Session 39 PD, Inflation or Default? Potential Impacts on the Life Insurance Industry Moderator:
John R. Skar, FSA Presenters: John R. Skar, FSA
Inflation or Default?
Which way out of the U.S. fiscal crisis
and what are the potential impacts on
the life insurance industry?
John R. Skar, FSA
Objectives of This Session
●
Discuss some non-mainstream economics
●
Generate your curiosity for further reading
●
Raise skepticism about the Fed’s ability to
control and/or predict outcomes
●
Create sense of urgency around building
Bibliography & References:
The End of Money. Rickards, James. 2014. The Big Reset. Middelkoop, Willem. 2014
“Crunch Time: Fiscal Crises and the Role of Monetary Policy” Mishkin et al. 2013 The Dollar Trap. Prasad, Eswar. 2014.
The Great Deformation. Stockman, David. 2013
Gold Wars: The Battle for the Global Economy. Mitchell, Kelly. 2013. Currency Wars. Rickards, James. 2011.
This Time is Different. Reinhart, Carmen & Rogoff, Kenneth. 2009 Financial Armageddon. Panzner, Michael. 2007.
The Misbehavior of Markets. Mandelbrot, Benoit and Hudson, Richard. 2004.
“The Causes of Price Inflation & Deflation.” Davidson, Laura.http://libertarianpapers.org/
Volume 3, #13
Bibliography & References
The Mystery of Banking. What has Government Done to Our Money. America’s Great Depression. Rothbard, Murray.*
Banking and the Business Cycle: A Study of the Great Depression in the United States. C.A. Phillips. 1927
“The Problem of Excess Reserves, Then and Now.” Todd, Walker F. 2013.
www.levyinstitute.org/publications/?docid=1817
“The Fiat Money Quantity” Alasdair Macleod, 2013.
http://www.goldmoney.com/research/research-archive/The-fiat-money-quantity-FMQ www.financeandeconomics.org www.shadowstats.com www.danielamerman.com www.edelweissjournal.com http://keithweinereconomics.com
Summary Review of Levin and Zahm
SOA investment symposium March, 2014
● Monetary base, public/private debt, central bank assets, all rising to unprecedented levels
● Many historical examples of hyperinflation/default ● Unemployment/growth missing in this “recovery”
● Inflation/deflation equally likely; Fed focus on deflation ● Assets best correlated to inflation: TIPs & Gold
● Insurers can use hedging and inflation linked products against inflation; no obvious remedy for default
Something to consider
“History shows that once an enormous debt has been incurred by a nation, there are only two ways to solve it; one is simply declare
bankruptcy; the other is to inflate the currency and thus destroy the wealth of ordinary citizens.”
Commentary from Dylan Grice*
Inflation is not measurable Money is poorly understood
The Economy is a complex system
Economic “science” is really just economic opinion. * www.edelweissjournal.com
Some concepts to puzzle over
● US GDP
● US annual deficit (GAAP)
● US total net liabilities (GAAP) ● Unemployment vs % working
J. Williams: U.S. GAAP Deficit
● Fiscal year 2013 $6.2 trillion ($6.6 trillion in 2012) ● Total obligations $91.7 trillion (5.7 times GDP) ● Employment ratio from 65% in 2000 to 59% 2014
J. Williams’ “Shadow Stats”: CPI*
● No longer measures constant standard of living
● No longer measures inflation for out-of-pocket expenses ● Politically motivated underreporting to cut COLAs
● Creates shortfalls if used to adjust retirement benefits or set investment goals
● CPI deflator tends to overstate actual GDP growth
*#438--Public Comment on Inflation Measurement, May 15, 2012
Daniel Amerman’s Opinion
● QE1: $800 billion out of thin air to stop global bank run ● QE2: Fed takes control of the bond market
● QE3: fending off triple threat of interest rate risk, credit derivatives risk and interest-rate derivative risk
● Interest rate risk: sovereign debts that can’t be repaid ● Interest rate derivatives: $560 trillion and counting
(subprime mortgages were $1.2 trillion)
● Danger when risks are correlated and discontinuous ● Counterparty risk, contagion and liquidity risk
How to resolve the paper money experiment?
● Inflate ● Default on entitlements ● Repudiate debt ● Financial repression ● Increase taxes ● Confiscate wealth● Currency reform (press “reset”) ● Bank “bail-in”
Other things to consider:
“The man of system seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges pieces on a
chessboard. He does not consider that in the great chessboard of human society, every single piece has a principle of motion of its own.”---Adam Smith 1759
“The ‘data’ from which the economic calculus starts are never for a whole society ‘given’ to a single mind which can work out the implications...
and can never be so given.” F. Hayek 1945
“Any established regularity will tend to collapse once pressure is placed on it for control purposes.”
Rickards: The Death of Money
● Complexity Theory (diversity of agents, connectedness, interdependence, adaptive behavior)
● Goodhart’s Law and Central planning ● Scenarios: (a) SDR World Money
(b) new gold SDR standard (c) social disorder
● Key question: is the Fed managing a reversible process?
Evolution of monetary regimes
1871 to 1917: “classical” gold standard 1918 to 1933: post war Gold Standard 1933 to 1947: Depression and War 1947 to 1971: Bretton Woods
1971 to 2014: Petro-$ standard 2014+ : The Big Reset?
IMF: The World’s Central Bank
● Dr. Zhu’s paradigm: clustering, spillover, transmission ● Cyclical vs Structural issues
● SDR is already money
● New world currency will be include U.S., Europe, China and the BRICS
COUNTRY (SDR%) Metric Tons Gold in Reserve Gold / GDP EURO zone 37.4% 10,783 4.6% U.S. 41.9% 8,134 2.7% China --- 1,054 / 4,200 0.7% / 2.7% ???? Russia --- 996 2.7% Japan 9.4% 765 0.7% India --- 557 1.6% U.K. 11.3% 310 0.7% TOTAL 100% 22,599 / 25,745 2.2% / 2.5%
Concluding Thoughts
● L&H actuaries can generally model and predict mortality & morbidity, but investment, lapse and expense factors are more difficult and volatile
● The investment assumption carries the greatest risk
● Find ways to insulate policyholders and balance sheets from the investment risks of the global monetary system
Concluding thoughts (continued)
● $ denominated contracts: devalued and debased ● Inflation is only slightly better than default
● Consider “hard asset” denominated products and surplus investments
● Reduce “investment risk” in favor of things we can predict: mortality & morbidity
