World is facing DEFLATION, in spite of MONEY PUMPING by USA and other countries and we are talking about HYPER INFLATION. Why?

October 14, 16

World is facing DEFLATION, in spite of MONEY PUMPING by USA and other countries and we are talking about HYPER INFLATION. Why?

Greetings from Hitesh! Regular readers are puzzled by our call of coming hyperinflation and they wanted our explanation on the same. Today I am going to deal with that. This is pure economic post and let me explain some basic before we deal with the subject. If you do not READ this, you will miss the major opportunity of your life.  READ it. I have kept it as simple as possible.

Let us start with MONEY MULTIPLIER Concept: -

Say you are going to OFFICE in an AUTO. You paid a fare of Rs.20 to AUTO Guy. Now AUTO guy being HUNGRY goes for a VADA PAV and CUTTING TEA in near by stall and pays Rs.20 to him. VADA PAV guys pays to ATTAWALA for the ATTA he supplied. ATTAWALA goes and pays to the PROVISION SHOP for the CHANA DAL he bought.

If you see the above example – Rs.20 got circulated 3 times –

1.   You paid to VADA PAV stall.

2.   VADA PAV Stall paid to ATTAWALA

3.   ATTAVALA paid to Provision Store.

This is KNOWN as Money Multiplier of 3 times. Number of times the money gets circulated!! Simple.

Now, let us understand the MONEY SUPPLY. We have seen that US was announcing QE 1/2/3 and pumping money to the system. JAPAN is also doing the same since last 25 years.

Say you have invested Rs.10 lakhs in share and the current value if Rs.2 lakh. Now, US Govt bought your shares at Rs.10 lakhs from you under QE programs. So, the loss went from BANKS Balance Sheet to US FED account and BANKS got the money to LEND. So, the supply went up like anything.

With the PRODUCTION not moving up and money supply moving up – the prices should have moved up like anything. But we are seeing REVRSE. WHY?

Let us see HOW GDP is determined in the simplest way?

Say there is a small country of 10 people and the money supply is Rs.1. Each one gives Rs.1 to other for the services or goods the other guy is giving and there bye money multiplier is 10 times.

Money stock * Money multiplier = GDP

 Rs.1 * 10 times = Rs.10.

Now say Govt starts pumping money and increases the money supply to Rs.10 but money multiplier comes down to say 1 time. So, we have….

Money stock * Money multiplier = GDP

 Rs.10 * 1 time = Rs.10.

Though MONEY SUPPLY went up, thanks to MONEY MULTIPLIER effect – economy did not move up!!

What happened in USA?

As per https://fred.stlouisfed.org/series/M1 - money supply in USA has moving up steadily from USD 400 bln to USD 1400 bln from 1980 to 2007. In 27 years it moved up by just USD 1000 billion. But from 2007 to 2016, in just 9 years – it moved up from USD 1400 bln to USD 3300 Bln, an increase of 135%!! (We have taken M1 to explain the concept. If you take M3m then also the conclusion will be the same. Just to make it easy for NORMAL readers we are dealing with M1!!)

As per the same Website – money multiplier was around 3 in 1980s and it came down to 1.65 in 2007 and now it is 0.89!!

Let us apply our FORMULA:-

Money stock * Money mulptilier = GDP

So, in 1980 USA ECONOMY SIZE was USD 400 Bln * 3 = USD 1200

In 2007 is was USD 1400 bln * 1.65 = USD 2310 bln

In 2016 it is – USD 3300 bln * 0.89 = USD 2937 bln.

If you look at the Money Supply it moved up from USD 400 bln to USD 3300 bln about 8 times and economy moved up from USD 1200 bln to USD 2937 bln, just 1.44 times!!

So, money supply is not adding to the GDP!!

This is a worrisome situation over there and all over the world.

There are PSYCHOLOGICAL REASONS to the above behavior:-

If you look at the period from 2008 to 2016 – it is full of uncertainty. People had lost billions in their investments in 2008 fall. The effect of the same was more in USA as the investors have taken LEVERAGE of 10 to 30 times their amount – so they got wiped out.

Now, they are getting NEW MONEY – but they are not ready to INVEST or SPEND. They are stuffing their EXTRA cash to their banks / lockers. They are playing SAFE now. Money multiplier has gone down by half from 1.65 to 0.89. It means more and more money is waiting in SIDELINES.

When money is waiting in SIDELINES – production and services are also not growing. So, this is also creating set back to the growth of economy.

WHAT IS HAPPENING in INDIA?

As per RBI report our money multiplier is around 4 to 5. In fact, it has moved up. But we see there is a severe liquidity crunch in the market and banks are asking for more and more rate cut. In fact, in the 10^th October post we talked that NEUTRAL REAL RATE (GDP RATE) in India is also not growing up, so RBI is reducing the REAL RATE. (please read this post – along with the above - Monday, October 10, 16

RBI has made SUBTLE change in its POLICY Communication. Very Few GUYS are talking about it.)

India has a different issue. As per various estimates we had a cash economy of around 50%. Since 2014, CASH circulation is reducing and it has come to a STAND STILL after IT raids in the past month. So, RBI says money multiplier has gone up but it has come down in real sense.

What will happen in WAR like situations?

People will hold their CASH like anything. They will avoid spending and save as much as they can. These will lead to more DELFATION for short period of time. More and more BANKS will have NPA’s and HUGE losses.

USA will come out with QE 4/5/6 in due course. Other countries will also join the game. So, all the economy will be full of CASH going forward.

That is the time something unexpected will happen.

Going forward – people will start feeling confident      (Once the war issues are resolved or some positive events start happening) and they will come back to market with their buying power which they have accumulated over the last 10 odd years.

In the SHORT TERM they will have MONEY ILLUSION as they have money and prices have not moved up. They will go on BUYING SPREE
(Supply side will not increase in short time) and prices will start moving up 10 times to 30 times. The value of your money will go down like anything!!

Let me give you an EXAMPLE of GOLD. In 2012 it was around USD 1800 and it made a low of USD1050 around Dec.,2015. Now a guy who has not bought the gold at USD 1800 and accumulated money over the years and made good return on the same would find GOLD as dirt-cheap. He would go like a MAD and buy GOLD. That’s what happens with GOLD and it made high of USD 1300 in short span of 3 months!! Gold has out performed the other asset classes so far in 2016. This will happen with all the asset classes over a period of time. We were on dot with our calls to buy gold to Indian investors on 15^th Jan.,2016 at Rs.24800/-. Our followers have made tons of money in gold this year.

In short, we have already SET the TIME BOMB and it’s ticking. It’s a matter of time when it will BURST.

What is the SOLUTION?

Investment is the only solution. If you are investing in proper mix of assets – you are more likely to come out of the situations without any losses. In fact, you may end up making SUPER PROFIT, as PRICES will move up FAST. If you lock your money in DEBT for a long term without CALL option – you will curse your luck.

The moot question is which asset classes to invest and what should be their proportion. You need proper education for the same.

If you want to PREPARE yourself for the JUDGEMENT Day – please contact us.

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Live With Passion…Invest With Passion.

Hitesh Parikh.

www.hiteshmparikh.com