Paul Singer: No Inflating Our Way Out Of The Debt Problem

Paul Singer: No Inflating Our Way Out Of The Debt Problem
By World Economic Forum (Flickr: The Global Financial Context: Paul Singer) [<a href="">CC BY-SA 2.0</a>], <a href="">via Wikimedia Commons</a>

Paul Singer is speaking on a topic titled ‘if you think financial repression is bad wait till what you see next’. Singer says that QE ‘is the functional equivalent’ of money printing—it has done a lot to help create inequality. Paul Singer jokes that there were high fives when someone invented the word “taper”.

See Paul Singer’s Q2 letter here.

Paul Singer: No Inflating Our Way Out Of The Debt Problem

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Paul Singer on Federal Reserve tapering

Paul Singer says that with just that word earlier this year rates went up almost to 2009 levels. The Fed has bought $3.5 trillion and there is no reported inflation, but growth is sluggish. So Bernanke probably asked, what will happen if we stop buying?

Singer believes that confidence can be lost if gold and commodities rise or there is inflationary potential and social unrest. Considering the Japanese model, that is not where the U.S. or Europe will necessarily be. The kind of remarks from investors that inflation is low so if it goes up to 2.5 percent things will be okay, is dangerous thinking. Paul Singer notes his investors manage several trillion, including SWFs, pensions etc.

The first whiffs of inflation could cause a loop and strangely cause a fall in stocks, and rapid increases in commodities.

Paper money easy to manipulate

Paul Singer, who is a gold bull, talks about paper money, which he believes is easy to manipulate. He notes that the destination is not clear, and that if someone like Volcker could come in (but not Janet Yellen), that could change things. The Fed and the country are getting themselves into deeper and deeper trouble; the U.S., Europe and Japan are all insolvent. The fact that leaders are not prepared to deal with it is scary. Although “conditions for a loss of confidence are here right now”, when this might happen is unclear.

Paul Singer says that when you look back at inflation you do not realize how bad it was by looking at a sheet of paper. Confidence should be jostled and it could be lost at any time. It is unknown how this will work out and no leaders are ready to take long term action.

The country is capable of growing at a far faster rate. The problem with the Fed is not the dual mandate—it’s that they revel in the role of being Atlas holding up the globe.

After Singer finished, the ‘debate’ panel took place after the remarks (we focused mostly on Singer).

Bond market controlled by central banks

Singer says that the $50 trillion bond market is now basically controlled by central banks, with $15 trillion owned by the CBs. There is uncertainty as no one would know what would happen if this stopped regardless of how strong the economy is. Singer says QE ‘is gimmicky’ and an indirect solution, when a direct solution should be taken. Everyone has ideas on how to create growth. Very little of this has been pursued in the U.S., Europe or Japan.

Had these lists been pursued then you could say it’s time for QE’s grand finale. But because this was not done, recovery has been weak. Additionally, recovery has been unfair—only the rich have benefited.

Other panelists argue with Singer and ask—is the dual mandate wrong? Paul Singer says he is not a fan of the dual mandate but the issue is bigger. The Fed cannot/should not be solely responsible for economic growth. Through the Fed’s actions they have been an enabler of the problems in fiscal policy.

If you look at Fed minutes from 2004-2006, the Fed seems clueless about the financial system. Therefore, to rely on those people now is a bit foolish.

Paul Singer admits that there are deflation signs, but it is hard to call what is happening today ‘stagnation.’

Q&A with Paul Singer

Paul Singer says not once in 37 years in the business has his hedge fund ever been able to predict future events.

Singer was asked about his predictions for treasuries by end of 2014 and said he cannot predict the future, and that he has no idea.

Asked about Argentina

Paul Singer believes even if the Supreme Court takes the case, it could take a while to resolve. He notes that Argentina was the seventh largest economy post in WWII and now is an emerging market. Investors have a short attention span so it will not have an impact whichever way it goes. Argentina agreed to borrow under U.S. New York law, and law does help. The absence of it could be problematic even if investors have short term memories.

When asked about emerging markets, Paul Singer states that he is frequently surprised and disappointed even when doing a lot of research on China.

Paul Singer says there were many fixes which could be done. If leadership takes these issues the market will respond positively. There is no inflating out of the debt problem. The reason is that markets will repudiate money faster than the government can act.

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