[Yesterday's commentary touched off quite a debate, and so I am running it for a second day to encourage further discussion. However, I am supplementing the essay with a link to one of my favorite bloggers, Charles Hugh Smith, who offers his own, compelling reasons for asserting that hyperinflation is simply not in the cards. Basically, he argues that it would not suit the interests of the rich and powerful, who after all are heavily invested in financial assets that would plummet in value. I have argued the same point, albeit from a different angle, by asking the inflationists to explain why the supposed Masters of the Universe would permit hyperinflation when it would effectively allow Joe Sixpack to pay off his mortgage and all other debts held by the rich and powerful with confetti. Smith's paper is entitled The Mechanics of Hyperinflation: Bankers vs. Politicos, and it can be accessed by clicking here. He provides a further link to an Austrian analysis that explains why Weimar's money blowout was quite different from anything that might occur in the U.S. The crux of it is that Germany's money supply was controlled by the political class rather than by such rich and powerful behind-the-scenes players as created and still control the Federal Reserve. I would ask that anyone who joins in the discussion from this point forward be familiar with Smith's argument, if not necessarily with the Austrian treatise. Please note that if your additional comments are not published it is because I have raised the bar to eliminate repetition. RA]
I awakened Sunday morning on three hours of sleep, lucid of mind and filled with dread from an essay linked below that I’d read before going to sleep. Amidst the desiccated hell of Colorado’s, and the entire Southwest’s, pine-forest die-off and a disturbingly winterless winter, even my wife still doesn’t get it. She seems to think that because peak real estate valuations have held up so far in our Rock Creek neighborhood, that they will continue to hold or even rise. It’s difficult to say why prices have stayed aloft here in Superior, Colorado, which lies just south of Boulder, about 20 minute from downtown Denver. Most likely, a combination of factors is involved. For one, in comparison to Boulder real estate, where downtown condos with a view of the Flatirons are listing — though not selling — for as much as $3 million, you can buy twice as much house in Rock Creek for half the money. Second, the supply of homes in the development is very tight, since only a few new dwellings were built here in recent years. Third, the schools nearby are rated among the best in Colorado. And fourth, there is the planned Conoco-Phillips campus for research into alternative sources of energy. The company has yet to break ground, but once this project is completed the facility will be a beehive for an estimated 7000 scientists, engineers, consultants and other white-collar workers.
Even so, I don’t believe for a minute that Rock Creek will somehow avoid the deflationary juggernaut that has already crushed real estate valuations across the U.S. by more than 30 percent. I predicted here years ago that home prices would eventually fall by at least 70 percent before deflation ran its course, and I am sticking with that forecast. It implies that even after the wholesale price destruction that has occurred over the last three years, the worst is yet to come.
And yet, for the moment, it is understandable that the hyperinflation argument has been enjoying (if you’ll pardon that word) a bold resurgence – one that has caused even me, a hard-core deflationist who has been writing on the topic since the mid-1990s, to second-guess myself. After all, fuel and grocery prices are rising steeply, and Federal debt — $14.270 trillion and counting – has entered a vertical parabola. While this appears to buttress the hyperinflationists’ arguments, and although Peter Schiff’s scenario – hyperinflation triggered by all-out monetization of T-Bonds – remains plausible in theory, it became quite clear to me, lying awake Sunday morning before dawn, why deflation will prevail – will in all likelihood smother an incipient hyperinflation before it even gets off the launching pad.
Total Collapse in Mere Hours
Let me explain. To begin with, we cannot have a Weimar-style hyperinflation for reasons that will be obvious to anyone who has read Adam Fergusson’s classic on the 1921-23 Weimar hyperinflation, When Money Dies. As Fergusson makes clear, this panic fed off a cash economy, not credit; and it required close collusion between the government and trade unions. In contrast, the U.S. economy is cashless and the unions are widely reviled. That said, let me cut to the chase: Hyperinflation occurs when people, fearing their money is about to become worthless, panic out of currency and into physical goods. This is highly unlikely to happen in the U.S. for several reasons, to wit: 1) Whereas Germany’s hyperinflation took several years to ramp up, today’s financial markets are primed for a catastrophic collapse that could conceivably run its course in a week, if not mere hours; 2) under the circumstances, there would be no shifting of financial assets into hard goods simply because any financial assets one holds at the time of the collapse would become worthless before one could sell them; and, 3) at that point, there would be insufficient currency available to drive a hyperinflation, since mattress money is likely to be scarce and because branch banks keep only about $25,000-$50,000 in cash on hand. All of which implies we will go straight to deflation without the emancipating, hyperinflationary interlude that some mortgage debtors might be hoping for.
Until now, I have been reluctant to air the simplistic argument, used by economists when they are at their most condescending, that inflation implies nothing more than an increase in the money supply. Although that’s a truism that we would not argue with, it holds little value for anyone attempting to predict how a drastic increase or decrease in the money supply might play out symptomatically. While the textbook theory of it could account for the gas-and-groceries inflation that QE1 and QE2 have produced so far, it fails to explain logically how we would go from grocery-store inflation to systemic and pervasive hyperinflation. To repeat: Hyperinflation would require the shifting of cash money into physical goods and assets. But other than mattress money and the relatively paltry sums of cash on hand at branch banks, there would be precious little cash to shift. And if the panicked money is assumed to come out of Treasurys and other paper assets, it begs the question of how much the paper assets will fetch on the day when there are no buyers other than the Federal Reserve.
Flat-Earth Optimists
My argument is simple, and I will not yield ground to any hyperinflationist who fails to explain, if the system collapses, where the money will come from to bid tangible assets skyward. Nor will I even print comments from the flat-earthers who see the financial system somehow muddling along, avoiding a collapse indefinitely. In any event, I would urge you to click here for Jim Quinn’s powerfully persuasive essay if you want to know why a financial collapse is not just likely, but inevitable.
I invite readers to attempt to rebut my argument in the Rick’s Picks forum – to tell me exactly where the cash will come from that would allow Americans to bid the price of hard assets into the ionosphere. In the meantime, I plan to run a guest commentary later this week concerning one asset class that seems likely to outperform all others. Hint: it is not bullion. And, this investment category could conceivably increase in absolute value for the same reason that the pine forests of the Southwest are dying. Under the circumstances, the asset appears to be very undervalued at the moment. It will be out of reach once the system crashes.
(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)
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Remember the old joke “Doctor, it hurts when I do this”.
Dr. says,”yes…Don’t do that.”
Well exactly that joke is on us now. Today’s version is,”Dr. We’ve built tons of houses in stupid places, shipped our factories to China, started lots of wars, while hiding the consequences with a gigantic Ponzi economy based on cash flows that will never materialize.
The Dr. Says” Yea. Don’t do that. ”
If you think printing money can get you out of this because you hope to pay your debts in funny money, the jokes on you. You’re the creditor who funded the insanity through the “Full faith and credit” slogan at the FDIC, the Fed, the Treasury, and so on. Print dollars till you drop moron, but it’s not going to cure anything.
This is why there will be no hyperinflation. It won’t work and the guys with the printing press know it won’t work. Time to take our real medicine now. Open wide…
You have to remember that world reserve is not carved in stone and what is really driving these gold prices is fear, the fear of bad policy making in Washington, the fear of war, the fear of the unknown. Money supply and inflation are obviously not correlated at all, you need velocity to ramp up actual inflation. Capital will be flowing from public to private debt over the course of many years to come. This could spell 30,000 Dow Jones which in real nominal purchasing power terms is actually 1,500 Dow Jones. Up is down and down is up. Sure there is going to be great volatility along the way, but these are the fundamentals. Back during The Great Depression the dollar had two great things going for it, government was a real viable institution to throw your money into for safe haven and it was de facto GOLD, a certificate, a receipt to be payed precious metal on demand. The dollar was merely the pants gold wore, gold is naked now and those pants have made there way into the garbage heap of histories failed fiat money experiments.
Rick you said…..
Argentina’s currency was never the world’s sole reserve, as is the US dollar, nor was it bound up in the collapse of a quadrillion-dollar global derivatives bubble.
Simple answer:
Have you ever considered China will one day DUMP the US Dollar?
What happens when China says it will no longer accept the US$?
US will lose its reserve status, because the Yuan will take that role. When that happens, the US$ will collapse…. and hyperinflation will arrive.
I think you overstate the impact of derivatives, but then I can’t back my opinion up with evidence.
I think one day the US$ will lose reserve status, and a shit load of US$ will come back to America and people will be trying to convert them to REAL assets.
We also have Walmart’s CEO saying there will be “significant” inflation.
Saying the US$ has reserve status is stupid because that can change very easily. The impact of losing reserve status can only be significant devaluation of the US$.
Have you been to China? I’m from China, and I think the Yuan won’t become the reserve currency simply because China is still poor economically, and more importantly educationally. Chinese workers work hard, but they can’t really do anything other than that. Yes, one day China will surpass the US, but that’s a long way from here. I’ve been outside of China for 10 years, the education level of the general public is still the same if not worse, by counting the number of spits on any of Beijing’s streets.
humans are the only species in history known to have confused adaptation and gold
conflating Adaptive Rate with commodity?
confusing evolution with bulk?
all economic & financial theories are just noise in the data thrown off by humans; as they discover how to survive despite what they say
Roger, a hu of man, a mere artful coloring of reality, ignoring a consensus of opinion contrary to human limitation in its DNA ability to create order, out of goo.
Great Job Rick and Everybody – haven’t had this much fun in a long while.
Another way to describe inflation is too much money chasing too few goods. But let’s look at the converse, deflation. Deflation would imply that too few dollars are chasing too many goods. Certainly, the supply of dollars is NOT decreasing or likely to decrease – the fed is creating dollars, not destroying them. Additionally, the production of goods is also unlikely, IMO, to increase substantially any time soon. How exactly is the supply of dollars going to decrease, unless the fed decides to start destroying dollars (or is that the expectation)? Or what would be the scenario where the supply of goods for sale going to increase markedly?
And to answer the question, “Has trillions of dollars’ worth of Fed monetization put a single inflated dime in your pocket or bank account?”
Yes, I can say it has. I have profited well off of the recent rise in stocks which have risen substantially due to the fed’s monetization efforts and juicing the markets.
To answer the questions regarding where upward pressure on wages will come from – the answer is energy prices and living costs. At some point, it becomes infeasible to go to work. Why work if it won’t pay the bills or if it costs the same to drive to work and back as the money you make? Local labor becomes scarce, and companies have to start paying higher wages or shut down for lack of help. And higher wages aren’t a big deal because they just get passed on in the form of higher prices, and the cycle continues.
To address the newly added portion of the essay, why would the rich devalue their holdings, the answer is that they (at least those in-the-know) will be prepared for it. This is about the US issuing TRILLIONS in debt and then either defaulting on it or paying it off with much-inflated dollars. One of the greatest ponzi-schemes of all times. The rich will then run around the country grabbing up assets for pennies on the dollar in a huge power grab.
Your assertions are correct. I am paraphrasing chapter 6 from the book The Weimar Chronicle by Alex de Jonge (1978). During Weimar’s hyperinflation, big business (especially the export business) prospered. It was easy to get a bank loan, use it to acquire hard assets, and repay the loan a few months later for a tiny proportion of the original. Some businessmen regarded the the shareholder as a burdensome nuisance, and were quite happy to see him wiped out to their benefit. The ingenious businessman had many ways of turning inflation to good account. Thus employees had to pay income tax weekly. Employers paid their tax yearly upon profits which were almost impossible to assess. They would exploit the situation of a smaller businessman, obliged to offer six to eight weeks of credit to keep his customers, by insisting on payment in cash. The delay between paying for the goods and reselling them eroded any profit the small man might make, while the big supplier prospered.
You’re absolutely right Rick. People forget that the dollars being printed are largely going into cancelling bank credit.
Fed prints a $, a $ of bank credit is cancelled = no inflation i.e. no overall increase in money supply.
Sure, the speculation in commodities etc is resulting in higher prices, but that’s a different story.
Since most US dollars are held outside the US and foreigners have the least reason to hold dollars when it falls in value (they don`t pay US taxes and have debts in their own currency), inflation would hit outside the US in a fall in the US dollar and would then come to the US in the form of increased prices for imports.
The implication of this for investors is that goods in the US that can be exported would rise in price (to pay for imports) while goods that can`t be exported would not rise as quickly or would fall. That seems to be playing out as gold, silver and oil rise while housing and US unskilled wages fall or stagnate.
Rick,
Several sources add cash to the economy. First – increase in velocity by loss of faith. I know many people who want to get G/S now that did not want it even six months ago. They don’t want to hold big savings in cash because they’re scared of it losing value.
Second – foreign holders. A) – changing from petrodollars will drop demand for $$ a lot. B) Loss of reserve currency status (pending and gradual) will lower the external dollars in circulation. Foreign parties won’t need this moving currency for settlements and it will repatriate here. Foreign goods will become expensive quickly. C) Large holders of US debt – see China’s $2 Tril for your spit in a bucket. They are getting O-U-T of T-Bonds, Bills and FRN’s. At the nation level, these are both US currency – obligations held on the country. As China divests, these instruments begin to MOVE in the economy, greatly increasing the money supply.
Third – The United States Government. Deficit spending is money put into the economy that is never taken out by taxes. It is an increase in the money supply. It now amounts to over a Trillion/yr.
So, yes there are sources of money. Also, you have ignored the increase in velocity – if money moves twice as fast, it means there is effectively twice as much money. And money going out of China, where it has been sitting for decades, goes from zero to I don’t know – but something faster than zero.
The derivatives problem – Notional derivatives are a Quadrillion, but when crossed obligations cancel each other, the number is probably less than 1/10th of that. Still a lot, but derivatives are a separate economy in many ways. Currently, it has impact on the main economy primarily by its deflationary (read money sucking) power. But this is where the Fed comes in – they have engineered a number of schemes to keep the banks solvent and resolve these inter-commercial obligations without drawing down the primary economy, except by limiting the amount of loans being made. A serious drag, but many community banks are now taking up the slack. We will see more and more N. Dakota style banks creating their own currency – and less desire for the dollar. More people will barter and use S/G for goods – less need for the $$. Slow, but sure and eventually, it will hit the tipping point. People nationwide will want a Silver backed Utah Buck instead of an ink-backed US $$.
There are millions of US millionaires – several trillion in money there. If they begin mass divestment from the dollar, then you will see huge velocity increases and hyperinflation. You are right – there are both forces at work, but in the end, the Fed doesn’t really want deflation. That would destroy the major banks – they are leveraged very high and deflation will kill them. Also, deflation would cause mass debt default – hurting banks.
Huffpost reported the number of US millionaires grew by 16% in 2009. In 2010, it was around 10% growth.
Where is that money coming from, Rick?
How many million U.S. millionares ? It ain’t money if its in stocks, houses, and/or bonds – its only money when its in actual cash. There’s a bunch of million dollar homes, (supposed), owned around here, and the only one who thinks the house is a million dollar asset is the owner and the bankster. “It” whatever it is, is nothing until the “IT” is converted to cash.
Just to make it “Real” the place behind me is a 700k asset for B of A, and they can’t sell it for 280k. How about that millionare for ya.
Its going to be a laugh when everyone hits the door to sell and the door is locked and there are no buyers.
“if money moves twice as fast, it means there is effectively twice as much money. ”
It could be that newly created money goes right into the banks, to satisfy what amounts to missed payments. Gotta keep those mortgages and Treasurys AAA, you know. And what else are banks to do with money that they aren’t lending, other than to stick it into places it has no good business going so that they can continue to make obscene profits from fraud?
“but in the end, the Fed doesn’t really want deflation. That would destroy the major banks – they are leveraged very high and deflation will kill them.”
And hyperinflation would kill the currency. Better the banks by attrition then that, from their standpoint.
Besides, what if allowing numerous banks to fail, like we’ve been seeing, is just a way to feed the TBTF banks, who just turn around and rework those failed loans to bolster their own books by keeping what’s salvageable and selling the bad portions to the Fed?
If that is the case, then from their perspective there’s no good reason to not allow deflation to rule the day. The currency stays intact and the TBTF banks and Fed get rich off the whole fraudulent process.
As for millionaires, there’s more poorer, both currently and in the pipeworks, and there’s plenty of paper gains to be had in the game of idle “economics” I’ve just described… which is why there’s more poor and poorer people about…
So let’s look at velocity (money multiplier) and the change in money, which peaked in 1987, shall we?
http://research.stlouisfed.org/fred2/series/MULT
And declining velocity:
http://research.stlouisfed.org/publications/mt/page12.pdf
Steve April 4, 2011 at 7:41 pm
My response – inflation is more money chasing less goods. NOT THERE ! This is something else.
Steve,
Whatever “it” is, food and energy cost more.
Rick Ackerman April 4, 2011 at 9:33 pm
How’s the value of your home holding up, James?
Rick,
Not bad. I live in Maryland and benefit somewhat from living next door to Leviathan.
The increased cost of goods is just the loss of purchasing power from fiat fraud. There is no increased wages, nor is there any savings to create what is defined as inflation.
Who’s borrowing the bucks from Ben ? Is it YOU ?
I doubt the middle class is borrowing “Bucks”. It might be that the banksters and corporate ‘ones’ are taking ‘credit’ and shoving it at the stock market. Yet, I hardly believe Joe Sixpac is out there borrowing up a storm on those declining wages. Some few are buying cars to try and beat fuel prices, good luck debtors.
Just because a few people have a belief in the sustained ‘value’ of stocks, does not make velocity, or debt, or anything into the “savings” and wages that must be spent to inflate. Each person (your 1 day old child) is in debt 450K, DONT YOU GET IT ?
I’m going to come at this discussion from a somewhat different angle, which, from where I sit, addresses the most pertinent issue before us, namely, how can all the debt that is acting as the gravitational equivalent of a black hole be extinguished. The problem where U.S. indebtedness, broadly defined, is concerned, is that insufficient productive gains from U.S. economic activity, coupled with the excessive spending proclivities of the corp/gov state, overpoweringly act to mitigate against the orderly settling of debt.
This portrayal is accurate, but does it mean that a deflationary black hole must, ineluctably, take hold?
It only can mean that if there is no other means to extinguish debt, but that is not the case. This, in my view, is where FOFOA’s -and his mentor’s- insights regarding our on going financial predicament, are invaluable. FOFOA has written voluminously and compellingly about the role that physical gold is uniquely cast to play with regard to debt service and subsequent recapitalization. And while I can hardly do justice to the breadth and depth of exploration that has occurred as the result of his efforts, here are a few questions that I believe are in keeping with his general train of thought.
What stands in the way, besides the destined to be extinct practice of fractional reserve gold bullion banking, of physical gold, a substance which is infinitely divisible, acting to encompass and envelop every last dram of debt that is acting as a dead weight on the global economy?
What stands in the way of central banks and the wealthiest of the wealthy from around the planet, all of whom hold physical gold as a key asset, from seeing their collective will thwarted such that physical gold is not allowed to be priced, in fiat of all denominations, at levels that allow for most, or even all, of the outstanding debt, to be eradicated?
The idea of overnight radical change in the fortunes of the financial/economic universe is one Rick seems more than a little fond of conjuring. Fair enough, I say, but, equally, I’d like to strongly suggest that any putative punctuated change will involve the spectacular restoration of gold’s role as the ultimate extinguisher of debt.
As Alan Greenspan and Milton Friedman pointed out, we are no longer on the (Constitutional) gold standard because there are too many Treasury debt obligations relative to alleged US gold reserves, implying a $50,000 value for each ounce of gold…
($14.3 T Fed Debt/287 M oz gold = $49,826)
http://www.usdebtclock.org/
Gold standard is executive criminal treason done in 1934 in creating an executive gold dollar. The ‘value’ standard is the Spanish Milled Dollar, 371 4/16th grains of fine, adopted by the U.S., as legislatively defined “Dollar” meaning a Coin struck “coined” by the Mint containing said 371 4/16th grain fine, with a coined Coin Dollar 413 grains 90%.
Constitutionally there is no gold standard, only Article I, sec 10, cls. 1 prohibition against the several States, No State Shall. . .make anything but. . . .”
Bring suit against your governor for HIGH TREASON, fault lies there because the Currency Cases of eary 1900 addressed only the federal government, and what the federal government may do territorially, and for corporate enfranchisees.
Here we are, 100+ comments later, yet the inflationists still come and still don’t get it. I guess they can’t enough of Rick repeating himself
Inflationists: It’s all incredibly simple… so long as the bankers are in charge of the decisions, there is not going to be hyperinflation. They will act according to the interests of the central banking system, which means controlled and prolonged deflation. Why? Cui bono. The bankers who make these decisions won’t benefit from HI so they are not going to allow it.
And so what if they’re injecting trillions. The trillions in debt came first, so all new money does is go from Fed to, ultimately, the banks. Along the way, those who manage to get a peice of it do what? Right. They make the payments on their debts. It goes back to the bank, not so much to more food, oil, houses, etc.
But why price inflation if there is in fact depression for as far as the eye can see? “Speculation”. The recipients of new Fed money undoubtedly invest chunks of it in various assets. This they do in order to shore up their debt-laden books, so that the Fed will want to buy more of their toxic junk. And seeing as how bidding up prices works to the interests of the banking system (curbing consumption, partly countering inflation), I doubt the Fed and regulators care one lick what they do with the money they’re given. Besides, propping up prices is what the Fed wants. They got it. Who the among them gives a flying F that it’s not due to legit economic activity and hurts the working class?
Anyway, why do these distinctions matter?
There is no shortage of people expecting HI to destroy the system, and set us all free (even if it unceromoniously dumps us into the swamps). But that day is never going to come. And the sooner more people realize and accept that, the quicker something can be done about this…
Why did the Spanish-milled silver coins of a dying empire define the U.S. dollar? Because. Yep, that’s all. It was what people used and so, lacking any other free market input, the U.S. dollar was determined to be 371.25 troy grains of pure .999 silver.
People never learned or accepted that the Constitution allows us (not Congress) to reweigh the dollar as we see fit. That is the market input required that has been forever lacking. And no act of Congress is legitmate that doesn’t count what the Mint has coined from the metals it has been given by the public. So…
Have the metal and want government to do something? Coin your metals to weight to dollar higher. Want less government action is your country and the world so you can get on with your plans in this too-short thing called life? Coin less to weight the dollar lower, and retain greater weight at higher currency value.
The central banking system is rich in both gold and silver. With the a smaller amount in outsider hands, the weight of a dollar would be very, very, low. So they’ve no good reason to stand in our way any longer. They got what they wanted from their centuries of parasitism. They would be incredibly rich. We, on the other hand, have all we need to let them keep their ill-gotten spoils, and get on with living and producing in not just a country of small government, but a world, for generations yet to come.
It’s either that or we go through this crushing, civilization-killing depression during which time governments will probably seize control of monetary policy to destory everything in an HI anyway. But even if that doesn’t happen, there is no way out other than to assert our right to market-determined currency supply, via coined weight at the Mint.
Let’s not wait another 100 years for a real recovery.
Pardon me, but I needed to substitute realized for thwarted.
What stands in the way of central banks and the wealthiest of the wealthy from around the planet, all of whom hold physical gold as a key asset, from seeing their collective will realized such that physical gold is allowed to be priced, in fiat of all denominations, at levels that allow for most, or even all, of the outstanding debt, to be eradicated?
I don’t know what stands in their way; they’ve so much of it that they and their yet-to-be-born children can be swimming in money like Scrouge McDuck in his vault…
…if the currencies only had some weight. Some, which is what it would be if they managed to retain even half what they own.
I can hazard some guesses as to what the obstacle is, but in the end it doesn’t matter because it needs to happen, but hasn’t yet. And that worries me…
Well Edwardo, as Rick and numerous people tried to get across to you on ZH, the banksters hold the debt usury as an asset, so they are doing everything they can to preserve it…
Yes this is a rare moment when you can have it both ways! Inflation and deflation at the same time, and that is exactly what we are experiencing!
Toto, I’ve a feeling we’re not in Kansas anymore.
Compare prices of 1900 and 2011 and u are in hyperinflation. Rich are getting richer and poor are getting poorer.
Inflation graph is poisoning everybody slowly and one day it will burst. Then u will call it hyperinflation. But it will be too late.
Right on, brother. However, the “one day” is upon us. Get into silver and gold while you still can. Hyperinflation is no more than 3 to 5 years away.
It is not people switching their money into “hard goods” that causes the currency to become worthless. The flight to the safety of items with intrinsic value is merely a reaction to the declining value of paper dollars, not its’ cause.
If your theroy were correct, Helicopter Ben could run his electronic printing press 24/7 and there would not be any price inflation. Clearly, this is not the case.
Actually, the flight to safety is a reaction to declining faith in credit. To cause a loss of faith in credit, simply issue too much of it. Issue more than too much, and the currency looks a sight better than debt, which means many things… but hyperinflation is not one of them.
“If your theroy were correct, Helicopter Ben could run his electronic printing press 24/7 and there would not be any price inflation.”
Nice, but… If your theory was correct, then the whole meltdown that started in 08 never happened. No debt would’ve been defaulted on and we’d all be up to our statrospheres in paper.
But it did happen and we’re not. Instead we’re up to our necks in debt and price tags that a growing number of people can’t afford… and it’s all rising. If that isn’t depression, I’d sure hate to see what is!
Everyone talks like they cannot call the Federal Reserve and find out a federal reserve note is valueless, and is not a Dollar as legislatively defined.
As of 8:30 AM, EST nobody has explained where the paper money is going to come from to stoke the fires of hyperinflation, nor has anyone explained how dumping other paper assets in exchange for real goods is going to do the same.
We have inflation. We’ve had inflation the entire time of everyone alive on this forum. Whether its 1% a year or 20% a year its still plain old-fashioned ordinary inflation.
Where is the hyperinflation going to come from if hyperinflation is defined as a rapid exchange of paper for real goods, such as food, energy, and anything else the consumer ordinarily purchases that causes these items to rocket up in price? 20% or more PER DAY. Let alone big ticket items such as cars and houses.
Or is there some other definition of hyperinflation that I’m not aware of?
Andy
How to increase cash money supply quickly:
1. Print up a large amount of currency.
2. Send checks to all taxpayers, call it anything you want.
3. People cash checks and buy stuff. (what difference if they use a credit card?)
Good theory, except there isn’t enough being passed to the people, and what was, in creating more Social Security Debt, is being intentionally sucked out of the system by 108 oil.
They aren’t done yet…
Photo, the fed is going to give ya all 450k to get even ? And, then you still have your mortgage, car loan, college loan, and credit card debt ! Go figure that Bernanke is going to give every family of 4 in excess of 1.8 million. We wus onze free and nows weez FEE.
If it hasnt been posted in previous comments here is FOFOA’s reply to Ricks essay.
Big Gap in Understanding Weakens Deflationist Argument
Interesting response. I’m firmly in the middle on this one. Which is to say, I don’t know which view is correct. They both seem plausible, although one of FOFOA’s linchpins appears somewhat unlikely, to wit: government stooges will introduce cash into the economy via purchasing all the newly poor’s iPads, etc.
I read the response to Rick by FOFOA and find it brilliant in mind, grand in words, and short on substance. Each person in the U.S. is 450k in debt because of forced loans by the legislative branch in conspiracy with the private board of the fed. That debt would need to be erased by some means, and the people allowed to borrow more money in order for money to flow into inflation. The banks are being given boatloads of money, but; who in their right mind would lend to other than the top 10% of the population? If the banks quit buying stocks that bubble will burst. Wages of the people are going down, and there are fewer and fewer workers every day in real terms. The price of goods is going up, not wages = lower borrowing ability. Money may be spinning from the fed to china to the banks to the stock market to the currency enchange, but; none of it is making it into the hands of the people in a way that can spark anything other than more debt on top of 450k the second one is born. The family of 4 is what, 1.8 m in debt by forced loans on top of what ever visa, mortgage, car loan they have.
Yes, forgive all Amerian debt and let the banks loan to these new savers of coin. Now, we have money in hand to chase products. Other than that the game is being played by the top 10% who are all upper managment, or government workers = nonproductive sucking jobs. Now you policemen and firemen don’t get all bent. You are useful, you just do not produce for the economy. As to teachers; your product sucks. Do a good job and get paid. Right now the product produced by American Education is inferior in whole.
OK I have had the night to sleep on it and have changed my position slightly; first as a long time deflationist I began losing my convictions and started moving towards the hyperinflationist camp, now I am moving to a more middle of the road (dare I say “muddle through”) view.
Will we have Inflation or deflation => yes
Just more and more of what we have now. Deflation in all assets that are typically purchased on credit (houses, land, cars, etc) more deflation in wages because of global arbitrage and high unemployment, with continued high inflation on all those things that we need to survive (food, clothes, energy) and also in stocks and bonds because all the bailout money is and will continue going into speculative ventures by the TBTF banks.
That is the only possible solution …. more of the same.
Nice insights C…
Carol, and what of the debt load on the people ? At what point does debt crush everything? Each day the legislature forces loans upon your credit, on top of the 450k each individual already owes for congress’s excesses. (we are going over 14t, or we default) Each individual failure evaporates more money. I keep putting forth this real example about bank assets, let alone individual delusion about home value. The house behind me is owned by B of A, or some fancy foreign trust. It is on the books at 700k. It has been sitting for 4 years. It will not bring a 200k bid at auction, should it ever get there as it falls into ruin. Paper ‘value’ shows 700k for B of A, but Carol, where is that 500k that is falsely claimed ? Is the 500k fraud used by B of A to trade on the stock market after getting loans from the fed ? It looks like a house of cards build upon delusion.
I read this morning about China, and the expectation of 30% wage increases a year for the next 5 years. Now that will be inflationary as the Chinese are “savers”, get it ? The Chinese are savers who’s government will allow the money to get into their hands. Cost of goods from China for export is going where ? Wages increasing in the U.S., not likely = more debt and more foreclosure.
We will be lucky in deed if stagnation, or stagflation if one chooses, is the answer. I would like to know what is to be done with the 450k in individual debt caused by the legislature’s monetary treasonous intent. The debt ceiling raised over 14t, and that 450k just went up.
Steve,
I agree with all your comments above 100% (as usual) but even your comments reinforce what I said – deflation in credit procured assets, inflation in neccessitites!
Your first paragraph clearly shows the deflation in credit procured assets – the 500k in missing “market value” held on BofAs books which may never sell so that is a 500k – 700k $ lost into the thin air that it came from => deflation.
Your second paragraph clearly shows the imported from China inflation in real goods (necessities and gee-gaws) that will shortly be hitting our shores.
So again it looks like we will continue to get more of the same UNTIL the whole damn enchalada explodes and then ???? Armagedon I guess. I know that it will explode at some point but like Rick states I think it will be a flash crash or sorts (hours or days) and the whole system will go down in flames. BUT until that DAY we will have just more of the same that we have now.
YUP! The debt will crush, but; when. When the crash starts no one will be able to get out, or into the market. If one is short, hope/pray that the company survives so that your electronic clicks have value after the dust. People will cry because they do not hold an actual Stock Certificate in the company that survived, their broker bankrupt and gone. The ’same’ I see is the loss of lifestyle, loss of life as we know it, except for the top 10%.
WEB made the point his naked European put shorts don’t have counter-party risk, because he gets the cash premiums to invest now.
But who really knows where the markets will be when they come due between 2019 and 2027?
The SPX would have to be between 9284 and 19,901 to revert to historical mean return, seemingly a good bet, but a bet nonetheless, not insurance.
Meanwhile, BRK mark to markets pounded BRK earnings down -96% in Q4 2008 and dropped BRK credit rating from AAA to AA, although BRK credit still trades like AAA…
I do not see a big gap in logic, just that you, as a “hard core deflationist” are coming up with an argument to keep entrenched in that position. I guess everyone (including myself) can do that in this type of debate.
To me, massive price inflation or possibly hyperinflation is, by far, the most likely outcome. Where are the goods manufacturered that “we” (the people of the U.S.) buy? China, Canada, Mexico, etc. Yes, we do assemble and slap nameplates on some goods, but the parts of made abroad. Some of the items that we do “manufacture” (agriculture, oil) and sell are not sold directly to people in the U.S., but on the world market.
So, it seems to me is that your premise is that these foreign manufacturers and governments will find the U.S. Dollar more valuable over time and offer to take less of them for all of their commodities and labor! Also, it seems that you’re suggesting that worldwide government and investors will find the U.S. Dollar or Treasuries more and more valuable and not move a growing percentage of their assets to gold, silver, commodities or commodity-producing companies or other currencies. The evidence clearly shows that foreigners want more of our little pieces of paper for their commodities/labor and that they are moving an increasing percentage of their wealth into gold, silver, commodities, commodity-producing companies and other currencies. The Fed is buying an ever increasing proportion of our debt and dumping the responsibility on U.S. taxpayers.
We have had the world reserve currency for so long that we forgot there is more than just supply which accounts for its worth. The demand was built in for decades. But as the demand is eliminated, fluctuation in supply with our of control money printing and/or debt descruction will not be the only factors in determining its worth. For example, if I cut my production of 8-track tape players or dung-covered paper currency in half, they are not going to become more valuable. Out of control printing and massive buying of one’s own debt are some of the factors reducing demand, but not the only factors.
You imply that the banking elite will not allow hyperinflation because it is not in their interest and they have control of the money. However, it is in their interest to have international agreements and organizations such as the IMF, World Bank, BIS, etc. control the money and allow their “financial terrorism” to continue where the ocassional honest politican cannot control or prosecute them. Look at the direction these controlling “elites” have gone in the last few decades, WTO, NAFTA, CODEX, European Union, etc. This allows the multinational corporations to control laws and rules that might hurt or benefit their corporations without having people have much say. The U.S. has always been difficult because of its history of freedoms and constitution that enumerates limited powers by government bodies. In order to facilitate massive change, these elites will need to cause a crash whereby we are begging for IMF “advice” or a world currency and world banking organizations. So, I believe it is in the elites interest to eventually crash the U.S. dollar — by then, most of their key assets will no longer involve the U.S. dollar. Remember how we were looted with TARP — create massive fear/panic. You may claim this is a “conspiracy theory,” but you suggested that the elites can have control over what happens in a country.
Finally, the collapse of some asset prices like housing prices was long predicted by hyperinflationists (not just deflationists). They have also predicted market valuations (eventually) such as a 1:1 ratio between the DOW and gold — meaning that stock prices might rise or fall in fiat dollars depending on what the government does, but they will fall over time in terms of real money.
Just keep your eye on the collapsing U.S. dollar (over the *long run*) through:
1. gold prices
2. silver prices
3. oil prices
4. Shadowstats (without manipulation):
http://www.shadowstats.com/alternate_data/inflation-charts
5. billion price project ( bpp.mit.edu )
Twoggle
The fatal flaw is that the ‘money’ has to get into the hands of the People in the U.S. !!!! It, the money, is not getting into the hands of the people. In fact, import costs from China is taking money from the hands of the American people forcing the people to choose to buy this instead of that, and less of this because it costs more. The loss of standard of living is not being caused by hyper-inflation. It is being caused by depressionary wages, while imported costs are increasing. China is reporting that they expect wages in their country to increase by 30% per year for at least five years. China might go hyper-inflationary because their people have savings to spend, and with increased wages at 30% a year – well YaHoo maybe the Chinese will put Americans to work welding by hand, and clipping hanging threads from shirts.
In response to Steve (not sure if his reply will be above or below this one):
The money does not have to get in the hands of the people of the U.S. for there to be hyperinflation. You are still thinking solely in terms of *supply* of U.S. dollars (and/or debt) rather than supply and demand. All that has to happen and all that is happening is that the demand for U.S. dollars and U.S. debt to collapse by those manufacturing our goods and/or supplying our commodities and then prices skyrocket (in U.S. dollar terms). Foreigners are not going to sell us their commodities and labor at a loss just because the people in the U.S. don’t have enough money. They will sell more and more to themselves (their own people) and to other countries with rising living standards. As I pointed out before, I cut the production of my dung-covered currency in half and it’s not in the hands of the people in the U.S. (no velocity of ‘money’) and *still* it’s not becoming worth more (perhaps the demand has something to do with that!).
China will hit bumps in the road and have some bubbles, no doubt. But the demand for their currency is growing because has gone up for years (compared to other currencies) and may eventually be one of the world reserve currencies. So, while they may print more money and increase their debt load over time, the demand will keep their currency from collapsing and becoming worthless.
Average wages for the middle class in the U.S. haven’t changed that much in the last 20 years, but prices have gone up considerably. I think we just need to keep an eye on the prices (see suggestions in my original response) and watch them increase in the long run whether wages stay the same or go down.
Twoggle
Inflation adjusted wages went nowhere to down in Ag the last 20 years, thanks to taxpayer subsidized illegals, while productivity up 50% and defacto unemployment 29.78%, meaning the American labor force worked harder and got hungrier.
This is the stuff of revolution, perhaps why KBR built all those concentration camps and Alex Jones et al claim the architects want to take global population back to 500 M through various means…
http://cwcs.ysu.edu/resources/cwcs-projects/defacto
@Steve
“I would like to know what is to be done with the 450k in individual debt caused by the legislature’s monetary treasonous intent.”
What if, when the paper markets fail, in what ever way you want to imagine, gold is allowed to find it’s physical price? What if the gold paper market fails (no one is willing to hold a piece of paper that is a promise for gold and instead demands physical only)? So the paper market for gold collapses (a Market Collapse by ‘most’ current definitions) and individuals still owe 450k.
What do you think the price of ‘physical gold unencumbered with paper promises’ would be? Oh, and the best part of that question is ‘The Price Would Be Enough To Settle The Debt Of Each Nations Currency’. At the moment of ‘UNENCUMBERED’, gold will just be a unit of measurement, we’ll call it an ‘Ounce’, and an ‘Ounce’ will be the same everywhere and an ‘Ounce’ will be priced in local currency so it erases/cancels/balances all National Debts everywhere in that instant.
Unencumbered Gold, which can only come from a Market Crash / Loss in Faith of Paper Promises, will reset the balance sheets of the world. So, Steve, if the United States has ‘X’ amount of physical gold, why can’t an ‘Ounce’ of gold be priced in enough dollars to offset our current debt? It has been calculated that a current price of $54,000 would do it but since it is just a number why can’t Unencumbered Gold be priced at a dollar amount to suddenly erase all Federal Debt?
Great discussion, a single ‘copper’, a single ‘nickle’, a single 1/10 Dollar can extinguish all the fiat valueless discharges around the world. That is reality. The fiction is that anyone believes that a federal reserve note has any value. And, the crime is that your legislative body commits ‘high treason’, and the people do nothing because they fear loosing something that they never owned in the first place. Fear puts people on a jury where they act immorally to protect their ’security’ such as it is.
The response here in the last two days has been absolutely phenomenal. I have read through all of the comments and links posted.
While many of us differ on the outcomes that might follow from Government policy there can be no doubt we are all very worried and on many different levels.
What we seem to have in common is a fear that debt production is destructive to the economy. Almost every single comment alludes to concerns that we have gone too far in the wrong direction. But what direction?
I encourage everyone to continue to make their voice heard here. People are listening. People with the power to change the course of history read these blogs too and often have the same worries as you and I.
Never forget that or think that your words do not make a difference. Those who remain silent will never have a voice in the changes that are coming.
Certainly provided my share of hot air to keep the I/D argument spewing. Liked Carol’s observation we have both in different areas.
Here are some parting facts from
http://www.usdebtclock.org/:
US Savings per family = $6,947
US Total Usury per citizen = $11,479
Fed Gov Debt per person = $45,883
Personal Debt/citizen = $51,924
Fed Debt per taxpayer = $128,447
US Total Debt/citizen = $177,733
Assets per citizen = $248,943
US Total Debt/Family = $675,880
Fed Liabilities/person = $1,019,076
What is the scarcest item?
Cash savings…
Ouch. You are freaking me out Rich. Good post.
Great post Rich. I question the final number based upon the accounting fraud that is ongoing. Yet if your numbers are correct, and my 1.8 million federal debt per family is correct – what does it matter. The boat is upside down.
Is bullion considered “cash savings” or is bullion considered an asset?
I think it is unfortunate that the word hyperinflation is a used for this phenomenon, as it implies that this is some offshoot of inflation. I think it clouds the discussion as these are 2 different animals. The end result of runaway prices may make one assume they are the same event, when they are not.
I subscribe to Armstrong’s Public Confidence Model conception that hyperinflation only occurs when there is a collapse in confidence in the government (loosely: fear of the government currency and bonds). Deflation occurs when there is a fear of the private sector’s stocks and bonds. We had deflation, or a “public sector crisis”, in 2008 where counterparty risk was the trigger for a run on the repo market and herding into the still credible Us dollar and treasuries for safety. When the US ultimately loses its credibility and the “full faith and credit” is worthless, then we will absolutely have hyperinflation.
The presupposition in Rick’s discussion that financial assets will fall, is thereby presuming deflation. People leaving en mass the private sector, running to the Public for safety. That would require trust in the government. Instead people would be running from treasuries and fiat currency looking for safety from what they perceive as death spiral. During hyperinflation those equities and bonds should hold up, and rise (like in the Wiemar case), except perhaps if the societal breakdown within a hyperinflation is so great, that there is a consequential breakdown in the real economy. (goods and services are not able to be marketed, functionally. Probably due to government interventions/restrictions/war impeding this) The “money”, if able to escape capital controls, will flow into overseas equities, financial assets and inflate those that are deemed to be relatively safer. 2008 was a flight to safety into Treasuries when it was clear there were a lot of bankrupt institutions in the marketplace.
If/when the US Treasury bond is not seen as “safe” (-and the cracks are becoming evident to ever greater proportions of the still capitalized individuals, until this hits some unknown critical mass) the hyperinflation will take hold.
As more and more private debt becomes taken on as a public debt (since this is not of infinite capacity ) this becomes more and more likely to detonate.
See Armstrong’s “Sometimes the Lunatic Fringe Do Get it Right” available on martinarmstong.org
How does the money get into the prices? Well if things continue to go spiraling down, more and more subsidies of costs are borne by the US government. Just look at the food stamp program as an example. Direct subsidy for the most basic needs. Prices continue escalating and so do the record after record breaking subsidy in food stamp program outlays paid for from an insolvent government, with bogus “quantitatively created” money. Similar story with unemployment benefits.
How long will the world allow this to happen? What other desperate actions will be taken to continue the charade?
Which will be the last straw?
When people fear the public debt… then hyperinflation follows. And since the world is consumed by the competitive devaluation death spiral, the western, debt based, economies will simultaneously, or sequentially, fail in the same manner. The US will not be alone, and may not be first.
This is also why a war is not out of question. – The World Debt War between the lenders and the debtors, perhaps?
@Steve
FOFOA is correct on the cause of inflation. Gideon Gono of the Zimbabwe Reserve Bank himself admitted he was forced to print the cash. That was the point of my quote which you replied to earlier.
Since I live in this part of the world I am quite familiar with how the cash gets into the economy. Through the government employees and the military and police first; the government “stooges” FOFOA alludes to, the apparatus that supports the regime and keeps Mugabe in power. Not everyone who lives in Zimbabwe was/is on the breadline, there is much wealth and big spending from those who are connected.
If this reason is too “real world” and not enough “academic analysis” you realize why most economists have no grasp on hyperinflation at all. As Gideon Gono rather tellingly says….“I found myself doing extraordinary things that aren’t in the textbooks.”
http://www.zerohedge.com/article/gonzalo-lira-vs-rick-ackerman-slicing-logic-behind-no-hyperinflation-argument
Thanks, I just read that article a few moments ago.
Ego, smugness and condescending attitudes may be virtues in Gonzales Lire’s world but his attitude just trivialized his arguments and left me cold.
In this line for example, he writes..
“Apart from the obvious fact that he [Rick Ackerman] presented no sound argument against hyperinflation—or even a valid argument—the answer to his “challenge” is simple: The money will come from the Federal Reserve by way of the Federal government.
This of course makes the assumption that the Fed, a private banking cartel is financially suicidal and will seek to destroy itself in the process of ruining the general economy by debasing the currency in order to perpetually fund government. That just does not add up though and is as likely a final outcome as me shooting myself in the head to cure a really bad headache.
This whole argument over the theoretical future actions of the Fed presumes they are going to engineer their own default in the process of inflating the US economy into oblivion (and beyond). But for what reason? Can Lire explain why the Fed might do that?
We need to consider too the premise that the dollar might be repudiated by all foreign governments with the prospect that US Dollars will come flooding back into the country in the hundreds of billions. That certainly sounds inflationary on the face of it as Americans are swamped with money and by turns the prices of everything will skyrocket, right?
The idea here is that this will be highly inflationary and in effect touch off a dreaded hyperinflation. That argument does not work for me though. We need to keep in mind that while dollars may indeed flood back into the US that they are not flooding back into my wallet or yours.
We still do not have a mechanical means by which to start driving the explosive velocity combined with mass volumes of cash by which a bitter hyperinflation will be ignited.
We don’t have the desire either.
Nor does it seem relevant to Mr Lire that US States are entering a period of strict austerity and that they might well be seen to be the delimiter on any wild machinations and suicidal tendencies of the Federal Reserve in collusion with the banks and the politicos at the helm.
Does it not require the cooperation of States to bring about a true hyperinflationary scenario? If it does then we can be certain one cannot take place as there is cooperation required to debauch a currency and that clearly does not exist at this time.
Instead what we see is that wages of public sector workers are under seige and are being pared along with benefits, that services are being cut across the board, programs reduced, expenditures rebalanced against incomes and plenty of other slash and burn activities that all lead to a decidedly deflationary outcome.
Mr Lire seems to pride himself on his deep faculty of logic and even appears to offer good convincing arguments. It all falls apart at the end though where he blithly suggests that Fed will be behind putting the money into the hands of the people who will miraculously begin to bid up prices into the stratosphere.
There seems to a logic flaw there or perhaps just a lack of knowledge about who and what the Fed really is. Lire perhaps is suggesting the Fed is hell bent on its own demise. Last time I checked they were still in the business of making money though. Not losing it. And that, in essence is why the QE’s will not continue indefinately. It is quite simply because they cannot continue indefinately.
Can he please explain the mechanism by which this transfer will take place? The banks as we can all see are not willing to lend money to those who are not credit worthy. Instead they are bidding up commodities and investing in resources. Hard stuff. Materials in the ground and what can generally be referred to as assets that are secure.
Do we not also need the cooperation of the banks along with the implicit assumption that they too are financially suicidal and idiotic custodians of wealth to also cooperate in the charade that would create a hyperinflation that would end in their own destruction?
Granted, many see the banks as irresponsible (and even idiotic) but that has still not resulted to date in any serious inflation, never mind a hyperinflation.
This has only resulted in the demise of some of the banks themselves to date and a bull market in commodities.
The survivors meanwhile are in no hurry to wipe themselves out through the active destruction of their own assets. On the contrary, they are busy cooking the books to prove that half price real estate is still worth more like what they currently hold it for. Like it was in the good old days when the mortgage money was first rented out.
Housing continues to deflate though. And it is huge. Mr. lire seems to be having trouble connecting the vastness of the deflationary effect of real estate with the nearly insignificant price inflation we see in food and consumables. He does not seem to notice that the two of these events ocurring simultaneously only further prods us into deflationary territory as consumers and householders get squeezed in a financial vice.
He has failed to understand that this is in effect adding to the deflationary spiral that is feeding into reductions in the consumption of both products and services. Need I even mention that real estate continues to fall due to the lack of credit, savings and cash on hand?
We all understand that a hyperinflation is essentially a currency event and one that is hypothetically possible however we cannot all agree that the stomache is there amongst all parties to actually make it happen.
With the Fed out of the equation (for its own reasons of maintaining solvency), the States out of the equation too and the Banks themselves wanting no participation in fulfilling their own destruction then it seems a certainty to me that a hyperinflation cannot take place.
Politicians could still make it happen but the electorate is clearly not on side with wild experiments in finance. Not yet anyway. Tea Party’s are in fact on the rise as Americans are more enlightened daily and are clearly becoming revolted by the profligate tendencies of their leadership.
Rick, I therefore believe, is quite correct in his assertion that no hyperinflationary event will take place. The debt bomb on the other hand can and will go off eventually. The outcome that seems much more likely to result from that event is a bitter and long lasting period of deflation that could run a decade and perhaps longer before finally correcting itself.
Just in case anyone out there thinks I lost my mind when I suggested (above) that the inflationary impacts of consumables like fuel and food are in fact resulting in a deflationary outcome let me assure you that comment was deliberate.
This is indeed the case and it is why we often call the kind of inflation that is now being generated by speculative forces affecting commodities “the wrong kind of inflation”.
This inflation only results in taking money out of the normal economy. Commodity inflation is in fact a tax on global consumption and it does not typically lead to economic recovery. Nor does it result in wage increases at a time when labour is in low demand.
Why is that? The main reason here is that as dollars are shifted out of the hands of consumers to make ordinary purchases that the immediate impact is a reduction in all other forms of consumption.
This typically translates into a situation resulting in insufficient demand in a supply and service economy and in order to balance the trade, prices begin to fall in most other sectors to compensate for the declining demand.
Real estate is an obvious example even though it is at the high end of consumption goods. The rule is just as applicable to haircuts or bags of chips and new shoes though.
The wrong kind of inflation therefore actually exerts a deflationary force on an economy that is already suffering high unemployment and slow growth and is a drag on GDP growth.
I hope that clears up any confusion I might have created.
Hyperinflation, which I do not predict (yet) as an outcome in the United States, is a combination of either money printing, collapse of confidence in the currency, or both. Thus, Rick, your question as posed relies too much on the issue of money supply. This has been a fequent blind-spot among deflationists. (Rest assured, the hyperinflationists also have many blind-spots).
So to answer your question: hyperinflation can occur in your scenario if there is a collapse of confidence in the currency.
This is a pretty textbook, straightforward answer to your question.
Personally I do not predict hyperinflation in USD based economies, though, we should remember it remains non-zero risk.
G
http://www.zerohedge.com/article/gonzalo-lira-vs-rick-ackerman-slicing-logic-behind-no-hyperinflation-argument
Velocity of money is a key factor
Answers to some questions with some questions (as in “You can’t eat gold, – well, can you eat dollars?”):
“Rich wouldn’t want the hyperinflation!” – well, you think they would enjoy the deflation?
“When financial system collapses, financial assets are wiped out…” – were AIG, BofA, and others wiped out?
“Weimar Republic was ruled by the party” – are you saying that the party wasn’t all about money, wealth and control, that our ruling class is in any way different?
“With most Americans holding little or no cash money, where would the cash come from?” – what about foreigners who hold most or all of their money in US cash?
“it would effectively allow Joe Sixpack to pay off his mortgage…”
How silly can you get? He would need that money for his 6-pack!
This appears to be a must read:
and perhaps a response
Big Gap in Understanding Weakens Deflationist Argument
Does anyone have a vision as to what we will end up with after a collapse? Crash JP Morgan, Crash the banking system…. and then what?
If I was driving a car down this road, I’d like at least some idea of what I was heading towards.
Does anyone have a clue as to what we can expect on the other side?
That, I’d like to hear !
State owned banks would make for a great start.
Dear Sir,
How do u expect gold and silver to perform in a deflationary environmment?
Thanks
cheongwee
@cheongwee
If you mean ‘Unencumbered Gold’ it will do extraordinarily well as a store of value.
Personally, I just think our economy is sinking further and further into the pit. We have to do something more than just debate and talk about it.
What does everyone think about the gold standard? Using gold rather than paper dollars? I saw this article this morning and think it might be the way to go: http://www.thegoldstandardnow.org/history/what-the-gold-standard-is
I see it a bit different. Inflation can benefit the banks. If deflation occurs banks are forced to recognize losses, and they will not be payed back for the mortgages at all because everyone would have lost there job, or go into strategic foreclosure. On the other hand inflation is good for them, because then they are not insolvent. Also all mortgages were ARMs meaning they can just raise rates to that they can turn a profit. So the fed isn’t worried about inflation. As the fed tries to create inflation, it may inevitably cause hyperinflation. The only thing that would not allow this is if, people would no longer accept electronic dollars.
Point should be made here that one can have extreme deflation and at the same time your money can go worthless for trade outside your country.
For example if Bohemia had the worst case of deflation in human history and cheap hoses for everyone, would anyone else want to buy its currency to buy any products made in Bohemia or its houses if no one wants to go there to live and or if Bohemia had nothing to sell.
This can be the same for the US as it seams to becoming a country of rich bankers and paper pushers rather than of entrepreneur’s or industry manufacturing anything.Last I read is not only are there more civil servants than people in private industry they are actually payed twice as much.A society that fails to celebrate the architects of its own future tends to have less to celebrate.
The US has reserve currency status however that can backfire where there is a build up of US dollars that can suddenly want to come home to roost, given any sigh of weakness as in losing value.
When I bought my silver from the US I was forced to convert to US dollars first and pay a currency exchange fee for the privilege that might as well be a vapor tax doing nothing but move paper.That’s the thing about the US having reserve status, even when buying oil sometimes they need to buy US currency first, unless they already have US dollars but what if that stops being the case.
Look-up c-gold and goldmoney and a few others to see why gold as money actually works so well that there is circumstantial evidence of the governments hostility towards any competing currency especially when its that good.The US dollar has probably already been obsolete for some time now.
For example they work as well as Pay Pal and is some ways better such as cheaper as long as you can find anyone set up to receive gold payments in grams or milligrams and let them convert to local currencies when or if they want.
To explain this better here is a story I made up.A parody of the US dollar.
On this Rinky dink island where special coco nuts blessed by the big guy, 10 can buy you a pretty wife and a farm.Well while these coco nuts are quite valuable thereon the island they do not have anything else anywhere else and to spend these you need to live there.Most do not want to live there its to far away.
Suddenly they discover oil and well you now need to buy their coco nuts to buy their oil and all of a sudden everyone wants those special coco nuts to buy oil and they start hording them and with time actually stockpile them even start using them as money amongst themselves.
They become money to use between country’s now without even noticing the island that started them.
Time passes and the islanders eventually run out of oil and people are so used to using these coco nuts for money and stockpiling them as savings that no one even notices or cares that the islanders no longer has any oil.This is great for the islanders as they then notice that all they need to do now is just continue to make more coco nuts and then sell them for there use as money and still get flat screen tvs etc.That’s a great deal for the islanders are smart and know its worth keeping this game going.
Until someone notices that for some reason the coco nuts start buying less and get suspicious and the smart ones start to sell those coco nuts to whomever will take them.Panic sets in and the coco nuts drop in value to the surprise of everyone who now asks what happened.
Someone needed to read the Manufacture of consent.The emperors new cloths.The creature from Jeckel island etc. ? Note I might have the title wrong on a few here, but that’s the point, and in the simplest way to explain it.
You can have both inflation and deflation at the same time.
Sorry I could not edit where I said
they do not have anything else anywhere else and to spend these you need to live there.
I meant they do nay have -any value anywhere- else so to spend these you need to live there.
Yes I do believe its very likely that hyperinflation might be approaching but there is a chance that the US might come out with an alternate currency before then, to save us all.However if they are really stubborn and insists on preserving a fiat currency no mater what then things could get very bad.
For example I have read that even Cambodia had to re start using a rice backed currency and the, with time, the rice backing could be removed.
Thats the thing to remember if hyperinflation does happen and people get burnt bad enough and I mean really badly as in losing all their savings etc, it might prove impossible to just print a different color ink onto a different piece of paper with a new name, like new dollars, and expect it will be accepted as completely as cash is today, The longer they wait the more difficult it will be to just push another fiat currency.Even the dumbest people can be convinced to accept gold or silver if its explained to then that they can just send them to the mints for any currency they want whenever they want.Thats the thing that makes everything more difficult here, people have been trained to believe only un backed pieces of paper can ever be money.Some great history here for those who want to check up on How excessive government killed ancient Rome.
http://www.cato.org/pubs/journal/cjv14n2-7.html
Note how hard it was for the Romans to sneak into pure fiat by debasing the silver currency with copper etc.
Its claimed to be a large part of the reason for their collapse.Its ironic today if I went into the grocery store today without paper cash and only a gold coin I could probably get arrested.
In reality. Cash is for fast local spending while gold is for savings and international spending.
I haven’t read through all the comments yet so im not sure if this has been asked
Why do you think that the digital currency that has been printed into existence cant be systematically moved into hard assets causing the hyperinflation? we dont use physical cash anymore so that stuff isnt as relevant for hyperinflation this time. wouldnt an increase in velocity of digital currency do the same thing?
we can already see big money losing faith in the USD (digitally) and moving out of the bond market.
If no one wants it then those stuck holding it will lose out, which wont be the big boys controlling this demise
The very wealthy are hedged either way… they own not only most of the financial assets but most of the real hard assets as well (the most desirable land, art, precious metals, jewels, and other commodities) so in either scenario they do all right.
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No one does “all right” in a deflation, although those who are out of debt have a better chance of surviving financially. The $600 trillion derivatives bubble is the amount by which the real assets of “the rich” have been leveraged out. RA
One more thing…..your deflation IS happening but the world reserve currency since the year 2000 has been gold. Look at a chart of the DOW versus gold and silver and you will see a PLUMMET. But GE and Conoco Phillips stock will not go down against a paper currency that is “all out of bubbles”. A Japanese nuclear meltdown outside of Toyko only knocked off a few hundred DOW points….and only for a few days.
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No argument from me, but I would point out nonetheless that this is your deflation too. RA
Rick, I agree that hyper-inflation probably is not in the cards, but high inflation of the variety we saw in the late 70’s and early 80’s I think will be impossible to avoid. GenX and the teenagers today have lived in a gogo economy their entire lives and this will seem extreme to them, the severity will be relative to an individuals norm.
About Superior, when I moved there in the early 70’s there was a pig farm on main street within 2 blocks of downtown. I enjoyed the years that I lived there, but then moved to just south of Golden.
I just read the first couple of lines and I know this writer aint up to it. ‘the elite are heavily invested in paper assets, so how would they allow hyperinflation to occur’ They are invested in gold and silver and commodities, so yes hyperinflation is quite possible.
German hyperinflation caused by politicians & labor unions? Dream on, wild child. It was crony-to-crony with those German marks back then, just like it’s crony-to-crony right now with the U.S. dollar. In Germany the cronies managed to buy up 47% of the country before the carry trade marks in the pipeline gushed out into the resulting hyperinflation. The big difference is that the mark’s playing field was confined to Germany, while the dollar’s playing field is the whole planet. I’ve been reading ‘Tragedy & Hope’ by Carroll Quigley and I recommend it highly to everyone.
This whole argument depends on so many variables that it is pretty pointless to debate how it will end other than ‘very badly for all of us’.
Rick, the whole crux of your argument depends on what time-frame you are looking at. There is a big difference to saying the system impodes in 1 day or it implodes in 2 weeks. At first glance they may not seem to be very different but your ‘deflationist/where will the money come from’ theory presupposes that the FED (and all the other central banks) can’t pump enough money, fast enough. You may well be right, but this hinges on a time-frame. We do not know that time-frame. Yes it will be quick as the whole system is incredibly fragile and poised on a knife-edge. But there’s quick and quicker.
So if you want to boldly state your case for deflation, please first boldly state the exact unfolding conditions replete with time-frames and that will allow people a chance to better rebuff.
Currently I see no-one giving enough detail to backup their theory. Theories which I might add are all pretty irrelevant anyway. We know the system will, at some point, fail spectacularly. It precise method seem altogether inconsequential as we discover the ATM’s don’t work, that supply chains are broken and food disappears (at deflated or inflated prices!!!!) from the shelves as the civilised veneer of society becomes a thing of the past.
The only salient conclusion we can draw from the hyper-inflation/catastrophic-deflation argument is that the system will fail. You then either believe that gold and silver become a valid store of wealth or you stock up on food with a very long shelf life. Preferably both.
And for those that say it will never happen, just think of it as insurance. You paid your house insurance last year but it never burnt down. To my mind, a systemic collapse is a far more likely event!
Rick,
Now that you are a “hyperinflationist” maybe we can be friends! I live in Louisville and would like to meet you to say hello. I’ll be back in town after May 5th. so if you are interested in meeting new people and possibly making new friends please either email me or call at 720 890 8896
Thanks, Ron Epner
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