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Next year austerity and rising interest rate will take root in major economies, forced by runaway inflation in food, gas and commodity prices - caused by massiv

Next year austerity and rising interest rate will take root in major economies, forced by runaway inflation in food, gas and commodity prices - caused by massive printing by US/Europe/Japan/China. This will result in money in flight from risky investments (emerging countries, startups, expansions) to safe investments, which will cause job losses in many of those sectors. Healthcare and Food industries will grow. Entertainment, Advertising, Construction and Transportation industries will wither.

haploid 16y ago
What do you consider "safe" in a super-inflationary environment? Safety is generally regarded as being cash or bonds, but those become the absolute worst asset classes to hold during very high inflation.
- chailatte 16y ago
  Things that are in short supply that are either essentials or are regarded to be able to preserve its worth. Food, water, gold, silver, platinum, strong currency, high art, etc.
iuguy 16y ago
Your thoughts about inflation are interesting, as I've been expecting them year after year. I'm now convinced there's an effort to spin plates for want of a better word on a more or less global scale. If one major economy goes down it would drag others down with it. I don't think we'll see hyperinflation in the conventional sense, but to put it into perspective we have seen massive inflation in specific targeted areas (food, drink, petrol) in specific economies. I think there may be interesting arbitrage opportunities for some next year resulting from this, but I don't see a major hyperinflation event occuring (at least not on the scale where oil went up to nearly $200) next year. 2012 maybe (but not for the UK due to the Olympics - yes I believe that event alone will cause a loss that will cost us dearly in the long run but may delay the inevitable).
- chailatte 16y ago
  That reminds me: there will likely be a default by a major country next year that will drag every economy in the world along with it. My belief is that it will be Ireland, which will affect UK tremendously, since a lot of the Irish debt is held by UK.
  - russell 16y ago
    Wow, Ireland is in a world of hurt. External debt is 10x GDP. http://en.wikipedia.org/wiki/List_of_countries_by_external_debt http://en.wikipedia.org/wiki/List_of_countries_by_external_d.... The US is at 94%, but Europe is way worse. Luxembourg is 38x. Could that be correct? Where is all this money roosting? For the US it's China, Japan, and OPEC, with China way out ahead.
    - Someone 16y ago
      I think it is almost more meaningful to compare Luxembourg to lower Manhattan than to other countries. Its 'problem' is that it has a huge banking sector for its 500k inhabitants. That brings in lots of money (Luxembourg is the richest country in the EU), but also imports risks. I do not know where their banks invest their money, but chances are that a fair amount of it is in euro, and that they have been bringing down their investments in the weaker euro countries.
  - myth_drannon 16y ago
    It can't default because it has already received the necessary funds from ECB and IMF. My take Spain is next. Anyways, lets not turn HN to ZeroHedge :)
  - pdelgallego 16y ago
    I will bet on Portugal, dragging down Spain in it fall.
    - iuguy 16y ago
      I'm down for either Portugal or Spain. Ireland will be bailed out and everyone will be fine, but by the time we get to Portugal there'll be no money left. On the other hand, Spain may have such an impact that the sudden realisation that this is the last bailout may well tip countries over the edge.
aristidb 16y ago
My prediction: Overall price inflation in the USA will remain low.
- russell 16y ago
  I am curious to know your reasoning. In a post in this thread I was leaning towards inflation in a few years, with the other possibility being a long recession or Japanese style stagflation. The downside would come from an austerity program hitting the middle class.
  - aristidb 16y ago
    Because deleveraging of the banking system produces a deflationary shock. The Fed is trying to offset this, but for political reasons can only partially (people would cry "currency debasement!" - and already do). Scott Sumner has written some things on this: http://www.themoneyillusion.com/ http://www.themoneyillusion.com/ The fact that interest rates are very low is also a hint that maybe inflation expectations are not very high. A good source for the relevant interest rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ http://www.bloomberg.com/markets/rates-bonds/government-bond... (yield column). You can also compare to Japan there.
  - Symmetry 16y ago
    Japan style stagflation? Japan has been suffering deflation during its recent period of stagnation. Indeed, the Japan central bank has long worked hard to insure that inflation in Japan remains roughly 0%, and they have on average succeeded at this, with some years the yen increasing in value and some years decreasing - but generally these changes cancelling out. Indeed, many people like Milton Friedman have blamed the bank's insistance on 0 inflation for playing a role in Japans economic problems.
russell 16y ago
This is a curious expectation, but it feels right to me (with a degree in economics). Recessions are usually preceded by inflation, not followed, However, wars are usually followed by inflation. Since 1960 inflation has been over 600%, energy about 850%. My expectation, is that a huge amount of money has been pumped in to the economy to pay for the wars and the bail-outs. The money is being absorbed by the wars and the trade deficits. I think the current situation is unstable and it will blow up, perhaps in 2012. Certainly any austerity program that hits the middle class hard, and all the Rep. proposals do, will trigger political thrashing and immense hardship, something approaching the severity of the Depression, or we will get the typical end of war inflation.
- RobGR 16y ago
  I agree with you, but I think your terminology is inexact when you say: "The money is being absorbed by the wars and the trade deficits." Wars do not absorb money, they absorb wealth -- money is paid to make a bullet, and after the bullet is shot the money remains to decrease the value of all money, and the bullet is gone. Trade deficits can move accumulated wealth (or money) around, but they also don't absorb it; a foreign country might absorb money, if they decide to stockpile it.
  - russell 16y ago
    It felt awkward when I wrote it. You are right. The wealth is absorbed/destroyed, but the money is still there with fewer goods to purchase, hence inflation (eventually).
Symmetry 16y ago
I wouldn't bet on inflation. Inflation is most directly caused by people's expectations about inflation - and the market's expectations as seen in the difference in price between inflation protected securities and securities that aren't inflation protected (the TIPS spread) is still that inflation will remain low.

haploid 16y ago

What do you consider "safe" in a super-inflationary environment? Safety is generally regarded as being cash or bonds, but those become the absolute worst asset classes to hold during very high inflation.

chailatte 16y ago
Things that are in short supply that are either essentials or are regarded to be able to preserve its worth. Food, water, gold, silver, platinum, strong currency, high art, etc.

iuguy 16y ago

Your thoughts about inflation are interesting, as I've been expecting them year after year. I'm now convinced there's an effort to spin plates for want of a better word on a more or less global scale. If one major economy goes down it would drag others down with it. I don't think we'll see hyperinflation in the conventional sense, but to put it into perspective we have seen massive inflation in specific targeted areas (food, drink, petrol) in specific economies. I think there may be interesting arbitrage opportunities for some next year resulting from this, but I don't see a major hyperinflation event occuring (at least not on the scale where oil went up to nearly $200) next year. 2012 maybe (but not for the UK due to the Olympics - yes I believe that event alone will cause a loss that will cost us dearly in the long run but may delay the inevitable).

chailatte 16y ago
That reminds me: there will likely be a default by a major country next year that will drag every economy in the world along with it. My belief is that it will be Ireland, which will affect UK tremendously, since a lot of the Irish debt is held by UK.
- russell 16y ago
  Wow, Ireland is in a world of hurt. External debt is 10x GDP. http://en.wikipedia.org/wiki/List_of_countries_by_external_debt http://en.wikipedia.org/wiki/List_of_countries_by_external_d.... The US is at 94%, but Europe is way worse. Luxembourg is 38x. Could that be correct? Where is all this money roosting? For the US it's China, Japan, and OPEC, with China way out ahead.
  - Someone 16y ago
    I think it is almost more meaningful to compare Luxembourg to lower Manhattan than to other countries. Its 'problem' is that it has a huge banking sector for its 500k inhabitants. That brings in lots of money (Luxembourg is the richest country in the EU), but also imports risks. I do not know where their banks invest their money, but chances are that a fair amount of it is in euro, and that they have been bringing down their investments in the weaker euro countries.
- myth_drannon 16y ago
  It can't default because it has already received the necessary funds from ECB and IMF. My take Spain is next. Anyways, lets not turn HN to ZeroHedge :)
- pdelgallego 16y ago
  I will bet on Portugal, dragging down Spain in it fall.
  - iuguy 16y ago
    I'm down for either Portugal or Spain. Ireland will be bailed out and everyone will be fine, but by the time we get to Portugal there'll be no money left. On the other hand, Spain may have such an impact that the sudden realisation that this is the last bailout may well tip countries over the edge.

aristidb 16y ago

My prediction: Overall price inflation in the USA will remain low.

russell 16y ago
I am curious to know your reasoning. In a post in this thread I was leaning towards inflation in a few years, with the other possibility being a long recession or Japanese style stagflation. The downside would come from an austerity program hitting the middle class.
- aristidb 16y ago
  Because deleveraging of the banking system produces a deflationary shock. The Fed is trying to offset this, but for political reasons can only partially (people would cry "currency debasement!" - and already do). Scott Sumner has written some things on this: http://www.themoneyillusion.com/ http://www.themoneyillusion.com/ The fact that interest rates are very low is also a hint that maybe inflation expectations are not very high. A good source for the relevant interest rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ http://www.bloomberg.com/markets/rates-bonds/government-bond... (yield column). You can also compare to Japan there.
- Symmetry 16y ago
  Japan style stagflation? Japan has been suffering deflation during its recent period of stagnation. Indeed, the Japan central bank has long worked hard to insure that inflation in Japan remains roughly 0%, and they have on average succeeded at this, with some years the yen increasing in value and some years decreasing - but generally these changes cancelling out. Indeed, many people like Milton Friedman have blamed the bank's insistance on 0 inflation for playing a role in Japans economic problems.

russell 16y ago

This is a curious expectation, but it feels right to me (with a degree in economics). Recessions are usually preceded by inflation, not followed, However, wars are usually followed by inflation. Since 1960 inflation has been over 600%, energy about 850%. My expectation, is that a huge amount of money has been pumped in to the economy to pay for the wars and the bail-outs. The money is being absorbed by the wars and the trade deficits. I think the current situation is unstable and it will blow up, perhaps in 2012. Certainly any austerity program that hits the middle class hard, and all the Rep. proposals do, will trigger political thrashing and immense hardship, something approaching the severity of the Depression, or we will get the typical end of war inflation.

RobGR 16y ago
I agree with you, but I think your terminology is inexact when you say: "The money is being absorbed by the wars and the trade deficits." Wars do not absorb money, they absorb wealth -- money is paid to make a bullet, and after the bullet is shot the money remains to decrease the value of all money, and the bullet is gone. Trade deficits can move accumulated wealth (or money) around, but they also don't absorb it; a foreign country might absorb money, if they decide to stockpile it.
- russell 16y ago
  It felt awkward when I wrote it. You are right. The wealth is absorbed/destroyed, but the money is still there with fewer goods to purchase, hence inflation (eventually).

Symmetry 16y ago

I wouldn't bet on inflation. Inflation is most directly caused by people's expectations about inflation - and the market's expectations as seen in the difference in price between inflation protected securities and securities that aren't inflation protected (the TIPS spread) is still that inflation will remain low.