Wednesday, 14 January 2009

Did we have Hyperinflation already?

Hyperdeflation scenario:
Could we get hyper-deflation of the $500 Trillion derivatives pyramid - a total and instantaneous deleveraging? This could all happen in a single day or even a single hour and no-one will be able to get out of the way. It could come like a thief in the night.

Hyperinflation scenario:
However, if the Fed succeeds in stopping this process or event, it will mean that they will have committed hyperinflation to cover all these potential failures, having possibly had to underwrite or monetise all several hundred trillion of derivatives transactions. Taking $500 Trillion as an estimate of derivatives' notional value, that would mean a 40x increase in money supply (M3 being about $13T - and US GDP being about the same). That's 4000% inflation guaranteed then, if the Fed succeeds."

Now, considering the above, have we already had the hyperinflation that may on the web have been discussing as being in the future?

1) Firstly, we have had a 100-fold increase in prices in the last 90 years, since the inception of the Federal Reserve and the first ending of the Gold Standard in 1914.
2) Secondly, we have had hyperinflation in the notional value of derivatives transactions at a far higher rate than that of the traditional measures of money supply M1, M2 M3, MZM, TMS, Adjusted Monetary Base, etc.

It seems to me that the measures of traditional money supply are becoming irrelevant as the leverage increases and the derivatives streak ahead of all measures of savings, cash and GDP.

Taking $500 Trillion as total notional derivatives value, that is 40 times the US money supply, 40x the US GDP and 10x the world GDP. Would a 2.5% wipeout in derivatives notional value wipe out the US GDP? I don't know!

It would be fascinating to see the figures from the Bank of International Settlements (BIS) for derivatives transactions notional value for year end 2008, to see if they decreased in the second half of 2008 as they should have done with this present 'deleveraging' - or if they actually increased.

Try this link and download Table 19: Amounts outstanding of over-the-counter (OTC) derivatives by risk category and instrument, i.e.

As of June 2008, notional value outstanding of Over the Counter (OTC) derivatives was 683,725,000,000,000 (683 trillion) and the Gross Market Value of these was 20,353,000,000,000 ('only' 20 trillion). That presumably excludes all derivatives traded on exchanges, since these are just the OTC figures! What do these figures really mean?

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