By ValueWalk Staff

Know I was thinking about it though Dave because we’re looking at the news with Venezuela it’s so sad. I don’t think people really understand the tragedy of hyperinflation but the tragedy means that you know some people literally don’t eat. I heard the latest statistic that their inflation rate has blown to 42000 43000 percent where a month’s wages will buy three cups of coffee. At this point you know when you look at something like that whether it’s the fire here in Durango or the hyperinflation Venezuela a lot of it is tied to context. You have the appropriate context efforts take place in the teens and early 20s.

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Transcript

The McAvaney weekly commentary covering monitary economic and geopolitical news events. So that’s the problem is we’ve created a structure within the financial markets which requires greater and greater liquidity to see those asset prices maintained or propelled to higher levels. If you don’t provide the liquidity you see what Druckenmiller described as potentially the greatest deflationary collapse the world has ever seen. Now here are Kevin Orrick and David McElhaney welcome to the McAvaney weekly commentary from Kevin Orrick along with David McAvaney. Well the fire we’ve been talking about has spread now to fifty two thousand acres. You know David we’re in week 5. We knew we had a very dry environment. We knew that we could expect something like this. It’s amazing to me how quickly something like that can blow up. We’ve got a whole community that sounds like they’ve been smoking Camel filter list cigarettes for the last five weeks. It’s a lot of swimming. It’s a lot of smoke every day. You know I was thinking about it though Dave because we’re looking at the news with Venezuela it’s so sad. I don’t think people really understand the tragedy of hyperinflation but the tragedy means that you know some people literally don’t eat. I heard the latest statistic that their inflation rate has blown to 42000 43000 percent where a month’s wages will buy three cups of coffee. At this point you know when you look at something like that whether it’s the fire here in Durango or the hyperinflation Venezuela a lot of it is tied to context. You have the appropriate context efforts take place in the teens and early 20s.

You had the reparations payments from the Treaty of Versailles. And you know there was an unsolvable problem. And yet they’ve found a way to move forward through the printing presses. But the context was set and that was an insurmountable debt that had to be repaid that an insurmountable debt that had to be repaid was the backdrop issue that was the primary issue feeding into the Weimar hyperinflation. You could have looked at Venezuela and seen something like this coming years and years ago. And certainly we’ve got the fuel to feed the fire here in Durango and it kind of is just a matter of time before you have a lightning strike or something else that gets started. Well and it’s not just Venezuela. I mean we can look at our own economy and say look at the trillions of dollars that have been printed in a way that’s a little bit like a dry forest. It hasn’t turned to inflation yet but I’ll just tell you with the dryness that we had over the winter this year the environment changed enough that I called my insurance agent and raised my fire insurance on my house knowing that we probably would have something like this. We haven’t really experienced much inflation right now in the United States. Kevin this is one of the points that I was going back and forth with Bill King here in recent weeks because this issue of the monetarist school of thought assuming that the monetary base as it increases it translates into greater inflation right. That’s what we’re taught. Inflation is everywhere and always a monetary phenomenon. RIP money you get inflation decrease the printing you should have a deflation.

That’s the theory. So what do we have here is that rule no longer applies is it. Milton Friedman being thrown out on his ear and the whole theory being turned upside down and inside out or is it a question of sequencing the fixation that I had with Bill King in a conversation and globalization is this link this link between what should be a monetary axiom create lots and lots of credit and money and you end up with inflation and something that has reduced or tamed inflation in the short run. So again is globalization that trend. That’s what I wanted to know. Is it the trend which has taken the monetarist equation out and ended it or is it something that we’re just waiting for. I know from our conversations in-house with Doug Noland and others who focus on credit. Clearly there’s been massive inflation in asset prices and the central bank community has done a masterful job of focusing the liquidity flows towards one particular place. And so rather than seeing a radical increase in the cost of goods and services we have had a radical increase in the price of assets as intended as the playbook was set out by Ben Bernanke during the crisis. Well look at the 20th century. Could you imagine Dave if they weren’t printing money and we were on a gold standard how much prices would have actually dropped. The cost of living would have actually dropped as we globalized because what you’re doing when you do the globalization thing right. You’re actually becoming more efficient with labor what have you.

Now I’m not necessarily saying I’m a proponent of current globalization but our prices and our cost of living should have dropped and so what they’ve done instead. You’re talking about changing the equation. We should have had the kind of deflation that’s good for all of us. But instead the Federal Reserve has been printing and moving that money to where actually my cost of living is still increasing. I mean look at the Fed’s inflation gauge here within free market circles there is the story of the pencil and how it’s created and what goes into creating the graphite that goes into the lead part and where you harvest the wood from and where that metal band at the end which holds the eraser on. Where do you get all of these parts and how long does it take to create a pencil. If you’re doing the project alone print the value of all the markets in the value of free trade and the value of mobilization in that sense is that you get to specialize and when you specialize the cost of a pencil instead of being worth 20 or 30 dollars because of the labor hours that go into it now cost pennies it cost pennies and it means that nobody really thinks about the cost of a pencil anymore. Those are the benefits of a deflationary environment where we actually see a massive increase in our living standards because things get cheaper. Now you look at the Fed’s inflation gauge and we have these numbers out here this week. They prefer something called the PC PC core over the CPI. You and I are stuck with a consumer price index and that’s the reference that we have.

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