OPEC Stalemate, What Constitutes Hyper-Inflation?, Structural Unemployment, How Screwed Up Is This?

An article titled 'OPEC Concludes Meeting, Arrives at a Stalemate' - reading time 2 minutes - reports that the OPEC meeting yesterday failed to reach agreement for the first time in 20 years.  At the meeting Saudi Arabia apparently proposed increasing quotas by 1.5 million barrels a day - presumably in large part to offset the current almost 90% reduction in Libyan oil output (reported in the same article).  That proposal was supported by Kuwait, Qatar, and the United Arab Emirates.  It was opposed by Libya, Angola, Ecuador, Algeria, Iran and Venezuala.

Reach your own conclusion, but it appears to me that what transpired largely was a 'pro-America' vote for, and an 'anti-America' vote against.  What this says about yet to be determined retail gasoline prices in America over the now ongoing 'summer driving season' remains to be seen.  That said, I would expect U.S. retail gasoline prices to be more likely to increase than decrease between now and September - with resultant increasing downward pressure on U.S. durable goods prices as U.S. consumers direct an increased % of their 'spendable dollars' to keeping their vehicles 'on the road'.  Moreover, if oil prices rise in the near term, that almost certainly will promote an increase in U.S. monthly net trade deficits over the next few months - see 'How Screwed Up Is This' following.

Many media commentators and newsletter writers speak to what they see, or think they see, as the possibility or probability of 'hyperinflation' in the United States or on a broader world economic level.  I have yet to see or hear even one of them attach a % inflation rate to 'hyperinflation'.  From my perspective, the worst offenders are those who continuously write expansively about the 'coming higher price' of physical silver, followed closely those that write (often somewhat less expansively) about the 'coming higher price' of physical gold.

A simple definition of inflation is that it is a rise in the general price levels of goods and services in a given economy over a specific period of time.  Hyperinflation is level of inflation that is very high relative to a 'norm', and that may or may not be 'out of the control' of financial regulators.  In a fiat currency environment, which is what currently prevails worldwide, with the U.S.$ being recognized as the 'World Reserve Currency', hyperinflation specific to a given economy results in the purchasing power of the fiat currency of that economy deteriorating rapidly in relative value when measured against the fiat currencies of other economies.

So what constitutes 'hyperinflation' in percentage terms? The International Accounting Standards Board ('IASB') describes hyperinflation as inflation that results in "a cumulative inflation rate over three years approaching 100%, being a compound inflation rate of 26% over a consecutive three year period - and hence any inflation rate that exceeds 26% compounded over a three year period.  The IASB, who establishes special accounting rules for use in hyperinflationary environments, lists four factors that can trigger application of these rules.  Defacto, the presence of one or more of these four factors presumably can be said to suggest the presence of, or tendency of a given economy toward, hyperinflation. 

These four factors, none of which as I see things currently apply to the U.S., are:

1. The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency, and local currency is immediately invested to maintain purchasing power.  
2. The general population regards monetary amounts not in terms of the local currency, but in terms of a relatively stable foreign currency.   
3. Sales and purchases on credit take place at prices that are increased by an amount that will compensate for the expected loss of purchasing power during the credit period, even if the period is short.  
4. Interest rates, wages and prices are linked to a price index, and (as already noted) the cumulative inflation rate over three years approaches or exceeds 100%. 

In a September, 2010 Exposure Draft: Severe Hyperinflation - Proposed Amendment to IFRS 1, the IASB has requested comment on a proposed categorization of an economy subject to severe hyperinflation as one in which the currency has the following two characteristics:

1. A reliable general price index is not available to all entities with transactions and balances in the currency, and  
2. Exchange-ability between the currency and a relatively stable foreign currency does not exist.  Clearly neither of these criteria currently is even close to being applicable to the U.S.

All in aid of suggesting that, from my perspective, those who write about concerns of hyperinflation being experienced in the near-term in the U.S. ought to express their concerns about inflation differently.  Something to think about.

If you have been reading these e-mails you know I have been concerned for some time about what I think currently is a degree of Structural Unemployment in the United States.  Whether or not Structural Unemployment exists in the U.S. to any serious extent, this will bear directly on recovery, or lack thereof, in the U.S. unemployment rate.  That is, the greater the degree of Structural Unemployment in a given economy, the less likely will be recovery in the unemployment rate.

Simplistically, Structural Unemployment exists where either where workers are not trained for the jobs available in the geographic area where they live, or where jobs they are trained for are available in an area that requires their physical relocation.

There is considerable debate over whether the U.S. labour force currently has a significant Structural Unemployment component.  I have been unable to find what I think to be meaningful statistics on this.  That said, intuitively I think a serious amount of Structural Unemployment exists in the U.S., and that this is particularly important going forward in the context of U.S. economic recovery. Gavin Adamson of Investment Executive recently interviewed me on the topic of Structural Unemployment in the United States - video length 6 minutes. 

My 'How Screwed Up Is This? note for today has to do with the pronouncements yesterday by equity market commentators that the Dow and S&P indexes went up yesterday because of the good news that that the U.S. Net Trade Deficit for April was U.S.$43.7 billion, smaller than the U.S.$48.8 billion that was forecast. 

I consider it truly nonsensical that this could result in the U.S. equity markets gaining ground.  Continued monthly U.S. Net Trade deficits signal continued erosion in the U.S.'s world economic status.  In my view the U.S. equity markets are truly 'grasping at straws' if they think an April Net Trade Deficit of U.S.$43.7 billion is 'good news'.