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The “Missing” Inflation Shows Up as Hyper-inflation

2017 November 16
by Ian Welsh

In things that rich people buy.

Ever since the financial crisis, there has been a lot of screaming about inflation. Screaming that it should show up, with all the money being created by central banks and, privately, and isn’t.

But it is.

A painting of Christ by the Renaissance master Leonardo da Vinci sold for a record $450 million at auction on Wednesday, smashing previous records for artworks sold at auction or privately.

New York, London, and Vancouver real estate, along with a number of other cities (China’s printing more money than anyone else), is also where it showing up.

And it’s showing up for ordinary people, not as hyper-inflation, but as high inflation of some things. Whatever the figures show, anyone who buys food knows that food prices have been going up faster than normal wages for quite some time.

But mostly it is showing up at the top end, in things that rich people bid up. $450 million is damn near half a billion, the ability to blow that amount of money on a single painting is absolutely crazy, no matter who the painting is by. It could not have happened even 20 years ago, and did not happen even ten years ago.

The rich are floating on an ocean of money, and they have nothing to spend it on that really matters, so it’s going to third homes, real estate, speculation and conspicuous luxury consumption (which is what that painting is).

As an aside, one of the ways to deal with off-shore tax haven money is for the major economies to not allow it back into their countries without high taxation. It’s great that you have a few billion in an offshore haven, but you can’t spend it there. If you want to bring it back or use it as collateral then just make them pay taxes on it. 90 percent is a good rate.

What, they won’t bring it home at that tax level? Then fuck’em. You can’t buy anything that matters in most tax havens, and no one wants to live there. Let it rot, uselessly, there.

 


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38 Responses leave one →
  1. Duncan Kinder permalink
    November 16, 2017

    Re: Spending money in a tax haven.

    With all due respects, there is a high positive correlation between tax havens, on the one hand, and scenes in James Bond movies, on the other. Eg: both Monaco and the Bahamas are tax havens. (Not to mention such places as Luxembourg, Switzerland, Malta, and I could go on.)

    So in the manner of Bond (or, if you prefer, your favorite Bond villain), one could shuttle back and forth on one’s yacht.

  2. Ian Welsh permalink*
    November 16, 2017

    Yup. But you can’t live in most of those places and run your business and even in Monaco there’s limits to how much you can spend. You can’t spend billions on anything that matters. Switzerland isn’t a reliable tax haven any more, they broke under the IRS and Treasury assault some years ago.

    Still, you have a point.

  3. DMC permalink
    November 16, 2017

    Didn’t we have this conversation a few years back about how come there wasn’t hyper-inflation due to all the TARP bailout money and we concluded that it only ever chased a few, very high end goods(which did experience some inflation) while mostly remaining in the purely financial economy?

  4. Synoia permalink
    November 16, 2017

    That and 90% Death Duties, or Estate Taxes, on estates over a couple of million.

    You rich made the money because of the rule of law, state built infrastructure, and the commons.

    At death it gets paid back.

    And non of this “foundation” nonsense.

  5. Adams permalink
    November 16, 2017

    Wait, wasn’t all that wealth supposed to trickle down? Like Malthus and subseqeunt slavering, obsequious, oleaginist economic apologists for extreme, obscene wealth have been saying for centuries.

  6. Jay permalink
    November 16, 2017

    It would be nice if someone cut the cables to the Caymans, scrambled their satellite comms, declared war, and then bulldozed all of the banks and accounting firms on the islands, and repeated this in other tax havens as often as necessary. If we can do this to Manuel Ortega over drugs and drug money, certainly we could do it to sociopathic tax cheats over unpaid taxes. If someone’s cheating at Monopoly, you simply tip the board over.

  7. StewartM permalink
    November 16, 2017

    What Jay said. The billionaire class isn’t tough, unlike drug lords and ‘terrorists’, and even modest pressure put on their havens would fold them.

  8. bruce wilder permalink
    November 16, 2017

    The only thing money per se is good for, with regard to investment goods as opposed to consumption goods and status signifiers, is as insurance. More piles of money available to try to earn returns as insurance requires more demand for insurance, which means eliminating social insurance and mutual finance and insurance schemes and doing whatever can be done to increase volatility and immiseration among wage earners. Then, you can expect Democrats to do whatever they can to facilitate pay-day lending. Financial innovation!

    So, all the easy money going to the top drives inflation in luxury goods and status signifiers.

    And, unregulated predatory lending as a goal of public policy.

    It is a twofer, this disaster capitalism.

  9. Synoia permalink
    November 16, 2017

    And, unregulated predatory lending as a goal of public policy.

    It’s not that unregulated, Try not to pay it back.

  10. Peter permalink
    November 16, 2017

    @DMC

    I don’t think the TARP loans ever moved anywhere to cause inflation because they were used for internal liquidity in the banking system and then mostly repaid to the Fed. The realestate based CDO’s were bought sorted and resold by the gov but we don’t know the score from those transactions.

    What wasn’t known by most people is at this time there was an electronic run on the banks underway with people having taken $1 trillion out of their accounts and over $5 trillion was expected to be pulled. Without rapid action the banks would have been forced to close their doors and ATM’s and we may have seen a total collapse of our economy.

    Deflation was the dominant force during this time, you could buy a house for half price in some areas, if you could get the loan. Reinflating these deflated banks allowed the normal flow of money to continue supplying the loans and confidence needed in the economy.

    Looking for the missing inflation in a one of a kind da Vinci painting is creative and afflunent people have bolstered consumption during the great recession. This kind of search reminds me of the CAGW Warmers search for their missing global warming at the bottom of the oceans.

  11. VietnamVet permalink
    November 16, 2017

    For the connected with access to digital fed money; there is inflation due to the lack of convertible movable valuables they can buy with zeros and ones. For the lower classes there is inflation of the things that they need to survive; food, shelter and healthcare and a stagnation in wages. When three persons hold half of America’s wealth (Bill Gates, Jeff Bezos and Warren Buffet); at some point, the police will look the other way and the alt-populists will seize control so their families can stay alive.

  12. Duncan Kinder permalink
    November 16, 2017

    “But you can’t live in most of those places and run your business ”

    Yes, figuring how to be an expat billionaire is a challenge, but that is what private bankers and Big 4 accounting firms are for.

    In particular – and this is important – certain outfits including Hong Kong, Singapore, and Dubai are setting themselves up as business centers. These are not just islands with a lot of mailboxes.

    I predict we will see quite a lot business being transferred to these more sophisticated havens. Keep an eye on this.

  13. November 16, 2017

    \”China’s printing more money than anyone else\” because China\’s real economy is doubling every ten years.

  14. will andermann permalink
    November 16, 2017

    In a couple of recent articles in the New Left Review Luc Boltanski and Arnaud Esquerre set out an interesting take on the luxury economy. They argue that it has been goosed by dwindling returns in the standardized goods economy, which has in turn fueled speculative dynamics buttressed by a fairly elaborate, to put it one way, aura-generating support sector. Highly recommended.

    https://newleftreview.org/search/multi_parameter?author=boltanski&title=&subject=Any&type=Any&display_all=1&order_by=date

  15. bruce wilder permalink
    November 16, 2017

    Back in 2005 when the GFC was just a twinkle in Ben Bernanke’s eye, efforts were put in place to foam the runway with prophylactic liquidity, a policy pursued after becoming Chair in 2006 with some vigor. The result was a global boom in commodities speculation that drove the prices of a broad range of basic commodities, foodstuffs as well as metals and petroleum to politically destabilizing heights peaking in early 2007. It was the unwinding of that commodities bubble that created the brief deflation that caused the contraction in leverage that triggered the crash of housing and mortgage backed securities.

    Stability is overrated these days. There is something to be said for a controlled burn, for purging the rottenness from the system, to coin a phrase.

  16. Billikin permalink
    November 16, 2017

    Every year Forbes posts a story about the inflation rate of luxury goods. For a long time it has averaged around 2% more than the CPI. It may be higher lately, I don’t know. People call inflation a tax. Well, in that case rich people are being taxed more than everybody else. But the tax isn’t going to the nation, it’s going to the makers and sellers of luxury goods. It should go to us, don’t you think?

  17. Charlie permalink
    November 16, 2017

    What Jay said here as well, and offshore Haven’s aren’t the only financial instrument that could be targeted.

    https://www.theautomaticearth.com/2017/11/tax-them-till-they-bleed/

  18. November 17, 2017

    “Trickle down” has been around for a great many years, of course, but first entered serious government policy discussion with David Stockman and Ronald Reagan. When it first started to be “seriously” discussed I immediatly asked, “What happens when the top layer just keeps the money?” I was laughed at, but of course that’s precisely what happened.

  19. Jeff Wegerson permalink
    November 17, 2017

    The poor military. Because all that newly created money is also out of the taxing process they are not getting the extra billons they crave.

  20. realitychecker permalink
    November 17, 2017

    @ bruce

    “The only thing money per se is good for, with regard to investment goods as opposed to consumption goods and status signifiers, is as insurance. More piles of money available to try to earn returns as insurance requires more demand for insurance, which means eliminating social insurance and mutual finance and insurance schemes and doing whatever can be done to increase volatility and immiseration among wage earners.”

    That is an excellent point which deserves more airing than it is getting, IMO.

  21. realitychecker permalink
    November 17, 2017

    @ Peter

    Well, you already know I disagree with your sanguine views about the bank bailout (I just don’t see how you can excuse saving the failures from failure, and still pretend you are in a system of capitalism and competition.), but I’d like to focus on just this from you:

    “The realestate based CDO’s were bought sorted and resold by the gov but we don’t know the score from those transactions. ”

    These were trusts, with a big question about their basic legal legitimacy because they were not perfected at the moment of creation, under the New York law that most were created under, and such flaws ARE NOT REMEDIABLE under that law.

    So, there are trillions of dollars worth of these things, or maybe they are worth zero.

    I have always felt the real nitty gritty of the bank bailout story is what happened/happens with those mortgage-based securities that the Fed created an artificial market for? I have had no luck in pinning down authoritative data on that (understatement alert), but maybe you have found something that I might read about that? Because to me, that is a big ticking time bomb that still threatens our system.

    @ bruce wilder

    Applying this concern to your second-to-last comment here, I would suggest that this component of the overall picture you described should be given much greater emphasis.

    Trillions of dollars of supposed value suspended in a giant mystery cloud–what could possibly go wrong?

  22. Hugh permalink
    November 17, 2017

    I would think that while the tax havens are offshore the money itself has passed through various LLCs to obscure its ownership and origins and then brought back onshore to be invested/laundered in real estate and stocks, etc. or just deposited in a bank. Much like family foundations, the idea is to keep control of the money but make it invisible to or outside taxation, or rather outside nigher levels of taxation.

    Re China, while it has been growing very fast, nobody believes the stats, and it is not growing as fast as it was. It has had currency controls to keep money incountry but as only just begun to talk about limiting “investments”, such as Vancouver real estate, abroad. China continues to have numerous concurrent bubbles in real estate and commodities as well as in its shadow banking sector.

  23. Hugh permalink
    November 17, 2017

    Sorry for typos.

  24. Peter permalink
    November 17, 2017

    @RC

    I don’t know if sanguine best describes my views or that melancholic best describes yours even if there is evidence for both.

    Your nostrum for capitalist failure probably wouldn’t even apply to Goldman Sachs because they hedged their bets and their loses were covered. What was threatening to shut them down wasn’t losses but the worldwide credit crunch that even shut off their overnight credit needs.

    I don’t know anything about the technical problem with the trusts but the SEC did charge GS and settled with big fines and restitution for mistakes they admitted to.

    It would be good to see a final account of the TARP purchases of bonds with their attached mortgages. They were called toxic and were because of too many low quality loans. Once they were gone through and the toxic mortgages removed the remaining majority of the paper should have been good investments based on seasoned up to date payments that the fed was collecting. A few months ago I read about some of the last of these assets being auctioned with good bids expected.

  25. November 17, 2017

    Hurricane could wipe the Caymans off the map, those ones and zeros will still be there. Physically the tax havens are not the problem.

  26. Hugh permalink
    November 18, 2017

    How quickly they forget. Goldman got bailed out twice in a week, first on the weekend of September 13-14, 2008 as part of the AIG deal just before Lehman went splat on the 15th, and again on the 21st when Bernanke declared it would be treated as a commercial bank and was given access to all of the Fed’s programs. This all happened not because Goldman had the smartest guys in the room but because its former CEO and chairman of the board Hank Paulson was Secretary of the Treasury.

    Netting, the practice of covering both sides of a bet, looks good on paper, but it overlooked one tiny bit of reality: if the counterparties on the losing side of these bets go bankrupt, you will not be paid and you will still owe everyone who was on the winning side of them, and you will go bankrupt in short order. Vehicles like CDS multiplied the size of the losses. They were like fire insurance that not only you but anyone else could take out on your house. Worse the underlying collateral for them had often been pledged multiple times, again multiplying losses and bankruptcies.

    As for any settlements which financial institutions like Goldman entered into, several factors need to be kept in mind. First, they weren’t even pennies on the dollar for the harm caused. Second, the amounts cited in the settlements were almost always deceptive. Banks got to add in various amounts they had already expended in other programs to up the apparent size of the settlement. Various other programs were unlikely to be fully accessed by those harmed, if at all. Fourth, there was generally no admission of guilt or wrongdoing on the part of the banks. Fifth, what fines that could not otherwise be finessed could be written off as losses for tax purposes, meaning that you the reader very likely ended up footing part of the bill for these settlements. Sixth, it is important to understand the whole rationale for the settlement process. It was PR for the Obama Administration, the SEC, etc. and it was a cheap price for banks to pay for an immunity bath. It wasn’t a punishment, but just a cost of doing business, a way to buy a Get Out Of Jail Free card on the cheap.

    Ten Bears, the mailboxes are there. Even the ones and zeroes are probably domiciled somewhere else.

  27. realitychecker permalink
    November 18, 2017

    @ Peter

    I refer you to Hugh’s comment above for some real history.

    Just to add, the banks fucked with risk in various unacceptable ways, and getting that right was their job. They did it badly. Period. They should have gone down, and their fate would have tightened up everybody else’s game.

    RE the MBS issue: As a trader, I expect to be able to see or make charts showing the detailed flow of price fluctuation over time. I can’t find any data to use to figure out some basic facts abiut the MBS land mines. (Note that you totally ignored my point about trust creation requirements.) That is just wrong, and I can only surmise bad reasons for it.

  28. November 18, 2017

    Now, now, real, don’t be too harsh, s/he is young still. Could barely write just a month ago, now look at the reasonable word salad screeds s/he posts. As a Computer Scientist, a Mad Scientist doing research into the development of artifical intelligence I’ve been quite fascinated with he/r progress.

  29. Peter permalink
    November 18, 2017

    @RC

    I said that I knew nothing about the trust business you mentioned not that I was ignoring it for whatever reasons. It seems that the authorities in NY are the people ignoring it or have they filed charges? They have had 9 years to get their ducks in line and make a case or has the SOL already passed.

    Your and Hugh’s comments are what forced me to look more closely at this ancient history and the first thing that popped up was your faulty logic about forcing a company such as GS to go out of business for not failing no matter all their other ‘mistakes’. It’s all your fault!

    It’s a strange reality today when a billion dollars in fines and restitution is dismissed as inconsequential. Speculating about how they might avoid paying the money is just random speculation without any evidence. Someone should be able to get the information about the TARP purchases, coupon clipping and auctions to produce a cost accounting of that program, these are public records.

  30. Peter permalink
    November 18, 2017

    @Ten Beers

    It would be reassuring if you could display some natural intelligence before you develop the Mad Scientist version of AI.

  31. November 18, 2017

    I’ve already turned it loose. I’m proud of you.

  32. Hugh permalink
    November 19, 2017

    Re gasping about billion dollar “fines”, Goldman paid out $4.8 billion in bonuses in 2008. As the saying goes, do the math.

  33. Peter permalink
    November 19, 2017

    Point taken, but 20% of a lot of money is still a lot of money. We should also take into account the yacht builders and diamond cutters who will be pushed into the unemployment lines from the lack of this mammon.

  34. Altandmain permalink
    November 19, 2017

    I would rather see historic works in a public museum for everyone to enjoy than some rich plutocrat’s basement for just themselves. That’s the thing though, it is the destruction of the public good for private gain. That’s what society has become all about.

    Toronto could also be added to the housing inflation, like so many other places. That bubble may very well be popping soon in a very dramatic fashion.

    Finally, I agree that they need to crack down on rich people and tax havens. Stuff like this makes my blood boil:

    http://www.cbc.ca/news/business/zero-income-tax-high-income-canada-1.4087033

    https://www.theglobeandmail.com/news/politics/tax-man-goes-easy-on-rich-people-liberals-say/article29909238/

    Agree with Ian Welsh on experimenting with tax haven punitive rates. We need some way to deter this from happening. Actually, even absent of those, tax rates need to go up, especially for capital gains.

  35. Peter permalink
    November 19, 2017

    @Alta

    The US can’t do anything about people putting foreign earnings into offshore accounts but they can intervene when these people try to launder the money into the US. This is what Manafort is being charged with doing with his earnings from Ukraine.

    The tax and spend commies you support are stuck in the wastebin of history and I doubt anyone will let them out to spread their rubbish.

  36. realitychecker permalink
    November 20, 2017

    @ Peter

    I know you are very sharp about some things, so I assume you know the basics; re the trust creation thingy, either there are trillions of dollars of worthless securities, or a court has/will overturn the most basic title laws we have, just to spare the banks. That is not capitalism. What the hell is it?

    Kind of a big thingy, wouldn’t you agree? Also a big thingy not to be able to find continuous MBS price data in any analyzable form.

    And the fines are mere crumbs, just as Hugh told you; just a tip to the waiter.

    You know, we reveal stuff about ourselves by what we DON’T investigate, as well as what we do. By example, you remain remarkably unaware of all the most damning evidence against the finance industry. Remarkable given your awesome command of the facts in some other areas. Just sayin’ . . . 🙂

  37. Peter permalink
    November 21, 2017

    @RC

    Once more unto the breach, my friend. I am and will remain Sergent Schultz on the topic of trusts which at this point seem like a lost cause. The people who should understand this topic must think that it isn’t worth disrupting the system to correct the mistake.

    I did learn that the CDO’s are true synthetic quants but I don’t know if that fact means they are evolved beyond the connections/requirements with trusts. A new version of these synthetics are being marketed today.

    I also read a good accounting of QE1-4 where the purchase of the MBS’ helped keep the housing market afloat and to recover. The recovery of the housing market returned value to the MBS before the Fed stopped buying and started selling their large holdings.

  38. realitychecker permalink
    November 21, 2017

    @ Peter

    The trust thingy is important, and has been written about by several lawyer types. You should know, because you like to be competent.

    This is too big a stinking carcass to ignore.

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