Inflation or Deflation?

One of the most tricky financial phenomena is INFLATION....

A continuing inflation of an average 2% or 3% devalues pensions and erodes saving accounts on the long run.

A sudden shock of inflation, hyperinflation, vaporizes the assets as well as the debts.

It could be (the only) way out of this sustainable crisis we seem to be dealing with. The other side, credit deflation, is also a potential 'Crisis Solver Candidate' for restructuring the enormous debt in our economy.

Which one will win?  Price (hyper)inflation or credit deflation? That's the key question....

Artificial

Just like the complete arsenal of asset classes in our financial 2012 society, price inflation is not (longer) a result of natural price mechanisms directly or indirectly based on supply and demand.

Worldwide, governments and central banks (FED, ECB, etc) are trying to control inflation  to keep economies as stable as possible and to create an economic environment with growth potential, while restructuring debt step-wise on the long run to 'acceptable' levels....

Historic Price Inflation

With the above formulated insights, let's take a look at how U.S. price inflation and deflation have historically developed on the long run:

A visual analysis of this inflation graph clearly shows the hyperinflation waves (most often) are followed by a hyperdeflation avalanche. However for more than 56 years on a row now, inflation has been only positive. So the key question stays: Are we heading for a major devaluation crash or a final hyperinflation scenario after which what (?) happens????

To get (visual) sight on this question, let's take a look at the 10Y and 50Y moving averages::

At first sight, one could visually conclude that it's most likely that inflation will rise again..... On the other hand, looking 'long term' deflation seems inevitable......   But who really knows?

Detail Figures

Maybe some quantitative information gives more insight:

From this we can conclude that the average arithmetic inflation (1.38%) as well as the compound (geometric) inflation (1.13%) is modest and the standard deviation (considering the low averages) is relatively high.

This calls for a period inspection:

Or in plain numbers:

Now we have a clear view! Until 1900 the average yearly inflation was around 0%. From 1900 to 2000 we suffered from an increasing inflation, mainly due to a number of crises. As from 2000 of, we try to push inflation down, with limited success.

Hyper Risk

All these charts lead to a better view on inflation, but what about the risk of 'hyper' inflation- or deflation.

A short look at the frequency table helps us to get a picture of the inflation risk distribution:

I'll leave it up to you, to draw your conclusions from this last chart.

Mathematica

More insight and feeling about how inflation correlates with some important economic variables can be developed by playing around with the next Mathematica Applet.

To work with the applet, allow the Mathematica plugin to download (it's safe).

This year (2012) inflation come out will be somewhere around 2.1%.

One of my next blogs will allow you to Mathemetica(lly)  'play' with inflation (including the 2012 inflation outcome), so you'll be able to grasp inflation finally.

Finally: Keep Cool!
Until then....., keep cool while watching the inflation balloon rise until it will (not) burst !!! , as researchers in a "Bursting balloons and anxious faces study"  concluded that a person is willingly to take more risk when a watching friend suppresses facial expressions of anxiety. "Such a finding has obvious implications for the interpersonal emotion regulation of advisors or counselors intervening in real world decision making situations". 

Links

- Excel Spreadsheet with inflation data and charts

- Inflation Wikipedia

- Study Bursting balloons and anxious faces

What's a Greek Tragedy?

As actuaries we do not believe in miracles, or do we?

According to a 'strictly confidential' document from the Troika (= EC, IMF & ECB), Greek's Debt/GDP ratio suddenly raised from 149% to 186% in 2013!

This new insight causes a 'potential need for additional official financing' ranging up to €440 billion!! (are you still with me?)

Let's take a look at how Debt/GDP ratio developed in the past and the new optimistic Troika forecast (red line).

Just to help the Troika, I've added a non-miracle 'Maggid' forecast based on simple and more realistic economic principles.

Not a word in the Troika report about the drivers and cultural changes that are necessary to achieve a long term decrease of the Debt/GDP ratio. Everything is based on  suggestive mathematical art.

Continue throwing good money after bad, is not the way forward. Greece will first have to show that it is not only willing, but also achieving debt reduction. Current measures are insufficient. Start for example to raise retirement age to 65 as a beginning...

Let's pray European leaders give up Keynesian miracle thinking and take the right decision:

Stop helping Greece to finance their debt, unless Greece shows strong progress in reducing debt itself every month .

If not.., the line 'A Greek Tragedy' will get a new meaning....

Sources/Links:
- Troika report
- Zerohedge: Greece
- Retirement around the globe blog

U.S. Debt Autopsy

Coming back from vacation, the world seems lost. You don't need to be an actuary to grasp that the recent decision to lift the U.S. debt ceiling is first class trickery and completely inadequate.

What the Chinese rating agency Dagong already concluded back  in November 2010, is only now (August 5, 2011) reluctantly and partly followed by S&P:

U.S. AAA status = Dead.

It's interesting to see which countries Dagong rates lower than  the three famous rating Agencies in the U.S.  (download complete Dragon report).

Meanwhile Dagong downgraded the U.S. again to an ordinary A-status on august 2, 2011.

The arguments for country degrades (as the U.S.) are as much clear as simple: if lifting debt ceilings is not at the same time combined with serious debt reduction measures (spending cuts), you go DOWN!

The outlook on the U.S. is still negative.

Outlook
Let's take look at what happened during 2011 and what 2012 will bring..

This chart instantaneously makes clear what's happening:

• Jan 2011 -  half May 2011
  Although  the whole world can figure out that the original debt ceiling of  $14.294 trillion will be reached within a few months, no measures or actions are taken by the U.S. Treasury to prevent a debt default,.
  
  
• May 16, 2011 - August 1,  2011
  Treasury Secretary Timothy Geithner informs Congress he will start tapping into federal pension funds on Monday to free up borrowing capacity as the nation hits the $14.294 trillion legal limit on its debt.
  
  By these and (possible) other optical actions the actual debt is kept artificially stable, slightly above the first ceiling. Of course the factual debt will (non reporting or visible) continue to keep growing.
  
  
• August 1&2, 2011
  The U.S. House of Representatives and the U.S. Senate pass the Budget Control Act on Aug 2, 2011.The debt ceiling is immediately raised by $400 billion, to $14.694 trillion.
  
  A second debt ceiling increase allows the current new ceiling to grow by an additional $500 billion, to $15.194 trillion, so that government can pay its bills until the end of February 2012.  However, Congress has the authority to reject this second increase.
  
  
• August 5, 2011 - March 2012
  
  TresuryDirect reports show the debt catch-up effects on August 5, 2011.
  
  Already $271 billion of the $400 billion debt ceiling lift turns out to be 'consumed'. Another $129 billion is left.
  
  As my two year old son can calculate: If no measures will be effective, around mid September 2011 a new ceiling crisis and media lift-show shall start.
  
  After agreeing in  September to the second ceiling of  $15.194 trillion the muppet debt show will start again in March 2012, when the second ceiling will break.

The party is over
I'm not a pessimistic person by nature, but the U.S. is running out of possible solutions. 

It looks like the financial space flight program is over. 

We'll have to build a society on new ethical financial principles.

If real measures stay out and claims on other countries or banks (as was the case with the sub prime debacle) are limited, the U.S. will unfortunately default in the end.

This U.S. default will take along most western countries.

It will result in a worldwide financial meltdown.

They only way out that seems left is:

Inflation

Let's hope for the best or a miracle. God bless America!



Related Links and Resources:
- Spreadsheet (Excel) with 2011 Debt Data
- S&P Report, August 5, 2011
- TreasuryDirect (U.S. Debt development)
- Debt Ceiling Increase of 2011
- Alert - Just So We Don't Get Confused As To The Source Of Our Little Problem

Actuarial Proverbs: Will Europe Survive?

According to Eurostat, Europe - especially the Euro (€) 'Coin' Countries that put all their Euro eggs in one basket -  face a difficult time. In a world where money seems to grow on trees, it's hard to take the right measures to prevent Greece from a financial meltdown with unknown consequences.

Questions
Even for actuaries it's hard to understand what's happening and what makes sense or not, It's over our 'actuarial' head....

• Should 'Europe donor countries' support Greece fore more than the '110 billion Euro rescue' in 2010?
  
  
• Is Greece’s 10-year bond rate of 15% an adequate risk premium?
  
  
• Will restructuring Greece's debt solve anything, devaluate the Euro,  or pose other  incalculable risks to the overall Euro zone?

Difficult questions that are hard too answer....


Debt-Deficit Comparison
Let's take an actuarial look at the facts by comparing 2010 Government Debt with Deficit (all in % GDP):

From this chart it's clear that not only Greece is in the danger zone, but also Ireland and the US as well... Moreover, the UK is not free from worries, to put it mildly...

The blind are leading...
Another chart-conclusion might be that the blind are leading the blind'. Relative strong less-weaker countries like Germany and France,  have to carry the financial consequences of cheating and not-performing countries. Above all, we all know: one rotten apple spoils the barrel!!

In fact to save or revive 'Financial Europe' it would take some countries with no debt and a strong positive surplus (= negative deficit) instead of a deficit.

It seems neither sensible nor logical  to restructure another  country's debt if the outlook of the governments debt and deficit of the' helping country' is (slightly less) negative as well. But as we know: only fools rush in where angels fear to tread.

Trying to help other countries that fail to restructure themselves is like banging your head against a brick wall...  No risk premium on government bonds can compensate that...

Countries with a strong relative debt and a deficit should restructure their own country and financial situation at once, before asking ore receiving any outside help.

Growth: The Solution?
Some argue that debt and deficits are not so bad as long as countries are growing. Let's dive into this argument with the next chart (data source: Eurostat):

Indeed, from this 'Growth-Believe' we can now understand why (only) Greece is seen as such a major problem.

From this chart it's also clear that if Ireland and Spain are not going to grow one way or the other, they will become the next big problem. These countries have to take the bull by its horns, before it's too late.

It's throwing caution to the wind when 'debt and deficit countries' with a positive 'Real GDP Growth Rate' try to save sicker country-brothers by lending them money.

Moreover, it's lending money you don't really possess or own, it's like robbing Peter (yourself) to pay Paul....

Combining the two Eurostat charts it becomes clear that that not all 'Garlic Countries' (Mediterranean countries:Greece, Spain, Portugal, Italy) can be lumped together.

Greece is indeed the greatest risk , secondly a non-garlic country: Ireland...
Spain, Portugal and Italy are relatively at arm’s length and could perhaps keep their head above water if they take the right measures in time.

U.S.' Fiscal Gap

Finally, don't forget about the U.S., as the U.S. Real GDP Growth Rate is already declining to 2.3% in Q1 2011.

According to Boston University economist Kotlikoff, the U.S. is broke.  Kotlikoff doesn’t trust government accounting. He uses “Fiscal Gap,” not the accumulation of deficits, to define public debt. This "Fiscal Gap" is the difference between a government’s projected revenue  and its projected spending .

By this measure, the U.S. government debt is $200-trillion – 840 percent of current GDP. 

Conclusions

From all this it's clear Europe is stuck between a rock and a hard place...
Although ECB President Mr. Trichet thinks different, it looks like €-Europe has to choose between two blind goats (Irish saying):

(1) A complete Financial Europe Meltdown in case of endless financing default countries like Greece or

(2) Letting individual default countries go bankrupt, with unsure (systemic) consequences for local banks and other financial institutions that financed or invested in default countries.

How to decide? Guideline:  Of two evils, always choose the less....
As option (1) is clearly putting the cart before the horse, and surely leads to a meltdown, only option 2 is left: QUIT!

Sources and related links:
- Spreadsheet: Used Data, Tables for this blog (xls)
- US Real GDP Growth Rate
- Government Debt and Optimal Monetary and Fiscal Policy (2010)
- English proverbs and sayings (!)
- English deficit (including time table)
- Shadowstats (for the real stats!)
- The U.S. is broke?
- Eurostat: Euro area government deficit at 6.0% GDP (2011) 
- BILD: Interview with Jean-Claude Trichet, President ECB, 15 January 2011

Return of a U.S. Debt Dollar

Take a (compressed) look at what author and business owner Nathan Martin calls:

The Most Important Chart of the Century!

This chart, based on the latest (March 11, 2010) U.S. Treasury Z1 Flow of Funds report, shows the change in GDP divided by the change in Debt. Or in other words: it illustrates how much extra economic productivity is gained by pumping one extra dollar of debt into our debt backed money system.

As is clear, the economic return of one dollar of 'debt infusion' declined from a positive $ 0.70 in the sixties to a negative $ 0.45 return by the end of 2009!

From a macroeconomic point of view the U.S. economy is fully saturated with debt. Flushing more debt in the U.S. economy will no longer help the economy out. Moreover, it will damage the economic growth!

Interested? Read the full blog of Nathan A. Martin

Links:
- Source: The Most Important Chart of the Century!
- U.S. Treasury Z1 Flow of Funds report (March 11, 2010)

Country Default Probability

National debts are growing worldwide. It seems we're drowning in a sea of debt. Who's gonna survive?


By experience we know that whenever our gut-feeling takes us for a ride, help of statistical models is necessary to rebalance and get sight at the real problem.

Sovereign Risk Monitor
In this case of 'national debt', the help of CMA's Sovereign Risk Monitor comes in. The CMA Sovereign Risk Monitor identifies and ranks the world’s most volatile sovereign debt issuers according to percentage changes in their 5 year CDS. CMA also calculates the Cumulative Probability of Default (CPD), the 5 year probability of a country being unable to honour its debt obligations.

Let's take a look at the world's most risky countries in Q4 2009:




Yet, the 'Default Landscape' is rapidly changing as becomes clear in CMA's interesting daily 19 March 2010 report showing Greece 'Cumulative Probability of Default' rising to 24.27%.

On the other hand we've got the world's best Countries, with Norway on top....

More actual information is available at CMA (registration required).

Latest CMA Update

Let's hope for the best....

Links:
- CMA Sovereign Risk Report for Q4 2009
- Source: CMA
- Latest CMA Update

Credit Crisis Predicted

Lyndon LaRouche, economist, long-range forecaster, risk manager 'avant la lettre' and one of the initiators behind the SDI-project (Strategic Defense Initiative) in the 80s.

With firm quotes like "there has been no economic growth on this planet, since the end of the 1960s. None, if you measure the right magnitudes", he takes stand in the sometimes overoptimistic and misleading world we've created.

Back in 1995, in Germany, he stated "We are at the end of an epoch".

He warned that a global financial bankruptcy and collapse would be under way and introduced in an econometric form his 'famous' "Typical Collapse Function" or "Triple Curve"to illustrate that power statement.

In his daring view, he describes the interplay of the three curves (non mathematical directionalities) that characterize the collapse process:

1. Physical-economic input/output (bottom curve)
   The productivity and functioning of the physical economy, upon which all human existence depends;
2. Monetary aggregates (middle curve)
   The increase in monetary aggregates (approximately represented by money supply measures; injections)
3. Financial aggregates (upper curve)
   Growth—which can become hyperbolic growth—in financial aggregates of all kinds: run-up of debts and other obligations, speculation in currencies, stock markets, futures (derivatives), etc.

As in the case of a "typical collapse function," the interaction of the upper two curves sucks the underlying physical economy dry.

But at a certain critical point (around 2000 in the USA), no matter how much money is injected in the economy, the financial bubbles cannot be kept aloft! The rate of rate of growth of monetary aggregates becomes higher than the rate of rate of growth for financial aggregates. In graphical terms, this is the "inevitable crossover" point of the middle, monetary curve, breaking up through the top financial curve.

Although this looks like intuitive econometric science, LaRouche illustrates this with some striking examples.

In the year 2000 LaRouche stated that compared with a worldwide GDP of about $41 trillion, the total amount of financial aggregate in short-term obligations was over $400 trillion. In other words, at least 10 times the amount of the total annual product of the world as a whole at that time. "

In 2008 he publishes in 'The Time Has Come for a New System':

• We are a credit system, not a monetary system.
• Outstanding obligations: $1.4 quadrillion, derivatives, short-term obligations of speculative nature
• This mess is coming down.
• System will be put into bankruptcy, by governments

And than to realize that there are still leading prominent professionals that like to make us believe that it's just some limited subprime issue. Regretful, it's the other way around. Subprime will just turn out to be the proverbial little stroke that'll fell the great oak.

Read more about LaRouche Writings

Let's hope that LaRouche is a pessimistic man....