injected. That’s why I don’t put much store in any GDP-based ratios.

    • H & H are money managers. If/when they are proven wrong about long term US treasury rates for an extended period (say 3 years?), they might be open to an alternative theory like SEEDS. A six month to a year period is too short to cause them distress I suspect.

    • Yes, I know they are well regarded. As you know, I come at these things from a very different perspective, which I think is exemplified in this article.

    • @ Steven B Kurtz

      Thanks for the note that Q1 is out. I follow H&H closely and in full disclosure am also an investor. I could obviously be suffering from the bias of “it’s hard to convince a man of something if his job depends on him not understanding it.”

      I would note my two main criticisms of Hunt: (1) He has made statements in the past that he doesn’t believe in limits to growth. (2) I think it really is “different this time”, with the possible exception of the 2008 recession. What’s mainly different is that the energy underpinnings, as discussed here, are collapsing, and this time around this includes EM’s.

      I might add a third personal opinion which is that I also think technological progress is in terminal decline, due both to surplus energy decline and structural diminishing returns on complexity. Given Hunt’s previous technophilia , It was nice to see in this latest report that he acknowledges reading Gordon (Rise and Fall of American Economic Growth)

    • @ theblondbeast
      We have some things in common. If you would care to interact privately, I’m on Twitter and FB. plus have an alt e-addr. for beginning contact: kurtzsb AT yahoo DOT ca

      Have been back in US since 07, but keep Canadian e-addresses.

  6. Well, the other TIm calls it for inflation too: https://consciousnessofsheep.co.uk/2021/04/12/let-our-woes-begin/

    As for when the various crashes kick off, to misquote a famous line: ”How did our situation become bankrupt? Gradually, then suddenly” Enjoy the current ominous calm if you can.

    The only thing ordinary people can do now to prepare is quickly learn to live simply, cutting out all non-essentials and increasing resilience by learning useful skills for example, like basic repairs.

    • It’s another good article by Tim W..

      His main focus is on the UK situation, whilst mine, in this article as generally, is worldwide. RRCI numbers for the UK shot up last year. So, interestingly, did the GDP deflator.

      You’ll know that UK financial assets are far higher, against GDP as well as against prosperity, than in most other countries. Britain, Ireland and Holland come up as ultra-high-risk on all the metrics behind the global numbers used in this article.

      Just as Mr Trump used to claim that booming stock markets were a positive verdict on the American economy, UK policymakers have long had an almost institutionalised belief that high property prices are ‘good’. Faced with any suggestion of a fall in house prices, they cut/suspend stamp duties (transaction taxes), which are very low anyway, and push credit into the system under the guise of “help[ing]” young people to borrow enough to buy houses at inflated prices.

      If I’m reading the latest stats correctly, and I’m pretty sure I am, the measure of UK broad inflation – the GDP deflator – rose by 5.7% last year. It was base 100 in 2018; 2019-102.114; 2020-107.974.

      Yet the BoE’s policy rate is 0.1%, and they’ve been giving serious consideration to negative nominal rates.

      So the UK has a policy rate (0.1%) way below broad inflation (5.7%), is still pouring huge stimulus into the system, used newly-created money to fund 92% of the huge government deficit last year, has financial assets above 10x GDP, and is run by people who favour high house prices.

      What could possibly go wrong?

    • Very interesting – thank you for covering these hugely important topics. A question: if you were to provide direct policy advice to the UK government today, what would you tell them and what would you suggest they should do?

    • Tricky.

      I would start with the need to prevent a new bubble, a risk heightened by covid support policies. The aim with response policies should be to support households and businesses, NOT fuel asset price bubbles.

      A bubble is likelier to happen in property than equities. IF they’re going to keep rates low, these need to be counteracted – they should reinstate, and consider increasing, stamp duty, perhaps above a low threshold, and perhaps with an exemption for first time buyers. The aim would be to send a clear signal that they don’t want property prices to rise any further. These transaction taxes are far higher in some other countries. Put a stop to all “help to buy” policies, which really amount to “help young people to get into debt”. Consider tapered capital gains taxes (low if you’ve lived in the house a long time, higher if you haven’t).

      More broadly, they need to look at the affordability of essentials going forward. I’ve read that the ceiling on electricity and gas bills recently increased by 9%. This is ominous.

      They also need to get a realistic picture of the economic outlook and the risk profile. Inflation and bursting bubbles are just two of many potential hazards. Showing positive intent on future rates might reassure FX markets.

  7. “First, nothing of any economic value or utility can be produced without the use of energy.” What is often not thought about is the fact that energy still has to be poured into the object of value or utility to keep it up and/or running. So all of the global infrastructure is using as much energy to maintain it as was used to put it “in place” to begin with. Typically commercial and industrial infrastructure has a forty year life span after which major “upgrades” are required to keep it useful for any reasonable extension of the lifespan. I can’t see this being too much of an obstacle!?
    P.S. Another great read Doc!

    • Quite so. Maintenance (and renewal) is a big part of why prosperity turns down at such low levels of ECoE – 3.5-5.0% in advanced economies, 8-10% in EM countries.

  8. Question About Japan and Futurity
    As I recall, when Japan hit the wall back in the 90s, 8 of the 10 most valuable companies in the world were Japanese banks. The Japanese government was unwilling to see a reset in the value of those banks, and has done everything in its power to preserve them by preserving inflated financial assets such as real estate. It has been a futile effort, as no Japanese banks are currently in the top tier of financial value. So, if my faulty memory is correct on this point, what has been the effect on the Japanese citizen’s concept of futurity? Do they still think that the future is bright due to the march of technology? I haven’t read anything compelling on that topic.

    As I look at Europe and the US, what I see is financial support for the murderous war in Yemen pursued by the Saudis and the demonization of the Saudi’s enemy, Iran. And attempts to start WWIII in Ukraine. And belligerence and propaganda aimed at China. So it implies to me that the respective Deep States in the US and EU and Britain understand that their countries need resources including primary energy, and are resorting to a resurrection of the colonial system…just with modernized methods of control. (I assume that the Deep States see neoliberalism as failing to preserve the power of the the US and EU and thus the positions of the Deep Staters.) If my perception is correct, then WWIII is perhaps a bigger threat than inflation?
    Don Stewart

    • I don’t know about Japan – but your comments on the U.S. military made me think that perhaps “projection of power” is the equivalent for military matters as CB attempts to influence sentiment in markets.

      I think an interesting question might be “what sort of shocks could make a broad consensus turn negative on the economy?” The mainstream idea of the end of growth or prosperity could certainly have this effect.

    • Don, re: what has been the effect on futurity in Japan, I am sure you are aware of the numerous social consequences – children living at home with parents well into adulthood, a category of young men who basically won’t leave their homes (the Japanese have a name for it, I forget what it is), delayed and large reduction in number of marriages, fewer children (population decline, “fertility” rates below replacement value), higher suicides. All things now endemic in the Western developed societies as well (as long as you exclude immigration additions to population), just not as deep yet. Or perhaps it is is, when you add in the opioid crisis and health effects.) Standing back and viewing the seep of recent history, the swiftness of the fall from the futurity heights in the 50’s and 60’s (Boomers) to now, three generations later, is astounding.

    • Don, IOW, per William Gibson, the future is already here, it’s just not evenly distributed yet.

    • ”Richard Andreas Werner (born January 5, 1967) is a German banking and development economist who is a university professor at De Montfort University.
      . . . In 1995, he proposed a new monetary policy to swiftly deal with banking crises, which he called ‘Quantitative Easing‘, published in the Nikkei. [2] He also first used the expression “QE2” in public, referring to the need to implement ‘true quantitative easing’ as an expansion in credit creation.[3] His 2001 book ‘Princes of the Yen’ was a number one general bestseller in Japan. In 2014 he published the first empirical evidence that each bank creates credit when it issues a new loan. [4]”
      ‘Princes of the Yen: Central Bank Truth Documentary’

      Although, like most economists, he is fighting ‘yesterday’s battles’?

  9. I was speaking to a couple of local accountants in the last few days, both of whom deal with the taxes of small to medium-sized businesses in South West England; not a happy pair, as they seem to believe that they will lose around a third of their clients as soon as the UK government’s “support and deferral” ends later in the year. On average, these small firms employ 5-10 people, many of whom remain on furlough. All kinds of businesses, few of whom can even afford the interest on the loans they have taken.

    Not good!

    • A Universal Basic Income by stealth, you mean? Are the Tories really going to effectively offer the nation “helicopter money”? I think that very unlikely, if not impossible (Corbyn must be somewhat amused or bemused, I guess!).

      I must admit that, for a man aged 57, and remembering being unemployed for nearly a year in 1982/83 as manufacturing was dismantled all around me (I was living in Leicester at the time), I find it amazing that the Tories have done what they have done, but I fully expect them to revert to free marketeers as soon as possible.

      It’s a bind, that’s for sure, and disregarding political parties it must be,shall we say, “tricky” to know what to do next for the government. Maybe the resignation of the BoE’s chief economist Andy Haldane will sharpen minds. Maybe Baroness Harding is up for the job? (that’s irony, by-the-way).

    • Nobody in government is really a free marketeer now – that stopped in 2008.

      Seriously, though, I do think they’ll taper support. But cutting off support programmes would cause a ‘cliff edge’, see many businesses go under and large numbers of jobs lost. It would be very unpopular, and ending rent and interest holidays would be even more so. Consequences could include falls in house prices, seemingly an obsession in government circles.

  10. Fascinating you make up a new term when there is already a term in wide use, EROEI. But very good analysis.

  11. I note that the long-predicted return of sub-prime lending seems to be well underway here in the UK. Today, this can be seen in the “second charge” market, where borrowers leverage equity in excess of 75% loan to value, over and above their first charge residential mortgage.

    In March 2021, second charge lending rose by +31.27% to hit £91.4m. This may seem small, but it is a lot of “homeowners” in significant financial straits (2,202). Source: Secured Loans Index published by Loans Warehouse.

  12. Dr. Tim, yet another great piece!
    This isn’t (cannot be) good.
    I will attempt a couple of questions.
    This balloon of hot air(RE, stocks and bonds) caused by ultra cheap money will find it’s way into everyday life as people-1) cash out and spend it for real. 2) look at their high net worth and borrow and spend against that preception?

    The other small business owners I speak with are fundamentally spooked by what they see as government massively spending money it doesn’t have vs or juxtaposed over a steep decline in tax receipts. They have a look of utter disbelief on their faces. A few have said something to the effect “are they trying to destroy the economy on purpose”.

    So am I correct the (injected) hyperinflation threat is 2 x? Cheap money and government spending gone off the rails. It’s like either one should be enough(pre-covid) but they have pulled out any restraint.

    You don’t mention it but I’m seeing scarcity in various forms. Is this another fallout? Like a economic wobbling drunk?

    NW Oregon USA. Lumber prices- 1/2 acx plywood @$16 now $65(!!!). Steel has doubled in less than 1 year. Ford F-150 production halted for some $1 chip.
    In my industry(wholesale plant nursery) I received 2 phone calls Monday morning requesting the entirety of their spring order to be delivered this week. This type of phone call should be end of May-to-mid-June, never mid April. My suppliers are saying there is resin shortages for making plastic nursery containers. Plants are available but there is a truck and truck driver shortage.

  13. More thoughts on “futurity”: A Zerohedge article up now on “Unprecedented Demand: RV Sales Hit Record” identifies the growing “Nomadland” trend for Americans with no real source of retirement income beyond meager social security benefits:

    “With median prices for both existing and new homes at all time highs, and soaring at a record annualized rate of almost 20%…[GRAPHS EXCLUDED] … increasingly more Americans find themselves priced out of homeownership and, unwilling to rent shoeboxes in those liberal bicoastal, record tax incubators, are instead opting to not purchase expensive (and stationary) homes altogether, and are picking a far cheaper (and mobile) option.”

    IOW, for many, the “future” is here, and the “future of more” mindset is inhabited by fewer and fewer individuals. Unfortunately, those individuals control the financial, institutional and legal structures that prevent the people who see a more realistic future (like young people who would take up small farming or made by hand crafts but can’t afford the land or even acquire it from the large conglomerates or “investors” like Bill Gates, can’t afford the tools or start-up costs or complete with the industrial means of production, worldwide labor arbitrage and cheap shipping costs) from acting on their own visions of the future.

    In the Michael Hudson / Pepe Escobar presentation that Tim recommended some time back, Hudson made it very clear during the Q&A that the moneyed and power interests were so entrenched that reform was not possible and that only revolution would bring about the changes needed. Just one of the very sobering assessments in that talk.

    • Very much so. In the 1970s in the UK one read books by couples who had left ‘the rat race’ for life on a smallholding in counties like Sussex, Suffolk, etc. That’s not possible on an average income now because there are extremely few affordable small houses with plenty of land.

      Yet small farmers produce more food per hectare than large farms. It always seems to have been so. Corporate takeovers potentially reduce food output. Gates is dangerous in my view. He is reportedly trying to squash organic, small-scale, niche, specialist farming via the usual high-level lobbying.

      As positive examples of ‘regenerative farming’ and high yields (and profit) and carbon sequestration, look up the videos of Gabe Brown, a farmer in N Dakota, or Richard Perkins (a Brit.) in Sweden.

    • @William
      Do you have any references for this about Gates:

      “He is reportedly trying to squash organic, small-scale, niche, specialist farming via the usual high-level lobbying.”

      From my reading, he and his wife are quite socially conscious. They support women’s empowerment and modern technological family planning, despite being Catholic.

  14. I see that Professor of economics Nouriel Roubini has a new Project Syndicate article. He doesn’t concede I think that the economy is an energy system but he does end by saying “ over the next few years, loose monetary and fiscal policies will start to trigger persistent inflationary – and eventually stagflationary – pressure, owing to the emergence of any number of persistent negative supply shocks.

    Make no mistake: inflation’s return would have severe economic and financial consequences. We would have gone from the “Great Moderation” to a new period of macro instability. The secular bull market in bonds would finally end, and rising nominal and real bond yields would make today’s debts unsustainable, crashing global equity markets. In due time, we could even witness the return of 1970s-style malaise.”

    Would it be fair to say now, that the only organisations that are now not predicting higher inflation are central banks and governments?

    • Interesting!

      We need to avoid being too influenced by Britain and America, two particularly badly-managed economies, with severe structural problems and wrong policy assumptions.

      Britain, for instance, has a 0.1% policy rate – with an acknowledged GDP deflator of 5.7%, and RRCI (my comprehensive measure) even higher – yet hasn’t ruled out negative nominal rates. The US situation, though not as extreme, is pretty bad. Both are unwilling to anger those who favour high property and equity markets.

      In both cases, it seems to be argued that price inflation wouldn’t carry over into wage inflation, and it”s true that labour pricing power is weak in both. But has anyone even stopped to think about an economy/society in which prices, including necessities, keep outstripping wages for most people?

      I don’t see UBI as viable, but I’m working on ideas around ensuring that everyone has affordable access to necessities.

    • I would note that “loose monetary policies” are a lagging response to “tight economic conditions.” The reality exposed by energy economics has convinced me that tight economic conditions will not be alleviated, and can’t be more than temporarily forestalled from the continuing downward trajectory.

    • Central banks are signaling higher inflation, and governments want all to believe that reflation is coming. I think it’s quite the opposite – check the bond markets. The TIPS doesn’t look like it anticipates inflation.

      Then there is the issue that “higher” inflation, as predicted (+2%) wouldn’t even equal the 2008 GFC lows.

      If inflation goes up, stocks will crash, and we’ll take another leg down.

    • My feel for this is that consumer inflation is probably running at about 6% in the US, rather more in the UK and a bit less in the EA. With huge stimulus payments, enormous deficits and full-bore monetisation, I don’t see how it can be less. Stocks and property are running hotter than this as investors seek to hedge.

      Markets tend to price the future rather than the present. I agree that bond markets are pricing low rates, thinking that CBs can keep nominal rates ultra-low, using QE for this purpose.

      For me, this stacks up to deeply negative real interest rates. This is madness, and cannot end well!

    • Here’s asset inflation at an insane level:

      single New Jersey deli doing $35,000 in [2 yrs]sales valued at $100 million in the stock market

      Hedge fund manager David Einhorn warned of dangers for retail investors that he sees in the market, and one of his main examples was a tiny New Jersey deli with a market capitalization of more than $100 million.

      The Paulsboro, New Jersey-based Your Hometown Deli is the sole location for Hometown International, which has an eye-popping market value despite totaling $35,748 in sales in the last two years combined, according to securities filings.

      “Someone pointed us to Hometown International (HWIN), which owns a single deli in rural New Jersey … HWIN reached a market cap of $113 million on February 8. The largest shareholder is also the CEO/CFO/Treasurer and a Director, who also happens to be the wrestling coach of the high school next door to the deli. The pastrami must be amazing,” Einhorn said in a letter to clients published Thursday.

      Hometown, which appears to have begun trading in 2019, according to FactSet, has shares that trade over the counter and rarely has more than a few hundred shares change hands per day. Often, there are no trades logged in an entire trading day.

      Still, the company’s market cap is just over $100 million, according to FactSet.

      Hometown did not immediately return a request seeking comment made to the phone number listed in the company’s securities filings. A manager was not available to comment at the deli’s phone number.

      According to the company’s latest 10-K filing, the company’s single location was closed from March 23 to September 8 of last year because of the coronavirus pandemic. During that time, the company’s stock price rose to $9.25 per share from $3.25 per share. It last traded at just under $14 per share.

      The company sold 2.5 million shares last year and has about 60 total shareholders, according a filing.

      Hometown reported more than $600,000 in expenses last year, up from about $154,000 in 2019. The company also reported a net cash gain of $2.2 million from financing activities, such as selling stock, in 2020.

      Einhorn’s highlighting of Hometown comes as politicians, regulators and high-profile investors have publicly fretted about the boom in certain types of stocks over the past year.

      As a new wave of retail investors joined the market in recent months, special purpose acquisition companies have launched at a record pace and some stocks, like GameStop and Discovery, have seen wild swings after being bid up by traders on Reddit or hedge funds.

      The over-the-counter stock market, often referred to as pink sheets and penny stocks, have historically been a risky place for investors. Shares of penny stocks have also soared in recent months.


  15. Dr Tim, thank you for another stimulating and thought provoking piece. I am unable to participate in the discussion of the intricacies discussed by many posters here, but anecdotally I’m ‘clocking’ some pretty hefty rises in prices of essentials. Locally, since the beginning of LockDown 1: Bread (local baker) +23.5%, Pies (local butcher) +18.2%, Cleaner (supermarket) +8.3%. Council Tax overall has increased by +3.7%. Green Bin Charge +6.1%. The price of petrol at the pumps is now +16.3% higher than a year ago. I feel that significant price inflation in essentials is already here!

    • Same here in Somerset, Kevin – I often use that old Victorian saying “make sure that you have enough income to put bread and cheese on your family table” when dealing with retirees. Now we have to factor in much higher rates of inflation and, sadly, debt running into retirement.

      As Charles D. Ellis wrote in his seminal “Winning The Loser’s Game” (McGraw Hill, 1998) “… the impact on returns of changes in the expected level of inflation can be enormous, particularly on common stocks which are virtually perpetuities. Such a change in the expected rate of inflation from approximately 2 per cent in 1960 to approximately 10 per cent in 1980 (along with other changes) caused a change in the required nominal average rate of return from common stocks from about 9 per cent in 1960 to about 17 per cent in 1980, and this produced a major reduction in stock prices. Inflation adjusted, the loss investors experienced during the adjustment was the worst in half a century. A further increase in the expected rate of inflation would have further depressed stock prices. This would drop stock prices down to the level from which buyers would get sufficient returns – with the same future “real” earnings and dividends as previously expected – to offset the now expected rate of inflation, compensate for risk, and provide a risk-free real rate of return of about 6 per cent plus or minus 12 per cent in two out of three years. A decrease in the expected rate of inflation would have the opposite effect, as we saw in 1982 and the following years.”

      Ellis also wrote “There’s a big difference between deliberate borrowing and being in debt. The borrower is comfortable because he or she has ample capacity to repay and, most important, decides or controls the timing of repayment. The debtor borrows only what a lender decides to lend – and must repay at the behest of the lender.”

      There are a lot more debtors around, I fear, than borrowers today.

  16. Mark, the late Ian Rushbrook at Personal Assets Trust plc reckoned that Ellis provided some very profound insights into the process of investing. I have a copy of Ellis’ book in the bookcase – it ranks among the Top-10. The idea of a difference between a borrower and a debtor is interesting. Here, I think, one can apply Graham’s concept of ‘margin of safety’ – the safety of knowing one can suffer a catastrophic loss of income and still service debt and put cheese and water on the table. Anecdotally, I know of some people that last year took mortgage holidays to ‘save’ money to buy ‘stuff’! Not a good idea, me thinks.

    • Thanks, Kevin. Back in 2007, I think It was, I read a transcription of a talk by the late Ian Rushbrook (the famous purchaser of an ex-Maggie Thatcher handbag for £100,000 at some kind of charity auction IIRC) when he said something like “there’s a credit crunch coming” Unfortunately, he died just at the moment of vindication in 2008. PAT plc is an interesting trust (I own a massive 30 shares in the fund); possibly good for the present situation, but that is merely an observation, not advice.

      I have talked professionally to people of late who are in desperate financial straits, many of whom are beyond redemption, very sadly. Most people, though, seem to think that they are in good shape for the coming rocks and shoals they will soon face when the storm eventually arrives. They confuse capital values with “wealth” when, in truth, it is income that is needed.

      Simply, they are entirely unprepared and very vulnerable. And the government knows this – what is to be done? Not much, very probably, but lets hope a lid can be kept on the possible rise of ugly “populism”!

  17. Mark, when I used to attend the AGM at Personal Assets it was like a small family gathering. Most of the attendees were relatives and friends of the directors! Now attendance is in the hundreds! I always enjoyed chatting with Ian Rushbrook, and Robin Angus. Ian and Robin always had an interesting ‘take’ on the situation. Personal Assets was well prepared for GFC1, and is to my knowledge the only investment trust that went 100% liquid to preserve capital. I remember the announcement and gasping! I better add the rider – that is history, not advice.

  18. Hi Tim,
    you might want to look at credit cards, I’ve had a Barclaycard for years, I’ve just been notified my credit limit is being slashed from £5,900 to £250,
    I got curious and did a web search about it and lots of people seem to be having their credit limit drastically reduced,
    they seem to be reducing thir exposure to potentially bad debt on a large scale,
    they must be anticipating something?


    • Thanks.

      Obviously, please don’t give a personal answer to this question!

      But, for a ‘typical’ person in this situation, what would happen if outstanding credit was already, say, £5,800?

    • I’m luckily atypical in this situation having cleared any outstanding balance last April,
      maybe this gave them the opportunity to radically reduce my credit limit without putting me in a compromising position,

      I’m not sure if they could reduce someones limit to below their existing balance because it would cause an outrage,
      from the examples in articles I’ve read they seem to be curtailing peoples expansion into further debt but not actually leaving them on the wrong side of the line,

      it certainly seems worthwhile for people to reconsider the utility of any credit cards they might carry,
      whatever emergency credit they might represent could disappear suddenly.

    • That’s right – bank lending is not increasing despite the increase in liquidity. Increased banking profits this year have been from their trading arms in markets. Lending is hampered by the lack of profitable investments. They are buying all available US paper at any price because they see risk.

    • Thanks, a good report from an excellent source, certainly recommended reading.

      I note that it mentions the deflationary implications of a tsunami of corporate collapses, referencing the proliferation of zombie companies (created during and since the GFC). My question is -will the authorities try/succeed/fail to prevent these collapses.

      Essentially, what happened during the GFC was that many companies which would (should?) otherwise have collapsed were given the lifeline of interest costs on their debt being slashed. Others have been kept from default by being allowed to add interest and/or capital payments to the total outstanding.

      In the same vein, will the authorities let markets – equities, bonds and perhaps property – crash, or will we have yet more gimmickry to prevent this from happening? Mr Trump used to say that high stock markets were a positive verdict on the US economy. It wouldn’t surprise me if the current administration took a similar line. The UK is obsessed with propping up house prices.

      Purist theory states that over-inflated markets ought to be allowed to crash. Even corporate bankruptcy doesn’t destroy asset value, but simply transfers ownership of it, generally to creditors. These ‘laws of the market’ have been held in abeyance since the GFC.

    • The linked report is 15 months old. Things haven’t come to pass as expected. Dr Tim spotted the new article. Time will tell. Defaults and bankruptcies could offset money printing to a large degree.

    • I think the most likely response to a corporate bond disaster would be to lower rates, allowing bond rollover. The FED was provided a temporary ability to buy corporate junk bond ETF’s last year. If that were made permanent my outlook would change to pull forward hyperinflationary expectations.

      The major difference between 2020 and 2008 in the corporate markets is that companies did not deleverage last year. They increased their leverage.

    • Indeed. We’re in the absurd situation of paying businesses (and individuals) to borrow. If we can’t unwind ZIRP/NIRP, maybe we can unwind de-regulation?

  19. I have just listened to the latest Macrovoices presentation of Jeff Snyder (https://www.macrovoices.com) in which he argues very strongly against inflation. Here is an extract from the transcript:

    “You know, inflation, it’s made to sound like it’s always guaranteed to be just around the corner, and that there’s no way anyone could possibly disagree with that. Except the whole damn global bond market does. It’s not just a one person here or there, it’s the entire marketplace. And since that includes pretty much the entire financial system worldwide, I’d say the deflationary story has
    overwhelming support rather than the other way around.”

    Despite the large number of charts, it seems he did not convince the podcast hosts. Can anyone point to counter-arguments that are understandable by those of us not immersed in trend analysis of bonds and futures probability curves?

    • Bond markets price interest rates, not inflation. If we were to think that inflation was going to rise, whilst bond markets were to be right that interest rates were not, then we would have to conclude that the CBs see a rationale for deeply negative real rates.

      Taking the UK as an example, underlying inflation, as per the 2020 GDP deflator, was/is 5.7%. The ceiling on combined power and gas bills has been raised by 9%. Yet base rate is 0.1%, and cutting it to negative has not been ruled out.

      There are, moreover, other limitations – other,that is,than interest rates- which can be used to limit borrowing. We’ve been reminded of one such, which is imposing limits on credit cards.

      So, what happens if rates are kept low, but quantitative limits are imposed on borrowing? You might still pay – say – 3% for a mortgage. Fine for existing borrowers. But a new mortgage might be limited to a tight ratio of earnings. A big deposit might be required. Loan to value limits might be tightened.

      In other words, credit controls hand in hand with cheap credit.

    • I think you’ve hit the nail on the head Tim,

      I think Barclaycard is withdrawing the credit limits extended in better times because it’s aware that existing customers’ incomes have fallen to levels at which they are a greater risk, even if they’ve never missed a payment.

      copious cheap credit is still widely available but less people qualify to access it,

    • It also makes sense if we assume that furlough payments, and interest and rent ‘holidays’, have to end before too long. After all, no monthly mortgage payment is unaffordable if, as now, you don’t actually have to pay it.

  20. In the press today there is a piece about a shortage of garden gnomes in UK garden centres .
    The explanation is that the Suez Canal problem and material shortages are the causes.
    I am wondering (tongue in cheek) if the gnomes may now have moved from Zurich to Shanghai .
    Clearly the despite the warnings here and in a few other reports , UK residents must still assume that imported Chinese ‘tat’ is more important to their well-being than planting a few seeds.

  21. It seems to me that Western countries’ policy objectives now can be defined with reasonable clarity.

    If governments want to prevent stock and property market crashes, they need to prevent these markets getting any more inflated, and ideally let their real (ex-inflation) values fall gradually.

    If inflation takes off, there are hazards in two directions. If wage rates inflate, there’s an inflationary spiral. But if wage rates don’t keep up with price inflation, the result is hardship and anger.

    They don’t want to raise rates, because this would weaken the economy and crash the bond markets. But they do need to curb inflation.

    The solution, though far from ideal, might be to use fiscal and regulatory tools to put a stop to asset price inflation?

    • I think there is a strong possibility they will try something – maybe starting with limitations on share buy-back? Unfortunately there are at least two prices to stocks – one set by a discounted flow of future earnings, and the other set by the anticipation of continued growth trends (the latter of which tends to be a self fulfilling prophecy).

      With stocks at record valuations (most valuation methods lead to expect negative 10 year returns on equities) any end to growth expectations would lead to a selloff of epic proportions as nobody wants to hold an overvalued asset which isn’t growing and isn’t worth its price. Current price levels also make stocks very inflation sensitive.

      CB’s are “threading a shrinking needle” over which I think they have less control than they portray. In keeping with the “declining discretionary income” we agree on, it’s hard for me to imagine producer price inflation being affordably passed on to consumers. Corporate profits have been flat. Lack of affordability if prices can’t be passed on puts pressure on the bottom line which could lead to pressure on wages, bankruptcies, bond defaults, etc.

      I think the next effort may be a continuation of topping up wages. Perhaps new minimum wage laws? I wouldn’t be remotely surprised if the rent holidays get extended. But then again – how long do landlords hold unprofitable real-estate before they dump properties? What impact would this collapse in the value of real-estate have on small landlords/investors whose private residences and savings are at risk and depleted respectively? This was a big part of the 2008 unwind. Last year we saw a big impact on the Air-B&B market.

      Any movement towards something like unfunded UBI would definitely put me in the hyperinflation camp.

  22. The mechanics of Degrowth and/or Financial Debacles and/or Social Disruption vs. Unlimited Potential
    Over the last 24 hours I have read and listened to prognostications at 180 degrees to each other:
    *This current blog by Dr. Morgan

    *Alice Friedemann on peak oil and the end of heavy transportation and mining:
    “Peak conventional oil, which supplies over 95% of our oil, may have peaked in 2008 (IEA 2018) or 2018 (EIA 2020). We are running out of time. And is it really worth building these small modular reactors (SMR) given that peak uranium is coming soon? And until nuclear waste disposal exists, they should be on hold, like in California and 13 other states. And since trucks can’t run on electricity, what’s the point? Nor can manufacturing be run on electricity or blue hydrogen. Once oil declines, the cost to get uranium will skyrocket since oil is likely to be rationed to transportation, especially agriculture.”

    *Are humans limited creatures with lizard brains, or infinitely malleable and adaptable to circumstances? Why are other creatures in zoos, but not us? Is an evolving human/ machine partnership going to change everything?

    David Eagleman (a neuroscientist) talks with Lex Fridman. The sky is the limit.

    *My own predilection is to work diligently on adapting to Degrowth. I get a lot more satisfaction out of working in my garden and then eating what nature provides than in building a Squarespace Platform (recommended by Eagleman).

    Don Stewart

    • Replying to My Own Post
      It seems to me that we have not progressed at all since 2005. I remember back at that time when we were warned that we were not facing an ‘energy crisis’, but instead a transport crisis. That there were plenty of ways to make electricity, but very few ways to get the energy density required for heavy transport. And, as I recall the numbers, 85 or 90 percent of the remaining fossil fuels are coal. Did we spend the last 16 years, as a society, coming to grips with that? No, we did not. Perhaps the smart people understand that there is no solution which will keep BAU operational? Did we locate more production near water transportation? Or perhaps it’s is just too scary? Or perhaps people simply cannot see the heavy transport at work all around them every day? Two days ago a water main developed a leak and a huge truck came out carrying an excavator which dug a big hole which allowed some concrete pipe brought in from a factory somewhere which requires high process heat to be used by some workers to fix the leak. How many people who watched that repair, while cursing at the traffic delay, saw oil and coal at work? Or were they thinking about colonizing Mars? What do they plan to do about drinking water? Drink from the local river full of glyphosate and endocrine disruptors?

      Don Stewart

    • Don,

      why are they at 180 degrees to each other?

      And, are the oil data from which Alice Friedemann derives her prognosis known and reliable? I have seen these numbers several times, but how well-supported are they?

      And, the chemical industry is now planning to “fully electrify” their production, based on (gray, blue, green, ??) hydrogen. I am not saying that this is going to work well at the scale they would need, but I am not sure if one can really say, “Nor can manufacturing be run on electricity or blue hydrogen.”

      In other words, while I tend to agree with Alice Friedemann’s sentiment, it would be good to see more hard data on all this.


    • @Martin
      I’m not the expert. But she always gives references. The hydrogen comment is based on a very recently published scientific paper. See her current post. Also be aware that she frequently uses a cradle to grave analysis. One cannot assume that oil based heavy transport will be available to support the electrification of the chemical industry. If you have used Google recently, you see a slogan something like ‘carbon neutral since 2015’. But without heavy transport, Google would be a shadow of itself. While one can make advertising (Google’s business) carbon neutral, the stuff being advertised is definitely not carbon neutral.
      Don Stewart

    • Some links to support these shortages as well as a number of other non-renewable resources that will cause some minor inconveniences for most. For the oil part just do the math. 80 million barrels per day = 57 years +/- without accounting for the normal losses along the way. Also assuming it is all recoverable. My own estimation puts around forty years without any increases or heavy losses due to unforeseen stresses, but those are unlikely:) The supporting documentation at the site quotes optimistic sources like BP and the IEA.

    • “The Human Zoo”, Desmond Morris (1969) was a real life-saver for me when I was “a little lost” back then. But then again was it banned in the land of the free and you didn’t get to hear about it?

    • Thanks for reminding me about this book. Since it was written, human population doubled. Migration to urban areas followed lock step. Earning a living in rural areas, even via basic agriculture, was becoming increasingly difficult. If population hadn’t grown, violent conflict probably wouldn’t have risen. Recall the rats in a cage experiment.

  23. All the concepts of reducing debt by some means will only lead to a recession/depression. It is expanding money supply via debt that keeps the entire system going. There has been the ‘worry’ about too much debt in the system for the last 50 odd years that I’ve been paying attention. It is only when we have contractions in new debt that the system has a fit, ie 74-75, 81-82, 87, 90-91, 00-03, 07-09, 20..

    I would go so far to claim the current economic system needs increasing debt/money creation to keep going, even if we do run into resource limits sometime soon. At that point it is game over for our current economic system.

    Basically our economic system relies on increased growth on a finite planet, so it was doomed from the start, unless we do keep growing in space, even then we run into eventual problems as the universe is probably finite, but at least the day of reckoning would be a long way into the future.

    Coming back to Earth, we will know when we are reaching limits by price increases in fossil fuels, when their price becomes too expensive and alternatives don’t exist. Price controls might be implemented, but they will just lead to shortages, with other aspects of the system breaking.

    We were heading that way prior to 2008, but the slowdown of the GFC allowed time for production to increase via fracking, so that prices were affordable. Most importantly though money creation has continued, debt grown, with many scratching their heads trying to work out why the economic system continues intact with these high debt burdens.
    Sudden money increases ‘saved’ the system at the bottom of the GFC, likewise last year as Covid froze economies everywhere. Go back through history, new money for and after WW2 saved the world from the Great Depression, The great spending of Regan after years of doldrums from the mid 70’s etc.

  24. Thanks for another tour de force, Dr Tim!
    This inflation vs deflation was actually the topic of today’s Keiser Report: https://www.rt.com/shows/keiser-report/521239-inflation-deflation-debate-goldmoney-guest/

    This debate is the same one that was raging in 2008 although the rules of the game have changed. More than a decade of interest rates at historic lows have enabled debt binge fueled share buybacks, fracking and other unproductive assets. Meanwhile wages have stagnated – many in the US have seen their income significantly increase in 2020 with the net result of more money being pumped into Wall Street in the first five months of last year than the last ten years combined.

    Given the fundamentalist market driven ideology that the Central Banks have ( in particular the Fed and B o E) they will do their utmost to keep interest rates as low as they can. It is like watching a slow motion train crash

  25. I’ve avidly read the article and comments and am trying to discern the actions to take with a diversified retirement portfolio. It seems that if the expectation is for financial assets to crash and interest rates to rise to prevent hyperinflation and currency devaluation, it would make sense to sell stocks and hold cash.

    • Not financial advice here, but one may consider the TIPS market if you really predict inflation. These are bonds which pay a normal interest rate but are also adjusted value based on CPI. One hedged approach if unsure about the near future could be to invest in both tips and standard bonds. If inflation goes up, TIPS is protected. If rates go down, previously purchased bonds go up in value and are saleable.

    • Thank you for the suggestion. I like the idea of owning some bonds, like TIPS, that actually do better if interest rates rise.

  26. apparently people have been buying these Russian bonds,


    The share of foreign-held OFZs increased from nearly zero in 2006 to 25% by the end of 2013.
    As of February 2018, 33.9% of all outstanding OFZs were held by foreigners.
    By September 2018 the number had dropped to 27%, due to the threat of further US sanctions against the Russian economy.

    and then the sanctions arrived blocking off this avenue,


    Treasury issued a directive that prohibits U.S. financial institutions from participation in the primary market for ruble or non-ruble denominated bonds issued after June 14, 2021 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation;

    well that’s one bolt hole plugged!

    • @Matt
      Thanks. I was not aware of the hostile US action. The thought had occurred to me several years ago, when the Keisers reported on the hard-money stance of the Russian central bank leader, that the US and Europe and Japan could not tolerate such a stance by a country with a significant sized set of physical resources. From the perspective of the CBs in the US, Europe, and Japan, everybody needs to inflate in lock-step. A ‘safe haven’ cannot be tolerated…particularly in the US which is utterly dependent on its ‘reserve currency’ windfall.
      Don Stewart

  27. A question 😊 ..

    Do increases in a company’s share price as a result of QE and money creation increase the capacity of company to make acquisitions of other companies.

    If this is the case, fiat money creation is increasing the ability of the market to make acquisitions, increasing the ability of the market to grow through innovation and productivity gains and perhaps more poignantly increasing the capacity of the market to facilitate human growth.

    In this respect, money is energy tokens whether as claims on past energy, present energy or future energy.

    By increasing the money supply, with the hope that the money will increase investment in future markets, will increase productivity in current and future markets and will increase the velocity of money through job creation and tax transfers, the creation of money, the amount of money and the distribution of money directly facilitates the creation of humans, the amount of humans and the distribution of humans.

    If this is all correct, then QE and money creation actively seeks to perpetuate the human growth crisis but how could it be any other way when poverty and increasing conflict over available resources is the alternative!

    This would mean the only way to avert a human growth crisis would be population reduction since the only alternative is human consumption reduction but how would that be managed and distributed through the invisible hand of the market?

    • Interesting questions!

      Acquisitions are undertaken using either an exchange of shares or borrowed money. The aim is to be accretive (the reverse of dilutive). If company A, priced at 20x EPS, buys company B, priced at 10X, the buyer’s earnings increase by more than the increase in the number of shares outstanding. Debt, if cheap enough, is the alternative.

      Stocks, like property, are assumed to be ‘valued’ at whatever today’s price happens to be. Since all the owners can’t sell at the same time, the aggregate of that value is purely notional. But owners in the aggregate, ignoring that, are emboldened to borrow by the high collateral ‘values’ of their assets.

      This is why governments like high stock and property prices. Asset prices are what, through markets, we tell ourselves that things are “worth”. Fear of the alternative is why the real cost of money has been negative since the GFC. The UK has just unveiled yet another scheme to “help” (predominantly young) people get further into debt.

      As the real economy deteriorates, the restoration of equilibrium requires that this supposed ‘value’ is destroyed, either by asset prices falling or by inflation taking off.

    • Presumably then, money creation and share price increases increases the capacity of the market to increase investments in future markets, increase productivity in current and future markets and increase the velocity of money through job creation and tax transfers.

      Thus, presumably, money creation is intended to eventually feed into the productive side of the real economy in contrast to money creation being fed into the consumption side of the real economy which really would create hyper inflation.

      The question is whether the belief in the ‘wisdom of the market’ is misplaced and whether money creation should be invested and distributed into State managed productivity?

    • Perhaps you both are forgetting that takeovers tend to decrease competition. While efficiency might increase in some cases, pricing of goods/services can actually rise with less competition. There are anti-monopolistic laws in the US and likely other countries which are designed to minimize this.

  28. The Game That is Being Played
    *There are soft money countries (The US, Britain, the EU, and Japan.
    *There is a gaggle of developing countries who are abjectly dependent on the US dollar
    *There is a hard money country, Russia,
    *There is the enigma we call China, which has been soft but may be transitioning to hard.
    *The first class of soft money countries have been rich, but have been losing wealth due to mechanisms that those of us who read this blog understand pretty well, plus the gross inefficiencies which abundant fossil fuels have allowed those countries to coddle…which very few people understand.
    *The developing countries are abject slaves of the system. A few have broken loose, but many of them are desperately poor (e.g., Cuba).
    *Russia is a hard money country with abundant natural resources. It resembles the United States in 1800. Lots of potential if it could avoid being destroyed by Europe’s colonial wars. But vulnerable to the great powers (the British burned the capital in 1812).
    *China, as a manufacturing country, is dependent on customers and their solvency. Therefore, the ideal strategy for China is to extract as much real capital out of the first group of countries as it can, while not alienating them, and then wean the poor countries away from the first group in order to form a new resource/manufacturing axis. But the first group of countries despise China, or fear China, or some combination which leads them to blame all their problems on China. Therefore, forming any China/ first group alliances is extremely difficult and unstable.

    Gresham’s Law shows us that the first group of countries must destroy the Russian hard money, because good money drives out bad money. Therefore, the first group will continue to fund and arm the Neo-Nazis in Ukraine and other countries to provoke the Russians. Putin has declared that he will not be drawn into pointless wars…but he also can’t stand idly by while Russian citizens are killed. This is a potential powder keg for a civilization destroying WWIII.

    The first group of countries need to dissuade China from pursing its military alliance with Russia, and its resource/ manufacturing axis with the poor countries. The strategy, as with Russia, is to stimulate any thorns such as Hong Kong and Taiwan. Another potential powder keg for WWIII.

    There is no question in my mind that an alliance between China, Russia, and the resource rich poor countries would be a lot better off if the first group of countries simply sank below the waves. But that imagined alliance would still have to cope with the gross overpopulation in much of the developing world.

    In short, the path to the future, if there is one, is fraught with risk. I am personally skeptical that any investment strategy implemented under current US law can escape the damage. I do not think Neo-liberalism is capable of bringing back the ‘One World’ paradigm.

    Don Stewart

    • Don,
      I like your assessment here, and I agree with much of it.
      As you say the path to the future is fraught with risk, but none the less, it is a path which the world must tread. I can see a future world centred on Eurasia, with German- Russian – China all linked, and prospering from the Silk Road.
      The real obstacle to this future is really only the USA, ( and their UK poodle ). The chances are that the establishment powers within these two nations will lead us all into a disastrous war, before cooler and wiser heads can even get their shoes on. Of course, the real problem is that these two nations are declining in status, they are not only morally and culturally bankrupt, but financially too.
      The UK in particular, is grasping at straws to maintain any relevance in the world – so much so that they are now dispatching two warships to the Black Sea in an open threat to Russia. A move which the USA itself drew back from, as they foresaw the danger that one of these vessels would soon have been at the bottom of the Black Sea as opposed to pleasantly cruising on its calm surface.
      It would appear that the UK Admirality is willing to sacrifice a few jolly tars just to get their war with Russia started.

    • So, you judge that Russia, North Korea, China…are not “morally and culturally bankrupt” ? I beg to differ on exceptionalism on these matters. Many countries fill that bill in my view.

    • Indeed Steven, I do judge China and Russia not to be morally bankrupt.
      Yes, they do have their problems, but having been in both countries, more than just once, I do hold the people in China and especially in Russia to have higher moral standards than those in the USA and the UK.
      I cannot speak for North Korea, but in considering their worldview, one must also take into account the inhumane treatment that they were subjected to by the USA during the Korean War. The people there were subjected to biological and chemical warfare tactics supposedly banned by civilised nations. The horrors inflicted upon them have left them scarred for generations.
      We cannot hope to understand North Korea without considering its history, a history which you will not hear on the BBC or on CNN.

    • I guess antisemitism and islamaphobia in Russia and China are perfectly OK in your moral schema. Each to their own. And rampant alcoholism which has dropped Russian longevity for decades is culturally fine. Empires have been nearly constant throughout millennia. The blame game is easy. Just blame whomever is the current dominant one. Human nature has no borders.

    • You are Cherry picking your data points, Steven.
      Stereotyping Russians as being Vodka swilling layabouts is pretty rich.
      On this basis I could just as well argue that Fentayl abuse and Obesity in the US are part of that county’s “Culture” ?
      Or how about English Defence League thugs ? They don’t exactly go about hugging semites or islamists.
      And as we are on the topic of Blame, many if not most of today’s ills can be placed at the feet British Imperialism and American warmongering.

  29. I’ve just finished watching Ken Burns’ 10 part series on The Vietnam War,
    one famous quote leapt out at me and I’d like to try paraphrasing it,

    “it became necessary to destroy the financial system to save it”

    • There’s an intimate connection, and failure to recognise this is a major weakness in transition plans. It’s something I’m working on.

  30. Pingback: #195. The unrelenting squeeze | Surplus Energy Economics

    • Realised Rate of Comprehensive Inflation. I should have explained this.

      It’s still in the development stage, but interesting.

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