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When A Stock Bubble Goes Horribly Wrong And Hyperinflation Results | Zero Hedge
When A Stock Bubble Goes Horribly Wrong And Hyperinflation Results | Zero Hedge.
Perhaps the most amusing and curious aspect of this entertaining summary of the Mississippi Bubble of 1720, the resulting European debt crisis (the first of many), how bubble frenzies are as old as paper money, the man behind both – convicted murderer and millionaire gambler, John Law, what happens when paper money’s linkage to gold is broken, and how everyone loses their wealth and hyperinflation breaks out, is who the source is. The New York Fed. Perhaps the Fed-employed authors fail to grasp just what their institution does, or have a truly demonic sense of humor. In either case, the following “crisis chronicle” highlighting how banking worked then, how it works now, and how it will always “work”, is a must read by all.
Crisis Chronicles: The Mississippi Bubble of 1720 and the European Debt Crisis
Convicted murderer and millionaire gambler John Law spotted an opportunity to leverage paper money and credit to finance trade. He first proposed the concept in Scotland in 1705, where it was rejected. But by 1716, Law had found a new audience for his ideas in France, where he proposed to the Duke of Orleans his plan to establish a state bank, at his own expense, that would issue paper money redeemable at face value in gold and silver. At the time, Law’s Banque Generale was one of only six such banks to have issued paper money, joining Sweden, England, Holland, Venice, and Genoa. Things didn’t turn out exactly as Law had hoped, and in this edition of Crisis Chronicleswe meet the South Sea’s lesser-known cousin, the Mississippi Bubble.
Who Wants to Be a Millionaire?
John Law was an interesting figure with a colorful past. He was convicted of murder in London but, with the help of friends, escaped to the continent, where he became a millionaire through his skill at gambling. Like South Sea Company Director John Blunt in England, Law believed that a trading company could be leveraged to exchange the monopoly rights of trade for the ability to make low-interest-rate loans to the government. And like Blunt, in 1719 Law formed a trading company—the Mississippi Company—to exploit trade in the Louisiana territory. But unlike Blunt or the South Sea Company, the Mississippi Company made an earnest effort to grow trade with the Louisiana territory.
In 1719, the French government allowed Law to issue 50,000 new shares in the Mississippi Company at 500 livres with just 75 livres down and the rest due in nineteen additional monthly payments of 25 livres each. The share price rose to 1,000 livres before the second installment was even due, and ordinary citizens flocked to Paris to participate. Based on this success, Law offered to pay off the national debt of 1.5 billion livres by issuing an additional 300,000 shares at 500 livres paid in ten monthly installments.
Law also purchased the right to collect taxes for 52 million livres and sought to replace various taxes with a single tax. The tax scheme was a boon to efficiency, and the price of some products fell by a third. The stock price increases and the tax efficiency gains spurred foreigners to Paris to buy stock in the Mississippi Company.
By mid-1719, the Mississippi Company had issued more than 600,000 shares and the par value of the company stood at 300 million livres. That summer, the share price skyrocketed from 1,000 to 5,000 livres and it continued to rise through year-end, ultimately reaching dizzying heights of 15,000 livres per share. The word millionaire was first used, and in January 1720 Law was appointed Controller General.
The Trickle Becomes a Flood
Reminiscent of a handful of florists failing to reinvest in tulip bulbs as we described in a previous post on Tulip Mania, in early 1720 some depositors at Banque Generale began to exchange Mississippi Company shares for gold coin. In response, Law passed edicts in early 1720 to limit the use of coin. Around the same time, to help support the Mississippi Company share price, Law agreed to buy back Mississippi Company stock with banknotes at a premium to market price and, to his surprise, more shareholders than anticipated queued up to do so—a surprise we’ll see repeated at the apex of the Panic of 1907. To support the stock redemptions, Law needed to print more money and broke the link to gold, which quickly led to hyperinflation, as we saw in our post on the Kipper und Wipperzeit.
The spillover to the economy was immediate and most notable in food prices. By May 21, Law was forced to deflate the value of banknotes and cut the stock price. As the public rushed to convert banknotes to coin, Law was forced to close Banque Generale for ten days, then limit the transaction size once the bank reopened. But the queues grew longer, the Mississippi Company stock price continued to fall, and food prices soared by as much as 60 percent.
To make matters worse, there was an outbreak of the plague in September 1720, which further restricted economic activity—in particular, trade with the rest of Europe. By the end of 1720, Law was dismissed as Controller General and he ultimately fled France.
Balancing Dispersed Debt Issuance against Central Monetary Policy
One might argue that Law suffered a self-inflicted loss of control over monetary policy once the link between paper money issuance and the underlying value of gold holdings was broken—a lesson that monetary authorities have learned over time. (ZH: they have? where?) But what if you don’t have direct sovereign authority over banknote issuance or, in more modern times, monetary policy? A challenge that’s perhaps most visible in the Eurozone is how best to balance dispersed, country-specific debt issuance against more centralized authority over monetary policy. In an upcoming post on the Continental Currency Crisis, we’ll see why a united fiscal policy was needed along with the united currency and monetary policies. Could the same be true of Europe? And if so, would a united fiscal policy include Eurozone debt as well as centralized fiscal transfers, or perhaps even collection of taxes? Tell us what you think.
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Soaring Stock Market Fails To Fix Venezuela’s Shortage Of Food (Or Toiler Paper) | Zero Hedge
Soaring Stock Market Fails To Fix Venezuela’s Shortage Of Food (Or Toiler Paper) | Zero Hedge.
Having just missed out of +500% returns in the Caracas stock market last year, the reality of a hyperinflating world continue to cause chaos in the real world of Venezuela. As Bloomberg reports, the bolivar’s 73% decline against the dollar on the black market in 2013 is fueling contraband and worsening shortages of food and consumer goods in a country with the world’s biggest oil reserves, adding pressure on President Nicolas Maduro’s government to devalue. Smuggling to Colombia has exploded as “professional shoppers” traffic in wheat flour, corn flour and milk leaving more than one in five basic goods out of stock at any given time. Regulated foods are just too cheap to stay on the shelves, “you can’t get anything in the shops here… it is taken to Colombia like a locust plague.”
Venezuelan taxi driver Jose Sotomayor drives four hours through army checkpoints every week from the city of Maracaibo to buy rice in Colombia for his family at 10 times the government-set price back home.
“You can’t get anything in the shops here, I don’t even bother going to them for basics anymore,” Sotomayor, 39, said in a phone interview. “All of our food is taken to Colombia, it’s like a locust plague.”
Sotomayor hasn’t seen rice for sale in the shops of Venezuela’s second-largest city since July, as smugglers snap up the staple for a maximum of 7.2 bolivars ($1.14) per kilogram, just $0.11 at the black market exchange rate.
How hyperinflation works…
The bolivar’s 73 percent decline against the dollar on the black market in 2013 is fueling contraband and worsening shortages of food and consumer goods in a country with the world’s biggest oil reserves, adding pressure on President Nicolas Maduro’s government to devalue…
A weaker bolivar reduces Venezuelans’ purchasing power by making imported goods more expensive.
…
Under a decade-long system of currency controls, the government provides about 95 percent of dollars in the economy to selected companies and individuals at 6.3 bolivars per dollar. The exchange rate on the illegal black market is about 64 per dollar, giving foreigners and Venezuelans with access to dollars about 10 times more bolivars for their currency.
…
Which means hordes of prefessional shoppers from neighboring (non-hyperinflating) countries are taking advantage…
Price controls introduced by Maduro’s predecessor Hugo Chavez in 2003 to boost nutrition among the poor have fueled demand for staples such as flour, rice and milk as shoppers snap up products whose prices don’t change amid 56 percent annual inflation, the highest in the world.
Dozens of people take shifts to line up outside supermarkets in Maracaibo, a city of 2.1 million people located 800 kilometers (500 miles) west of the capital, waiting for the next delivery of regulated goods. The new stock is bought up as soon as it hits the shelves, leaving shops barren of products such as meat, grains and toilet paper.
The goods are then loaded onto trucks and taken to Colombia. Many of these professional shoppers are native Guajira Indians dressed in bright floral-print dresses who have double nationality and are exempt from border controls.
…
More than 300 trucks with everything from rice to car tires made the 130-kilometer drive from Maracaibo to the border through eight army and police checkpoints when a Bloomberg reporter did the journey on Nov. 10. Drivers of cars carrying food pay those staffing the checkpoints anywhere from 20 to 300 bolivars for quick passage, according to Sotomayor.
“Regulated goods are just too cheap to stay on the shelves.”
Nationally, the central bank’s scarcity index was 22.4 percent in October. That reading, the highest since January 2008 and up from 16.1 percent a year earlier, means that more than one in five basic goods were out of stock at any given time.
…
“It’s an endless caravan,” said Sotomayor. “The price difference is so great, no amount of soldiers can stop it.”
Still, things must be going great because the Caracas Stock Index was up 480% last year – think of the confidence-inspiration and wealth effect!!
The Life And Death Of A Massive Debt Bubble In Seven Charts | Zero Hedge
The Life And Death Of A Massive Debt Bubble In Seven Charts | Zero Hedge. (FULL ARTICLE)
On September 5, 2008, Citi’s Matt King wrote a report titled “Are the brokers broken?” which in its rhetorical question (the answer was and still is yes), implicitly explained why ten days later the world would experience the largest bankruptcy in the history of western civilization, crushing confidence in the financial system to this day, and forcing the Fed for five consecutive years to be the marginal source of credit money in a “not without training wheels” world in which the longer the central bank is the only backstop of anything and everything, and where failure and risk are prohibited through artificial means, the less faith there is in any and every financial counterparty. So when Matt King sat down to pen his latest warning in which he showed how the world is now “positioning for the wrong sort of recovery”, we naturally listened. Below are the key charts which not only show the lifecycle of the source of every modern Keynesian empire’s boom and best, namely debt, but why 5 years later, “the slate has still not been wiped clean.”…
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- Peter Schiff On The Debt Ceiling Delusions | Zero Hedge (olduvaiblog.wordpress.com)
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Goldman Warns Of Venezuela Hyperinflation Threat | Zero Hedge
Goldman Warns Of Venezuela Hyperinflation Threat | Zero Hedge.
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- Venezuela: here comes hyperinflation (blogs.ft.com)
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- UPDATE 2-Venezuela inflation soars to record monthly high 6.1 pct (xe.com)
- U.S. and Venezuela agree to start dialogue to restore respective ambassadors (en.mercopress.com)
- Venezuela And Colombia See Tensions Rise (eurasiareview.com)
Hyperinflation – 10 Worst Cases | ToTheTick™
Hyperinflation – 10 Worst Cases | ToTheTick™.
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- The Move To Global Hyperinflation Is Now Accelerating (financialsurvivalnetwork.com)
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- Will the US dollar hyperinflate? (sgtreport.com)
- Controlling the Beginning Stages of Hyperinflation by Manipulating the Precious Metals (maxkeiser.com)