The stock market wafted last week into a psychologically surreal zone somewhere between terror and, if not greed, then at least jittery optimism. How can stocks rally at all when no one can predict whether the deadly spread of coronavirus is about to overwhelm America as it did Italy? The economic picture remains just as murky, since odds the global economy will fall into a full-blown depression are probably no better than 50-50 right now.

Granted, two trillion dollars worth of consumer stimulus is bound to produce short-term benefits and a fleeting bounce on Wall Street. Were you aware that much of that money is in the form of loans that will allow employers to avoid laying off even a single worker? The loans are structured as gifts, and if you borrow a few million dollars now and don’t furlough any employees, there’s reportedly a good chance the debt will be forgiven. This effectively creates a months-long paid vacation for the idle at the expense of those who are working. Or perhaps not; for if those still on the job are not taxed at some point to pay for this epic giveaway, the money will have come, so to speak, from trees. To use another metaphor, it would be the torrent of helicopter money that Ben Bernanke famously asserted could prevent the U.S. economy from getting crushed by deflation.

An Ethereal $88 Trillion

Could halting the reversal of American’s long run of prosperity be as simple as printing tons of money? I somehow doubt it. But I am still not quite ready to cede the endgame to the inflationists. For even if a series of bailouts injects as much as $2o trillion into the system, that would still be far less than the sum remaining to be deflated from the asset side of America’s ethereal balance sheet. At early February’s peak, we owned in the aggregate about $32 trillion dollars worth of residential real estate, $16 trillion of commercial property and $40 trillion in stocks, for a total of $88 trillion. This sum was effectively reduced by $15 trillion when the stock market bottomed on March 23. Does anyone actually believe the low is in? In any event, real estate has not yet begun to collapse because transactions have temporarily dried up.  But when price discovery returns to this crucial store of the nation’s wealth, it stands to be an even more powerful deflator than falling share prices. Indeed, were property values to fall as hard as they did during the 2007-08 crash, it would reduce the private sector’s balance sheet by a further $16 trillion.

So where does that leave us?  Better sit down for this, because those assets, all $88 trillion worth, are just a drop in the bucket compared to the financial derivatives edifice for which they, along with the world’s supply of oil and natural gas, are the chief source of collateral. Financial derivatives constitute a $1.5 quadrillion-dollar market — that’s $1,500,000,000,000,000 — and even a thousand helicopters filled with Benjamins could not keep this black hole from imploding once the process starts. Nor is it certain whether Nancy Pelosi and her ilk, presented with an unparalleled opportunity to give away vastly more OPM than all of their predecessors combined, will be able to muster the crazy gumption to undertake fiscal countermeasures commensurate with the problem.

All Eyes on Illinois

But here’s the wild card: the great state of Illinois, birthplace of Abraham Lincoln and Ronald Reagan. Its pension plan is headed toward certain bankruptcy, undoubtedly sooner rather than later, and it remains to be seen whether Uncle Sam will go “all-in” attempting to save it.  If so, you can be sure that two dozen other tottering states, including California, New York, New Jersey, Connecticut and Massachusetts, will scream “Help!!” I rate the political outcome a toss-up, because even the dumbest lawmaker on Capitol Hill — AOC, to name names —  can probably see that only a hyperinflation could result. This would not be your grandmother’s QE, where the mountebanks who run the central bank are tasked merely with pumping up stocks and real estate via easy credit. No sirree, this is the kind of monetization that would require sending out checks every month to more than a million recipients. Provide the same free lunch, in perpetuity, to every public-job retiree in every tottering state, and Fed helicopter money would soon lurch toward infinity. The predictable result after just a few months is that the $1687 check the Illinois DOT retiree receives every four weeks would buy a meager assortment of groceries. This outcome is so obvious that even Pelosi and AOL would see it coming.

That doesn’t mean we can rule out an open-ended bailout, since it is politicians and their lackeys on the Open Market Committee who would decide. Assuming they agree, as is their wont, that “Voters will LOVE this!” we are no longer talking about a mere $20 trillion bailout, but one with no practical limit. This would come on top of national debt that is already at $23 trillion and growing by an unprecedented $500 billion a month. The Guvmint will eventually have to cap interest rates, since allowing them to rise to market levels would raise the burden of debt for all of us to a fatal threshold. Under such circumstances, the Fed would become the only buyer of Treasury paper — not because the banksters are economic dunces, which they manifestly are, but because their role as lender of last resort remains legally unconstrained and politically unimagined.

Boxcars of Digital Money

Before hyperinflation erupts with the force of ten H-bombs, I expect deflation to play out ruinously in the private sector, impelled by a crash in real estate, commodities,  household and business income. When the Guvmint comes riding to the rescue in a way that dwarfs the paltry trillions advanced us so far, that’s when hyperinflation will take off. It will probably play out more quickly than the Weimar hyperinflation of 1921-24, since the means to effect it are digital rather than via boxcars stuffed to the roof with paper currency. This scenario will be extremely tricky for those who would secure their economic future with gold and silver. That’s because bullion will be trying urgently to separate out the mere suspicion that fiat currency’s days are numbered from the actual moment of its inevitable demise. Although I have long doubted gold could soar to the sensational heights predicted by some seers, I am now open to the possibility. I have remained firmly in the deflationist camp for more 30 years because I believed cumulative debt would eventually act like a black hole, sucking us into its maw so slowly at first that we would not feel the pull until it became irresistible. The pandemic has altered this dynamic by giving politicians and banksters a popular excuse for making mind-blowingly reckless decisions that are happening too quickly to challenge or resist. If the courage and sanity to oppose them exists, it will surface in token op-ed essays by the few who understand why money needs to be backed by something scarce that has real and enduring value.