Hyperinflation and Our Bankrupt Babushka Future
Those people who have saved for the future could soon form our own generation of bankrupted, Babushka pensioners…
Twenty-five years ago the Russians found themselves in a hole.
They had an official price for petrol (gasoline) of 1 ruble. But the cost of providing it, for example by buying it on world markets, was 8 rubles. Insofar as the state could supply any petrol to anyone at all, it was definitely going to be at a big loss. Yet they obstinately refused to accept that their price was wrong.
How we laughed at this dogmatic denial of the discipline of the market! We put it down to some sort of political imperative, but in fact it was much simpler than that.
Rather than lose money at a world-record rate, the Russian state responded by distributing official petrol in limited quantities, and only to favored clients, which in their society meant party members. The members used to fill up their Zil limousines with this cheap petrol, and effect a supply chain to retail via the simple device of draining their tanks into the jerry cans of local teenaged entrepreneurs – at 6 rubles per liter. That left the last 2 rubles to the entrepreneur, who sold it on the side of the street at 8, with hardly a murmur from official sources.
Party members were getting rich, after all, and the taxpayer was footing the bill.
Now substitute USA for Russia, and credit for petrol, and you have the essence of what is going on today. Can you get a mortgage in America or the UK at 2%, even if you pay a 50% deposit on your house? Certainly not. In America, only government mortgage agencies (Fannie and Freddie) and megabanks which are too big to fail have access to the 0.25% credit provided by the Fed. And once again, those megabanks are making very large sums, much of which gets distributed via bonus pools to those with an unremarkable talent for re-selling this cheap credit at market rates of 5.0% or more.
Political leaders regularly rail against greedy bankers, but the problem – all that cheap money – has for the last five years come directly from the false market in credit extended by ultra-low rate policies sourced in the Treasuries of the West.
Who’s at fault is academic. The issue now is that this artificially low interest rate environment can set off a hyperinflation chain reaction, just as it did in Russia once market forces prevailed. Not much is different from previous hyperinflation episodes, save that the melting of a glacially frozen stockpile of $50 trillion in government bonds performs the role traditionally played by the printing press.
In the end, those who have saved for their futures could form our own Babushka generation of pensioners. Paid out monthly, and in full, their pension will buy them a sandwich or two. The nominal value of sovereign debt will not decline, but the value of it will inflate away, taking with it the value of all those bonds.
We could end up needing to remove a couple of zeros from banknotes, because otherwise the coinage will be melted back into nickel and copper ingots as soon as it is issued, and then sold to the Chinese…
Regards,
Paul Tustain
BullionVault
October 12, 2009
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“In America, only government mortgage agencies (Fannie and Freddie) and megabanks which are too big to fail have access to the 0.25% credit provided by the Fed. And once again, those megabanks are making very large sums, much of which gets distributed via bonus pools to those with an unremarkable talent for re-selling this cheap credit at market rates of 5.0% or more.”
LONG LIVE THE PEOPLE’S REPUBLIC OF RICH AMERICA!
You get to vote for these folks America. It is called DEMOCRACY.
You get to vote for these folks, America. It is called DEMOCRACY.
[...] in their official reports … but STILL don’t lift a finger to change course … then they have Hyperinflation and Our Bankrupt Babushka Future – whiskeyandgunpowder.com 10/12/2009 Those people who have saved for the future could soon [...]
A very interesting example…with one major flaw…Russia was, and still the 2nd largest oil exporter (after Saudi Arabia). They certaily had the refining capability.
Why on earth would they had to “buy oil in the world markets for 8$”?.
You could have found another example and actually be right about system corruption and the whole thing.
Goes a long way to demontrate the need to slander, even indirectly, everything that tries to put a leash in this crazy-savage capitalistic system of ours.
Not everyone is ill informed nevertheless…
[...] controls black markets spring up to continue commerce without interference. In an article today by Paul Tustain in Whiskey & Gunpowder he describes the effect 25 years ago in the USSR when the government set the price of gasoline at 1 [...]
Wellington, they weren’t buying at 8 rubles on the open market. It was costing 8 rubles to deliver gas to the end users who were required, by law, to pay only 1 ruble. Which makes the analogy to our credit markets, so manipulated by our government, a valid one.
Thanks Dave,
THAT makes sense. (Hope we don’t see those phenomena reaching our shores in the future…)