Sunday, April 4, 2010

Former Plunge Protection Team Member Warns on Coming Inflation

Recently, I posted a short profile on Philippa Malmgren and the remarkable list of clients she has gained since leaving government.

There is no question that word is out among insiders that she is an up and coming player. Take a look at the client list again. Everyone who is an inside player is sending her a check.

Below is a one hour, eleven minute youtube video of a speech she gave recently. I highly recommend that you find the time to listen to the entire video right through to the last question, which was about whether insiders saw the subprime crash coming.

Keep in mind while you are watching this tape that this is a very connected and powerful woman who could very well become a future Treasury Secretary or Federal Reserve chairman. In the world of realeconomiks, I would be happy with her selection (although it's not going to happen in an Obama Administration).

The first item that should be noted about her approach is that she is looking at  the economy from a qualitative angle versus a quantitative approach. In the examples she uses, it almost appears that she looks at the economy in much the same way that I outlined the economy should be watched, when I wrote, How to Monitor the Economy.

That said, she gives no indication she understands business cycle theory. Further, although it is clear she understands that default or inflation are two of the ways by which the debt problem can be resolved, she also lists devaluation of the currency as a separate method, when it is really not different from an inflation. I have no idea how you would get a devaluation of the dollar without inflation being the cause.

She also talks somewhat in code, toward the end it becomes clear she is very critical of Obama but she takes a tact that Mises often took, i.e. criticizing a concept or a period in history rather than current players. She  talks about FDR instead  of Obama. She means Obama. She is also bullish on commodities, and this might also include gold, but as a former member of the plunge protection team, she is not going to say so outright.

The most remarkable part of the clip is her warnings on inflation, which starts roughly at the 20 minute mark. This is no ordinary analyst making this warning. This is a person who was a key member of the Plunge Protection Team, which means her warning about inflation and her very bullish stance on commodities is a quite remarkable thing to hear.

I should point out that she is probably talking long-term here and not anything that will occur, say, over the next six months or so. Thus, there is no conflict with my own short-term bearish view on gold (and most other commodities ) and my long-term bullish view.

There are a lot of insights in this speech. I don't agree with everything she says, especially her occasional nation/macro thinking, but overall it is a remarkably open speech from someone who is a major player.


  1. Perhaps a split currency is implied. For example, if the "old" dollar is printed for debt repayment, and a "new" dollar is kept for domestic use only, the "old" one could be flushed down the pipes without destroying the "new" one.

  2. That was worth every minute of time I spent listening to it. Thanks for posting it!

  3. Well, her theory about the introduction of former communist countries and people into the world economy as this inflation tamer was a cool idea but she didn't explain why this dynamic suddenly stopped working.

  4. Re: Former communist countries in the world economy. I've heard this before and it makes sense. My understanding is that those countries have reached an equilibrium state in their demand for US money. The gap and the means the US used to export inflation to the rest of the world is closed. There's only so many people that desire dollars. If their hands are full, it would make sense the old regime of print a bunch and inflation not coming down the pike because of foreign demand is over. Consider also other contender currencies that have sprung up like the Chinese Yuan and the Euro. Both are relatively stable and China in particular, being an emerging economy will continue to grow. I think these factors have whittled away the power of the US dollar as a reserve currency.

    Re: Currency split. I doubt that would happen without severe affects. I think under that system, the "Old" dollars would be severely discounted to the point of uselessness. Why would anybody want to buy debt or receive debt payments in the form of the "Old" money? Venezuela has had problems with its reckless inflation and actually created an new currency, it was a band aid on a head wound, as it would be in the US. Maybe there's something I'm missing, but I don't think a two tier currency would work if the weak currency was used for debt repayment/issuance. Historically, the strong currency has to be the one used for that, see the gold exchange standard as an example.