Month: December 2019

Submitted by Nicholas Colas of DataTrek Research

With Paul Volcker’s passing on Sunday we would like to dedicate Story Time Thursday to some personal recollections and lesser-quoted wisdom from “Tall Paul”.

#1: I met Paul Volcker a few years ago, and since we share a birthday (September 5th) I used that to start a conversation with him. His observation was that he had benefited greatly from the timing of his birth. “In my day, you got to start school as soon as you turned 5. Since the school year started in early September, I got to go earlier than most kids.” Paul Volcker was, at heart, a true analyst and considered the role of something over which he had no control as important to his eventual success.

Since there were many other people waiting to talk to him, my only other question was why his only long-form press interview as Fed Chair was with Andy Warhol’s Interview magazine. “That was Ida’s doing… no one in DC ever said no to Ida.” It’s true, that. Ida Ginsburg was a famous 1970s socialite who hosted the most exclusive dinner parties in Washington. She was a huge Warhol fan, and the feeling was mutual enough that Andy made her Interview’s DC editor and head interviewer.

#2: That Interview magazine article (June 1987) is not available online, but I have a hard copy and it shows much about why Volcker was so successful in his time as Fed Chair:

• On the Federal Reserve’s independence. Current Chair Powell is not the first Fed head to be threatened with firing. Then-Treasury Secretary Don Regan under President Reagan openly agitated for a change to the laws governing a Fed Chair’s tenure in order to remove Volcker. His policy of high interest rates to dampen inflation was not popular in the White House, of course. When asked if this scared him, Volcker’s reply was “No… what could I do about it?” White House pressure clearly played no role in Volcker’s thinking. He could not have cared less…

• On how much the general population understands monetary and fiscal policy. Volcker had a great deal of confidence in the American people: “It’s basically common sense, and sometimes ordinary people know what you’re dealing with better than very sophisticated people.” “Is something the matter if you don’t save very much? Is something the matter if you don’t invest very much? Those aren’t very complicated concepts.”

#3: The other interview with Volcker that sticks in my mind was one he gave PBS back in 2000 for its excellent series “Commanding Heights”. As Chair Powell mentioned at the start of Wednesday’s press conference, it was Volcker’s success in taming inflation that paved the path for decades of prosperity thereafter. As it turns out, it wasn’t just economic theory that guided Volcker’s thinking about monetary policy.

• Volcker saw the value of a country’s money as a national moral obligation. “The issue of money is a government responsibility predominantly, and to use that authority in a way that leads to inflation is a system that fools a lot of people, and to keep doing it you have to do it more and more.”

• He also saw a nation’s monetary system as central to its citizens’ confidence in all government: “It (bad monetary policy) corrodes trust, particularly trust in government. It is a governmental responsibility to maintain the value of the currency they issue. And when they fail to do that, it is something that undermines an essential trust in government.”

The bottom line is that, yes, Paul Volcker was the right person holding the right job at the right time in history but his guiding principles apply more broadly. He understood at a deep and intuitive level that all government institutions – including the Fed – have to connect their actions to the needs of ordinary citizens. At times, that takes conviction and even some risk to personal reputation. Get it right, as Volcker did, and the resultant success will outlive the individual who made the tough calls for the right reasons.

Source: PBS Interview: https://www.pbs.org/wgbh/commandingheights/shared/minitext/int_paulvolcker.html

A few short days after former psychologists at the NHS’s flagship Gender Identity Development Service (GIDS) told Sky News they feared young people were “being over-diagnosed and then over-medicalised,” warning that:

“We fear that we have had front-row seats to a medical scandal.”

The Daily Mail reports that Australian doctors, writing in the Journal Of Autism And Developmental Disorders, stated that

“The few studies employing diagnostic criteria for ASD suggest a prevalence of 6-26 per cent in transgender populations.”

Notably, they added, that this was “higher than the general population, but no different from individuals attending psychiatric clinics.”

The Australians also quoted ‘definitive findings’ from a US study of almost 300,000 children, which discovered those with autism “were over four times as likely to be diagnosed with gender dysphoria” compared to those without autism.

Last year The Mail on Sunday unearthed an internal study by GIDS in London, also known as the Tavistock Clinic, which found 35 per cent of children and teenagers referred there between 2011 and 2017 had “moderate to severe autistic traits.”

A recent study published in the American Journal of Preventive Medicine found that 80 percent of gender minority students report having mental health problems, nearly double the rate of “cisgender” students. 

This should not come as a huge surprise to many, as a reminder, in 2017, The American College of Pediatricians issued a statement condemning gender reclassification in children by stating that transgenderism in children amounts to child abuse.

“The American College of Pediatricians urges educators and legislators to reject all policies that condition children to accept as normal a life of chemical and surgical impersonation of the opposite sex. Facts – not ideology – determine reality.”

The policy statement listed eight arguments on why gender reclassification is harmful.

1. Human sexuality is an objective biological binary trait: “XY” and “XX” are genetic markers of health – not genetic markers of a disorder.

2. No one is born with a gender. Everyone is born with a biological sex. Gender (an awareness and sense of oneself as male or female) is a sociological and psychological concept; not an objective biological one.

3. A person’s belief that he or she is something they are not is, at best, a sign of confused thinking. When an otherwise healthy biological boy believes he is a girl, or an otherwise healthy biological girl believes she is a boy, an objective psychological problem exists that lies in the mind not the body, and it should be treated as such.

4. Puberty is not a disease and puberty-blocking hormones can be dangerous. Reversible or not, puberty-blocking hormones induce a state of disease – the absence of puberty – and inhibit growth and fertility in a previously biologically healthy child.

5. According to the DSM-V, as many as 98% of gender confused boys and 88% of gender confused girls eventually accept their biological sex after naturally passing through puberty.

6. Children who use puberty blockers to impersonate the opposite sex will require cross-sex hormones in late adolescence. Cross-sex hormones (testosterone and estrogen) are associated with dangerous health risks including but not limited to high blood pressure, blood clots, stroke and cancer.

7. Rates of suicide are twenty times greater among adults who use cross-sex hormones and undergo sex reassignment surgery, even in Sweden which is among the most LGBQT – affirming countries.

8. Conditioning children into believing a lifetime of chemical and surgical impersonation of the opposite sex is normal and healthful is child abuse.

Finally, as Paul McHugh, a renowned psychiatrist from Johns Hopkins University, told The College Fix, transgender people are being experimented on because the doctors treating transgender patients with hormones “don’t have evidence that (the treatment) will be the right one.”

He also criticized the manner of treatment given to many children who claim to be transgender.

“Many people are doing what amounts to an experiment on these young people without telling them it’s an experiment,” he told The Fix via phone.

“You need evidence for that and this is a very serious treatment. It is comparable to doing frontal lobotomies.”

Simply put, as McHugh dared to admit in public, the medical and psychiatric industries are reckless and irresponsible in their treatment of patients who claim to be transgender.

Authored by Sarah Cowgill via LibertyNation.com,

The American electorate may be on the receiving end of an early Christmas present as the entire field of Democratic presidential wannabes that made the grade are boycotting their own December 19 debate. After months of pandering for press and polling numbers and increasing amounts of individual donors, a simple labor dispute has the field tweeting out their collective disgust at the battle taking place at the scheduled venue, Loyola Marymount University.

The issue is simple. No self-identifying Democrat will cross the picket line and snub UNITE HERE Local 11, the union representing cooks, dishwashers, cashiers, and servers – employed by global services company Sodexo –  who toil away for Loyola Marymount University (LMU) students, faculty, and staff. In an ongoing – as in seemingly never ending – heated battle, UNITE HERE Local 11 is going toe-to-toe with Sodexo for increased wages and benefits.

What better stage to force Sodexo to their negotiating knees than the Democratic primary debate? Of course, everyone from LMU, UNITE HERE, and the Democratic National Committee – who had to move this tired sixth debate locale from UCLA to LMU over another labor dispute – is in a tizzy.

What’s The Deal?

Since early last spring, Local 11 has been in negotiations on a collective bargaining agreement with Sodexo – a subcontractor by Loyola Marymount University for foodservice operations and human resources, such as vetting and hiring workers on campus. But as negotiations between labor and corporate America rarely are an easy feat, there is no such resolution in the near future – namely by debate time. A picket line with all eyes on the not so magnificent seven who have qualified is an optic Local 11 would be foolish to pass up.

They didn’t waste a moment: One week out and Local 11 has a picket line ready to roll, daring the Dems to cross it.

Sen. Elizabeth Warren (D-MA) was the first to raise her Twitter fist in solidarity: “Unite Here is fighting for better wages and benefits—and I stand with them. The DNC should find a solution that lives up to our party’s commitment to fight for working people. I will not cross the union’s picket line even if it means missing the debate.”

Joe Biden

And then everyone else rushed to make the same pledge. Former Vice President Joe Biden said, “A job is about more than just a paycheck. It’s about dignity.”

Don’t you just feel warm and fuzzy inside now?

Susan Minato, Co-President of UNITE HERE Local 11, issued a public statement that seemed to mean more for the DNC. She said she “hoped that workers would have a contract with wages and affordable health insurance before the debate next week,” before adding the “or else” of a picket line.

DNC spokeswoman Xochitl Hinojosa tweeted the official party stance:

“Working with all stakeholders to find an acceptable resolution that meets their needs and is consistent with our values and will enable us to proceed as scheduled. Tom Perez would absolutely not cross a picket line and would never expect our candidates to either.”

Oh Please, Oh Please

As America readies for a holiday fraught with uncertainty, thanks to the actions of Congress, the Dems face yet another problem in getting a clear message to the electorate. Will the big day be lights out for the struggling field of candidates? Does anyone even tune in anymore for the debates?

This sixth weeding of candidates – if it happens at all – will be the first to be held in California before the state’s March 3, 2020, primary election. It’s a big deal to be in the state yammering about climate change, free stuff, and deflating the bad orange man to potential voters. Perhaps Tom Perez, the chair of the listing DNC ship, can use his experience as former President Barack Obama’s Secretary of Labor and get the job done. But I’d wager that America hopes the picket goes off and the debate doesn’t.

The day started off poorly in AsiaPac with Aussie PMIs notably disappointing (both Services and Manufacturing in contraction).

The latest Commonwealth Bank Flash Composite PMI® pointed to a further marginal decrease in business activity across the manufacturing and service sectors in the final month of 2019. Weakness was particularly evident at manufacturers, which saw the sharpest decline in the 44-month survey history.

Commenting on the Commonwealth Bank Flash PMI data, CBA Chief Economist, Michael Blythe said:

“The PMI readings indicate that the Australian economy ended 2019 on a softish note. The RBA’s “gentle turning point” for the economy remains elusive. And the weakness in private spending evident in the Q3 GDP data looks to have continued in Q4, with a flow on to labour demand as well. There were also some early indications that the disruptions associated with the terrible bushfires around Sydney and elsewhere are having some impact.”

This was followed by New Zealand Institute of Economic Research lowering GDP growth expectations to 2.2% (from 2.3% in previous survey published in September), lowering wage inflation expectations as well as employment and raising overall inflation forecasts.

Then Japan’s PMIs hit with manufacturing contracting further and Services rebounding modestly (as the composite Japan PMI was flat from November (and still in contraction).

Commenting on the latest survey results, Joe Hayes, Economist at IHS Markit, said:

“Latest survey data showed that the Japanese economy remained stagnant in December, following on from a similar outturn in November. Taking fourth quarter survey data as a whole, the poor performance in October could see Japan’s economy dip into contraction.

“The most disconcerting takeaway from fourth quarter survey data has been the marked loss of momentum in the service sector, which alongside domestic consumption, has been a key driving force of the economy in 2019, negating much of the manufacturing malaise. It is now clear that the service sector is unable to offset the industrial weakness, which does not bode well for growth prospects in 2020.

“That said, the recent stimulus package launched by Abe has the potential to breathe life back into the domestic economy. Indeed, this will certainly alleviate pressure on the Bank of Japan to take immediate policy action if the economic outlook worsens.”

And finally, the big kahuna, China released its November data – all of which were expected to improve sequentially after disappointing weakness in October.

Chinese data has miraculously rebounded in the last few weeks with China’s manufacturing PMIs coming in on the high side for November, with both the official and the Caixin gauges beating the median forecast and showing some improvement from October.

Source: Bloomberg

So here is tonight’s smorgasbord of ‘managed’ misinformation from China…

China’s New Home Prices rose at just 0.3% MoM – below expectations and the weakest growth since Feb 2018…

Source: Bloomberg

And then the rest of the China data avalanche hit…

• China’s Fixed Assets Investment YoY was +5.2% as expected and the same as October

• China Industrial Production YoY rose by 5.6% (the same as October but better than the expected 5.5% rise)

• China Retail Sales YoY jumped to +8.0% (from +7.2% and better than the 7.6% expected) but the impact of inflation, which will push the nominal level higher. CPI rose 4.5% in November year on year (thanks to soaring pork prices driving food inflation dramatically higher), well above the 3.8% rise in October.

• China Surveyed Jobless Rate remained at 5.1%

• China Property Investment YoY slowed modestly to +10.2%

So all in all, flat to positive reports from China

Source: Bloomberg

So the big question is, how much of a lift retail sales got from inflation.

Additionally, Bloomberg reports that Iris Pang, an economist at ING Bank, says retail sales are distorted somewhat by a long holiday in October that had depressed some spending. But, she does see the numbers overall as positive for growth.

As China’s credit impulse inched into the positive… (despite Chinese policy makers’ crackdown on shadow lending – credit extended outside of bank balance sheets – which has contracted for at least 14 straight months – and has been a major dampener for growth.)

Source: Bloomberg

And China defaults are soaring…

Source: Bloomberg

Of course, given the “phase one” deal that is being heralded by so many, all of this will be cleared up and economic growth will soar to the moon, alice. Or maybe, just maybe, none of the slowdown in economic growth was related to trade wars’ de minimus tariffs at all, and in fact, the limit of printing money, raising debt, and forcing consumption has been reached globally.

PBOC fixed the yuan below 7.00 (at 6.9915), the strongest since August 6th, and we note that Chinese stocks opened lower (despite the trade deal).

Authored by Mark Glennon via Wirepoints.org,

A commenter here recently asked it this way: “How high would income taxes have to ramp in order to offset reducing Illinois’ property tax burden to that of Indiana, Iowa or Wisconsin?”

That’s a great angle to look at it from because you learn much by seeing that math. Don’t worry, we’ve done the math for you below. You’ll see that no meaningful property tax relief is possible without major, structural reforms that cut spending. You’ll also see that Governor JB Pritzker’s property tax relief task force cannot be expected to come up with much. Its report is due out by the end of this month.

The reason is simple. The numbers are overwhelming. Meaningful property tax cuts can’t be achieved without real spending reforms.

Here is the answer to that commenter’s question:

• If we cut Illinois’ residential property tax rates to match Indiana’s and shifted the burden to the state income tax, we’d have to cut property tax rates by 56% and nearly double the income tax. Seventeen billion dollars of property tax revenue would be lost, which represents 92% of what Illinois collects on the state income tax.

• Even to match Wisconsin’s property tax rates, which are fourth highest in the nation, Illinois would have to cut its property tax rates by 24%, and shifting that to the income tax would mean a $7.6 billion income tax increase – a 40% jump.

• Iowa’s property tax rates are one-third lower than ours, and cutting ours to match theirs would mean a $10 billion income tax hike – a 54% increase.

For perspective on how big those tax hikes would be, consider that the pending progressive income tax proposal – the “Fair Tax” – is optimistically estimated to raise just $3.5 billion of additional revenue. So, it would cost five times that to match Indiana’s property tax rates through an Illinois income tax hike. New revenue from the Fair tax is less than half of what it would take even to match high-tax Wisconsin’s property tax rate.

That’s just part of the absurdity of claims that the Fair Tax will help cut property taxes meaningfully. The $3.5 billion of new revenue from the Fair tax has already been promised away several times over. Endless messaging from supporters says the tax would also provide for fixing the state’s structural deficit, investing in schools and health care, fixing our crumbling infrastructure, creating thousands of jobs, “paying off the Republican Party’s old bills,” assuring that domestic violence shelters are kept open, helping stabilize our pensions, putting us on a path to fiscal stability and more. Truly paying for all that’s been promised from the Fair Tax would require tax rates that become absurd, which we’ve estimated before.

Nor can you expect much help from the Property Tax Relief Task Force. It’s not charged with producing the kinds of drastic spending reforms that are truly needed, including genuine pension reform and the constitutional amendment needed for that. Besides, the Pritzker Administration has ruled that out. The task force now has over 80 members, making it difficult to see how it will agree on anything bold. They already rejected a measure on perhaps the most obvious, albeit small, reform needed, which is putting an end to lawmakers running property tax appeal businesses as side jobs.

What about the pending legislation to consolidate investment functions of suburban and downstate police and firefighter pensions? Isn’t it supposed to relieve the property tax burden? It will only save an estimated $164 to $500 million per year, according to Pritzker, and that’s entirely speculative. That’s only 1.6% of property taxes at best, and nobody knows whether any savings from the plan will really go into property tax relief instead of being spent elsewhere.

The initial aspect of the problem is that Illinois property taxes are monstrous – highest in the nation along with New Jersey. They total $31 billion across the state, which is far higher than any other source of government revenue for Illinois and its municipalities.

But the ultimate, core problem when you add them together with all other taxes imposed statewide and locally is that we end up as America’s “least tax-friendly state,” as Kiplinger Personal Finance recently put it. It’s that total that’s the problem.

Maybe the Property Tax Task Force will suggest at least some of the reforms that would help, such as consolidation of school districts and other units of government. But returning Illinois to competitive levels of taxation and services will require a long list of reforms small and large that address the state’s total tax burden. They include real pension reform, collective bargaining reforms, ending unfunded mandates imposed by the state on municipalities and much more.

In summary, any meaningful property tax reduction, such as matching rates for neighboring states, would require reforms that our political establishment won’t consider.

The former Indian Chief Economic Adviser Arvind Subramanian warned that the Indian economy is headed for increased financial hardships, reported Business Today.

Subramanian said the country’s current economic slowdown is considered a “Great Slowdown.” He suggested that the economy is headed towards an “intensive care unit,” referencing how the economy is on life support.

He warned that the second wave of twin balance sheet (TBS) crises is crushing the economy, which will develop into an even more massive crisis, expected to unfold in the year ahead.

“Look at electricity generation growth, it’s falling off the bottom, and it’s never been like this ever. So this is the sense in which I would say this is not just any slowdown, this is the great slowdown that India is experiencing and we should look at it with all seriousness …and the economy seems headed for the intensive care unit,” Subramanian said during a conference at Harvard University’s Centre for International Development.

Subramanian also warned about the TBS crisis in 2014 when he was Chief Economic Advisor under the Modi government.

TBS refers to the developing problems in corporate debt and increasing non-performing assets have led to difficulties in the country’s banking sector that have weighed on credit growth. This has further slowed the economy and will likely lead to more deceleration through 2020.

Subramanian said IL&FS Ltd, or Infrastructure Leasing & Finance Services crisis in 2018, was a “seismic event” as it triggered panic in banks and raised questions about sustainability.

The TBS problem in India will push the economy much lower into 2020. Already, growth in Q3 stood at its lowest in six years.

As economic growth rapidly slows, the Indian rupee has tumbled.

Industrial production growth is at the weakest level in a decade.

Business confidence has also plunged to decade lows.

And maybe because the 2016 recovery is over, a much longer-term downturn has resumed.

Clearly, the financial sector is the most significant imbalance in the system that could be corrected as the economy continues to decelerate.

Indian stocks are bumping up against a two-decade diagonal resistance line.

Saxo Bank’s Christopher Dembik, global head of macro research, warned on Twitter earlier this month, that “All the leading indicators point out it will get worse.”

India’s slowdown has certainly been the most under-appreciated aspect of the current global downturn. In Q3 this year, the Indian economy reached a 6-year low at 4.5% YoY, down from 5% in the previous quarter. All the leading indicators point out it will get worse. pic.twitter.com/sGajxI9Q4u

— Christopher Nicolas Dembik (@Dembik_Chris) December 2, 2019

Putting this all together, it means that central banks’ are failing to stabilize the global economy as it seems their policies are becoming less effective than ever before. This also means desynchronization continues to persist in the global economy, and really in manufacturing hubs around the world, indicating that a massive rebound in global growth, already priced in by global equity markets for early 2020, might be a fantasy at the moment.

Authored by Thorsten Polleit via The Mises Institute,

In the early 1920s, Ludwig von Mises became a witness to hyperinflation in Austria and Germany – monetary developments that caused irreparable and (in the German case) cataclysmic damage to civilization.

Mises’s policy advice was instrumental in helping to stop hyperinflation in Austria in 1922. In his Memoirs, however, he expressed the view that his instruction — halting the printing press — was heeded too late:

Austria’s currency did not collapse — as did Germany’s in 1923. The crack up boom did not occur. Nevertheless, the country had to bear the destructive consequences of continuing inflation for many years. Its banking, credit, and insurance systems had suffered wounds that could no longer heal, and no halt could be put to the consumption of capital.

As Mises noted, hyperinflation in Germany was not stopped before the complete destruction of the reichsmark. To illustrate the monetary catastrophe, one may take a look at the exchange rate of the reichsmark against the US dollar.

Before the start of World War I in 1914, around 4.2 marks would buy 1 US dollar. As soon as war action began, the convertibility of the mark was suspended and paper marks (papiermark) were issued, largely for financing war-related outlays. In 1918, after the end of World War I, 8.4marks bought 1 US dollar. In December 1919, the mark had depreciated to 46.8 per US dollar, and in December 1920 to 73.4 per dollar.

In July 1922, the US dollar cost 670 marks.

When French and Belgian troops occupied the Rhineland at the beginning of 1923, however, the exchange rate of the mark plummeted to 49,000 marks per US dollar.

On November 15, 1923, when hyperinflation reached its peak, the currency reform effectively made 1 trillion (1,000,000,000,000) papiermarkequal to 1 rentenmark, and as 4.2 trillion papiermark exchanged for 1 US dollar at that time, 4.2 rentenmark would equal 1 US dollar.

Increases in the Money Supply

The 20th century saw many hyperinflations, including China in 1949–50, Brazil in 1989–90, Argentina in the late 1980s and early 1990s, Russia in 1992, Yugoslavia in 1994, and, most recently, Zimbabwe in 2006–09. All of these hyperinflations were the direct result of a system of unfettered fiat money under government control — a system that produces money in a non-market-conforming way: the money supply is increased out of thin air by banks simply extending loans (circulation credit) and/or monetizing assets.

Hyperinflation is perhaps the darkest side of a government fiat money regime. Among mainstream economists, hyperinflation typically denotes a period of exceptionally strong increases in overall prices of goods and services, thus denoting a period of exceptionally strong erosions in the exchange value of money. Some people consider a rise in overall prices of 10 percent per month (which implies an annual rate of price increases of around 214 percent) as hyperinflation; others indentify hyperinflation as a monthly price rise of at least 20 percent (which implies an annual increase in prices of nearly 792 percent).

However, any such numerical definition can be criticized, as it refers to the symptom rather than the root cause of the accelerating loss of the purchasing power of money. Economically speaking, hyperinflation is the inevitable consequence of an ever-greater rise in the amount of money. And this is exactly what the monetary theory of the Austrian School of economics teaches: In fact, Austrian theory shows that inflation is the logical consequence of a rise in the money supply, and that hyperinflation is the logical outcome of ever-higher growth rates in the money supply.

According to the Austrian school, money is, like any other good, subject to the irrefutably true law of diminishing marginal utility. It is this law, which is implied by the axiom of human action, which is at the heart of Mises’s praxeology. As it relates to money, the law of diminishing marginal utility states that an increase in the quantity of money by an additional unit will inevitably be ranked lower (that is, valued less) than any same-sized unit of money already in an individual’s possession. This is because the new money can only be employed as a means for removing a state of uneasiness that is deemed less urgent than the least-urgent uneasiness which one has up to now been removing with the money in one’s possession.

Money Demand

People hold money because money has purchasing power (which people desire, given the fact of uncertainty as an undeniable category of human action), and the purchasing power of money is determined by the supply of and demand for money.

If a rise in the money supply is accompanied by an equal rise in money demand, overall prices and the purchasing power of money remain unchanged. Once people start to exchange their increased money holdings against other goods, however, prices will start to rise, and the purchasing power of money will fall. That said, it is rise of the money supply relative to the demand for money that brings to the fore the obvious effect of an increasing money supply: rising prices.

Mises saw that money demand plays a crucial role for the possibility of an unfolding hyperinflation. If the central bank is expected to increase the money supply in the future, people can be expected to rein in their money demand in the present — that is, increasingly surrendering money against vendible items. This would, other things being equal, drive up money prices. Mises noted that “this goes on until the point is reached beyond which no further changes in the purchasing power of money are expected.”4 The process of rising prices would come to a halt once people have fully adjusted for the expected increase in the money supply.

What happens, however, if people expect that, in the future, the money-supply growth rate will increase to ever-higher rates? In this case, the demand for money would, sooner or later, collapse. Such an expectation would lead (relatively quickly) to a point at which no one would be willing to hold any money — as people would expect money to lose its purchasing power altogether. People would start fleeing out of money entirely. This is what Mises termed a crack-up boom:

If once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the ‘twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse).5

The Unrelenting Power to Inflate

If people expect a forthcoming, drastic increase the money supply — but if they at the same time expect that such an increase will be limited (i.e., a one-off increase) — the central bank can actually orchestrate a debasing of money without causing its complete destruction. As long as government and its central bank succeed in making people believe that any future rise in the money supply will remain within an acceptable limit, from the viewpoint of the money holder, monetary policy is an effective and most perfidious instrument for expropriation and non-market-conforming income redistribution.

This may explain why Murray N. Rothbard, in his famous essay The Case for a 100 Percent Gold Dollar, wrote the following:

I am not saying that fiat money, once established on the ruins of gold, cannot then continue indefinitely on its own. Unfortunately … if fiat money could not continue indefinitely, I would not have to come here to plead for its abolition.6

Rothbard saw the danger that the government-controlled fiat money could be held up and running indefinitely, that it would not necessarily drive itself into a fatal and final collapse. As long as people do not expect that a money supply increase will spin out of control, the central bank is in a position to debase the currency without completely destroying it.

In other words: hyperinflation would be possible without destroying the money completely. The crack-up boom, as Mises pointed out, would unfold only when people come to the conclusion that the central bank will expand the money supply at ever-greater rates:

But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.7

Debt Levels

Today’s fiat-money regimes are characterized by ever-greater amounts of debt relative to real income — caused by policies that try to solve the economic problems caused by credit and money creation out of thin air by using even greater amounts of credit and money created out of thin air. And it is fair to say that the higher an economy’s overall debt level is, the more likely hyperinflation becomes.

To show this, let us assume that after a long period of money creation through bank circulation credit expansion a credit crisis emerges: Creditors are no longer willing to roll over maturing debt at prevailing interest rates. Borrowers cannot repay their obligations when payment is due, and neither can they afford paying higher borrowing costs. Investors start fleeing out of bonds, making interest rates increase sharply and thereby covering up unprofitable investment. More borrowers, including banks, fail to meet their obligations, and bankruptcies spread. Ensuing recession and rising unemployment aggravate the collapse of the credit structure.

Should investors in such a situation expect that the government and its central bank would opt for bailouts financed through additional money creation, the demand for money and fixed claims would most likely dry up. This would make it necessary for the central bank to extend ever-greater amounts of money to struggling borrowers in order to prevent the spread of bankruptcies. The larger the amount of outstanding debt is, the larger will be the potential increase in the money supply. The more the money supply grows, the more likely it is that there will be hyperinflation and a potential breakdown of money demand: the unfolding of a crack-up boom.

Now that two of the market’s greatest unknowns – Brexit/the UK election, and the “Phase One” part of the US-China trade war (with the Phase Two supposedly on the “to do” list after the Nov 2020 elections) – appear to have found an interim, if not fully satisfactory, resolution, a recurring question among the trader community is what will the market care about in the coming year.

Conveniently, an answer to that question is the topic of a Goldman report published over the weekend, and which points out that despite the immediate newsflow vacuum now that stocks will no longer rally on “optimism” of an imminent deal announcement, there is still quite a bit to occupy traders. Starting with the Treasury-market, Goldman notes that activity here will depend crucially on the Fed’s reaction function and the current pace of growth (among other things).

As shown in the chart below, sensitivity to inflation surprises picked up sharply in late 2017 and 2018 as the Fed hiked, as realized inflation moved towards the target, and as the risk of overheating entered the mainstream policy debate.

However, 2019 saw a reversal of all three trends, and inflation sensitivity declined arguably as a result.

Following the sharp tightening in financial conditions at the turn of the year, the combination of renewed growth fears, declining core inflation, and the dovish Fed pivot resulted in a roughly 50% decline in inflation sensitivity. Equity-market inflation sensitivity also declined, albeit more modestly.

In contrast, sensitivity to growth data picked up sharply in 2019, reflecting slowing growth and the return of recession fears. In fact, growth sensitivity in the bond market is already back to its level during the shale bust and capex-driven growth scare of 2016-17.

Looking ahead to 2020, Goldman expects another signal reversal, as its forecast of improving growth and diminished trade risks suggests scope for a modest pullback in sensitivity to growth data. Treasury-market sensitivity has already overshot relative to the bank’s predictions (see blue and red line in the left panel of Exhibit 6), and the end of the mid-cycle adjustment coupled with its expectation of firming US growth argues for more a normal degree of data sensitivity in early 2020.

Similarly, equity-market reactions to growth data could also wane a bit early next year if growth picks up.

It is also worth recalling that 2020 will be the year of the presidential election. As a result, Goldman analyzes the impact of elections on data sensitivity since 2000. Adding election dummy variables to the models shown in Exhibit 6, the bank finds a negative and significant “election effect” on growth sensitivity—with reactions to growth surprises attenuating in the quarter of presidential elections. Goldman analysts also find tentative evidence of attenuation in the quarter preceding the election (statistical power may be limited by the short sample).

The implications for 2020 are shown by the dotted lines above (i.e., a short-lived lull in data reactions in the coming fall 2020).

In contrast, the bank finds no such effects for inflation sensitivity. This may suggest that market participants view elections as more important for the growth outlook than for the near-term trajectory of core inflation (such that inflation news continues to be an important driver of price action, even if growth surprises are faded). In conclusion, Goldman expects inflation reactions to pick up gradually in 2020 as inflation rebounds towards the target and the Fed begins to contemplate its next move. All of that, of course, assumes that inflation will rebound next year as most on Wall Street now openly expect. However, if there is anything that 2019 once again vividly demonstrated, it is that when everyone expects something, the opposite happens.