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January 30, 2014
Sovereign Valley Farm, Chile
Zimbabwe. You remember those guys, right?
The country’s plight with its currency became world famous, the butt of untold jokes in economic circles. At its height, hyperinflation in Zimbabwe reached nearly 90 sextillion in 2008.
That’s a 9 with 22 zeros.
To put it in context, if you had 90 sextillion grains of sand, you could cover the entire surface of the earth all the way to the outmost layers of the atmosphere.
Then, in April 2009, the government effectively abandoned the Zimbabwe dollar. The US dollar became the official currency for all government transactions, and US dollars, British pounds sterling, euros, and South African rand became the most widely used tender in circulation.
I’ve traveled to Zimbabwe frequently; they have some of the best stories you could ever hear about standing in line at the banks with wheelbarrows, and using stacks of paper currency at home for toilet paper or furniture.
Given that Zimbabwe is literally THE poster child for hyperinflation over the last half-century, one cannot understate the irony of their latest announcement.
Just yesterday, the government there announced that the Chinese renminbi (among other currencies) will become legal tender in Zimbabwe.
This is big news. As we have discussed so many times in the past, the current fiscal and monetary antics in the United States are absolutely no different than what Zimbabwe employed several years ago.
Zimbabwe printed its currency in nearly infinite quantities. So has the United States. The only difference is that the US dollar is readily accepted around the world thanks to good ole’ American credibility that was built by previous generations.
But that credibility is rapidly deteriorating. And everywhere you look, there are obvious signs that the rest of the world is quickly moving on from the dollar.
Central banks around the world are stocking up on gold. Major powers like China and Russia are calling for a new reserve currency. And a number of nations (Zimbabwe is the latest) have already begun to use other currencies like the renminbi for international trade and central bank reserves.
It’s happening. And it’s one of those things that will play out like what Hemingway wrote about going bankrupt: gradually, then suddenly.
The dollar’s share of global reserves has slowly fallen from roughly 75% in 2001, to just over 60% today.
But the world will eventually reach a bifurcation point where investors, foreign governments, central banks, etc. panic and start rushing for the exits.
It’s something that could happen tomorrow. Or five years from now. No one knows. But rational, intelligent people shouldn’t be waiting around for it to happen.
I very strongly recommend that you take a portion of your savings and move them into real assets– precious metals and productive land are the most obvious. But even things like collectibles or nonperishable goods (like ammunition) would be preferable to US dollars.
Then there’s other currencies that you can hold. Right now, the Norwegian krone has the strongest fundamentals in the world as it is backed by the most solvent central bank on the planet.
The Hong Kong dollar is also an interesting option because it minimizes your downside currency risk while providing protection against the US dollar’s deterioration.
(Premium members: please refer to your SMC welcome guide for actionable information about holding Hong Kong dollars and Norwegian krone.)
On Friday, when stocks were plunging, natural gas soared 9.6% to $5.18 per million British thermal units (MMBtu) at the Henry Hub. Up 20% for the week. The highest close since June 2010.
Back then, the “shale gas revolution” had turned into a crazy no-holds-barred land-grab and fracking boom that veered into overproduction and a “glut” – accompanied by a historic collapse in price. The US could not export its excess production due to export restrictions and the lack of major LNG export terminals. By April 2012, when the Japanese were paying around $17 per MMBtu for LNG on the world markets, natural gas in the US hit a decade low of $1.92 per MMBtu, and predictions that it would go to zero showed up in the mainstream media. That was the bottom.
But nothing can be priced below the cost of production forever. By Friday, natural gas was up 170% from the April 2012 low. Turns out, only a low price can cure a low price.
The low price caused demand to creep up.
Gas exports via pipeline to Mexico have been growing, especially since additional pipeline capacity went into service last year. Mexico is switching power generation from using its own oil to cheap US natural gas. This allows it to export its more valuable oil to the US. Ka-ching. But building gas-fired generating capacity is a slow-moving process.
Other exports are also moving forward – in people’s heads. There are pipelines between the US and Canada, but the US is a net importer. Exports of LNG are at this point still a pipedream, so to speak, though deals are being made, contingent on getting government approvals to export LNG. It’s going to take years before LNG can be exported in large quantities.
But the low price had short-term and structural impacts. Utilities dispatched electricity generation from their coal-fired plants to their gas-fired plants. And there have been structural changes: utilities have built gas-fired power plants and have retired – not mothballed! – their oldest, most inefficient, and most polluting coal-fired power plants. Global industrial companies have been building plants in the US for energy-intensive processes and for processes that use natural gas as feed stock. Even natural gas in transportation is picking up.
The low price destroyed the business model for drillers.
Thousands of unprofitable wells litter the land. Many billions were written off. Real money that had been recklessly thrown around during the boom disappeared into the ground. Investors were lured with false promises. The bloodletting in the industry was enormous. Some of the largest drillers have pulled back from drilling for dry natural gas. Most of the wells that are still being drilled are in fields that are rich in natural-gas liquids and oil, which sell for much higher prices and make wells profitable. Dry natural gas has become a byproduct. In the immensely productive Bakken shale-oil field in North Dakota, where gas occurs along with oil, 30% of it is flared – burned at the well as a waste product. The low price doesn’t justify building pipelines to haul it off.
But shale gas wells have sharp decline rates, and new wells need to be drilled constantly to make up for the decline in older wells. These days, not enough wells are being drilled, and production in all gas plays combined – except for the Marcellus – is already in slight decline. The only production boom left is in the Marcellus: the “shale gas revolution” in the US is now a one-pony show.
In January 2012, according to Baker Hughes, there were 143 rigs drilling for natural gas in the Marcellus – the most prolific parts of which are in Pennsylvania. Today, there are 86. But during the drilling boom, someone forgot to install sufficient pipeline infrastructure. So, wells were shut in, perhaps thousands of them, a giant reservoir waiting for takeaway capacity. That was 2012. Last year, part of a new pipeline network went into service, and bottlenecks were removed, and the gas started flowing to New York City and other places. Drilling is down. Production – the delivery of gas to the markets – is soaring!
How long can it last? Well decline rates in the Marcellus are as steep as elsewhere, and this sudden burst in production, if not supported by a new bout of drilling, will taper off as it has in other fields. And that’s today’s one-pony show of the US “shale gas revolution.”
Then cold fronts swept across the country.
These polar vortices, as they’re now referred to for additional flair, have caused demand for gas as heating fuel to spike to record highs. And more bitter cold weather is being forecast. Natural gas in underground storage dropped to 2,423 billion cubic feet (Bcf) for the weekending January 17. The last time storage levels were this low during an equivalent week was in January 2005!
At the time, gas was selling for $12 to $14 per MMBtu and hit an all-time high of $15.40 in December that year. But demand has changed. In 2013, demand was over 18% higher than in 2005; this year, it might be over 20% higher [my article from nine days ago…. Natural Gas Squeeze? “Panic hasn’t ensued just yet”].
And the big money has jumped into the fray.
For years, the favorite game was to short natural gas, playing the glut for all it was worth, a sport that has gotten very complex and, if you get the timing wrong by a few hours, very expensive. Some of the spike late Friday, and some of the action all week, was due to a hard squeeze on these folks – as the big money arrived en masse.
On Wednesday, the big money went public. As reported by MarketWatch, Citi analysts wrote that, “With tight fundamentals, $5 gas is not impossible.” What had been obvious for a while, showed up in the media: “Strong demand is expected to push gas inventories to very low levels with cold weather lingering.” And the price took off once again.
Now everyone is bent over weather data, trying to figure out what nastiness the winter will still serve up, and they’re betting on the weather because cold snaps happen relatively fast and are observable. Watching the fundamentals is like watching paint dry. But it’s the fundamentals that have changed the equation. The polar vortices are merely speeding up the calculus.
Natural gas is famous for its head fakes, unexpected plunges when it should rise, and inexplicable rises when it should drop. It’s being manipulated in a myriad ways. It’s always a bet on the weather, except when it’s not. It can turn around in a second and cause whiplash. It’s a seatbelt-mandatory commodity. And once every few years, there is a panic, and it spikes to dizzying highs.
While natural gas was soaring on Friday, and all week, the rest of the markets were tanking, with emerging markets “trading in full-blown panic mode.” What gives? Read…. A Teeny-Weeny Bit Of Taper, And Look What Happened
This is part two of a Q&A with Willem Middelkoop about his new book The Big Reset. In his book a chapter on the ‘War on Gold’ takes a prominent position. Willem has been writing about the manipulation of the gold pricesince 2002 based on information collected by GATA since the late 1990’s. So part two of our interview will focus on this topic.
The War On Gold
Why does the US fight gold?
The US wants its dollar system to prevail for as long as possible. It therefore has every interest in preventing a ‘rush out of dollars into gold’. By selling (paper) gold, bankers have been trying in the last few decades to keep the price of gold under control. This war on gold has been going on for almost one hundred years, but it gained traction in the 1960’s with the forming of the London Gold Pool. Just like the London Gold Pool failed in 1969, the current manipulation scheme of gold (and silver prices) cannot be maintained for much longer.
What is the essence of the war on gold?
The survival of our current financial system depends on people preferring fiat money over gold. After the dollar was taken of the gold standard in 1971, bankers have tried to demonetize gold. One of the arguments they use to deter investors from buying gold and silver is that these metals do not deliver a direct return such as interest or dividends. But interest and dividend are payments to compensate for counterparty risk – the risk that your counterparty is unable to live up to its obligations. Gold doesn’t carry that risk. The war on gold is, in essence, an endeavor to support the dollar. But this is certainly not the only reason. According to a number of studies, the level of the gold price and the general public’s expectations of inflation are highly correlated. Central bankers work hard to influence inflation expectations. A 1988 study by Summers and Barsky confirmed that the price of gold and interest rates are highly correlated, as well with a lower gold price leading to lower interest rates.
When did the war on gold start?
The first evidence of US meddling in the gold market can be found as early as 1925 when the Fed falsified information regarding the Bank of England’s possession of gold in order to influence interest rate levels. However, the war on gold only really took off in the 1960’s when trust in the dollar started to fray. Geopolitical conflicts such as the building of the Berlin Wall, the Cuban Missile Crisis and the escalation of violence in Vietnam led to increasing military spending by the US, which in turn resulted in growing US budget deficits. A memorandum from 1961 entitled ‘US Foreign Exchange Operations: Needs and Methods’ described a detailed plan to manipulate the currency and gold markets via structural interventions in order to support the dollar and maintain the gold price at $ 35 per ounce. It was vital for the US to ‘manage’ the gold market; otherwise countries could exchange their surplus dollars for gold and then sell these ounces on the free gold market for a higher price
How was the gold price managed in the 1960’s?
During meetings of the central bank presidents at the BIS in 1961, it was agreed that a pool of $ 270 million in gold would be made available by the eight participating (western) countries. This so-called ‘London Gold Pool’ was focused on preventing the gold price from rising above $ 35 per ounce by selling official gold holdings from the central banks gold vaults. The idea was that if investors attempted to flee to the safe haven of gold, the London Gold Pool would dump gold onto the market in order to keep the gold price from rising. During the Cuban Missile Crisis in 1962, for instance, at least $ 60 million in gold was sold between 22 and 24 October. The IMF provided extra gold to be sold on the market when needed. In 2010, a number of previously secret US telex reports from 1968 were made public by Wikileaks. These messages describe what had to be done in order to keep the gold price under control. The aim was to convince investors that it was completely pointless to speculate on a rise in the price of gold. One of the reports mentions a propaganda campaign to convince the public that the central banks would remain ‘the masters of gold’. Despite these efforts, in March 1968, the London Gold Pool was disbanded because France would no longer cooperate. The London gold market remained closed for two weeks. In other gold markets around the world, gold immediately rose 25% in value. This can happen again when the COMEX will default.
More evidence about this manipulation?
From the transcript of a March 1978 Fed-meeting, we know that the manipulation of the gold price was a point of discussion at that time. During the meeting Fed Chairman Miller pointed out that it was not even necessary to sell gold in order to bring the price down. According to him, it was enough to bring out a statement that the Fed was intending to sell gold.
Because the US Treasury is not legally allowed to sell its gold reserves, the Fed decided in 1995 to examine whether it was possible to set up a special construction whereby so-called ‘gold swaps’ could bring in gold from the gold reserves of Western central banks. In this construction, the gold would be ‘swapped’ with the Fed, which would then be sold by Wall Street banks in order to keep prices down. Because of the ‘swap agreement’, the gold is officially only lent out, so Western central banks could keep it on their balance sheets as ‘gold receivables’. The Fed started to informing foreign central bankers that they expected that the gold price to decline further, and large quantities of central banks’ gold became be available to sell in the open market. Logistically this was an easy operation, since the New York Fed vaults had the largest collection of foreign gold holdings. Since the 1930’s, many Western countries had chosen to store their gold safely in the US out of fears of a German or Soviet invasion.
Didn’t the British help as well by unloading gold at the bottom of the market?
Between 1999 and 2002, the UK embarked on an aggressive selling of its gold reserves, when gold prices were at their lowest in 20 years. Prior to starting, the Chancellor of the Exchequer, Gordon Brown, announced that the UK would be selling more than half of its gold reserves in a series of auctions in order to diversify the assets of the UK’s reserves. The markets’ reaction was one of shock, because sales of gold reserves by governments had until then always taken place without any advance warning to investors. Brown was following the Fed’s strategy of inducing a fall in the gold price via an announcement of possible sales. Brown’s move was therefore not intended to receive the best price for its gold but rather to bring down the price of gold as low as possible. The UK eventually sold almost 400 tons of gold over 17 auctions in just three years, just as the gold market was bottoming out. Gordon Brown’s sale of the UK’s gold reserves probably came about following a request from the US. The US supported Brown ever since.
How do they manipulate gold nowadays?
The transition from open outcry (where traders stand in a trading pit and shout out orders) to electronic trading gave new opportunities to control financial markets. Wall Street veteran lawyer Jim Rickards presented a paper in 2006 in which he explained how ‘derivatives could be used to manipulate underlying physical markets such as oil, copper and gold’. In his bestseller entitled Currency Wars, he explains how the prohibition of derivatives regulation in the Commodity Futures Modernization Act (2000) had ‘opened the door to exponentially greater size and variety in these instruments that are now hidden off the balance sheets of the major banks, making them almost impossible to monitor’. These changes made it much easier to manipulate financial markets, especially because prices for metals such as gold and silver are set by trading future contracts on the global markets. Because up to 99% of these transactions are conducted on behalf of speculators who do not aim for physical delivery and are content with paper profits, markets can be manipulated by selling large amounts of contracts in gold, silver or other commodities (on paper). The $200 crash of the gold price April 12 and 15, 2013 is a perfect example of this strategy. The crash after silver reached $50 on May 1, 2011 is another textbook example.
For how long can this paper-gold game continue?
As you have been reporting yourself we can witness several indications pointing towards great stress in the physical gold market. I would be very surprised when the current paper gold game can be continued for another two years. This system might even fall apart in 2014. A default in gold and/or silver futures on the COMEX is a real possibility. It happened to the potato market in 1976 when a potato-futures default happened on the NYMEX. An Idaho potato magnate went short potatoes in huge numbers, leaving a large amount of contracts unsettled at the expiration date, resulting in a large number of defaulted delivery contracts. So it has happened before. In such a scenario futures contracts holders will be cash settled. So I expect the Comex will have to move to cash settlement rather than gold delivery at a certain point in the not too distant future. After such an event the price of gold will be set in Asian markets, like the Shanghai Gold Exchange. I expect gold to jump $1000 in a short period of time and silver prices could easily double overnight. That’s one of the reasons our Commodity Discovery Fund invests in undervalued precious metal companies with large gold/silver reserves. They all have huge up-side potential in the next few years when this scenario will play out.
In Gold We Trust
Synopsis of The Big Reset: Now five years after the near fatal collapse of world’s financial system we have to conclude central bankers and politicians have merely been buying time by trying to solve a credit crisis by creating even more debt. As a result worldwide central bank’s balance sheets expanded by $10 trillion. With this newly created money central banks have been buying up national bonds so long term interest rates and bond yields have collapsed. But ‘parking’ debt at national banks is no structural solution. The idea we can grow our way back out of this mountain of debt is a little naïve. In a recent working paper by the IMF titled ‘Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten’ the economist Reinhart and Rogoff point to this ‘denial problem’. According to them future economic growth will ‘not be sufficient to cope with the sheer magnitude of public and private debt overhangs. Rogoff and Reinhart conclude the size of the debt problems suggests that debt restructurings will be needed ‘far beyond anything discussed in public to this point.’ The endgame to the global financial crisis is likely to require restructuring of debt on a broad scale.
About the author: Willem Middelkoop (1962) is founder of the Commodity Discovery Fund and a bestselling Dutch author, who has been writing about the world’s financial system since the early 2000s. Between 2001 and 2008 he was a market commentator for RTL Television in the Netherlands and also appeared on CNBC. He predicted the credit crisis in his first bestseller in 2007.
This article was written by Graham Summers and originally published atPhoenixCapitalResearch.com
History is often written to benefit certain groups over others.
Indeed, you will often find the blame for some of the worst events in history placed on the wrong individuals or factors. Most Americans today continue to argue over liberal vs. conservative beliefs, unaware that the vast majority of economy ills plaguing the country originate in neither party but in the Federal Reserve, which has debased the US Dollar by over 95% in the 20thcentury alone.
With that in mind, I want to consider what actually caused the hyperinflationary period in Weimar Germany. Please consider the quote from Niall Ferguson’s book, “The Ascent of Money” regarding what really happened there:
Yet it would be wrong to see the hyperinflation of 1923 as a simple consequence ofthe Versailles Treaty. That was how the Germans liked to see it, of course…All of this was to overlook the domestic political roots of the monetary crisis. The Weimar tax system was feeble, not least because the new regime lacked legitimacy among higher income groups who declined to pay the taxes imposed on them.
At the same time, public money was spent recklessly, particularly on generous wage settlements for public sector unions. The combination of insufficient taxation and excessive spending created enormous deficits in 1919 and 1920 (in excess of 10 per cent of net national product), before the victors had even presented their reparations bill… Moreover, those in charge of Weimar economic policy in the early 1920s felt they had little incentive to stabilize German fiscal and monetary policy, even when an opportunity presented itself in the middle of 1920.
A common calculation among Germany’s financial elites was that runaway currency depreciation would force the Allied powers into revision the reparations settlement, since the effect would be to cheapen German exports.
What the Germans overlooked was that the inflation induced boom of 1920-22, at a time when the US and UK economies were in the depths of a post-war recession, caused an even bigger surge in imports, thus negating the economic pressure they had hoped to exert. At the heart of the German hyperinflation was a miscalculation.
You’ll note the frightening similarities to the US’s monetary policy today. We see:
1 Reckless spending of public money, particularly in the form of entitlement spending
2 Excessive spending resulting in massive deficits.
3 Little incentive for political leaders to rein in said spending.
4 Intentional currency depreciation in order to make debt payments more feasible.
This sounds like a blueprint for what US leaders (indeed most Western leaders) have engaged in post-2007. The multi-trillion Dollar question is if we’ve already crossed the line in terms of setting the stage for massive inflation down the road.
We believe that it is quite possible… for the following reasons.
The US now sports a Debt to GDP ratio of over 100%.
Every 1% rise in interest rates will result in over $100 billion more in interest payments on US debt.
Indications of inflation (stealth price hikes, wage protests, etc.) are showing up throughout the economy.
Indications that other countries are moving to abandon the US Dollar are present.
In a nutshell we are in a very dangerous position. This doesn’t mean hyperinflation HAS to occur. Indeed, history often times rhymes rather than repeats. However, the fact of the matter is that the same policies which create Weimar Germany are occurring in the US today. How they play out remains to be seen, but it is unlikely it will end well.
January 24, 2014
Sovereign Valley Farm, Chile
One of the greatest lies of the modern financial system (and that’s really saying something) is about inflation.
The puppet masters who control the system have managed to convince people that deflation = bad, and inflation = necessary evil.
Perhaps the even bigger lie is that of the actual inflation statistics. They tell us that there’s no inflation… or minimal inflation.
And they tell us that the ‘target’ rate is 2%. Bear in mind that 2% annual inflation means your currency will lose over 75% of its value during the course of your lifetime.
But these figures are massively understated. And you don’t have to look hard for proof.
US postage stamp rates, for example, are set to increase this weekend. They’ve been going up almost every year since 2006.
This weekend, the rate for a one-ounce first class letter will rise to 49c from 46c, a 6.5% increase. And the price to send a postcard will rise from 33c to 34c, a 3.0% increase.
If you take a longer-term view, the price of a postcard back in 1951 was just one cent. This means that the dollar has lost over 97% of its value against postcard shipping rates in the last six decades.
Let’s look at this another way.
According to the US Department of Labor, the average household income in 1950 was $4,237. This means that the average US household could afford to send 423,700 postcards back then.
Today’s median household income is $51,017 (and that’s from a majority of dual-income households). This means the average family in the Land of the Free can now afford to send about 150,050 postcards.
It’s a huge difference. The standard of living denominated in postcards has declined by nearly two-thirds since the 1950s.
Short-term, long-term, the conclusion is the same: Inflation exists.
And any suggestion to the contrary that inflation is ‘good’ or at least a ‘necessary evil’ is simply a lie. It destroys both purchasing power and standard of living.
Rational, thinking people need to be aware of this. If you hold a lot of your savings in a bank denominated in paper currencies like the dollar or euro, you will lose.
And I’d strongly urge you to consider holding at least a portion of your savings in stronger, more stable currencies, or better yet, alternative asset classes that cannot be inflated away by central bankers.
This includes productive real estate, precious metals, or even collectibles.
Canada’s inflation rate quickened somewhat to 1.2 per cent in December, higher than November’s level but still low by historical standards.
Statistics Canada said Friday the consumer price index was led higher by gasoline, which was 4.7 per cent more expensive at the end of 2013 than it was at the end of 2012.
The loonie reacted mildly positively to the news, trading up about a quarter of a cent to 90.34 cents US.
Six of the eight categories of items that Statistics Canada tracks the price of were higher.
Prices increased in every province except B.C., where they were flat.
Loonie inches higher
If pump prices are stripped out, inflation would have come in at 1.1 per cent.
That’s still within the band of between one and three per cent, where the Bank of Canada likes to see the rate stay, but it has been on the lower end of that range for a while.
In its latest interest rate decision, the central bank said it expects inflation to remain subdued for a while yet.
Canada’s inflation rate averaged 0.9 per cent last year. That’s down from 1.5 per cent in 2012 and the softest rate since during the recession in 2009.
“When we are already below [our inflation] target, as we are today, we care more about downside risks than upside ones,” Bank of Canada governor Stephen Poloz said earlier this week.
That’s the central bank’s way of saying it’s less concerned about prices rising to fast, and instead focused on ensuring the economy doesn’t slip any further into disinflation or even deflation.
There’s a lag time of a few months before the impact of Canada’s lower loonie is likely to show itself in inflation data. So economists are expecting the inflation number to come in on the low end of the central bank’s target range for the next several months.
“The inching up in year-on-year [inflation] should not give the [central bank] very much solace on inflation,” Scotiabank said in a commentary Friday morning.
“We don’t expect annual CPI to remain above 1 per cent for too long,” the bank said.
UPDATE: The Argentine Trade Balance missed surplus expectations by the most in 3 years (and 2nd most on record).
As those who follow Zero Hedge on twitter know, we have recently shown a keen interest in the collapse of the Argentine currency reserves – most recently at $29.4 billion – which have been declining at a steady pace of $100 million per day over the past week, as the central bank desperately struggles to keep its currency stable. Actually, make that struggled. Here is what we said just yesterday:
The decline continues: ARGENTINA’S RESERVES FELL $80M TODAY TO $29.4B: CENTRAL BANK
— zerohedge (@zerohedge) January 22, 2014
As of today it is not just the collapse in the Latin American country’s reserves, but its entire currency, when this morning we woke to learn that the Argentina Peso (with the accurate identifier ARS), had its biggest one day collapse since the 2002 financial crisis, after the central bank stopped intervening in currency markets. The reason: precisely to offset the countdown we had started several days back, namely “an effort to preserve foreign exchange reserves that have fallen by almost a third over the last year” as FT reported.
As the chart below shows, the official exchange rate cratered by over 17% when the USDARS soared from 6.8 to somewhere north of 8.
But as most readers know, just like in Venezuela, where the official exchange rate is anywhere between 6.40 and 11, and the unofficial is 78.85, so in Argentina the real transactions occur on the black market, where they track the so-called Dolar Blue, which as of this writing just hit an all time high of 12.90 and rising fast.
What happens next? Nothing good. “The risk of capital flight is rising by the minute. This will be very hard to control,” wrote Dirk Willer, strategist at Citigroup, adding that liquidity had “largely disappeared” with a risk of Venezuela-style capital controls. Ah Venezuela – that socialist paradise with a soaring stock market… even if food or toilet paper are about to become a thing of the past.
Some other perspectives via the FT:
Siobhan Morden of Jeffries said: “This is not an administration that respects or understands market pressure. They have been in the early stages of currency crisis since December, and yet their main strategy has been to pay off arrears and try to attract foreign direct investment.”
Luis Secco, Buenos Aires economist, said “It is hard to figure out what is the logic behind the authourities decision to let the peso so abruptly, without any other accompanying macroeconomic policy. It’s possible that the authorities would rather see a strong rise in the dollar, than lose, again, a large quantity of reserves.”
“It is a potentially dangerous situation…not least because it could give the impression that the authorities don’t have a very clear idea of how to manage the situation.”
Ricardo Delgado, Buenos Aires economist, said on Wednesday: “The government faces a dilemma. It wants to stop reserves from falling. But that means less imports and thus lower growth, as the economy is very dependent on imports. So the question is: do you want more growth, or higher foreign reserves.“
However, with the “currency run” having once again begun, absent a wholesale bailout and/or backstop by “solvent” central banks of Argentina, a country which has hardly been on good speaking terms with the western central banks, there is little that the nation can do.
So for all those morbidly curious individuals who are curious what the slow-motion train wrecked death of yet another currency will look like, below is a link to the DolarBlue website, aka the front row seats where the true level of the Argentina currency can be seen in real time. If and when this number takes off parabolically, that’s when the panic really begins – first in Argentina, then elsewhere.
Of course, it’s not just Argentina – most of the world’s emerging market FX is getting hammered year-to-date…
As the saying goes, ‘desperate times call for desperate measures.’
The phrase is bandied about so frequently, it’s generally accepted truth. But I have to tell you that I fundamentally disagree with the premise.
Desperate times, in fact, call for a complete reset in the way people think. Desperate times call for the most intelligent, effective, least destructive measures. But these sayings aren’t as catchy.
This old adage has become a crutch– a way for policymakers to rationalize the idiotic measures they’ve put in place:
- Inflation-adjusted interest rates that are… negative.
- Trillion dollar deficits.
- Endless wars and saber-rattling
- Unprecedented expansion of central bank balance sheets.
- DIRECT CONFISCATION of people’s bank accounts.
But hey… desperate times call for desperate measures. I guess we’re all just supposed to be OK with that.
One of those desperate measures that’s been coming up a lot lately is the re-re-re-introduction of capital controls.
It started in late 2012, when both the European Central Bank and the International Monetary Fund seperately endorsed the use of capital controls.
For the IMF, it was a staunch reversal of its previous position, and Paul Krugman lauded the agency’s “surprising intellectual flexibility” a few days later.
The IMF then followed up in 2013 with another little ditty proposing a global wealth tax. The good idea factory is clearly working ’round the clock over there.
Lately, two more leading economists– Harvard professors Carmen Reinhart and Ken Rogoff– have joined the debate.
In a speech to the American Economic Association earlier this month, the pair suggested that rich economies may need to resort to the tactics generally reserved for emerging markets.
This is code for financial repression and capital controls.
The idea behind capital controls is simple: create barriers to restrict the free flow of capital. And if you’re on the receiving end, capital controls can be enormously destructive.
But for politicians, capital controls are hugely beneficial; once they trap funds within their borders, the money can be easily taxed, confiscated, or inflated.
Historically, capital controls have been used in ‘desperate times’. Too much debt. Too much deficit spending. Wars. Huge trade deficit. Intentional currency devaluation. Etc.
Does any of this sound familiar? It’s no surprise that policymakers have once again turned to this ‘desperate measure’. They’re already here.
Iceland has capital controls, over five years after its spectacular meltdown. We can also see capital controls in Cyprus, India, Argentina, etc.
I’ve been writing for years that capital controls are a foregone conclusion. This is no longer theory or conjecture. It’s happening. And every bit of objective evidence suggests that the march towards capital controls will quicken.
This is a HUGE reason to consider holding a portion of your savings overseas in a strong, stable foreign bank where your home government won’t as easily be able to trap your savings.
Other options including storing physical gold (even anonymously) at an overseas depository. Or if you’re inclined and tech savvy, you can also own digital currency.
But perhaps the best way to move some capital abroad is to own foreign real estate, especially productive land.
Foreign real estate is not reportable. It’s a great store of value. It generates both financial profits and personal resilience. It’s a LOT harder to forcibly repatriate. And it ensures that you always have a place to go in case you need to get out of Dodge.
Even if nothing ‘bad’ ever happens, you won’t be worse off for owning productive land in a thriving economy.
Like I said– desperate times don’t call for desperate measures. More than ever, it’s time for a complete reset in the way we look at the most effective solutions. These options are certainly among them.
For Dominga Kanaza, it wasn’t just the soaring inflation or the weeklong blackouts or even the looting that frayed her nerves.
It was all of them combined.
At one point last month, the 37-year-old shop owner refused to open the metal shutters protecting her corner grocery in downtown Buenos Aires more than a few inches — just enough to sell soda to passersby on a sweltering summer day.
“It was scary,” said Kanaza as she yelled out prices to customers while sipping on mate, Argentina’s caffeine-rich herbal drink. The looting that began in neighboring Cordoba province when police officers left streets unguarded to strike for higher pay had spread to the outskirts of Buenos Aires, sparking panic in Kanaza’s neighborhood. The chaos, she said, was like nothing she had seen since the rioting that followed the South American nation’s record $95 billion default in 2001.
Thirteen years after that collapse, President Cristina Fernandez de Kirchner is running out of time to avert another crisis. The policy mix that Fernandez and her late husband and predecessor, Nestor Kirchner, used to usher in 7 percent average annual growth over the past decade — higher government spending financed by printing money — is unraveling.
Inflation soared to 28 percent last year, according to opposition lawmaker Patricia Bullrich, who divulges monthly estimates for economists cowed into silence by Fernandez’s crackdown on price reports that clash with official figures. By the government’s count, inflation was less than 11 percent.
The peso sank 3.5 percent to a record low of 7.14 per dollar yesterday, according to Banco de la Nacion Argentina, and has plunged more than 25 percent in the past 12 months. That’s its worst selloff since the devaluation that followed the default. Currencies from only three countries in the world have fallen more: war-torn Syria, Iran and Venezuela.
Power outages like the one that sunk Kanaza’s shop into darkness are becoming more frequent, deepening the economic slump, after the nation’s grid atrophied under a decade of government-set electricity price controls. The International Monetary Fund, which censured Argentina last year for misreporting inflation, predicts economic growth will slow to 2.8 percent this year, about half the 5.1 percent average across developing nations.
Fernandez’s biggest financial problem is the loss of foreign reserves. They’ve tumbled 44 percent in the past three years to $29.5 billion as prices on the country’s soy and wheat exports slumped and Argentines circumvented currency controls created to keep dollars onshore. The government sought to stiffen those restrictions again yesterday, limiting people to two online purchases a year from overseas providers.
For a country that remains locked out of international debt markets as it haggles with billionaire hedge fund manager Paul Singer over lawsuits stemming from the default, the reserves are its main source of dollars to pay holders of $30 billion of bonds who accepted restructuring terms. When other foreign-currency obligations are included, the amount owed swells to $50 billion.
Investors are bracing for the possibility of another default. The country’s average dollar bond yield of 12 percent is the highest among major developing nations after Venezuela. Trading in swap contracts that insure bonds shows investors see a 79 percent probability of a halt in payments over the next five years, a reflection in part of concern that Singer’s demand of full repayment on the securities he kept from the 2001 default will disrupt debt servicing.
“We’re seeing some sort of day of reckoning,” said Diego Ferro, co-chief investment officer in New York at Greylock Capital Management, which has been investing in the country’s debt since the 1990s. “The adjustment will have to happen if Argentina doesn’t want to hit a wall before 2015.”
Fernandez, 60, has overhauled her cabinet and reworked some policies in a bid to stem the capital flight. In her first day back on the job in November following surgery to remove a blood clot near her brain, she replaced the economy minister, cabinet chief, agriculture minister and central bank president. A day later, Guillermo Moreno, the trade secretary who played the strongman enforcing price controls, was gone.
The new cabinet pledged to work with the IMF to improve data, began talks to settle $6.5 billion of overdue debt with Paris Club creditor nations and unveiled plans to compensate Spain’s Repsol SA for the seizure of its local oil unit in 2012. Bonds advanced, driving yields on the country’s benchmark securities to a one-year low of 11.07 percent on Nov. 29.
Ferro doubts the measures are enough. Bolder steps, such as reaching a deal with Singer to regain access to overseas markets and lifting currency controls, are needed to regain investor confidence, he said. The bond rally began to falter in early December. By mid-month, all the gains had been erased.
An Economy Ministry spokeswoman didn’t return telephone calls seeking comment on the government’s financing plans.
Fernandez is giving no indication of what her next move is. After re-appearing following the five-week absence for surgery, she vanished again, spending much of December holed up in her 5,600-square-foot (520 square meters) brick villa in Patagonia. She went another five weeks without making a public appearance before unveiling a new student aid program before supporters in the presidential palace last night.
And that’s perhaps what angers Argentines like Miguel Llanes the most. While the looting spread across the country from Cordoba and the blackouts dragged on day after day in the capital city, Fernandez was nowhere to be seen. Llanes, unable to open his curtain shop in downtown Buenos Aires for over a week, vented by joining protesters who were burning tires and garbage in the streets.
“Where was the president?” he shouts.
And then he raises a question that holders of $50 billion of Argentine bonds are dying to know.
“How long will this last? They’ve spent all the money.”
To contact the editor responsible for this story: Laura Zelenko at firstname.lastname@example.org