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DISCUSSION THREAD: Episode 26 - Paul Brodsky

  • amkc
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2 years 3 months ago #1 by amkc
Complete accident that we ended up talking about hyperinflation but it was interesting to hear Erik and Paul address this topic. We obviously have limited time for discussion on-air but, to me, it seems that there are tons of signs pointing towards the U.S. losing reserve-currency hegemony. The Yuan is going to be in the SDR by end of September and China/Russia have a pipeline deal to settle natural gas and oil in their respective currencies. Interesting to think about whether this will be "death by a thousand cuts" or bankruptcy (slowly and then all at once...)

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2 years 3 months ago #2 by bbachand93
Replied by bbachand93 on topic DISCUSSION THREAD: Episode 26 - Paul Brodsky
While I agree that there are certainly many pieces of evidence pointing towards a significant devaluation of the USD, there are some aspects of the world financial situation that are not addressed in the show. For example, the massive $9 trillion carry trade that has actually increased in size since the beginning of the recent dollar strength trend. If the dollar continues to rise because the US economy is the cleanest shirt in a dirty laundry pile, this has to be unwound. Additionally, the global pension system has a massive amount of capital that HAS to be deployed. Because of the current interest rate environment, much of that capital will likely flow into US assets (be that debt, or equities). These assets require dollars to purchase. In addition, the situation in China's banking sector especially regarding WMPs (wealth management products) wherein there will likely need to be a government bailout of insolvent banks (the alternative being social unrest in massively overpopulated cities). This draw on China's foreign reserves is going to eat up a large chunk of their USD reserves which they have been using to protect their peg. If the peg has to go out the window and a 20-30% devalue continues, most of that deflation will be exported right here to the US as far as I can tell.

Long story short, I don't see inflation or a weaker dollar unless fiat money goes out the window. I think it is either hyperinflation of all currencies (because people don't trust fiat currencies) or dollar deflation because al, currency strength is relative.

All that said, a gold/dollar long pair trade makes a lot of sense right now and that's something Raoul Pal has been very vocal about lately.

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2 years 3 months ago - 2 years 3 months ago #3 by Pepe le Moko
Replied by Pepe le Moko on topic DISCUSSION THREAD: Episode 26 - Paul Brodsky
Yesterday I read an article about a physics professor who offers a Dial-A-Physicist hotline to cranks who want to promote crackpot physics ideas. She has huge success. She has this to say:

"I haven’t learned any new physics in these conversations, but I have learned a great deal about science communication. My clients almost exclusively get their information from the popular science media. Often, they get something utterly wrong in the process. Once I hear their reading of an article about, say, space-time foam or black hole firewalls, I can see where their misunderstanding stems from. But they come up with interpretations that never would have crossed my mind when writing an article.


But the most important lesson I’ve learned is that journalists are so successful at making physics seem not so complicated that many readers come away with the impression that they can easily do it themselves. How can we blame them for not knowing what it takes if we never tell them?"


The bulk of these "autodidact physicists" to use the polite phrase have engineering backgrounds. They are not stupid men. They simply don't have the specialized training to be able to follow, let alone do original work, in physics.

I was thinking about this when I listened to the Paul Brodsky interview the other day. I also watched the linked interview on Epoch Times. It is obvious to me that Mr. Brodsky is a powerful intellect and that I simply cannot follow what he is talking about for the most part. I'm a computer professional with years of experience. I'm used to solving problems and absorbing volumes of new material. I manage my own money and, in the wake of two major stock market crashes, I always will. This is a zero sum game where the sharks eat and the fish get eaten. I think of myself as a fairly sophisticated investor and it pains me to say this, but I, and by extension most of the listeners here, are fish.

Popular economics give the impression of approachability. Can you make a chart with excel? You are an economist! A few days ago I posted a chart showing interest rate spreads. I said at the time that I thought the concept was confusing. This is a quote from wikipedia about a particular type of interest rate spread:

Option-adjusted spread (OAS) is the yield spread which has to be added to a benchmark yield curve to discount a security's payments to match its market price, using a dynamic pricing model that accounts for embedded options. OAS is hence model-dependent. This concept can be applied to a mortgage-backed security (MBS), or another bond with embedded options, or any other interest rate derivative or option.

By show of hands, how may of you can tell me what that means? Plain English please. Even assuming that you could puzzle it out. If you where in a conference room and had to accept or reject a contract with this type of spread, could you do it quickly?

Years ago I read a study into why African-Americans have lower household wealth than whites. The finding was that African-Americans on the whole didn't trust banks and didn't take out home loans. You can imagine what it must be like to walk into a bank branch and talk to a condescending or hostile loan officer. What is more, they had good reason to distrust white people. Most of them had been taken advantage of in business deals in the past.

Do you think that you are smarter than the average bear? You are not. You are just a bigger fish for the sharks.

Mr. Brodsky is one of my all time favorite speakers. He makes no bones about it. The US ( and maybe the whole world ) will see hyperinflation accompanied by a gold revaluation. It is vitally important to understand how his views differ say from FOFOA or long time gold bugs like Peter Schiff, but in the long run these are details. It is much more important to understand the processes that they are discussing and to gauge if these things might happen in our lifetimes.

Brodsky's primary concern is Financialization, which he feels is creating socially disruptive wealth inequality and chocking out productive investment. He thinks that as GDP declines that central banks will have another Bretton Woods style conference and revalue gold relative to the dollar to many multiples of its current level. In the epoch times article he has some ... interesting things to say about this revaluation:

Epoch Times: This would benefit gold holders disproportionately.

Mr. Brodsky: There’s no question. And so if you’re going to be cynical about this you would say they’re not going to do that until the right people own gold. You would want China to own enough gold so they wouldn’t become hostile. You would want all central banks that are going to be included in this to own the gold. And obviously individuals or other portfolios that own gold would benefit greatly.

Mr. Brodsky is being tactful. We can see what "The Establishment" wants. They use the NYBOT_DX or the "Major Currencies" measure of the dollar which deliberately excludes non-white nations. Most gold is held privately by Indians (the East Asian kind). American and European central banks may be forced to let China into the club because it has a powerful military, but they will not let Indians or other non-whites in. The "switch" will not be thrown until all of the rich white Americans and Europeans are holding gold (and conversely, non-whites have been stripped of it).

I find it odd that I have to remind people of this, but the US was once an all white nation by law. It was illegal for a non-white to become a US citizen and black people where enslaved. Even as recently as WW2 all people of Japanese decent where put in prison. The UK recently voted to leave the EU mostly due to a large influx of non-white immigrants. You can read about the white Australia laws on wikipedia. Is there any doubt about what they really think?

It is important to understand that these are deliberate policies of the central banks. Hyperinflation doesn't just happen. He specifically points out that markets are being supported by central banks. He doesn't even consider this controversial. He says that central banks will stop supporting markets. This will lead to a crash because the only thing holding them up is massive infusions of central bank money. Then the central banks will step in and save the day by revaluing gold.

Let's look at an actual hyperinflation:

Here we see three periods of hyperinflation. If you don't think these represent hyperinflation I can simply point out that Mexico replaced 1000 old pesos with one new peso. Maybe this requires a more persuasive argument. This is Mr. Vincent Cate:

How is hyperinflation defined?
In Cagan's 1956 paper on hyperinflation he used inflation of 50% per month as the cutoff for his study. In a footnote he says, "The definition is purely arbitrary but serves the purposes of this study satisfactorily.". Since then many academic researches have taken this as the official definition of hyperinflation and ignored any cases of less than 50% per month as "not true hyperinflation". Hyperinflation researcher Steve Hanke wrote a letter to the editor to complain when a company used 40% per year and a standards board used 100% in 3 years. In the real world today people call 100% inflation in 3 years hyperinflation. I don't think Cagan even meant to exclude 10% or 40% per month as "not true hyperinflation", I think it was just his way of reducing the cases to investigate down to a manageable number. When millions of people call what they are living through "hyperinflation", I think it is wrong for academics to ignore them because one guy used a higher cutoff in a paper long ago.

You can find lots of valuable information on Mr. Cate's web site:

You can find the Cagan paper here:

The three episodes of hyperinflation are as follows.
average yearly inflation rate 1982-1984 165.4%
average yearly inflation rate 1985-1988 100.0%
average yearly inflation rate 1995-1996 90.6%

Peak inflation rate was about 400% inflation in 1983. To my way of thinking, when prices double over the course of a year that is hands down hyperinflation. That is not exaggerating it is just a fact.

What I want to draw your attention to is the sharp straight sides on those spikes. The central bank engaged in a series of deliberate devaluations of the Peso. Note that it looks like a light switch being switched on and off. It sounds disingenuous to say that this policy was forced on them. They had too much debt and they thought it would be easier to inflate it away than to default. In effect they punished Mexican citizens to pay international debts. They certainly had a choice. They could have refused to pay.

The revaluation of the Dollar vs. gold that Mr. Brodsky ( proposes? anticipates?) is not a given. The central banks could simply stop intervening in markets. Under the gold standard central banks were unnecessary. Any private bank could issue money. The threat of having the paper money redeemed in gold coins was sufficient to keep everybody honest ( more or less). I am not proposing a return to the gold standard and I don't think it would be a good thing. On the other hand I think that central banks actually look forward to hyperinflation. It would solve their main problems and they and their friends would benefit at the expense of virtually the entire population of the world. This stops just short of criminal.

Mr. Brodsky continues and makes an interesting assertion. He says that prices and wages would increase. This presupposes a level of labor organization that the US has not seen since ... I don't even know when ... 1934 maybe? Not coincidentally immediately after the dollar was revalued vs. gold. The difference was that there were unions back then. Given the police state explosion and somnolent labor movement I'm going to say that prices would go up, but wages would not. Historically hyperinflation has redistributed wealth from retired people to working age people. This one will not.

Mr. Brodsky seems to think that this revaluation will be accomplished with a "mere" 3x to 10x jump in prices. He is dismissive of the "wheelbarrow" theory. If foreign central banks stop buying US bonds you can replace the wheelbarrows by pickup trucks ( pulled by donkeys). I'm long wheelbarrows.

Thinking over his ideas about oil it seems to me that shale oil is being supported specifically to solve this problem with hyperinflation. Oil being the main import, the US government is promoting domestic production to take the edge off a hyperinflation.

Erik Townsend discusses the wage price spiral. This certainly happened in Mexico, but as it happened millions of people left. They went to the US. Most of the Mexicans in the US came during that time. This produced an upward pressure on wages. Incidentally they are going back now. Things are looking good in Mexico. It is disingenuous to say that the Wage/Price spiral "caused" hyperinflation in Mexico. Devaluation caused Hyperinflation in Mexico. Also it is important to understand that a strong labor movement existed in Mexico. There is no labor movement in the US. The wage/price spiral is dependent on workers demanding more. This will not happen in the US.

Just for the record: I didn't ask if you where intentionally avoiding discussing Hyperinflation. I assumed that you where. The distinction is important. I wanted you to choose your own path and not be influenced by me. I want the focus here to be on the guests and not have me monopolize the discussion forums. On the contrary If I had an opinion ( and I don't ) I would like you to spend time going over some of the more difficult concepts in the interview. For instance among the many dense interconnected subjects Brodsky covers was the idea of the ratio of debt to base money. Why exactly is that important. Under what circumstances would base money be used to pay down debt? I can see how that would kill off any interest in the show ;-) Maybe just a link to some pertinent resources. This is the kind of thing that should be discussed in the forums.

Oh! I almost forgot Mr. Townsend, the US has already had hyperinflation in it's currency:
Do you know what happened? They dumped it and replaced it with "Pieces-of-eight" also known as ... Pesos

Love the show! Keep it up!
-Pepe Le Moko
Last edit: 2 years 3 months ago by Pepe le Moko.

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2 years 3 months ago #4 by Pepe le Moko
Replied by Pepe le Moko on topic DISCUSSION THREAD: Episode 26 - Paul Brodsky
In a recent article:

An interesting relationship is discussed. Historically inflation expectations have been very important for determining where inflation would go. This is no longer the case. Inflation expectations only matter if the people doing the expecting are in a position to fight for wage increases. This article doesn't actually explain why people have changed their behavior, but it isn't hard to figure out what is going on. The US labor force no longer has a collective memory of successful collective action. The Plan worked.

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2 years 3 months ago #5 by Pepe le Moko
Replied by Pepe le Moko on topic DISCUSSION THREAD: Episode 26 - Paul Brodsky
Does anybody want to discuss these ideas? If I wanted a one way communication I would have posted this on my own blog. If nobody wants to debate I can go do stockfighter instead.

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2 years 3 months ago #6 by d2thdr
Debt is the essence of Fiat currency.

The deflationists think that as the debt defaults, fiat is destroyed. How wrong are they!

When Mr Townsend says - Hyperinflation is impossible in USA, I feel he does not understand the concept.

Hyperinflation is the process of saving all that debt from default. Its in essence helicopter money. Its buying that debt outright for CASH.

These central bankers will dump all their debt on your front lawn in Maine.

Why is this a certainty?

Because policy allows for printing of cash.

Its as certain as the rising sun.

Those dollars dumped on the front lawn by the central bankers will of course be worthless.

Of course, dont listen to this incoherent ramble. I am a humble dentist not a hedge fund manager.

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  • Michael Gebhart
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2 years 3 months ago - 2 years 3 months ago #7 by Michael Gebhart
Replied by Michael Gebhart on topic DISCUSSION THREAD: Episode 26 - Paul Brodsky
When you got the world's senior reserve currency you can print at foreigners expense. That makes it easier to print away debts by socializing the inflationary pressure.

Paul Brodsky made an interesting point about the Fed needing to maintain that status by keep yields higher than foreign bonds.
Last edit: 2 years 3 months ago by Michael Gebhart.

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