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Re: Oil/Inflation-“Are we headed for Weimar, or is it just Hyperinflation Hyperventilation?” / Our Geographic Advantages.
Thanks to yesterday’s discussion around my tweet of Druckenmiller’s quote, I wanted to collect my thoughts and address this question more formally.
My Thesis: It will create inflation for sure, but this in and of itself will force a self- correcting negative feedback loop that may prick asset bubbles but will prevent a much worse positive feedback loop that eventually breaks the system.
When you analyze a company’s creditworthiness, you have to focus not just on its cashflow/income statements, but also on its balance sheet. A company with strong cashflow/income can still suck as a credit if its capital structure is too levered.
Conversely, a company with strong asset coverage of its debt can be a decent credit even if it runs into a rough patch on the cashflow/income front; there is collateral available to bridge funding gaps until it can “grow into its capital structure.”
Why should analysis of our country’s creditworthiness be any different? For some reason, most of the Hyperinflation Hyperventilation going on right now seems to focus solely on the Debt/GDP ratio and how this is going to lead us down the path of post-WWI Weimar Germany.
I don’t buy into the “Hyperinflation Hyperventilation.” Don’t get me wrong -- I’m NOT supportive of the Admin continuing to fire monetary and stimulus at an economy that was/is already recovering.
It’s as if they think they can perform a controlled burn of dry brush while continuing to pour gasoline on the kindling. That all said, I think there are some natural firebreaks that will contain the conflagration before it rages out of control.
Let’s get a couple metrics out of the way. Current US National Debt: $28T. Current US GDP $22T. Debt/GDP=127%. By most metrics, we are at an all-time high – even above the WWII peak. Not good.
But does it mean impending doom? Does it mean the USD loses reserve status? Does it mean we go into a hyperinflationary spiral a la Weimar/Venezuela/Zimbabwe? No, no, and no.
Now for some historical and geopolitical context. Post-WWI Weimar had “reparations debt” of approximately 300% of Pre-WWI GDP. That created some pretty bad inflation for sure.
But the main reason for utter loss of confidence in the Reichsmark was GEOPOLITICAL: the Post-WWI establishment was extremely fragile to begin with, rife with assassinations.
Continued profligacy to assuage the mob didn’t help, but the bottom didn’t fall out until France invaded the Ruhr Valley when Germany defaulted on its reparations payments.
This is a key tell that GEOPOLITICAL FACTORS MATTER MORE than monetary factors when determining faith in a country’s credit/currency. Venezuela’s death spiral, similarly was due to geopolitical factors.
A perfect modern-day example of a country that has run much higher Debt/GDP ratios without hyperinflation is Japan. Its current Debt/GDP is 250% -- double ours. Geopolitical stability no doubt allowed this to happen.
But wait, you say, if you include our “Off-Balance Sheet Liabilities” which include Social Security/Medicare/Other Liabilities, Total US Liabilities balloon to a staggering $148T. How much is too much?
Aside from the fact that these other liabilities do not present the same Sword of Damocles over US creditworthiness in the same way externally owned debt does, if we’re going to include Off-Balance Sheet Liabilities, we need to consider Off-Balance Sheet ASSETS as well.
According to USDebtClock.org, Total National Assets = $162T, consisting of personal, corporate, and non-profit assets. These “On-Balance Sheet Assets” already fully cover the $148T of our Total National Debt (including Off-Balance Sheet Liabilities).
But what no one ever talks about is our unparalleled Off-Balance Sheet GEOGRAPHIC/GEOPOLITICAL ASSETS, which are the best in the world. These assets confer huge economic benefits, low defense costs, and the ability to project power far and wide.
I’m not just talking about pseudo-quantifiable assets like oil/gas reserves. I am going to summarize some key points from two of my favorite authors on this topic, Peter Zeihan and Tim Marshall.
I will follow Zeihan’s lead and address 4 key categories of assets: 1) Waterway Network, 2) Arable Land, 3) Border/Coastline Security, 4) Deepwater Capabilities. Let’s talk about each one in turn and compare with our closest hegemonic rival, China.
Waterways: a) Riverine network - we have 14650 miles of rivers vs 2000 miles for China/Germany. Incidentally, the Louisiana Purchase for $15 mm in 1803 gave us the Mississippi Basin, and the Mississippi itself has more riverine miles than RoW!
Waterways: b) Gulf of Mexico is essentially a “US lake” which gives additional waterways AND friendly barrier islands. Along with riverine miles, our total waterway miles of 17600 is greater than RoW COMBINED.
Our waterways benefit us with low-cost transportation & ample freshwater supply. Incidentally, lack of ample freshwater is a key reason why the US “shale miracle” is
unlikely to be duplicated in our countries with big shale deposits. Lack of WATER is the constraint.
China’s riverine network is arguably a LIABILITY. The Yellow/Yangtze rivers flood every year. Last year, the Three Gorges Dam came close to overflowing; if this ever happens, 50% of China’s GDP and millions of people including the city of Shanghai lie in the floodplain.
Arable Land: The US Midwest has the largest contiguous chunk of arable land in the world. In total, the US has 360 mm acres of ag land vs. 138 mm in Northern European Plain, 262 in Eurasian Steppe, 104 in North China Plain.
Notably, these are spread out across multiple countries, China excepted. China’s arable land-to-population ratio is 0.074. Ours is 1.09. This is what I mean when I say we are LONG food, and China is SHORT food.
Borders/Coastlines: 1) North/South friendly buffer states in Canada/Mexico. 2) 95,000 miles of coastline, with East/West Coast oceanic buffers which make the mainland unassailable AND give us simultaneous access to European/Asian markets. 3) GoM’s “barrier islands.”
China’s Borders/Coastlines: 1) China’s land borders touch many rivals/not-so- friendlies: Russia, India, Vietnam, etc. 2) China’s measly 9000-mile coastline is even worse, facing unfriendlies like Taiwan, South Korea, Japan, Philippines, Vietnam, Malaysia, Indonesia, Singapore.
Fun fact: The Strait of Malacca sees 12 mmbpd of China-bound oil going past 3 pro- US countries: Indonesia, Malaysia, Singapore.
Deepwater Capabilities: a) US has more port potential than entire RoW COMBINED, which confers huge economic/military advantages. b) Most powerful blue-water navy in the world at 4.6 mm tons + 800 military bases across 70 countries = unparalleled ability to project power.
China’s Deepwater Capabilities: a) China’s paltry coastline doesn’t come close to offering the same port potential, which is why it has to pursue opportunities through its One Belt One Road (OBOR) initiative.
China’s Deepwater Capabilities: b) Although China’s Navy now has more ships, it is more of a “green-water” navy with many small ships (1.8 mm tons). China has 1 official military base in Djibouti and is attempting to build more in the contested islands of the South China Sea.
Long story short: China’s naval capabilities within the First Island Chain have grown formidable, but it still has no real blue-water force projection capabilities.
To summarize, the faith in the creditworthiness of a nation/currency goes far beyond pure Debt/GDP metrics. Our “national balance sheet” is FAR superior to China’s or any other country’s because we have huge GEOGRAPHIC/GEOPOLITICAL ASSETS.
We are LONG so many things that China/RoW is SHORT: food, water, energy, waterways, friendly neighbors, oceanic buffers, not to mention a free-market, capitalist system that values property rights.
China has to spend massive amounts of capital on artificial infrastructure (e.g.OBOR), whereas we have it NATURALLY. These assets are much harder to quantify than the liabilities but they exist and give us ample margin of safety to avoid the hyperinflation denouement many fear.
Simply put: our geographical advantages allow us to fuck up a lot more than anyone else before “going off the rails.” That said, current policies are likely to usher in a real bout of inflation/stagflation that could sow the seeds for a taper-tantrum pricking of asset bubbles.
This is why I don’t believe in hyperinflation for America. The sting of real “opex/capex commodity” inflation (how does $7 gasoline sound?) will divert us into a self-corrective negative feedback loop long before a positive feedback loop breaks the system as many fear.
Here is my thread on feedback loops:
END OF ORIGINAL THREAD.
Appending:
Re: Oil - The COVID-For-Inflation Switch. China exported COVID. We are exporting inflation as a result, and China is not happy. Too bad China is naturally short everything we are long.
“To accomplish this, the cabinet said it would step up stockpiling of commodities to ensure adequate supplies...” Huh?
The point of this thread was to show that there is more to confidence in a country’s currency than pure Debt/GDP. You have to consider the alternatives as well. What is up today amidst the “taper talk”-induced shitshow? The USD
There is no better way to highlight our comparative geographic advantages than to just trace a barrel of crude oil to China and look at how many critical choke points they have to brave to get this "opex commodity" that they are SHORT.
So this is a fascinating demonstration of current “fiat faith.” I maintain that GEOPOLITICAL advantages factor into this beyond mere debt/GDP.
Re: Oil/Inflation-“Are we headed for Weimar, or is it just Hyperinflation Hyperventilation?” / Our Geographic Advantages.
Curious if and how your thesis here has changed