The Golden Edge
{Sapientiae & Veritas}
Commentary on economy that effects the markets, that help you generate trade ideas, research and tested strategies, Not fake news just the facts, , Real Time Knowledge To Secure Your Future. Read daily or weekly
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'Big Short' investor Michael Burry says 'prepare for inflation' - and warns bitcoin and gold might be at risk
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• Michael Burry expects the economy's reopening and more stimulus to fuel inflation.
• "The Big Short" investor warned governments might 'squash' bitcoin and gold to protect their currencies.
• Burry highlighted Germany's hyperflation in the 1920s as a cautionary tale for the US.
Michael Burry expects the post-pandemic economic recovery and another round of stimulus to drive up prices, and doesn't see bitcoin or gold as guaranteed havens for investors.
"Prepare for #inflation," the investor said in a now-deleted tweet on Thursday night. "Re-opening & stimulus on the way. Pre-COVID it took $3 debt to create $1 GDP, and it is worse now. In an inflationary crisis, governments will move to squash competitors in the currency arena. $BTC #gold."
Burry shot to fame after his billion-dollar bet against the US housing bubble was chronicled in the book and movie "The Big Short." He also helped lay the groundwork for GameStop's stock to skyrocket last month when he invested in the video-game retailer back in 2019.
The Scion Asset Management chief underscored the rising threat of inflation in a flurry of follow-up tweets. He quoted at length from "Dying of Money: Lessons of the Great German and American Inflations," a book by Jens O. Parsson, to drive his message home.
Burry highlighted passages from the book about the recurrence of inflation throughout history, how it's usually preceded by an economic boom and a spike in overnight fortunes, and how it leads to soaring crime, surging living costs, and poverty.
The investor compared Germany's path to hyperinflation in the 1920s to America's current trajectory.
"#History is not useless," he said in another tweet. "This text explores the 1970s American #inflation, which is more relevant today than one might think."
Burry also drew parallels between the market mania in Germany before inflation took off, and the Reddit-fueled buying of meme stocks this year that led Robinhood to temporarily halt purchases of certain stocks.
"Before the German hyperinflation in the 1920s, 'everyone from the elevator operator up was playing the market' and volumes became such that 'the financial industry could not keep up with the paperwork' and the 'Bourse was obliged to close.' Sound familiar? #robinhooddown," he tweeted.
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Jens O. Parsson, Dying of Money: Lessons of the Great German and American Inflations (1974)
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In any case, Parsson makes the point that monetary inflation always ends in a trail of tears, because it is addictive and requires an increasing volume of inflated money in order to keep the party going. As soon as the spigot is turned off, pain comes, so the spigot is never turned off. In fact, it provides a constantly accelerating flow and ultimately either tragically deluges society in an out of control hyperinflation or, if discipline is somehow re-instituted, ends in a painful deflationary liquidation. Read on for Parsson's quote:
"Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and an ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation."
- Jens O. Parsson, Dying of Money: Lessons of the Great German and American Inflations (1974)
“Governments deliver less services to their citizens, tax them harder, and their standard of living declines. The insidious process of high inflation is another way governments are working to get out of their debt problems without it registering to ordinary people that there has been a transfer of wealth. They are essentially taxing the public to pay for the excesses of the financial system. In that sense the process has already started, it’s just that it hasn’t registered with people yet.”
– Philippa Malmgren, American policy analyst, Jan 2015
These days, thanks to the manner in which I believe our central banks distort markets and our government measures inflation, it is easy for us to be lulled into complacency. But I am confident the seeds of inflation are being sowed throughout the world and eventually green shoots will sprout, along with its consequences. The big question seems to be whether it comes after a deflationary collapse or if the central banks will first implement another program to speed up the germination process.
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Judy Shelton, of Sound Money Project, speaking from the Jackson Hole Summit last August
“We dare to talk about the gold standard and its relative merits, knowing that the merest whisper of a gold standard is enough to elicit the guffaws of the central bankers down the road. Because they say "that's just crazy." And I think, really? Crazier than negative interest rates? Crazier than paying banks to keep loanable funds in sterile depository accounts at the fed? Crazier than having the Fed buy up trillions in government debt, remit the interest payments back to the treasury, and then count that as revenue to the federal budget? Is it crazier than having hordes of financial market analysts parsing every word uttered by a monetary official, obsessing over the minutes of the latest fed meeting trying to glean clues about what must happen next? It's almost as if we've forgotten how to engage in free enterprise because we're waiting for marching orders from a central planning agency. I think we're the rational ones. They like to brand us as ideologues, but in truth, we're the realists. And that sobering fact is becoming clearer every day as reality continues to whipsaw global markets.”
The currencies central banks manage today have no anchor in gold and thus suffer from the same self-referential circularity that imperils all logical systems unmoored to outside foundations of reality. In the U.S., unmoored money can be manipulated at will by the Federal Reserve in the interests of its sponsors in government and their pseudo- private cronies. These manipulations bring huge transfers of wealth. With the government guaranteeing the large banks but not the small ones, the leviathans can expand their leverage and transform small and temporary arbitrage opportunities into outsized profits. Floating money thus changes the culture of capitalism. By unmooring money, the governments of the world ended up favoring finance over the enterprise and shortening the horizons of the economy...As the venerable monetary element, rooted in time and in the refractory geology of the planet, gold is gaining new supporters every year. Asian and Middle Eastern potentates are ignoring the constant detractions of gold as money and are increasing their holdings. Plans for new forms of the gold standard are proliferating. But the triumph of gold does not depend on governments. Collected by savvy savers everywhere, its price movements command the avid attention of millions of investors and traders. As a measure of value, it still far excels Bitcoin and other new currency projects.
Portfolio
“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that “being too far ahead of your time is indistinguishable from being wrong.”) Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.”
–Howard Marks, Oaktree Capital Management, November 10, 2009
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Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.
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Core Principles
The central idea of MMT is that governments with a fiat currency system under their control can and should print (or create with a few keystrokes in today's digital age) as much money as they need to spend because they cannot go broke or be insolvent unless a political decision to do so is taken.
Some say such spending would be fiscally irresponsible as the debt would balloon and inflation would skyrocket. But according to MMT, large government debt isn't the precursor to collapse we have been led to believe it is, countries like the U.S. can sustain much greater deficits without cause for concern, and a small deficit or surplus can be extremely harmful and cause a recession since deficit spending is what builds people's savings.
MMT theorists explain that debt is simply money the government put into the economy and didn't tax back. They also argue that comparing a government's budgets to that of an average household is a mistake.
While supporters of the theory acknowledge that inflation is theoretically a possible outcome from such spending, they say it is highly unlikely and can be fought with policy decisions in the future if required. They often cite the example of Japan, which has much higher public debt than the U.S.
According to MMT, the only limit the government has when it comes to spending is the availability of real resources, like workers, construction supplies, etc. When government spending is too great with respect to the resources available, inflation can surge if decision-makers are not careful.
Taxes create an ongoing demand for currency and are a tool to take money out of an economy that is getting overheated, says MMT. This goes against the conventional idea that taxes are primarily meant to provide the government with money to spend to build infrastructure, fund social welfare programs, etc.
"What happens if you were to go to your local IRS office to pay your taxes with actual cash?," wrote MMT pioneer Warren Mosler in his book The 7 Deadly Frauds of Economic Policy1. "First, you would hand over your pile of currency to the person on duty as payment. Next, they’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the taxpayer, left the room, they’d take that hard-earned cash you just forked over and throw it in a shredder."
MMT says that a government doesn't need to sell bonds to borrow money, since that is the money it can create on its own. The government sells bonds to drain excess reserves and hit its overnight interest rate target. Thus the existence of bonds, which Mosler calls "savings accounts at the Fed," is not a requirement for the government but a policy choice.
Unemployment is the result of government spending too little while collecting taxes, according to MMT. It says those looking for work and unable to find a job in the private sector should be given minimum-wage, transition jobs funded by the government and managed by the local community.
This labor would act as a buffer stock in order to help the government control inflation in the economy.
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Milton Friedman and Monetarism vs. Keynesian Economics
Keynes's Theories
Keynes argued that an interventionist government could help smooth out recessions by using fiscal policy to prop up aggregate demand. Strategic government spending could spur consumption and investment, argued Keynes, and help alleviate unemployment.
Keynes's theories gave rise to a new dominant paradigm in economic thought, which was subsequently dubbed Keynesian economics. While still popular, some have argued that Keynesian economics has provided a pseudo-scientific justification for short-sighted elected politicians to run fiscal deficits and accumulate massive levels of government debt.
Friedman's Free Market Thinking
As Friedman developed his ideas about monetarism, he came to oppose many of the policy proposals espoused by the Keynesian economists in the post-War period. He argued for deregulation in most areas of the economy, calling for a return to the free market of classic economists, such as Adam Smith. He challenged contemporary notions of deficit spending and suggested that, in the long run, only dis-coordination results from expansionary fiscal policy.
Friedman argued for free trade, smaller government, and a slow, steady increase of the money supply in a growing economy. His emphasis on monetary policy and the quantity theory of money became known as monetarism. The popularity of Friedman attracted other free-market thinkers to the University of Chicago, giving rise to a coalition referred to as the Chicago School of economics.
Government failures can be as bad, or worse, than market failures.
Friedman combined his lessons about unintended consequences and the bad incentives of government policy.
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Cure For Inflation
Why is inflation good for gold?
Key Takeaways: Supply, demand, and investor behavior are key drivers of gold prices. Gold is often used to hedge inflation because, unlike paper money, its supply doesn't change much year to year. Studies show that gold prices have positive price elasticity, meaning the value increases along with demand.
Gold is often hailed as a hedge against inflation - increasing in value as the purchasing power of the dollar declines. However, government bonds are more secure and have also been shown to pay higher rates when inflation rises, and Treasury TIPS provides inflation protection built-in.
What happens to gold prices during inflation?
As a result, gold is often seen as a hedge against inflation. Inflation is when prices rise, and by the same token prices rise as the value of the dollar falls. As inflation ratchets up, so too does the price of gold.
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A "Views expressed" disclaimer is typically seen on blogs or other online media publications, posts, or articles.
This disclaimer informs readers that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual.
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