Notes from the Book: Dying of Money

My way to looking at markets has always been Top-Down. I focus more on Macros and less on the Company that I finally may invest into for my view is that the Marco decides the larger trend which is critical.

Everyone from Charlie Munger to Howard Marks to the local stock broker Analyst say, don’t pay much attention to macroeconomic trends. While US investors saying this makes a whole lot of sense, it makes less sense in India.

Why?

Lets say 20 years back, 2 persons won a Million in a Lottery. Both of them don’t believe in Banks and would rather stuff the money in their pillows. Only difference to them, one won a Million Dollars in the US, the other won a Million Rupees in India.

Fast forward to today. The value of both the currencies have gone down in value. The One Million in USD s today worth 6.70 Lakh. The One Million in 2.83 Lakhs.

To give a different perspective, Nifty 50 in Rupee terms has a 20 year CAGR of 15.60%, but in USD terms, the CAGR is just 10%. If you were unlucky and invested in end of 2007, at the end of 10 years while Nifty itself had given 5.5% CAGR over the 10 year period, in USD terms, you would be just about breaking even.

Let me give an example closer home. Assume you were a rich Pakistani. You understand that inflation is high, real Interest rates are negative and hence investing in the stock markets is a better way. At the beginning of 2018, the KSE Index was at 41,000 and One USD cost 112 Pakistan Rupees. Today, the Index is at similar levels, one USD is now available 220. Basically in USD terms, the wealth has halved over a period of just 5 years.

While its not my intent or suggestion that India can face similar issues, I feel Inflation is something we need to keep a real eye upon for if it escapes, it can destroy a country like no other and we have seen multiple examples of the same elsewhere.

Dying of Money by Jens Parson has to be the best book I have read till date on the subject. When I read books, I barely note down anything. But this book was different and since Inflation is something that will never go away, understanding the impact it us on our financials is very important.

The book was written in the middle of the Inflation crisis that enveloped the United States with the end being seen nearly a decade now the road. The notes are basically copy pasting from the book which looks at inflation in ways that is rarely talked about, either by Economists or the Media. Not everything has to be agreeable but the overall construct is worthy of understanding.

Notes from the book:

As the profits of capital had shrunk to a minimum, the higher wages could be paid only if higher prices were obtained for the products. But higher prices raised the cost of living and brought about fresh demands for higher wages, which in turn led to a further rise in prices. And what was the part played by money in this vicious circle?

Lord Keynes observed at the time, nations are subject to a practical limit of how much debt their taxpayers will bear. Any nation’s debt which exceeds the limit must somehow reduce the debt to come within the limit. The only three ways to reduce the debt are to repudiate it, to assess capital levies and pay it, or to inflate and dilute it. Inflation is the way which is invariably used.

The big tax cut and the intentional deficits of the Kennedy and Johnson administrations received most of the economic attention, but the less noticed behavior of the Federal Reserve Board was even more remarkable. The Federal Reserve inflated obligingly throughout the boom and long after. This was a Federal Reserve in which no dramatic changes of personality had occurred, a Federal Reserve which was still under the chairmanship of the estimable William McC. Martin who had been closely associated with the far more restrictive Eisenhower economics. It is true that President Kennedy made menacing omens when Chairman Martin dared to speak as if the Federal Reserve would not underwrite the deficits, but the fact is that the Federal Reserve accommodated itself to the economics of the government in power. This it should and must do. There cannot be two or more captains steering a ship, no matter how dubious the judgment of the chosen captain may be.

Money inflation almost never fails to achieve dazzling prosperities in the beginning

Everyone loves an early inflation. The effects at the beginning of an inflation are all good. There is steepened money
expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays.

Stock market speculation, which adds nothing to the wealth of any nation, is the inflationary activity preeminent, and it was the craze of America in the 1960’s as it had been of Germany in 1921. A buoyantly rising stock market marks the opening stages of every monetary inflation. A sharply rising stock market proves to be an unfailing indicator of monetary inflation happening now, price inflation coming later, and a cheap boom probably occurring in the meantime. The stock market boom like the prosperity is founded on nothing but the inflation, and it collapses whenever the inflation stops either temporarily or permanently.

Stock market speculation had its customary companions, such as the conglomeration of industries. Germany had Hugo Stinnes and his kind, and America had its own well-known names among the conglomerators. In the peak year of 1968,
conglomerate mergers sucked up enterprises having $ii billion of assets, ten times the conglomerate mergers of 196o. New investment in stock market issues went into “hot stocks,” which were often marginal activities that had little or no productive justification for being.

Net export of money reduces the price inflation at home and distributes it instead abroad.

Prices as an aggregate are mathematically determined by the total amount of money which is available for spending in
a given period of time, in relation to the total supply of all values which are available for purchase with money in that period of time.

Modern conventional economics classifies causes of inflation as “cost-push” or “demand-pull” forces. This distinction
is purely descriptive and not analytical. It merely states which of the two parties to an inflation, sellers or buyers, is pushing or pulling the harder to get their mutual prices up to their preordained equilibrium. If sellers are the more eager to claim the full prices which aggregate available money would justify, the inflation will be “cost-push”; if buyers are the more eager to reduce their cash balances and bid up the prices of available output, the inflation will be “demand-pull.” As a means of analyzing the basic causes of inflation, the distinction is utterly useless.

No one can cause an inflation but the government, and neither more nor less is required to stop an inflation than that the government stop causing it – Milton Friedman

Monetary inflation invariably makes itself felt first in capital markets, most conspicuously as a stock market boom. Prices of national product remain temporarily steady while stock prices rise and interest rates fall.

A properly managed fiat currency, frankly having no inherent value even imaginary, is infinitely superior as money to gold or any other commodity having a conflicting real value.

Price inflation is slow to follow, but it does follow. The price inflation is the cost of the original prosperity

Interest is governed not by. the total quantity of all money in all markets, but by the relationship between supply
and demand in the one small market for money contracts. Inflation causes an oversupply of eager borrowers and a disappearing demand from fearful lenders, so that the prices of money contracts fall and interest rates rise. If demand for interest contracts should totally disappear, as it should do in an inflation if lenders really knew what they were about, interest rates would be infinite at the same time that the total supply of money was also excessively abundant. Monetary inflation causes high interest rates, not low ones.

Holders of money wealth are the sheep to be shorn in an inflation. The rich tend to be relatively bright men and
therefore to be net debtors, not creditors, in an inflation. The dull-witted rentiers who stand still for the shearing are the more modest savers of lower income, even the workers themselves.

When an economy is in the stage of growth (Current India for instance), taxes should be high on Consumption {Sales Tax} and low on Capital {Property / Corporate Income Taxes, etc} for the idea is to incentivize capital formation over growth. When an economy is mature, this should reverse {High taxes on Capital and low on Consumption}

The moment you abandon . . . the cardinal principle of exacting from all individuals the same proportion of their income and their property, you are at sea without a rudder or compass, and there is no amount of injustice or folly you may not commit.

Economic growth is heavily dependent on population growth. If population growth actually slowed down, growthism would
be more difficult to pursue and full employment impossible to achieve.

Economists are in the constant scholar’s danger of over-refining their material to a pile of fine dust, learning more
and more about less and less until they know everything about nothing. They develop a liking for paradox and a love for
making problems look more difficult than they really are, the better to justify their expert hood. Economics is swept by a constant epidemic of mathematics, substituting equations for ideas and computers for brains, as if mathematics lent scientific legitimacy to the black art. Many an economist, deprived of his mathematical language, is speechless.

Price controls have as long and honored a history as inflation. In four thousand years of inflation, price controls have a perfect record of four thousand years of total failure to control inflation.

A nation succumbing to inflation is like a man drowning within arm’s reach of a shore he does not see.

There are only three basic requirements for bringing any inflation to a halt. They are, first, that prices must rise; second, that money must stop rising; and third, that the money wealth must be devalued to tolerable levels. No more is required, but no less will do either.

Foreign money is a safe refuge from inflation only if the foreign money’s government will defend its value from inflation more successfully than one’s own government.

The stock market is the original home of inflationary madness in the early phases of any inflation. Later the stock market may fall into disrepute, but that is as misplaced as the original madness. Besides earning easy riches for everyone in early booms, common stock always enjoyed a traditional reputation as a secure hedge against inflation.

No nation can hope to exist free of inflation while inflation rages elsewhere in the world without accepting and
even seeking a constantly rising foreign exchange rate for its own currency.

The obsession for exports which are too easily competitive at undervalued exchange rates amounts to giving away part of
the value of the national product to the rest of the world for nothing, and it artificially benefits the export sector of the nation’s economy at the expense of the rest of its own people.

Some other nations tended to urge a return to a gold standard as a solution to the foreign exchange ills, but this absurd notion served only to hide the truth that a currency’s value depends on the whole economy that backs it and not on some little pile of hoarded gold.