Hyperinflationary Depression in the US 2010 - John William, Shadow Government Statistics

We don't necessarily agree with John Williams' analysis here. But its not sufficient to merely disagree. One has to listen to the argument, the key points and mechanisms, and then show WHY they might be invalid and where they might be less probable than something else.

John may be right. We have an enormous respect for him. His site is worth looking at, and his arguments are worth a listen. But we think he makes the error of assuming that the trends will be as they are today, and one can just extend them into the future, without limit, and not account for 'step changes' and likely exogenous events. This is an all too common error with model based predictors.

As a thumbnail sketch of our disagreement, we think that deflation and hyperinflation can only occur deterministically with reference to an external standard. With the lapse of the gold standard, there is none. Therefore its more likely to be the end result of policy decision(s).

Before the US lapses into a hyperinflationary depression the G8 will have an enormous incentive to essentially bail the US out by inflating their own currencies in sympathy and allowing the US to essentially and selectively default on its sovereign debt, in order to save the world financial system. In many ways Bear Stearns is a microcosm of the United States Treasury.

Doing nothing increases the probability that there will be a war, a significant world war, which will tend to wipe the slate clean, at least for the victor (if there is one) in terms of debt obligations. Not only is the US too big to fail, its too big a warpower for anyone to be easily able to collect what's owed to them.

That's what we think, but all things being equal, John does have his points in order, and his hypothesis is probable, more so than deflation, which is also a possibility. Volcker said deflation has an extraordinarily slim chance of occurring in the US. We tend to view it as an overt policy decision. Net debtors do not willingly choose deflation; they are compelled to it by some external force or constraint.

The best argument for the deflation alternative is that our monetary system is dependent on bank loans for the expansion of debt, and debt is money. However, we think the Fed is going to give us a lesson in monetizing debt, and there is plenty of it to go around. Common sense is a fine tool, but more detailed knowledge and rigorous thinking is essential.

John Williams is interviewed by Jim Puplava - MP3 Audio download: A Hyperinflationary Depression in the US 2010

Shadow Government Statistics Homepage

An Accounting View of the Financial Credit Crisis

Here's a joke to cheer up GE shareholders on this difficult morning.
(Hat tip to Sean, the Irish gnome in Zurich)

There are two sides to a bank's balance sheet - the left side and the right side.

The problem is that, on the left side, there is nothing right,
and on the right side, there is nothing left!

And some weekend reading for Jeff Immelt.

As a reminder, US financial companies start reporting their quarterly results next week.

PigMan of the Week Award

Thanks go to Lloyd Blankfein of Goldman Sachs for giving the markets some weasel-worded false encouragement Thursday morning that the credit crisis is "almost over." It helped to trigger a sucker's rally.

And "if we are in a recession, its a mild one." We'll put that one down in the books. In fact, we wish someone would take a look at your trading book.

Lloyd, who received about $70 million of compensation last year by some estimates, also said that shareholder votes on executive pay would "constrain the board and hurt the investment bank's ability to attract the best employees."

Lloyd, you get the "PigMan of the Week Award."

Reuters
Goldman CEO says "say on pay" a bad idea
Thursday April 10, 2:24 pm ET
By Joseph A. Giannone

NEW YORK (Reuters) - Goldman Sachs Group Inc (NYSE:GS - News) Chief Executive Lloyd Blankfein, who received about $70 million of compensation last year by some counts, said on Thursday that shareholder votes on executive pay would constrain the board and hurt the investment bank's ability to attract the best employees.

So-called "say on pay" initiatives, which allow shareholders to provide a nonbinding approval or rejection of a board's proposed pay package for senior executives, have become a hot topic among shareholder groups, pensions and other large investors focused on corporate governance issues.

In a spirited annual meeting held in a downtown Manhattan, a number of Goldman shareholders urged the board and investors to adopt an advisory vote as a tool to keep a lid on excessive pay. Advocates also argued the proposal would give shareholders a greater voice on an important matter, without binding directors.

Blankfein, in an extended response, expressed his concern that "say on pay" would limit directors in exercising their judgment.

Say on pay would "create a feedback loop. It would create a cloud, a constraint, a limitation on decisions that have been at the heart of what a board has done," Blankfein said.

The board, he said, needs to have the flexibility to weigh compensation packages and the market environment. He also expressed concern that decisions by board member could be judged by uninformed investors.

"Our compensation has been very well-correlated to performance," he said.

Goldman's shareholders apparently agreed, as the say on pay proposal was rejected, receiving approval by 43 percent of shares voted and 30 percent of shares outstanding.

Some speakers argued Goldman's compensation was enormously high. According to the proxy statement, Goldman's top five senior executives received roughly $250 million last year in salary, cash bonuses, stock awards and other compensation, excluding stock options.

For context, that haul was greater than JPMorgan Chase & Co's initial fire-sale takeover bid of $236 million for Bear Stearns Cos Inc.