[Addendum: I misread the date on Lira’s piece — his blog is not one of my regular stops on the Web —  and it turns out that it was written a year ago in August, not last month as erroneously noted. As readers may have surmised, however, that does not weaken or change my argument.  Nor would I claim that it weakens his, notwithstanding the fact that a prediction he made  more than a year has not panned out.  There is a lot of ruin in a global financial system, and although it sometimes seems as though ours may be no more than days from collapse, we all know how even terminal economic dysfunction, like lung cancer, can persist without producing the expected result. RA]

With deflation tightening its choke-hold on the global economy, we thought we’d drop in on our supposed nemesis, Gonzalo Lira, to see how he has been coping in these very un-hyperinflationary times.  To his credit, the erstwhile arch-inflationist, bending to reality, has acknowledged forthrightly that deflation rules the economic and financial worlds right now. “Yields are  low, unemployment up, CPI numbers are down (and under some metrics, negative) – in short, everything screams ‘deflation.’ ” He wrote those words a month ago in an essay entitled How Hyperinflation Will Happen, and although we are obliged to point out certain dangers in relying too heavily on the scenario he describes, readers should trust, as we do, that he has gotten the big picture right.  He asserts, for one, that economic recovery is no longer remotely possible for the U.S.  We agree. Nor, as he makes clear, is it a case of double-dipping into recession, as most economists and the mainstream media would have it;  as Lira flatly states, we never emerged from the first recession. The inevitable result, he says – and again we concur — is that an epic financial panic centered on the dollar’s collapse is coming, and it will push the U.S. from intractable recession into full-blown Depression.

As to how we might prepare for this, Lira has his ideas and we have ours. Possessing physical bullion in any form will be a part of the solution no matter what, as he would undoubtedly agree. Where we part company, however, is on the crucial question of whether any of us will be able to respond defensively, let alone advantageously, once the avalanche has begun.  While Lira talks about shifting assets from paper to real goods as hyperinflation plays out, our fear is that the dollar’s complete destruction will occur so swiftly – think May 2010’s flash crash, but on a global scale – that there will be no chance for anyone to liquidate intangibles (to whom?) in order to replace them with real goods. For all we know, the world’s bourses will be shuttered for a week or longer, diverting angry mobs to branch banks whose vaults, as the mobs are fated to discover, hold precious little cash.  Under the circumstances, it’s possible Americans will have no opportunity to get money out of banks, or cash out of stocks, much less catalyze a hyperinflation by shoveling dollars from who-knows-where into Lira’s short list of defensive assets: “residential property, as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added companies, like tech, aerospace or industrials.”

‘Burp’ Starts a Panic

Despite our concerns about the speed of the collapse, we think Lira’s description of how it is likely to trigger is not merely plausible, but riveting.  Since a summary would not do it justice, we’ve supplied the link above  In brief, however, he believes that a panic out of dollars will begin with a price “burp” in some essential commodity such as oil. A nervous market will seize on the idea as never before, turning it into a flight from U.S. paper and currency. Lira has imagined the entire collapse in such vivid detail that we expect most readers will find his scenario not merely plausible but compelling.   Still, some unanswerable questions will remain, including how securities regulators will react.  Will they quell the panic too quickly for events to play out as Lira has predicted? What if the commodity exchanges raise margin requirements to 100 percent as soon as panic hits? That would shut out nearly all players save those with cash.  Come to think of it, where would that cash come from – and what would even constitute “cash” in our totally digitized financial system?  Also, if the hedgies can somehow get their hands on piles of cash after miraculously liquidating stocks into a collapsing market and having their trades settle in just a day or two, how much of that cash could they deploy in commodities, given that lock-limit rules would effectively bar all but a lucky handful of bidders from getting aboard?

These are not niggling questions, but rather the reflections of someone who has spent quite a few years in the trading pits.  Now that I have raised these issues, perhaps more such questions will occur to you when you read Lira’s essay — critically, as you should.  The point is not to cut him down, but to help readers understand that it is impossible to predict with confidence how a hyperinflationary panic will play out.  Because of this, even diligent hoarders of physical gold and silver should not be comforted by the notion that they possess the “ultimate hedge.” While ingots, Maple Leafs, junk silver and such may prove to have been the best possible defense against financial Armageddon, there’s no guarantee that these tried-and-true investables will not be decimated in the interim by the increasingly powerful deflationary forces that are presently asphyxiating the world’s financial system.  And if gold does plummet, only to reverse course with a vengeance at some point thereafter, there’s no reason to think it will be easy to convert the metal, even priced astronomically in dollars, into farmland or other assets high on the pyramid of hard essentials.

We’re All ‘Ruinists’

We want readers to understand nonetheless that, despite any public disagreements we’ve had with inflationists in the past, we view the theoretical distance between us as slight. We are all of us Ruinists at heart, after all, and it is not the imminent, smoldering, wreck-of-an-economy that we see differently, only the path that takes us there.  If we have come to “see the light” of the hyperinflationists’ logic, it is through the realization that hyperinflation doesn’t need a push from rising wages or prices to occur — only the looming epiphany of the dollar’s worthlessness. At that level, and even though we still believe a hyperinflationary spike will only fleetingly disrupt an otherwise ruinously deflationary decade yet to be endured, we have no meaty bones to pick with Lira, or Gary North – or, even, with the volatile Jim Willie, whose work we have always enjoyed. Although they reacted with glee – and in one case, sadistic pleasure – when we wavered briefly in our steadfast commitment to deflationist arguments, we must concede that Lira had good reason to pounce as he did. (Our wife, with a Masters Degree in Speech and Rhetoric, told us the day after that our essay had more argumentative holes than a wheel of Swiss cheese.) But if Lira and other hyperinflationists are to be frank, they will need to acknowledge that there is no predicting the course of the coming crash, let alone the very crucial matter of whether the dollar’s plunge into de facto worthlessness is likely to occur in an hour, a day, a week, a month, or perhaps even longer.  Such details will ultimately matter, of course, and greatly, but we should have no illusions about handling them advantageously once the Day of Reckoning arrives.  Since the collapse could begin as soon as…TODAY!!,  now is the time to get ready.  On that note, we’ll leave you with a link to the book that we consider the best work on preparedness, Sean Brodrick’s The Ultimate Suburban Survivalist Guide.

***

If you want to be on top of our detailed forecasts and trading recommendations, and to have access to a chat room that draws top traders from around the world at all hours, click here for a free trial subscription to Rick’s Picks — or here to receive our commentary free each day.)