Big Gap in Logic Weakens Hyperinflation Argument

EST

[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 repetitionRA]

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.)

Comments on this entry are closed.

Ronald Epner, MD May 1, 2011, 4:41 pm

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

Lawrence April 21, 2011, 11:40 am

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!

Umbagog April 21, 2011, 6:14 am

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.

steve April 12, 2011, 4:45 am

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.

Bruce April 10, 2011, 3:57 am

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.

craig kick April 9, 2011, 2:53 am

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.

&&&&&

No argument from me, but I would point out nonetheless that this is your deflation too. RA

Lord Koos April 9, 2011, 2:08 am

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.

&&&&&

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

Jet April 8, 2011, 3:28 am

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

Dale Trynor aka ultarnerd April 7, 2011, 3:26 am

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.

Dale Trynor aka ultarnerd April 7, 2011, 2:46 am

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.

tyler April 6, 2011, 8:09 pm

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.

Dave Vice April 6, 2011, 4:57 pm

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

Robert April 6, 2011, 2:51 pm

@cheongwee

If you mean ‘Unencumbered Gold’ it will do extraordinarily well as a store of value.

cheongwee April 6, 2011, 1:00 pm

Dear Sir,

How do u expect gold and silver to perform in a deflationary environmment?

Thanks

cheongwee

SteveB April 6, 2011, 11:40 am

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.

Robert April 6, 2011, 5:29 am

This appears to be a must read:
and perhaps a response

Big Gap in Understanding Weakens Deflationist Argument

Eketahuna April 6, 2011, 4:17 am

“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!

Danny April 6, 2011, 3:49 am

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?

Gregor Macdonald April 6, 2011, 3:03 am

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

Phil C April 6, 2011, 3:02 am
Cam Fitzgerald April 6, 2011, 12:56 pm

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.

Cam Fitzgerald April 6, 2011, 1:19 pm

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.

ad April 6, 2011, 12:28 am

@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.”

Tony April 5, 2011, 11:49 pm

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?

Rich April 5, 2011, 9:45 pm

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…

Cam Fitzgerald April 5, 2011, 9:51 pm

Ouch. You are freaking me out Rich. Good post.

Steve April 5, 2011, 10:42 pm

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.

Robert April 6, 2011, 12:19 am

Is bullion considered “cash savings” or is bullion considered an asset?

Cam Fitzgerald April 5, 2011, 9:36 pm

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.

Robert April 5, 2011, 6:30 pm

@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?

Steve April 5, 2011, 10:38 pm

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.

Twoggle April 5, 2011, 5:13 pm

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

Steve April 5, 2011, 5:51 pm

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.

Twoggle April 5, 2011, 7:28 pm

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

Rich April 5, 2011, 9:21 pm

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

Carol April 5, 2011, 5:05 pm

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.

Steve April 5, 2011, 5:44 pm

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%.

Rich April 5, 2011, 9:10 pm

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…

Steve April 5, 2011, 4:45 pm

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.

Carol April 5, 2011, 4:15 pm

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.

Rich April 5, 2011, 8:57 pm

Nice insights C…

ad April 5, 2011, 3:14 pm

If it hasnt been posted in previous comments here is FOFOA’s reply to Ricks essay.

Big Gap in Understanding Weakens Deflationist Argument

DiverCity April 5, 2011, 3:36 pm

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.

Steve April 5, 2011, 4:28 pm

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.

Rick J April 5, 2011, 3:05 pm

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?)

Steve April 5, 2011, 4:09 pm

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.

PhotoRadarScam April 5, 2011, 8:13 pm

They aren’t done yet…

Steve April 5, 2011, 10:30 pm

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.

Avocado April 5, 2011, 2:37 pm

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

KC April 5, 2011, 11:32 am

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.

Benjamin April 5, 2011, 12:18 pm

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!

Steve April 5, 2011, 10:27 pm

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.

Amir Murtaza April 5, 2011, 6:08 am

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.

KC April 5, 2011, 11:35 am

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.

Dennis April 5, 2011, 5:34 am

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.

Edwardo April 5, 2011, 5:11 am

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?

Benjamin April 5, 2011, 10:28 am

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…

Rich April 5, 2011, 8:36 pm

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…

Benjamin April 5, 2011, 4:12 am

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.

Edwardo April 5, 2011, 4:07 am

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.

Rich April 5, 2011, 8:53 pm

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/

Steve April 5, 2011, 10:22 pm

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.

James April 5, 2011, 2:50 am

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.

Steve April 5, 2011, 3:51 am

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 ?

misterkel April 5, 2011, 2:36 am

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?

Steve April 5, 2011, 3:44 am

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.

Benjamin April 5, 2011, 10:12 am

“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…

Rich April 5, 2011, 8:41 pm

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

Rich April 5, 2011, 8:46 pm
Tom April 5, 2011, 1:04 am

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.

jag37777 April 5, 2011, 12:51 am

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.

PhotoRadarScam April 5, 2011, 12:25 am

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.

Micky April 5, 2011, 8:45 am

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.

Steve April 4, 2011, 11:12 pm

Great Job Rick and Everybody – haven’t had this much fun in a long while.

Roger Erickson April 4, 2011, 11:11 pm

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

Steve April 4, 2011, 11:17 pm

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.

Tom April 4, 2011, 11:05 pm

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$.

Peter April 6, 2011, 4:01 pm

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.

Bc April 4, 2011, 10:50 pm

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…

Hu of man April 11, 2011, 5:58 am

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.

Wisco April 4, 2011, 10:44 pm

“I’ll try asking my question for the eight-thousandth time, but in a slightly different way: Exactly how are you going to get your hands on some of that printing press money?”

What if TPTB mail each household a $10K check? $20K? $50K?

Rick Ackerman April 5, 2011, 12:18 am

For starters, $50k wouldn’t begin to handle your family’s shares of U.S. debts and future liabilities . In any case, I wouldn’t advise holding your breath waiting for that check.

Rick Ackerman April 4, 2011, 10:40 pm

I am posting the following for my friend and colleague Jim Willie, an inflationist’s inflationist if ever there were one:

the heart of the matter is not the outcome, but the path to the end point the Deflationists have gotten it wrong for a long time I dont really care about 3 years from now if an economic collapse takes place that seems all the wrong-footed Deflationists have focused on for a long time I care about the extent to which the cost structure will rise and then how much the end product & service price system will rise and how much the wages will rise in compensation

the Deflationists have ignored the pressure in 2007 and 2008 for the entire Quantitative Easing movement, which I forecasted with ease. The Deflationists consistently ignore the powerful effects of QE itself, they dismiss the human response to falling asset prices. the only conventional assets rising nowadays are stocks and farmlands. this piece by you surprised me but it should not have.

DEFLATION WILL PREVAIL BY SNUFFING OUT THE HYPER-INFLATION (my paraphrase)

“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.”

I dont give a s**t about the ninth inning when the important valuable parts of the game happen from innings 3 thru 8.
your ninth inning call pales by comparison to whether banksters take global control of govts, complete with new money forms shoved down our throats and complete with license to kill citizens. We are in the 5th inning, maybe the 4th

Rick, honestly, you keep going back to the Shed which had the wrong billboards. the Deflationist story ignores the Inflation story.

The G-7 Meeting to adopt the Yen Selloff Pact was a veiled GLOBAL QE ACCORD. Why not discuss important concepts like it instead of defending the wrong-footed construct of Deflation ??? with my smarter friends, I constantly laugh at their pre-occupation with Deflation.

I have asked some at least 20-30 times, WHAT IS DEFLATION ?? we will continue to experience and suffer both deflation of assets and wages. during a massive storm of inflation from central banks the hyper-inflation effect is a sideshow to the real game on stage. By the way, I do not expect wages to keep up with the rising costs, so a massive squeeze will continue — it will squeeze both households and businesses, with lost discretionary spending and lost profit margins. Besides all that, the debate over which prevails misses the entire point — that is, the Deflation will continue in certain asset classes, especially housing, while the Inflation will continue in monetary aggregate,

TO MAKE A GROWING POWERFUL DAMAGING GLOBAL HURRICANE. It seems obvious that the Deflationists ignore the battle and try to describe the outcome in narrow myopic terms

Best wishes, jim

24K April 4, 2011, 9:53 pm

I made a music video for one of my anti-banker songs at the London protest. You can see me singing infront of riot police

http://www.youtube.com/watch?v=OjPJ45kmDz8

Zombie Bank Death Squad

Tom April 4, 2011, 9:36 pm

Rick:

Here is a quote from Wikipedia about Argentina:

Inflation, which had been held to 10 to 20% a month, spiraled out of control. In July 1989, Argentina’s inflation reached 200% that month alone, topping 5,000% for the year.

Surely if that happened in Argentina, it could also happen in the USA.

Rick Ackerman April 4, 2011, 10:29 pm

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.

JC April 4, 2011, 9:31 pm

“how will all that printing press money find its way into the economic system”
The answer is the Fed prints what ever amount of dollars they think is needed and sends it to all the banks. The US government then gives every person (citizen or not) in our country a voucher for some large amount of US dollars in CASH to spend as they want. They would without any doubt have the votes from the citizens to back them.

Rick Ackerman April 4, 2011, 10:27 pm

See my comment above concerning how the supposed Masters of the Universe — aka, the rentiers — would feel about such a screw-y plan as yours that would allow all of us to pay all of Them with confetti. I don’t think so.

Roger Erickson April 4, 2011, 9:22 pm

We’ve been through this many times. When faced with new challenges, two human patterns come to the fore:

1) Luddites, such as narrow bank-lobbies; (still seeing ONLY past challenges; blind to the train coming down the tracks)
their response is always: “Let’s reduce exposure to uncertainty, by reducing exposure to the future.”

2) Adapters, such as all those who are not as complacent as the top drunks in the Pareto curve;
their response is always: “Let’s learn how to manage that new uncertainty, and rename it as risk”

Sometime in the future, the population always consists of >80% #2 & <20% #1.
THE PERENNIAL QUESTION IS HOW LONG WILL THAT TAKE! (AND WHOSE POPULATION SURVIVES?)

dan April 4, 2011, 8:49 pm

Inflation or deflation,what difference does a word make.When the money becomes worthless,the only metal that will save the day is lead.

ad April 4, 2011, 8:40 pm

Heres the angle from the person who probably knows the most about hyperinflation; the cause and effect.

From a Gideon Gono [Governor of Reserve Bank of Zimbabwe] Newsweek interview.

The stockbrokers were creating a money supply that wasn’t there. I printed Z$1.5 quadrillion, but the exchange was operating with Z$100 sextillion. So I said, “Who is doing my job?”

I’ve been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren’t in the textbooks.

Steve April 4, 2011, 8:54 pm

The MISTAKE – it is no one’s responsibility to ensure the survival of an individual, except the individual. It is the individual’s responsibility to ensure the opportunity to make that choice, and it is the obligation of all Men to destroy the abusers.

Ful_karboy April 4, 2011, 8:35 pm

Quinn comes up with some good arguments but quotes like this make me wonder. “These banks created products (subprime, no-doc, Alt-A mortgages) whose sole purpose was to encourage fraud.” BUT “These magnets {lol} of high finance were so consumed with greed they believed their own ideas and loaded their balance sheets with the very toxic derivatives they were peddling to the unknowing Europeans.”

So the banks knowingly defrauded themselves? AND sold crap to naive europeons? Come on! The banks were forced to make dicey loans by “community organizers” that under CRA rules could and did blackmail them. Since almost everyone was using David X. Li’s Gaussian Cupola formula which was based on the 10 year mortgage default rate {back when folks had to have a 20% deposit, a good job, good credit and assets ;>) of course the formula would founder under congress-mandated lower credit standards. Still even Goldman though Paulson was a rube at first and was going to fleece him cause he was a bit early {2006} but wisely chose big bubble areas to put in the Abacus Fund, that he wanted to bet against. This IS history and easily verified.

“When the world came to its senses and realized that home prices weren’t really worth twice as much as they were in 2000, investment houses began to collapse like a house of cards.”

At least he mentions “the world” but like many touts either doesn’t know or omits for agenda reasons, that bubbles were also huge in Ireland, Spain and England, to name but a few.

Since the article starts off with income disparity is this yet another “class struggle” {ie Leftist} writer? The following link shows that the top 1% lost a good bit during the stock and RE meltdown AND if one considers AGI {adjusted gross income} the “rich” pay almost twice the % share of income taxes as the % of income they earn. This doesn’t include earnings in the vast underground economy that would skew the figures so that the top 1% of earners would be paying an even greater share of income.

http://www.taxfoundation.org/news/show/250.html

By the way, I’m not one of “the rich” and as you’ve guessed by now, not a marxist either. For those with a GOOD sense of humor, enjoy the following, hee hee hee.

http://www.youtube.com/watch?v=tsZpWej8pF4

Steve April 4, 2011, 8:57 pm

No one forces anyone to commit fraud. One can choose No. The individual banker lined their pockets, and parked their funds in lands and other riches. The BANKS, they knew would be bailed out because the bankers own the legislature, and mobocracy.

ItsInTheCooking April 4, 2011, 8:04 pm

Never commented here before and I have massive respect for Rick and both sides of the arguments. I breathe Mises and Hayek and *was* an ardent (Prechter Level 3) deflationist.

I now realise that the main points people miss are political –

1) Goverment initially is created for the people. It ultimately only exists to protect itself from the people and will use *all* available means to do so. Imho Martin Armstrong trumps Prechter in most analysis here.

2) The no wage increase therefore no inflation argument misses one major point – POVERTY. Its coming your way, relative to ROW. Understand it sooner rather than later then more things make sense.

Travel Well

Steve April 4, 2011, 8:13 pm

Got Ya ! Increased costs engineered by the top 10%, and no way to create wage pressure = proverty.

Steve W April 4, 2011, 7:57 pm

I see our country’s current problem as a stagflation issue. We have core goods prices going up, but unlike a hyperinflation scenario, we don’t have a lot of dollars chasing after goods and services. People are pulling back on their buying and as a result, the slow death spiral/cycle continues. People will be using their savings accounts, tapping into 401k accounts, and selling off all their worldly possessions to make ends meet.. No one is getting cost of living wage increases. Thus the rapid hyperinflation scenario of a lot of dollars chasing tangibles won’t work. We will become a country of extreme poverty, because everyone will have sold off all their possessions to subsist, and when they have, they will go to the government for some sort of hand out. There won’t be any money supporting the government expenses from the masses so the welfare checks will have all been created out of nothing, creating more government debt, and a ever increasing cost of living. But not a hyper inflation situation. More of a slow insidious death march. By then, we will be owned and controlled by some other nation.
Anyway, I don’t know if the government could create a hyper inflationary environment in our current economic climate….even if they could, the ultimate end result is the same.

Steve April 4, 2011, 8:16 pm

At 450k forced debt by your legislative body for each individual = there isn’t more than 10% of the population that makes break even TODAY ! The average citizen is owned by the banking families that own the Federal Reserve – now who are those buggars? Rocki, Roth and the boyz?

Rick Ackerman April 4, 2011, 10:19 pm

Some excellents points, Steve W, including one that touches on the reason why we should greet mainstream media (MSM) reports of increased consumer spending with a mixture of skepticism, laughter and fear.

Rich April 4, 2011, 7:46 pm

Aloha All
Lots of blinding brilliance here on RA.com today responding to Rick’s challenging contrary provocative assertions of inevitable deflation, with three hours of sleep after reading James Quinn’s pelucid essay at Minyanville via Jesse’s Cafe, Seeking Alpha and TheBurningPlatform.com.
JQ is Senior Director of Strategic Planning at a Major University, after financial careers in homebuilding and retail. Unlike Larry Summers, who worked himself out of Jobs as Harvard President, Treasury Secretary and Hedge Fund Wall Street White House adviser with his provocative free market actions and assertions, JQ may be forgiven for knowing his subjects inside out, when he writes of Extend and Pretend, Mark to Market and The Illusion of Wealth.
The disintermediation, hyperdeflation, hyperinflation, stagflation as usual arguments will of course resolve in the markets sooner or later. As Cam, Mario, Frankie Joe, Kudlow, Prechter, Rick, Rosie, Salvigsen, Shilling et al may admit, it may well be later.
Yes, the trend is our friend, so long as we are able to turn and exit on the proverbial dime or land on the right side and square of ultimate market truth, before the sudden tipping turning point Rick and others envision.
As Socrates said some 2000 plus years ago, the truth appears like dancing flickers on the wall of a dark cave to us mortals. Then he drank the hemlock, rather than capitulate to the power elite of the day.
Today it is even more so, as the majority literally bought into the mass Inception Matrix Tranceformations enabled by corporate bankster monopoly media social capitalism promulgated by the top 1%.
As the Bible Joseph Jubilee, JQ and Nobel Laureate Columbia economist IMF critic and former World Bank employee Joe Stiglitz just warned in Vanity Fair, the top 1% were inevitably the downfall of the economy.
This follows night like day in the markets, with absurd uneconomic concentrations of 40% or more of the income and wealth in the hands of the oligarchic few who can’t spend their money fast enough to benefit the economy they plundered, smiling all the while.
As the age old old question asks, when markets are collapsing, Sell to whom?
Billion dollar bonuses were indeed predicated on institutionalized bankster/brokester theft from the duped majority, who trusted Wall Street crony corpse capitalism with their hard-earned assets and deposits.
The people were sorely robbed by institutional sovereign Neocheating thiefs, as ever it was since Aesop’s Fables of the Ants and the Grasshoppers brought foward by the Disney Dreamworks feud in A Bug’s Life and Antz.
Franklin, Jackson, Jefferson, Lincoln, Kennedy, Reagan, Washington and many others of course warned of all this, when they said big bad global government was the problem and fought Central European Sovereign Banksters inflating and deflating our economy with various usurious devices to confiscate and foreclose on our real income and property.
Hitler, Mao and Stalin called them parasites, while working for them behind the scenes.
Today Russia has a 13% flat tax, the 4th largest cash reserves in the world, and natural resource ruling oligarchs including Medvedev and Putin, while Wall Street Monopoly Capitalists have Buffett and Soros fronting for the Rothschild, Rockefeller and Bilderberg Bankers of Basel with their confiscated World War II gold, zero tax loopholes and endless lines of credit to crush the middle class with naked shorts.
More recently, leading up to 2008, the enemy used derivative neutron bombs to kill and profit from the subprime mortgagors and mortgagees around the world holding the bag, leaving foreclosed collateral properties standing, albeit with damages, MERS lawsuits and squattors evicted by Courts and Sheriffs thinking they work for the government banksters, until the scales fall from their eyes. There are even rumours Hillary, previous beneficiary of Bankrupt Madison Guaranty S&L Depositor Rose Law Firm Tyson pork belly Whitewater derivative scams, hypothecated American assets to Chinese Treasury holders to keep the Government Ponzi scheme going until she resigns and collects her booty in the Swiss Bank accounts that led to dupe lover Vince Foster’s and Ron Brown’s demise when they threatened to blow the whistle.
As H Ross Perot learned, it no longer pays well to be an Eagle Scout and the Head of your class at Annapolis when the Skulls are in charge.
Current and former Treasury Secs of course defended their house of cards system, by putting the economy, markets and taxpayers at further risk with their FICA, FIDC, FISL, FNM, FRE, HAMP, HUD, PBGC, SPIC, TARP and other sick financial acronym jokes, to kick the can down the road until they could get theirs, before the game of financial musical chairs all falls apart, as it almost did in 2008, a preview of coming attractions that could take years to unravel.
Why wasn’t the deep gold audited since Columbia President General Ike War Hero was President? Will NATO Commander Afghan rescuer David Petraeus betray us by leading us from defacto Depression to World War III/IV/V, depending on how historians including Churchill portray it?
Will we win or lose to Asia this time?
So why did Princeton and American President run against the Money Trust, then Negotiate Versailles to screw the German People and sign off on the 1913 Fed, IRS and Narcotics Laws that benefitted the hidden money trust?
The Three Card Monte Wall Street DC game never changed, a few fleecing the many by appealing to greed and using corrupt institutions and laws to promise a free lunch of benefits and profits they ultimately cannot deliver.
The denouement is as it ever was before.
A few with the insights of the Pauls who collected coins (Camino Coin) and Michele Bachmann (who worked for the IRS) may save themselves, while the 0s and Ryans of the day continue to promise $1 T and $4 T in budget cuts they cannot deliver, while militaristic governments kill more people and default on the all-seeing Police State eye debt pyramid, as Adam Smith and Moses discerned centuries and millennia ago.
The system collapses to benefit the few at the expense of the many, why we follow the Big4 few for our financial livelihood.
Today the key may be this inflated cybereconomy that can be turned off with the stuxnet switch that brings virtual asset exchange to a silent sudden halt, as people scramble and riot for their cash outside the courts of the moneychangers.
If anyone does not believe there is an ultimate end to the absurd money Matrix illusion, then perhaps they had better check out their financial institution here:
http://banktracker.investigativereportingworkshop.org/banks/
Courts ruled that assets held by banksters, although theoretically accounted as liabilities of the institution to the depositors, they are legally, technically, ultimately the property of the banks and brokers.
Possession is indeed nine tenths of the law.
A few Judges may defend a few people against MERS and Wall Street Theft, but most Judges and Sheriffs buy into the illusion they work for those who have the money.
Sometime in the not-so-distant future, millions may wish they had mattress money as the fiat dollar they ridiculed suddenly doubles from 70.70 to 115 and more when the poker player bluffs on Wall Street are called.
Then we may see another Declaration of Independence and Revolution led by the few who have arms, cash, silver and unpledged land, the John Hancocks, Thomas Jeffersons, Paul Reveres and George Washingtons of today.
For more documentation on this theme, click on Rich above…
Cheers all as I defend myself against the Fed, Treasury and IRS, at least one institution led by a man who did not pay his taxes on time, nor interest and penalties….

Rick Ackerman April 4, 2011, 10:14 pm

Let the world someday recall that it was you who introduced the great word “tranceformations” into the language. It pretty much sums up what’s going on in the financial/political realm. Meanwhile, I think you’ve got the makings of a fascinating book here, Rich. The chapter headings fall nicely into place, and the narrative is as richly dense with ideas as anything Harry Schultz ever wrote.

Fred April 4, 2011, 7:41 pm

“all of that printing press money would have to find its way into the economic system to become hyperinflationary.”

hyperinflation is about loss of confidence in a currency. it’s probability cannot be determined using normal measures and numbers because it is as much a political, psychological and external event as a pure economic phenomenon. FOFOA does indeed write some of the best stuff on this topic, but it requires a broader, perhaps ‘less logical’ perspective to appreciate.

Steve April 4, 2011, 7:51 pm

Still, to hyper-inflate; the currency has need to be applied to the product in purchase. Pray tell, who has the currency ? The fed is going to loose confidence and give Joe-sixpac unlimited greenbacks to buy with ! Or, maybe GE is going to give you some greenbacks to buy corn?

Rick Ackerman April 4, 2011, 10:07 pm

Confidence in what currency? Our money is almost entirely digital, and it will become “demagnetized” (i.e., unspendable) in a bank-system collapse. Thus, even if we do have hyperinflation, it’ll be over in 48 hours.

Dave Vice April 4, 2011, 7:40 pm

ive been doing alot of research on this hyperinflation issue. Ive seen alot about the gold dollar vs the paper dollar and here is what I found:
From http://www.thegoldstandardnow.org/featured-articles/169-us-currency-dollar-monetary-policy: The sun slowly sets on the use of the dollar as the world’s money. That’s the discussion going on within the finance ministries and central banks of the G-20.

What will follow the dollar, and when? Will it be replaced by the gold standard?

A classified cable from the American embassy in London passed by Wikileaks to The Daily Telegraph shows how well insiders recognize that there are intractable technical obstacles to use of the SDR.

So… what about gold?

Steve April 4, 2011, 8:19 pm

Dollar = 371 4/16th grains of fine silver struck as a Coin by the Mint for Legal Tender. Eagles “gold” are ‘valued’ in specie Dollars. Do a search of the word dollar and find Canada, Singapore, and about 50 more. You have your silver Specie Coin Dollars at the Mint. The people just refuse to do what is right.

Brad April 4, 2011, 7:35 pm

The only scenario that seems plausible is to me is a mass exodus from US treasuries responded to by panic fed buying in an attempt to quell the exodus. This could potentially inject trillions of hot cash into the system which would immediately be deployed to puchase commodities, stocks etc. If the fed refuses to intervene with “printing press” demand in this scenario the bond market crashes- which I don’t think they will allow to happen. To me it doesn’t matter whether our money dies in 10 years or 10 months- the carnage is the same. Prices will continue to rise- whether they go hyper or not is an argument over what could trigger a panic mass exodus from treasuries.

&&&&&

Massive exodus from T-bills will drive their value toward zero in mere hours, so don’t expect even the Smart Guys to cash out with trillions in “hot money.” And if the 20%-plus real interest rates that result are inflationary, then I am a monkey’s uncle. RA

Steve April 4, 2011, 7:39 pm

We have been being hand fed deflationary forces by China, assisted by the Fed for years at the expense of U.S. wages – bring that into perspective for me.

Benjamin April 4, 2011, 6:42 pm

If one were to ask me, the whole thing is staged in order to justify the creation of national ID/digital currency cards. As things stand now, a bank run would result in the wake of a collapse. Why? Banks would use that cash to lay claim to whatever assets they could. Sorry, no money for you, valued customer. Then along comes some JIT idea as digital currency cards. You are to fill out your national ID/debit card application or… don’t eat. Also, they’ll use these cards to enact/enforce other behavior modification.

I mean, really, you don’t actually expect government to go after those TBTF banks that won’t give you your money, do you? Why, they’ve never been the problem. They’re too big to be a problem. You and your liberties are the problem, one which will be rectified shortly.

Yes, the system as we know it will collapse at some point. But just as It would otherwise go broke in a matter of hours, so could It also pull off the biggest LIE! in human history. The question is… Would it work? Will people accept a national ID to take out some digitals? I think so. Initially, anyway, just to avoid immediate disaster. And that, folks, is how a most unwelcome guest will over-stay its visit, to prove the tin-foilers correct. Good bye, facades of liberty.

Anyway, I’ve concluded when this collapse and rebirth will take place… One fraud is despicable. Two frauds is depressing. When they run out of good mortgages, or a “good percentage” of them (see link in article), they’ll be forced to take them all off the balance sheet. We’ll have massive deflation because the whole system relies on perpetual creation and sustaining of debt; putting a mortgage off the books is the virtually the same thing as repaying it, and not taking on another one.

How close are we to that day? Closer than we were last year. Employment and wages are not getting better, but worse. Mortgages have been kept open when they should have been foreclosed, with the issuing bank allowed to fail.`Prices for daily necessities are rising. No rules have been laid down and enforced. Blames for government shut-downs are already being flung about. So guess what? Next year, we’ll be a little or a lot closer. Probably a lot.

roger erickson April 4, 2011, 6:41 pm

Correct, Rick. Yet there are many opinions converging to this same conclusion, by parallel evolution. As always. People recognize an impending pattern by various means.

Even while most smart people are, indeed, preparing for deflation, not inflation, there are additional, notable things missing from this particular list comparing us to Weimar Germany, that refute analogies between us now & Weimer then.

1) int’l standing post losing a world war (diverse constraints on sovereign policy)

2) massive imposed war debt repayments denominated in a commodity (gold), not even in a fiat currency (not least, not their own fiat currency)

3) Weimer was – with Britain, France & USA – still in the middle of the disastrous Gold Std experiment, that constrained all policy flexibility AND KINETICS!
see Lords of Finance: The Bankers Who Broke the World
http://www.amazon.com/Lords-Finance-Bankers-Broke-World/dp/159420182X

Things really are different since Nixon ditched the last vestige of the gold std, in 1973. It’s been a long time. Was that huge monetary-system inflection point missed mostly because economists, like everyone else, got so distracted by Watergate?

There is no documented case of hyperinflation involving a FULLY fiat currency regime (Zimbabwe is both pegged, and overwhelmed by fully insane policies unrelated to fiscal policy – there’s more than one way to commit market suicide).

Our current situation, AS ALWAYS, really does seem to be more nuanced than most grasp.

To quote Prof. Brad Smith, Union College:

“Keynes’ classic book Economic Consequences of the Peace quite well described the problems the French and British (and the US, by getting rolled over by the first two) created by deciding to see the peace treaty as an opportunity to cripple an old enemy – in the process, of course, unraveling the complicated economic machinery on which all of Europe depended for its living.

The analogy today would not logically be with Weimar; it would be with our voluntarily smashing our own productive capacity and services by a fixation on [entirely nominal] debt denominated in our own currency, in fear of an inflation that’s barely shown up.”

What will happen when all those rushing for the inflation exit finally recognize their error, and stampede for the escape-deflation hatches? It’s going to be very bloody, and sad to watch. These are our own neighbors and citizens.

For the orthodox banking fools setting up themselves with their public, Weimar and the f**ing Gold Std was just the first knockdown. After the mandatory 80-year count, Robert Rubin’s “Deregulation” was the feint, and our coming deflation will be the crushing sucker punch. (All this while shadow-boxing with ourselves in the mirror! It’s a Chaplinesque Greek Tragecomedy.)

Unless, of course, our corner somehow gets our public better trained before the next bell rings. We really do need to get all our neighbors back to training camp. ASAP. Otherwise, we’re going to knock ourselves for a loop early in the next round.

Robert April 4, 2011, 7:11 pm

“What will happen when all those rushing for the inflation exit finally recognize their error, and stampede for the escape-deflation hatches? It’s going to be very bloody, and sad to watch. These are our own neighbors and citizens.”

What are the mechanisms for escaping a deflation? What errors must be corrected?

Nobody likes deflation because everyone knows that deflation is a game that has no winners- the objective is simply to lose the least.

Actually- I fail- there are indeed CLEAR winners in deflationary economies… those who CAN.

Farmers win. Energy producers win. Welders win, Plumbers win, electricians, you name it- those who possess the real skills necessary to advance civilization win if deflation takes hold…

So I say bring on the deflation. The human race needs a collective boost to our productive spirit.

&&&&&&

Farmers do indeed win, a point that ties to the forthcoming commentary to which I alluded at the bottom of today’s essay. Incidentally, Fegusson documented that those who borrowed 100% to buy German farmland just before the Weimar hyperinflation kicked into high gear were able to retire their mortgages with proceeds from the first harvest. RA

Steve April 4, 2011, 7:52 pm

Excellent Robert

Benjamin April 4, 2011, 8:25 pm

“Actually- I fail- there are indeed CLEAR winners in deflationary economies… those who CAN.”

I don’t know, Robert. I can cite one example, which is an uncle of mine who is a union electrician. Pity he isn’t old enough to take his pension yet, because it simply will not be there for him when he is. Even when his mortgage defaults and is written off, he hardly has anything stashed away. But no problem… he’s not even fifty yet and can still work, right? Well, with the same problems hitting everyone else it sure won’t be at the union wages he is currently enjoying. Wages at all will be even more iffy than they are now (he’s off/on employed), seeing as how so many are going to be flat broke.

From this I extropolate that the few and truly independent farmers will have no use for excess production (in fact, it will be quite detrimental to keep/accquire). About the most they win is self-sustainance to their graves… so long as the weather favors their efforts for so long, to allow them to keep doing it. Otherwise, they join the rest of us in the pits of despair.

One thing we have to remember is that back in the other depression, there was no baby boomer generation, which is now well on it’s way to reaching retirement age. True, they don’t have to stop working at 65, but increasingly they’ll be getting infirm and thus reliant on their kids to take care of them as they age, which will be a drain on the productive-aged that are a smaller number.

Of course, the younger generations will have to have more kids. But even if so many kids could instantly become marginally useful, we’d be living third-world style. But since that rapid growth can’t happen, the productive will be for a time saddled with yet more unproductive mouths to feed. Therefore…

We’ll probably see a surge and plateauing of elder and infant mortality. Those with marketable skills and/or resources will be struggling to hold things at that spot.
So I’m not seeing any winners. It’ll be hard enough to attain a sustainable third-world living standard from the big dip that awaits us all. What I see is a regression to a perilous extent.

Roger Erickson April 4, 2011, 9:09 pm

I misquoted my colleague Brad (since another Brad called while I was typing; Brad inflation led to a deflating type 🙂 )

the real Brad, in this case
Prof. Brad Lewis; https://www.union.edu/Staff_Directory/Union/Economics/Lewis_Bradley_G.php

Roger Erickson April 4, 2011, 9:11 pm

> Farmers will win

Correction. Farmers, like many others, “could win”. If they’re prepared. Many farmers lost everything post Hoover, some didn’t.

The devil is in being ahead of the Hidden Context Pivots

Robert April 4, 2011, 9:52 pm

Benjamin:

“I can cite one example, which is an uncle of mine who is a union electrician. ”

– Sorry Benjamin, the rest of your personal account is moot. Your uncle pledged allegiance to people who declared that they were going to “administer” his livelihood in perpetuity. He was sold a bill of goods.

Had your statement began “I can cite one example, which is an uncle of mine who is an electrician who focused on self reliance and understands the difference between real savings and credit, but still lost…” then I might have become interested.

I do not contend that Union Electricians (or Unioin Anybody for that matter) are set up to weather a deflationary storm. I DO contend that people who understand how things work will have a lifetime supply of work as the items that today are disposable (cars, computers, refrigerators) suddenly require maintenance and repair.

Whether people leverage that work and save the excess of their productivity to capitalize further economic expansion will be up to the individual.

The farmers that failed in the 1930’s were those who only understood destructive soil management techniques… You know, the ones who always declare “this is the way we’ve always done it around here…”

Those who were open minded to new soil management sciences, and applied this intrepidity to their craft, thrived…

The dustbowl was going to happen regardless of whether or not Wall Street crashed in Oct 1929.

Thanks Roger for your point- it does demonstrate that the greatest resource we have is the power of individual intellect working on common problems.

In other words- entrepreneurism.

But don’t take that to mean that I suddenly buy your centralized coordination premise- For I still staunchly defend the anti-commitee principle that none of us is as dumb as all of us.

Benjamin April 4, 2011, 10:30 pm

Robert,

You didn’t have to contend that union electricians are set up to weather. I only that example specifically because, for all that it sounds bad for him, he’s actually doing better than another uncle was (now deceased; non-union) and my father, also non-union, is doing now.

The many Joe the plumbers do not have much, if anything socked away. Their employers… well, you know that story. It’s getting worse. As for all those rich savers living in perfect demographics, looking for maintainance… just where are they going to get the means to pay for it so the skilled worker can even get the material to fix/maintain their stuff?

Again, the farmers… What does soil science have to do with anything _today_? Their aren’t many truly independent farmers. And while those few-and-far-between will be able to pay food for maintainance, I doubt there will be so many of them at the moment of collapse as to make this a barely-noticed landing… such that materials can make labor possible, let alone saving from that labor by which we can truly begin to rebuild.

This is all going to take time to re-establish, and is going to be like a salmon swimming not up river, but up the waterfall. If fish could fly, I’d agree with you wholeheartedly. But it looks to me like just about everyone is going to put through the wringer at least once.

Zeke April 4, 2011, 6:35 pm

I can’t reconcile what I see around me with hyperinflation. I see small businesses going under at a rapid pace. I see unemployment and underemployment increasing. I see declining wages and salaries most everywhere. I see rising commodity prices. I see declining real estate prices. I see declining rents. I see a rising stock market. I see declining pension and fixed incomes. I see most people struggling to make do on less – much less.

To me this adds up to deflation and a commodity asset bubble. Something has to give: either wages will have to start rising and trigger inflation or the commodity asset bubble will burst triggering another deflationary depression. What will it be?

Cam Fitzgerald April 4, 2011, 7:13 pm

Yup, I agree with that. And yet here we are with many states seriously thinking about following the lead of those who would cut public sector wages and all because they cannot balance their budgets. Not only that but social spending and pension reform at the Federal level will see incomes dropping for millions. Just a little at first, then a lot more later.

Wage arbitrage alone seems massively deflationary where incomes are concerned as more incomes go into the pockets of foreigners along with the jobs lost on this continent. It becomes more and more difficult to reconcile truely big inflationary forces breaking out while home values continue to drop and wages are in decline.

I mean is it not the one thing we can agree on that an inflation or even a hyperinflation results in both rising incomes and assets which would include property? (and not just stock markets that appear to be topping anyway)

I am suspecting that even our commodity price increases will be tamed following the end of the QE’s in the first order or by the advent of an Asian recession or slowdown on the other.

When I then go and look at Europe and the declining consumption brought on by Austerity it is harder still to predict a hyperinflation breaking out. A bursting of the debt bomb maybe along with a drop in living standards and general misery but not a hyperinflation.

All we are are getting is a big ugly squeeze on the midlle class. The forces at work are lowering incomes and home values while driving up needs costs and strangling off any possibility of growth led by savings and true investment.

Rick Ackerman April 4, 2011, 9:37 pm

Great post, Zeke. You’ve said a few things more clearly than I did.

Pete Giovine April 4, 2011, 6:27 pm

Dear Ackerman Readers,

Heliocopter Ben already told you what his technique will be. What is the rest of this lip-beatin’ over?

P.

Rick Ackerman April 4, 2011, 9:34 pm

Yeah, sure, that’s right. Helicopter Ben has everything under control.

James April 4, 2011, 6:27 pm

I haven’t checked in for a while, but I am shocked to see you still claiming that inflation is a fantasy, Rick. Don’t you eat or drive?

Yeah, you may not see demand-pull inflation, but we’re starting to see currency devaluation inflation in consumables. You sound like the ivory tower fed official who thinks you can eat iPods (and real estate).

Steve April 4, 2011, 7:41 pm

My response – inflation is more money chasing less goods. NOT THERE ! This is something else.

Rick Ackerman April 4, 2011, 9:33 pm

How’s the value of your home holding up, James?

Robert April 4, 2011, 6:17 pm

“every “pro-inflation” comment in this forum, has contrived to ignore the main point of my essay — namely, that all of that printing press money would have to find its way into the economic system to become hyperinflationary. Please tell me how this would occur. And while you’re at it, explain how hyperinflation would occur if the financial system were to collapse this very evening.”

EUREKA- Rick Ackerman’s entire thesis is based around rate of change…

Ok RA- try this one on for size- You are currently living in the midst of the US Dollar’s hyperinflationary collapse.

It started in 1913, gained steam in 1933, picked it up another notch in 1971, and has really been on a tear since 2008…

If Ben Bernanke wanted to shift gears and throw the US into a deflationary collapse, all he would have to do is stop buying Treasuries, shut down the discount window and let the big banks go under. Sure it COULD happen, but is it likely?

Your time-based premise (that hyperinflations have to occur quickly) is based on the mis-conception that inevitability yields imminence, which is not the case at all. In fact- I would contend that the only game in town if you are Ben Bernanke or Tim Geithner is simply trying to traffic-cop this thing into being the slowest motion train wreck in history.

Rick Ackerman April 4, 2011, 9:30 pm

Thank you, Robert. In the 80 or so posts on the topic that have been published so far, yours is the first that has not moved me to sarcasm. The role of “rate of change” in relation to a banking collapse is indeed crucial and needs to be addressed.

Mainly, it is a matter of certain key differences between pre-hyperinflationary Weimar and what I would argue is pre-deflationary USA. Think of the differences between potential and kinetic energy. Water, just before it goes over the falls, has potential energy, but it becomes kinetic as it cascades. Similarly, our financial system contains vast amounts of stored-up potential energy in the form of a mark-to-market that has yet to occur in the derivatives realm. My argument implies that this energy will be released precipitously and simultaneously with the epiphany of the dollar’s worthlessness. What this implies very clearly is that we will not have time to dump dollars for “real” assets. In my essay, I also raised the prospect of financial assets becoming worthless literally overnight, making it impossible in practice to shift money from intangibles to tangibles before the former become worthless. So far, NO ONE has addressed the question this implicitly raises concerning our ability to hyperinflate.

Keep in mind that the Weimar government seeded and watered its hyperinflation slowly, over a period of several years. The goal was to keep unemployment low, and it worked. Similarly, the Fed has been seeding and watering a possible hyperinflation in order to meet certain political goals — namely, keeping stock market valuations high and preventing further deflation in real estate. But in the case of Germany, the process evolved out of a post-war condition of poverty and economic ruin. This contrasts sharply with a Fed attempt to inflate that is being met, fifteen dollars to one, by the collapse of a nearly quadrillion-dollar derivatives edifice. There was no such debt overhang in Germany to suffocate the process.

Nor can the difference between a cash economy such as existed in Germany in the 1920s, and a U.S. economy fueled almost entirely by credit and digital money, be overlooked. Whereas we have to borrow new money into existence, the German government had only to print and circulate it. This was done primarily via wage settlements with trade unions that were effected almost weekly. Also, as Fergusson recounts in “When Money Dies,” the worst periods of German hyperinflation occurred, ironically, during the relatively brief stretches when Germany’s money presses were idled by strikes. It is during such times that Germany’s largest employers snapped into action. They had been pre-authorized to print their own scrip if the government’s presses failed to deliver sufficient quantities of Reichsmarks to meet payrolls. This task they performed zealously, inflating even more promiscuously than a German government hellbent on doing so.

Fergusson’s book should be required reading for anyone who posts here on the topic of hyperinflation vs. deflation. It goes a long way toward explaining why hyperinflation would be so difficult to achieve in the USA.

Robert April 4, 2011, 6:05 pm

You are all tap dancing around the “trigger” that sets off any type of economic collapse:

Sentiment.

Effectively, Ben Bernanke has the power (just as Paul Volcker did in 1979) to engineer whatever flavor of collapse he wants to.

The Wiemar inflation did not just happen magically. There were deliberate policy decisions made to promote it, and anyone who is comparing today to Weimar is missing some key sentiment indicators:

Back then “printed” money was the only kind there was, hence it was easy for the printers to create notes and drive the value of said notes into the ground.

Today is much scarier- The Fed believes that they can create unlimited digital supply of dollars on a whim, yet by keeping those dollars out of the hands of the masses they think they can simultaneously keep those dollars from impacting general price levels…

Now, you tell me- is it working?

I summarized how easy this process works in a post on my own blog a couple months back:

People who grow and sell Corn & Wheat, or extract Gas and Gold are not selling them for fewer dollars- they are holding them until a higher bid comes along; and with all the new digital dollars floating around in the futures market, higher bidders are not too hard to find.- especially when one bidder is JPMorgan ( the Federal Reserve’s Bank) and another bidder is Goldman Sachs (the Treasury’s bank). Since these banks have access to the Fed’s Discount Window, they get brand new issue, un-depreciated digital dollars for next to nothing, and they can run out into the futures markets and bid up EVERYTHING.

These banks get the same legal tender money that you and I have to work for, for free, and they are using it to buy the same things that you and I need to take care of ourselves and our families- namely food, gas, and industrial materials.

How, exactly, is this a function of a free market? How is it fair? How does it not create price distortion?

Silver is on a tear today against all currencies… highly deflationary.

I think I need to build a wind generator. Fast.

And Rick- regarding hyperinflation vs deflation- seriously, who the hell cares? Economic collapse is economic collapse- they all suck.

Rick Ackerman April 4, 2011, 7:45 pm

See my note above re convergence.

Charlie April 4, 2011, 6:03 pm

Hyperinflation is an anomaly that is created by a loss of confidence in a currency. The required loss of confidence can be triggered by various factors.

Rick Ackerman April 4, 2011, 7:44 pm

And exactly how long does it take to lose confidence in a currency that as of this moment is already worthless?

Charlie April 5, 2011, 7:33 pm

I don’t know how long it takes, but in my house I’ve already lost confidence in the USD and have put my savings in hard assets. Effectively, the USD has already hyperinflated for me and for others of like mind.

Charlie April 5, 2011, 7:35 pm

The USD is not completely worthless…yet, you can still swap 40 notes for 1oz of silver. ; )

Rick J April 4, 2011, 5:56 pm

I believe the FOFOA scenario is the correct one. Every biological entity is governed by the goal of survival at all costs, as is by extension, governmental and corporate forms of organization. How do governments and banks survive without the ability to issue debt? We need to be able to answer that question from a very short term perspective. It is no good to say that we will simply switch to taxation and cutbacks in the case of government or we will switch to moderate leverage fiat banking, service fees, cessation of derivatives if we are talking about banks. Why? Because you cannot get there without hurting all the people in those entities in the short term and perhaps collapsing the entire world system.

Rick Ackerman April 4, 2011, 7:42 pm

Okay. So more debt is the answer because…we need the money. I get it.

ricecake April 4, 2011, 5:55 pm

It’s all about the price of things. May be not hyper but high and very high inflation is the sure things. Housing price may be going down but the rent is going up. Do you notice about that?

Instead of cash hyperinflation, it’s very possible to have credit high inflation. That’s you have to pay lots for certain things you really need. Bottom line is now you have to have to pay “money” in a large number for certain things which costed you money in a very small number . Your credit credit card bill for a bag of rice used to be $15. Now it’s $50 – $100.

If I have the rice in stock, I don’t worry deflation. Because I won’t sell it when price lower. I will sell it when price is high because the rice is is in demand and some people can’t live without it.

Anything that people live without in demand is an will be in much higher prices.

Although wages are not increasing, prices are going much higher in lots of things. You just have to use bigger portion of your wage to pay for those things.

Labor have to work harder and longer and living standard is decreasing when you depend on the rich other people to create job to hire you. It’s almost like depend on the foreign oil import for energy.

Middle class is the same. If they depend on the rich to give them jobs, they are in bad shape. That’s the the rich job providers corporations win all the time. How they win that’s related to political economy. They first eliminate the small businesses and monopoly the play fields. So we all become demand on them begging for their mercy.

p.s. One of the reason Japan could have the deflation in the past was because China’s export of deflation by cheap labor and land to the world so they could buy things cheap. But this is changing. China won’t be able to export deflation. Instead they are starting to exporting inflation.

I don’t see any reason to be too enthusiastic about the Japanese economy like many others do. I think Japan is badly beaten by: 9.0 earthquake, Tsunami, Nuclear crisis, Post Nuclear crisis crisis of food and water land, foreign energy dependency, energy crisis, productivity reduction crisis, tourism crisis, etc etc.

On the top of all the above, Japan may be hit by high inflation soon post crisis because they become dependent on foreign oil, gas coal again. Plus food and water too because the nuclear contamination they need to buy import food and water and so on. Their productivity will be reduce a lot. They are in heavy debt. They need lots of money to just rebuild. Although they can print money but those money will worth much less.

Sorry for out of line a bit here but can’t help it.

Knox April 4, 2011, 5:40 pm

Rick,

Your entire deflation hypothesis hinges on the assumption that cash is the only medium that can drive hyperinflation. I propose that this is a faulty premise. Digital money will drive hyperinflation the same as cash. In fact, digital credit has been driving simple inflation for many years.

Yes, we are facing a monetary collapse. But, once the average person can not afford a loaf of bread, it will be a fools argument on how we got there. Inflation or deflation… either way we are facing a systemic collapse and in the end we are screwed by our fractional reserve monetary system.

The inflation-deflation debate is a useless waste. Let’s get to the root of the problem which is fiat currency, a crooked banking system, and a congress that is too stupid to fix the problem.

Robert April 4, 2011, 6:21 pm

“Let’s get to the root of the problem which is fiat currency, a crooked (fractional reserve based) banking system, and a congress that is too stupid to fix the problem.”

Yes- EXACTLY….

Rick Ackerman April 4, 2011, 7:39 pm

Yeah, sure. The banking system collapses and we all get letters the next day telling us our credit limit has been raised to, um, oh, uh, a billion dollars. That should cover the bills for….exactly how long? The Guvvamint could also instruct the banks to add six or seven zeroes to everyone’s bank account overnight. While I’d have to concede that that would be hyperinflationary, how likely is it to happen? Moreover, why would your mortgage holder (aka Master of the Universe) go along with a plan that would allow you to pay him in snide?

Wyz April 4, 2011, 5:18 pm

The US will not have a Wiemar style hyperinflation. If it happens it will be Argentina style, as other analysts have noted. I’m surprised that only one reply has even mentioned Argentina, which had a banking system much closer to US style when they experience hyperinflation during the 1990’s.

Most hyperinflation forecasts are also based on anticipated actions of the FED and the US government. The expectation is they will take the wrong actions/response to problems and be a major cause.

Personally I am still open to the possibility of deflation, which our system very much needs to clean it out. Not unlike Rotor Router cleaning the crap buildup out of the sewer pipes. But so far that is not being allowed.

If hyperinflation does set in, I expect big ticket items that generally are bought on credit, primarily autos and real estate to drop in prices. They will be dumped or traded to get cash to buy things like food. Extreme example, a bellhop named Hilton kept a double eagle gold coin ($20) received as a tip from a US guest and eventually bought the hotel with it during German hyperinflation.

John Jay April 4, 2011, 5:08 pm

Inflation, deflation?
Something bad is coming, and we have had no representation in Congress for decades to protect us.
NAFTA, CAFTA, ZIRP, MERS, TARP.
I am sure there will be more acronyms in store for us all,
with increasingly bad consequences for you and me.

Steve April 4, 2011, 5:57 pm

Thanks JJ

Rick Ackerman April 4, 2011, 7:36 pm

To the extent there has been convergence and peace between inflationists and deflationists, it comes from the fact that we both see America’s standard of living falling to the same, almost unthinkable lows. The debate between us has meaning mainly in the context of explaining how one would protect one’s assets. But regardless of whether it is inflation or deflation that does us in, I am confident that gold and silver will shine defensively.

not_left_handed April 4, 2011, 4:46 pm

How does the proliferation of hard asset ETF’s play into the scenario? I understand the challenges of those, but people could conceivably get a decent return by moving other “financial assets” into ETF’s.

Steve April 4, 2011, 5:55 pm

Isn’t an ETF really just paper saying there ‘might be’ a hard asset ? And for the most part, isn’t the average ownership of a ETF only held on an electronic screen by some broker?

A Certificate in Hand, or an electronic click on a computer screen? If it all goes bust one might be OKay with a Stock Certificate in Hand (if the company survives), but; how many people have an actual Hard Stock Certificate in their safe? The broker goes bankrupt, and you get what from your ETF ?

Everyone trusts the light will turn on if the switch if flipped – what if it ain’t so.

TC April 4, 2011, 4:39 pm

Great article. We’re so far away from hyperinflation it is comical to talk about it. The risk of another deflationary shock should be everyones concern.

I’d note that this was all predicted by Keynes.

GlennH April 4, 2011, 6:10 pm

TC right on, Keynes, the most mis-quoted writer of all time. This is simple stuff, it all about the debt.

Rick Ackerman April 4, 2011, 7:32 pm

Never thought I’d see the day when an idea that originated with Keynes would be my defense.

DarkMath April 4, 2011, 8:05 pm

“I’d note that this was all predicted by Keynes.”

Oh, it must be right then. I mean Keynes could never be wrong.

Like when he assumed a rational government would stop running deficits when they stimulated their way to a recovery. It’s not like in a democracy politicians would ever keep running deficits to pander their voters into more terms in office. As if politicians can’t make the tough choices and put a stop to the printing press, Forsooth!

ruebezahl April 4, 2011, 4:28 pm

HowTo avoid a rising Yen and Dollar deflation?
Japan buys gold with their dollar dept.
Dollar inflates as supply of dollar dept rises.
No need to sell gold for Yen.
To print unlimited amount of Yen (create dept issued in YEN) , Gold and Silver will be used as collateral.

Dollar will inflate when central banks go back holding their reserves in Gold. This is an issues of politics and power and not of economics. Currently US military power avoids this scenario. Once there is a run on gold and silver central banks and big money will be in fear of being late. The worlds fear of the US power will vanish like the fear of arabian people of their governments.

Edwardo April 4, 2011, 4:16 pm

I strongly second the suggestion of Bjorn regarding the merits of FOFOA.

Rick Ackerman April 4, 2011, 7:29 pm

See my note(s) above.

Carol April 4, 2011, 4:16 pm

Where did I go wrong in my belief that we would most likely experience a deflationary depression and NOW I have changed my belief to one of a highly inflationary (possibly hyperinflationary) depression?

This author sums it up better than I could (http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post.html) —

“In fact, almost everything most deflationists describe will probably happen, in my view. But they all miss the hyperinflation that is coming. And they miss it because they don’t understand how perfectly it fits with a deflationary collapse. In fact, they argue vehemently against it the same as they argue against inflation, which is how I know they don’t understand hyperinflation. And they miss it because they are so meticulous in their observations and calculations that they can’t see that the collective will always changes the rules when things get really painful. The political will (which is the same as the collective will in my lexicon) always does whatever will lessen the immediate pain, even if it will most certainly cause greater pain later. This is the part that is as reliable as the sun rising.”

Sorry Rick but another “deflationist” (me) has now jumped ship!

Steve April 4, 2011, 5:46 pm

Carol, how can we get hyper-inflation when there are no increases in wages in the hands of the people? In real terms unemployment continues to increase as job creation is not keeping up with birth rates. The so called decreased taxes via reduced SS Tax has been negated by 108 oil. Increased costs, manipulated by banks, is not inflation is it ? Reduced payments into Social Security produces what ?

There appears to be something greater here that is being missed. Only 10% of the population is able to create hyper-inflationary forces through wage pressure. The other 90% will suffer cost increases until they have nothing t0 offer except blood. These cost increases are being created while corporations pay less taxes, showing better profits, to be paid to the top 10%, while the 90% are shoved deeper into debt.

The only people who could create hyper-inflation are the bankers/corporate heads making multi-millions a year, yes? There is already class anger – what next?

We have increased ‘debt’ like crazy, but; who is it that has the savings, or increased wages, to spend to create hyper-inflation?

I can cost control anyone into slavery. Increased costs is not inflationary unless they are driven by too much money chasing too few products.

We have product everywhere. Why are prices increasing on products, but; there is no inflationary pressure from wages? Is it even possible to create wage pressure on business with unemployement where it is ? There are jobs, but; they are government jobs, or jobs that require the skills of 3 college degrees, yes !

I’ve got it. Bernanke is going to get the corporations/bankers top 10% all well, and then he is going to tell the people that they get a 200% increase in wages.

Carol April 4, 2011, 7:15 pm

Steve,

Yes I know that oil at $108 is deflationary and all the other points you made. I agree with everything you stated 100%; your points are why I believed for the past 10 YEARS that we would have deflation. However, good ole benny with his “I’ve got a printing press and I ain’t afraid to use it” trumps all our arguments that you, I, Rick, et al make.

I finally see the points that FOFOA is making in the link that I included above. It is the loss of faith in the currency AND the FACT that benny and “da boyz” are intent on destroying any remaining value left in the FRN. They will NOT STOP their printing presses with QE3 to QE whatever-it-takes! They WILL print untill they “defeat” the big bad deflationary monster that they see coming at them like a train.

Now I do not any longer believe that the extra money needs to COME from the people (via their wages or asset appreciation) to start a hyperinflation. I now believe that it is the loss of CONfidence in the USD currency that will trigger the hyper event. As soon as benny anounces QE3 we are sunk I think.

I think my staunch belief in deflation is because I Want deflation to happen (it is in MY self interest as a saver who is NOT a debtor) and I also know that deflation is what is needed to clean out the system of all the rotten malinvestments, speculation, etc.

Loss of confidence in the currency is all that is needed, not wage pressures, or the extra money being in the hands of the people.

Rick Ackerman April 4, 2011, 7:29 pm

I commented above on the article you’ve linked, since someone else linked it as well. While thoughtful and well written, it evades or ignores the questions that I have asked of inflationists in today’s commentary.

Steve April 4, 2011, 8:01 pm

Carol, it does not matter if one looses faith in the currency if there are no wages or currency in the hands of the people. What is going on is price control, as in; the intent to increase prices without allowing wages to increase except in the hands of the top 10%. There is no way to increase wage pressure on business. There is only the intentional loss of lifestyle in the middle class.

Goin April 4, 2011, 4:14 pm

“…where the money will come from to bid tangible assets skyward.”
From every fiat money ‘printing press’ worldwide. From the coffers of every Central Bank (not run by Goldman Sach alumnis) reserve. The US doesn’t exist in a vacuum, Rick.
You’re right about deflation though, just wrong about which currencies are in it. Hint: XAU and XAG.

Rick Ackerman April 4, 2011, 7:26 pm

Yeah, sure. I’ll try asking my question for the eight-thousandth time, but in a slightly different way: Exactly how are you going to get your hands on some of that “printing press money” ?

Carol April 4, 2011, 7:45 pm

Rick,

as you stated – “Exactly how are you going to get your hands on some of that “printing press money” ?” that is what makes this discussion all so interesting, who the hell knows what benny has up his sleaves! As has been suggested by others (Benjamin) below maybe they will force us into digital cash cards with national ids (maybe even chip us) so that we are able to not only buy and sell but it may be used to add an extra zero on the account balance “as needed”.

Just never underestimate their creative evil.

Steve April 4, 2011, 8:03 pm

YES RICK !

Steve April 4, 2011, 8:07 pm

Carol, May I be the first to say – NO WAY, not going there – no one will ever force me to take a debit card, or national I.D. Went through the mill Thursday last week. Was stopped, they impounded the Dodge Pickup, and ‘they’ refused to arrest me. My ‘privilege to apply for a License is suspended’. All that is needed is for more to take a stand. Took 300 to take care of the impound, 75 to the sheriff’s office for a release. Its all monetary, not isn’t it.

Carol April 4, 2011, 8:19 pm

Steve,

I will have to fight you for being the last one in THAT line.!

I haven’t even asked “them” for over 12 years if I may “travel” in my own “household goods” so not only don’t I have any of their id to prove that I am one of “their” enfranchisees, but I will starve to death before I ever take any of their chips or any other form of biological id.

Most people think I am way over the edge radical but I say if we ALL refused to cooperate with their enslavement (as you say Steve “take a stand”) this world would be a much better place. They only get away with all the slavery and fraud because the people like sheep follow along and “do what they are told”.

Ok off track and now back the the main discussion.

Kevin Merry April 4, 2011, 3:46 pm

Hi

I will answer your question. You will say I’m crazy AGAIN but so far I’ve been right all along. But first a recap. 2 years ago when we came out of phase 1 inflation to experience a deflationary dead cat bounce you vilified inflationists. I stood fast. 1 year ago you publish an article conceding in the oh so subtile way that if fact inflation was beginning to surface. I felt your pain that you had to acknowledge that.

Now, that inflation is roaring, to save your deflationary face you now attempt to vilify hyperinflationists, a smaller more radical group. The money you claim that doesn’t exist, exists. It exist in three areas. 1. criminal syndicates hold, estimated, billions of undeclared deposits and they will shift out of them. 2 Hyperinflation results from a loss of confidence in the currency and the country that elects to send treasuries back first starts the ball rolling. Forget China or Japan, look to smaller countries which can’t afford to write-off these losses to be the first out the door. Once the world soon starts starving because of higher food costs, look to further civil unrest in smaller countries and those countries to redeem those dollars for the relief or over thrown governments to liquidate. 3. The FED will not seek QE3 because all they will have to do is print to redeem those treasuries and the money supply could double rather quickly. Bernanke gets his inflation.

Remember, hyperinflation is just 4 quarters of 20% inflation at a minimum so plausible it certainly is.

However, hyperinflation usually only last 1-3 years then deflation weilds it’s sword normally in conjuntion with the reduction of government and a new currency. Of course, that’s the pain.

USA to a degree will experience hyperinflation. To what degree will depend on one factor and that is the degree the FED will take the country to the brink.

For me, that is the only question which we should trying to figure out so we can sell our gold and silver before the crash.

Now if any of the other major countries jump in look out but I highly doubt that will happen unless there is a hidden agenda to speed up the shift of power from west to east only time will tell.

So here you have it Rick. I think you are awesome but you are 100 PERCENT offside in the inflationary debate. You realise that now, that’s good but don’t discount hyperinflation unless you have all of sudden believe the FED is on the peoples side and ignorantly believe that other countries will fall on their sword to you well fed. Ridiculous.

Steve April 4, 2011, 5:16 pm

Where is the increase in wages and too much money pursuing too few products ? It just isn’t there is it !

What you have is banks stoking prices through Fed abuses of credit, and the people falling deeper and deeper into debt.

Retail costs are going up, but; there is absolutely no real wage pressure on manufactures/business. Corporations are not paying taxes – so things look real good. There are how many million without jobs? Is that the 8.8% lie of the federal government, or the actual 16 + % that do not have a job and don’t count.

Now, the cost of the debt con. You were at Liberty as a Common Man, with Rights in Common with all other Men. Now, you are a corporate enfranchisee with in excess of 450k in debt you will never pay off to be free again.

All this worry about what inflation is, is about the fluff – the substance is that you have given up your inheritance for a bowl of handout soup Jacob.

Rick Ackerman April 4, 2011, 7:23 pm

Kevin, you have not answered a single one of the questions I posed. I’d suggest that you re-read my essay, along with the rebuttals I’ve posted in the forum this morning, before you try again.

DarkMath April 4, 2011, 3:25 pm

Rick,

I forgot, there’s another example of where a Debt deflationary collapse caused Hyper-Inflation.

Look at Argentina or any of the South American economies of the 80’s and early 90s that defaulted on their Debt. Yes their economy collapsed but the currency COLLAPSED FASTER. The result was, you guessed it, Hyper-Inflation.

&&&&&&&

What does Argentina have to do with anything? The U.S. dollar is the world’s sole reserve currency, the basic unit of a global derivatives bubble whose notion value approaches a quadrillion dollars. By contrast, Argentina’s currency is/was…what? RA

DarkMath April 4, 2011, 8:00 pm

“The U.S. dollar is the world’s sole reserve currency”

For now. Are you suggesting the US Dollar will remain the World’s reserve currency forever?

It’s not. We’re seeing a slow motion move away from Dollars. China is leading the pack. They’ve stopped buying our Debt. As their bonds mature they no longer roll them forward. This is a glacially slow process but it’s happening right now.

QE3 will no doubt “Speed the Plow”.

storfisk April 4, 2011, 3:22 pm

Inflation is,by definition, too much money chasing too few goods. What is hyperinflation? does it occur in a day? A week? A year? Perhaps a decade? if a word is not defined it has no meaning. It is just garble. Until the author defines the word this whole essay is meaningless

&&&&&

Try reading my essay, which is explicit on the question of time. RA

Steve April 4, 2011, 5:04 pm

Who has defined the word hyperinflation except by the graph provided by Rick? Who’s definition of ‘inflation’ is that fish – the goverment’s definition based upon the cost of hamburger at $16, where steak was $16 so there is no meat inflation? Is that the government’s definition of inflation where there is no inflation as long as wages are going nowhere?

I lived better on 500 a month in 1971, and paid very little in taxes, than the average person who is making 60,000 and paying 50% in taxes/fees today. How does that figure ? The same standard of living with a 10% tax rate, and better services, and now; a worse standard of living at 50% taxes.

Infringement is such an interesting word. Put a frog in a boiling pot and he will jump out. Increase the heat slowly and the frog will be cooked. What will it take before the water temperature increases too fast, and the frog rebels? At what point, and for what reason will the people not believe in a piece of plastic? At that point how many physical paper notes are there, and how are you going to import federal reserve notes from foreign lands? Get caught with 10K cash today and one has to prove the money is legitimate after it is seized as drug money. THAT IS TODAY.

You were at Liberty, and; now are enfranchised as a voluntary enfranchisee of corporate creation. That is inflation !!!!

storfisk April 4, 2011, 6:52 pm

Rick, You explicitly state “mere hours”, “a week”, “or in the case of Germany, several years”. Won’t you agree that is being just a trifle ambiguous?

&&&&&&

Please read my essay. The whole point of it is: How does hyperinflation “happen” if the financial system collapses OVERNIGHT. RA

DarkMath April 4, 2011, 3:09 pm

“tell me exactly where the cash will come from that would allow Americans to bid the price of hard ”

That’s easy. First of all you only thinking of Hyper-Inflation from the Supply side: the supply of dollars. But prices are set by Supply AND DEMAND.

What do I mean by Demand: the demand for the dollar as a currency. You can have hyper-inflation if the:
1) Supply of Dollars Increase.
2) Demand for Dollars decrease.

You’ve got yourself so close to 1) Supply you can’t see the other side Demand. If the Dollar Collapses then the demand of Dollars will drop and bingo: HYPER-INFLATION.

In other words there are more than enough dollars in existence today offshore to cause Hyper-Inflation if people don’t want to hold those dollars anymore.

Why would they want to ditch the Dollar? Because the Fed is monetizing the Debt and thereby DEVALUING the Dollar.

Q.E.D.

Steve April 4, 2011, 4:49 pm

The demand for actual/physical green paper will increase as people loose confidence in the credit clicks on some screen. Most Americans don’t carry any ‘cash’, only a debit card, or credit card. One cannot carry more than 10k cash into the country, and if an individual is caught ‘outside’ today with 10k in cash it is going to be seized as possible drug money.

It would appears that as long as a debt card/credit cards can be used that the actual increases in reported rise in inflationary costs can be manipulated by accounting schemes, ie: one bought steak for $16 lb, now hamburger is $16 lb there is not cost increase for meat. As I remember the only inflation that matters to Bernanke is when wages are increasing so that there are more dollars chasing fewer products, causing the prices to climb. Math skullduggery keeps all well until such time as confidence in the credit card works. Should the time come where confidence fails and the people want their credit clicks in paper there will be a shortage of green backs because of ‘limits’ on cash machines, and emergency limits on withdrawals. Demand for physical paper will drive the value of the paper until it is rejected. All contracts under the U.C.C., for practical conversation, are based in Federal Reserve Notes. All is great as long as the credit clicks/debit card/credit card works.

Last month as I traveled a pop cost $1.78, yet; there is no ‘inflation’ because there are not more dollars chasing that Mountain Dew. There are not more wages chasing that Mountain Dew. The price has simply gone up in a way that Bernanke does not count in regard to inflation, where the normal; more money chasing fewer products causes prices to raise. The same is true of the diesel I bought at $4.29 a gallon. There are no increased wages in the hands of the people driving up the cost of that diesel under the normal scenario where there are too many dollars chasing too few gallons of diesel. In fact, based upon unemployed, the cost of all things should be dropping under a normal scenario of too few dollars chasing too much product.

Who is gaining by the increased cost of materials ? and why?

Rick Ackerman April 4, 2011, 6:59 pm

Ditch exactly which dollars? Please answer the question I have asked here a dozen times.

Cam Fitzgerald April 4, 2011, 2:53 pm

That is really a damn good article you penned today Rick. The oddest thing happened to me after reading it and then going off to bed…I woke up with my head full of different ideas. That is usually how it happens. Early in the morning I tend to see the light better after a good nights sleep.

I think you are on to something here though in asking readers to explain the mechanics by which a hyperinflation might ocurr. That is a tough one. I don’t have an answer for that although in the past we have generally assumed that one bad day billions upon billions of rejected US Dollars would come flooding back to America from all around the world and then the game would be over…….hyperinflation in an instant noodle package.

I am conflicted though. Being in the contrarian camp I actually see the dollar headed for a healthy bounce right now but few (perhaps zero) people agree with that sentiment these days. The belief in a dollar collapse scenario is absolutely overwhelming and I get roundly criticized each time I suggest otherwise.

We will see. If your idea is correct that deflation is the true threat then that might also suggest the dollar will strengthen while also proving Bernanke was correct in his assessment all along. His primary concern has been that we could easily drop into a deflationary spiral if the system is not reinflated through intervention. Not that it would help really but rather only forestall the final day of economic reckoning.

It seems to me that what happens next with wages and property prices will define the direction we take. Both suggest the deflation scenario you suggest and when considered in tandem with falling prices from manufactured goods overseas there does not seem to be other outcomes except those created through deliberate inflation inducing processes.

When this is all considered in tandem with a true financial calamity as outlined in the article noted above there are few alternative scenarios to arrive at.

Rick Ackerman April 4, 2011, 6:58 pm

Thanks, Cam. Concerning the growing number of self-described “contrarian” dollar bulls — a badly waffling Jimmy Rogers among them — perhaps this is a true contrarian bamboozler where “everyone” who says the dollar can only go lower will turn out to have been right. From a technical standpoint, Hidden Pivot analysis shows no particular strength, incipient or otherwise, in the NYBOT Dollar Index.

DarkMath April 4, 2011, 7:19 pm

“Ditch exactly which dollars?”

US Dollars and US Debt. Last time I checked the Fed had plastered the world with Dollars and Debt.

All that money is ending up offshore and it’s being sterilized by buying even more US Debt in a mutant perpetual motion machine.

We both agree this can’t go on forever but you can’t tell me there isn’t a ginormous stack of Dollars and US Debt held offshore.

Brad Bolz April 5, 2011, 4:53 am

I find myself in the dollar heading to +80 camp and have been wondering why it isn’t happening. So, don’t count yourself out yet. I don’t bring much weight to the argument, but I see the dollar remaining strong for awhile. The market has been crawling upward, the dollar may follow.

JohnJay April 4, 2011, 2:36 pm

I’ll be very happy if the US government can go on creating evermore debt as the Japanes have managed to do so far.
Watching the farce as Congress argues over the bar tab on the Titanic without any indication they will ever make any real cuts in “Security” /MIC spending, or bring all the troops home right this minute I am filled with dread.
I agree with Rick that the end will come all at once, so the government can use the “9/11” type atmosphere of panic to ram through pre arranged measures to benefit the uber wealthy and impoversh the rest of us.
Don’t think they won’t have plans to confiscate all precious metals, freeze all assets, and put the final touches to the police state we have become.
At the current rate, the national debt will go from 14 trillion to 20 trillion in a couple of more years.
Even fleeing the US for another country may not work, they may claw it all back when the end comes, all governments see their citizens as “the enemy” and will very likely agree to work together with an economic version of the fugitive slave laws from the past.

ben April 4, 2011, 2:29 pm

If you want to see how inflation can occur while prices “drop” just look at what happened in bullion a couple years ago. Spot prices of bullion were at a trough. You could “own” silver at the ten dollar spot price…but if you wanted “delivery” you had to pay a 30% premium or accept an indefinite delivery time. When faith in the dollar itself disintegrates, the FED and the powers that be can short all the metal they want…they can push the “future” price of things down to oblivion as long as they have the ability to electronically create and spend digital dollars…but they can never force people to part with their physical bullion unless they are willing to send goons door to door to take peoples’ gold and silver at gun point.

In the scenario you are dreaming up, Rick, I would expect physical anything…including physical greenbacks…to carry a large premium to the digital stuff. This is not the type of situation that would persist very long however. Within months the green paper would lose all value, as anything non-paper and tangible, including base metal pennies, nickels, and quarters, started carrying huge premiums to what the computerized prices would suggest.

Rick Ackerman April 4, 2011, 6:50 pm

A “large premium” paid for with exactly what currency?

Avocado April 4, 2011, 2:19 pm

Nobody so far has explained where the PAPER money is going to come from to get hyperinflation. I doubt anyone will. As Rick points out as soon as enough people sell financial paper to buy something else the value of that paper will plummet.

Andy

&&&&&

Ahhh! Someone who gets it. Thank you for this elemental observation, Avocado. RA

mario cavolo April 4, 2011, 2:33 pm

Chiming in with agreement that we’ll see, ahem are seeing, some nasty, scary inflation, and a gradual decline in the USD, but skipping the hyperinflation scenario. And while a financial collapse disaster event could occur, when, pray tell, is the tougher question.

Cheers all, Mario

DarkMath April 4, 2011, 3:12 pm

“Nobody so far has explained where the PAPER money is going to come from to get hyperinflation”

See my post below. There are more than enough dollars held offshore (because the Dollar is the reserve currency) to stoke hyper-inflation if the Dollar collapses. In other words you are only thinking of the SUPPLY of dollars. But prices are set by Supply AND DEMAND. If demand for dollars drops you will see the same thing as if the Supply skyrocketed through Weimar style money printing.

&&&&&

Illegal stashes of hundred dollar bills aside, cash held offshore doesn’t amount to a drop of spit relative to the deflationary juggernaut energized by an imploding, quadrillion-dollar derivatives bubble. Not only that, but offshore “money” is probably disproportionately held in financial instruments whose value will be the first to plummet to zero on the day the financial system collapses. Of course, you could always argue that billions of dollars’ worth of Bolivian reverse floaters will be cashed out, to be quickly and astutely dumped into bullion. RA

DarkMath April 4, 2011, 7:13 pm

Rick,

“Illegal stashes of hundred dollar bills aside, cash held offshore doesn’t amount to a drop of spit ”

First of all we’re not talking illegal. by Dollars held offshore I mean US Dollars AND US Debt. They’re one in the same and both are held legally. If a country starts selling debt that is the same as selling Dollars. Say Japan sells some of its US Dollar Debt to pay for the earthquake. They’ll convert that Dollar Debt into Yen and hurt the Dollar in the process. It’s happening right now. So you can’t say it’s a spit in the bucket.

Also the Dollar’s price is set at the margin. It only takes a few people to freak out and start taking anything to get out of their dollar positions FOR THE HERD TO FOLLOW. We all know that. This is bubblomics. We saw it in Internet Stocks. We saw it in Housing. We’ll see it in the Dollar/Debt bubble.

Most holders of Internet Stocks/Housing/Dollar-Debt didn’t want to sell and were perfectly happy to keep playing the game. It was only a few “bad-apples” who started panic selling that started the ball rolling and forced everyone else to sell before they lost everything.

PhotoRadarScam April 4, 2011, 10:16 pm

An honest question as I am not sure of the exact answer, but how did all of the currency get into the people’s hands in Zimbabwe? Everyone knows about their ubiquitous Million and Billion dollar notes, how did those enter the economy?

Let’s also not forget that the government is quite capable of distributing cash. Remember the $1000 checks from Bush? Cash for clunkers? Down payment assistance?

steven hansen April 4, 2011, 1:36 pm

While the current dynamics say hyperinflation is unlikely, believing an option does not exist leads to a Fukushima Dai-Ichi. Economics is not a science – all beliefs are unproven all while the dynamics change daily.

One thing for sure, Japan cannot go on forever building debt and paying and ever growing amount in interest. Eventually something will change.

Bjorn April 4, 2011, 1:34 pm

In my opinion, the best explanation i have read about how and why dollar hyperinflation can and probably will occur is FOFOA:s.

http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post.html

Time will tell. And by the looks of it, perhaps not a whole lot of time…

Rick Ackerman April 4, 2011, 6:02 pm

Well, I tried. The thoughtful but logic-challenged article you’ve linked, as well as every “pro-inflation” comment in this forum, has contrived to ignore the main point of my essay — namely, that all of that printing press money would have to find its way into the economic system to become hyperinflationary. Please tell me how this would occur. And while you’re at it, explain how hyperinflation would occur if the financial system were to collapse this very evening. Please don’t try to argue that this is impossible.

DarkMath April 4, 2011, 6:33 pm

Rick,

“all of that printing press money would have to find its way into the economic system to become hyperinflationary”

Again I’m sorry but you’re wrong. You’re talking about the Philips Curve. The only way to get high inflation is to have high employment so that employees can spread all that money around.

http://en.wikipedia.org/wiki/Philips_curve

The Philips Curve died around 1978-80 time frame. We had HIGH unemployment but HIGH inflation. They called it Stagflation and we’ll see it again in coming years. Heck we’re already seeing it now.

&&&&&&

Stagflation? That’s like describing the cosmos, three minutes before the Big Bang, as quiet and peaceful. RA

jeff kahn April 4, 2011, 1:12 pm

You assume financial collapse will occur quickly. I agree it will occur. But you vastly underestimate the powers of the Fed. They can make it happen slowly.so that their Banks can suck every last dollar of productive capital out of the economy as it slowly deflates. They can. They will. Thus hyperinflation can occur.

Rick Ackerman April 4, 2011, 5:52 pm

The dollar’s fundamental worthlessness is already baked in the cake, so to speak, and all that’s needed to bring about the collapse a global financial edifice built on dollars is the epiphany.

Concerning the Fed being all-powerful, I wouldn’t call their desperate, multitrillion dollar attempt to reinflate the housing market a huge success.

Jim April 4, 2011, 12:33 pm

It’s an interesting question. At first i thought that hyper-inflation was a political decision, but Jim Sinclair seems to argue that it is a loss of faith in the currency.
Ultimately all paper currencies die, sometimes by hyper-inflation, sometimes by replacement, so I guess the question for TPTB is by which route do they profit more?

Rick Ackerman April 4, 2011, 5:49 pm

As Jim Davidson made clear in “The Great Reckoning,” hyperinflation necessarily begins with a political decision, since the critical threshold of monetization needed to trigger a run out of dollars implies ruining savers as a class, as well as destroying bond markets for perhaps a generation.

Andy B April 4, 2011, 11:17 am

Hyper-inflation may not occur, but high inflation may occur because of money printing. There are plenty of problems with high inflation, especially for the savers. The dollar may not collapse in a hurry, but it is eroding over time.

Rick Ackerman April 4, 2011, 6:08 pm

Mere inflation is virtually impossible, since the derivatives-market implosion that monetization has been trying to counteract aggregates into the hundreds of trillions of dollars. The sums are simply too large to conduce a “middle way.”

DarkMath April 4, 2011, 6:29 pm

Rick,

“Mere inflation is virtually impossible”

Three words: Argetina Debt Default.

Massive Debt weighed down the Peso and hinted at deflation. Then wham! The epiphany. The result was Hyper-Inflation as their currency collapsed.

The same thing will happen here in the US but more slowly.

Andy B April 4, 2011, 8:06 pm

OK Rick,
If it can only go one way, how will mattress money hold up? Are you talking deflationary death spiral where nothing has value? (Besides the rich, watered farm land you’ll talk about later this week.)

FranSix April 4, 2011, 10:44 am

I think in many ways that Paul Van Eeden was right in calling an inflationary depression. One missing detail on deflation so far has been the discount rate,(3-month T-bill rate) set by the market, has managed to remain above zero. Can’t seem to rule out a worldwide currency crisis at this point.

http://finance.yahoo.com/bonds

PhotoRadarScam April 4, 2011, 10:06 am

Again, the argument ignores the ‘lack of demand’/’refusal of the USD’ scenario. Prices in USD will skyrocket because you will have to convince people to accept USD by offering them increasing amounts of the currency for goods and services. This is where barter and alternative currencies (gold/silver, foreign) will become more prevalent. I still am not convinced that endless printing of money and monetization of debt can’t result in hyperinflation, and it will start with the treasury bond market.

Last I heard, the fed is buying (monetizing) over 80% of treasuries at each auction. I don’t expect this trend to change without the fed increasing interest rates significantly, which it is not in a good position to do. To make matters worse, most of the debt is maturing and will need to be re-monetized over the next 5 years, in addition to the deficit spending. I can’t imagine any holders of US treasuries to not be looking for ways to dump and/or not-renew their holdings. Pimco recently announced that for the first time ever they have ZERO holdings of US treasuries. And with an ever-increasing amount of unwanted USD-debt in the marketplace and foreign holdings of USD, the cost of goods imported to the US *must* start climbing rapidly… In fact, it’s quite likely that exporters to the US will stop accepting USD as payment (or charge a premium to do so), and now any importers will be scrambling to procure goods or other suitable currencies in order to import goods. For sure, shelves will go bare.

The scenario is a feedback loop that continues to accelerate slowly at first and increasingly faster as it progresses. The loop cannot be broken until the currency is replaced. Once oil/gas prices make commuting to work impractical or too expensive (and transportation of goods), people will quit their jobs and companies will be forced to increase wages as yet another price-increase to pass on in higher prices.

In every scenario the overriding theme will be the unwillingness to accept the USD (along with ever-increasing energy costs), first by foreign firms and governments, then domestically. And when people, companies, and governments are doing everything they can to unload or convert their USD, the only result can be hyperinflation.

Cam Fitzgerald April 4, 2011, 12:22 pm

And yet we just saw that in Japan, a nation carrying the largest debt to GDP ratio on the planet, actually saw it’s Yen appreciate against the dollar after monetizing and infusing 350 billion into it’s financial markets amid talk of selling some off some treasuries and issuing fresh debt of it’s own. The logic suggests though that the Yen should have weakened as if inflation were to suddenly break out on news of a lot of fresh money printing.

rmsimc April 4, 2011, 12:49 pm

Cam…respectfully, you are ignoring the G7 intervention imposed to defend the Yen. The G7 was very afraid of what foreign asset sales would do to the Yen carry trade so they defended the Yen to keep the carry trade intact. Otherwise, the Fed would have to buy even more UST’s.

DarkMath April 4, 2011, 3:21 pm

Replying to Cam Fitzgerald,

The Yen has been buoyed by the Fed’s money pump. The argument goes:

1) The US Treasury runs deficits allowing the US to buy more Japanese goods than they could otherwise.
2) Japan is inundated with Dollars. They can’t use dollars. They sell some of their Dollars to buy Yen. The Yen RISES.
3) They take the rest of their Dollars and buy US Debt.
4) GoTo step 1) and repeat.

The “Yen Carry Trade” is also collapsing at the moment which causes the Yen to rise ironically because it’s such a weak currency:

1) Investors borrow Yen at near %0 interest.
2) Investors take Yen and buy higher yielding assets.
3) As long as the Yen devalues Investor makes money.
4) If there’s a hiccup then Investor needs to unwind the Carry and BUY BACK YEN. This causes Yen TO RISE.

Rick Ackerman April 4, 2011, 4:45 pm

Has trillions of dollars’ worth of Fed monetization put a single inflated dime in your pocket or bank account?

DarkMath April 4, 2011, 5:22 pm

“Has trillions of dollars’ worth of Fed monetization put a single inflated dime in your pocket or bank account?”

That’s not the point. I don’t have any more money in my pocket but the stuff I’m buying is getting more expensive (gas, food etc). It’s still the same result. I can buy fewer and fewer things.

Do you see the difference?

You’re thinking of Dollar holders bidding up prices because they have so many of them. That’s only half the picture.
Prices can ALSO rise if the Dollar falls in value and can buy fewer and fewer goods.

&&&&&&

Just so — and please think about what you’ve said. I would ask, how will the ability to buy fewer goods feed inflation? The question becomes even more pointed when you ask it thus: How much CPI inflation can we have, even for essential goods, if real incomes remain stagnant? RA

DarkMath April 4, 2011, 6:45 pm

Rick,

“I would ask, how will the ability to buy fewer goods feed inflation?”

Your question makes me think you didn’t understand my explanation. The ability to buy fewer goods is caused by inflation.

Again your question is thinking only of the Supply side of the Supply/Demand equation. If the Supply of dollars rises because Americans wages rise and bid up goods then you would see Inflation.

However IF THE DEMAND FOR THOSE DOLLARS FALL then prices will ALSO rise.

In other words:

Supply of Dollars * 2 = Prices Rise by a factor of 2
Demand for Dollars / 2 = Prices Rise by a factor of 2

Prices Rise in both cases – we’re talking about two sides of the same coin.

SJB April 4, 2011, 9:42 pm

Hi Rick,

I bring you a challenge… from the hyperinflationist camp. Namely, me. Here’s my case for it:

http://sgtreport.com/2011/04/whos-ready-for-some-dollar-depreciation/

I’m, I suppose, what you’d call and Austrian economist. gold is money. paper is currency, and currency is not money. I’ve written more on this here:

http://sgtreport.com/2011/03/redefining-the-terms/

Now, to quote you:

>> 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 would deign to suggest
>> that the financial system will continue to
>> muddle along without collapsing.

QUESTION 1) “where the money will come from to bid tangible assets skyward”

Rick, The paper interest rate swaps derivatives markets are currently worth $583 trillion… Please pause here, and reflect on that number… $583 trillion is $583,000,000,000,000… That is $1.89 million ($1,888,286.40 to be exact) for each, and every single one of the 308,745,538 citizens of the United States of America.

I would say that if Bart Clilton’s “Race to the Bottom” happens, as he said it will happen if dodd-frank is enforced, then it’s pretty clear that there are ALREADY markets which contain enough currency to make everyone in America a “poor millionaire”. I’m not saying that each American will get “their share” of the money, but that it is clealy enough currency that once it leaves the interest rate swaps derivatives markets, it will big the price of SOMETHING up much much much much higher… I assume commodiets and hard assets, as we’re already in a real estate bubble, a bond bubble, and a stock bubble. There’s no bubble left to inflate.

Now, inflation will start slowly at first. Maybe the price of everything will “only” double from all this ‘QE’. the U.S gov’t is SOOO big, once they give in to demands for higher salaries, to cover inflation, the vortex of death has begun…

The more prices go up, the more people demand to be paid.
The more people demand to be paid, the more prices go up.

We’d be seeing more of this already, except the CPI is a LIE, and most people haven’t figured that out yet, so they haven’t been smart enough to demand more pay yet. It’s coming.

Do you suppose that the $583 trillion interest rate swaps derivatives market will grow forever? At some point, a “race to the bottom” is coming. Where’s a half-QUADRILLION gonna go, if not into hard assets?

http://sgtreport.com/2011/03/cftcs-chilton-says-global-swaps-markets-face-risk-of-race-to-the-bottom/

I’m in agreement with Peter Schiff here…. when NOBODY will buy bonds, specifically municipal bonds, I think the Federal Reserve will start monetizing the debt to buy the bonds… not just US govt treasuries, but also keeping, among others, the state of califorinia afloat, etc.

QUESTION 2) flat-earthers who would deign to suggest that the financial system will continue to muddle along without collapsing.

The collapse is coming, and “deflation” (where gold is money, and prices drop relative to gold) is coming as well, but there will be absolutely no deflation measured in fiat dollars…. not unless they stop printing currency. We can only have “deflation” is Ben Bernanke allows the supply of dollars to dry up.

Cam Fitzgerald April 5, 2011, 1:43 am

“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” ~~Rick Ackerman
————————————————————-

I think the above remark is a terrific observation. Going back to my mention of Japan earlier I should have stated that there is in fact one single country on the planet with a worse debt/GDP ratio.

That country is Zimbabwe of course and we can easily see how politics influenced the currency destruction there as Robert Mugabe’s policies led to the destruction of most interests of that countries financial sector.

So, two countries, both with terrible debt positions relative to economic activity and two very different outcomes. One was designed to hurt the interests of the “white settlers” who the Mugabe regime believed held too much power and influence, the other controlled by the financial sector and monied interests who would always prefer stability and inclusion over the politics of financial revenge.

If anything ever told us to get off the debt train now before it is too late, this might be it. The bills will somehow have to be settled eventually whether by debtors or creditors or both but there is a big difference between being neck-deep in a debt swamp versus being in up to the eyeballs.



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