(We’re on a roll here, so I am letting this commentary run for a second consecutive day. My good friend Doug, a bear’s bear and no slouch when it comes to making pellucid sense of the Big Picture, characterized my thoughts on hyperinflation as “nutty,” but perhaps he has exaggerated. Readers? RA)
For nearly twenty years, we haven’t flinched from our prediction that the massive debt build-up of the last generation would precipitate out as a deflationary bust. That is what we still expect, although we now believe there is likely to be a hyperinflationary phase at some point as the financial system implodes. But the bottom line is that no matter how things play out, America’s standard of living will fall more steeply than at any other time since the Great Depression. As for the deflation-vs.-hyperinflation “debate,” it is useful only to the extent it helps predict how mortgage debtors will fare as this economic cataclysm plays out. We seriously doubt they will be “saved” by the kind of hyperinflation that would put hundred-thousand-dollar bills in Joe Homeowner’s wallet. Imagine how mortgage lenders would react if Joe could peel off three or four of those bills and say, “Okay, pal, we’re square.” This scenario will seem particularly unlikely to those who believe that these economic hard times have been engineered by Masters of the Universe intent on stealing our property. Trust us on this: If there’s a hyperinflation, it is the rentiers who will get screwed most ruinously, not the little guys.
Even so, that doesn’t rule out the prospect of a fleeting, hyperinflationary spike on the way down, since widespread notions concerning the dollar’s true value could change precipitously overnight. We mention this because notions are already beginning to change in ways that leave the dollar increasingly vulnerable to a global run. The exploding caldera of fear that will eventually bring this about bubbled to the surface yesterday when the Fed confirmed yet again that it is absolutely clueless about how to get the economy moving. The central bankers’ muddled talk of still more “quantitative easing” (QE2) is about as reassuring as the promise of more sanctions against Iran. Paul Krugman may be the last person in America who still believes that additional heaps of “stimulus” will do the trick. On Wall Street, however, the belief is clearly ascendant that QE2 will only wreck the dollar without providing any lift to the economy. That could explain why stocks fell yesterday while gold and silver soared. Not that the yahoos on Wall Street exhibited perfect knowledge. To the contrary, the broad averages shot up initially, driven by headless-chicken panic, and T-bonds finished the day with anomalously large gains despite the louche tittering about further easing.
Schiff’s Scenario
Peter Schiff has provided the most plausible scenario for a hyperinflation. He foresees a day when confidence in the dollar collapses, as it eventually must, forcing the Fed to become the sole buyer of Treasury debt. When municipal and corporate bond traders realize on that same day that there is no official support for their markets, private debt will go into a death spiral, forcing the Fed to monetize all bonds. Under the circumstances, the Fed would not become merely domestic debt’s buyer of last resort, but the only buyer. Voila! Hyperinflation.
It should be noted that it is not some certain quantity of money injected into the banking system that will cause hyperinflation; rather, it will be the repudiation of all dollars already in circulation. Holders of physical dollars will panic to exchange them for anything tangible, causing the dollar’s value to fall to zero in mere days. Everything needed to trigger this collapse is already in the pipeline, and it is only the truly benighted, Nobelist Paul Krugman foremost among them, who cannot see the obvious. As for mortgage debt, you will still owe $250,000 on your home the Day After, except that your home will be much more deeply underwater than before – worth perhaps $20,000 instead of $180,000. Mortgage lenders will have to work with you – work with scores of millions of homeowners who are in the same boat – to bring about a reconciliation. No one can predict how already-unpayable mortgage debt will ultimately be paid, but it is almost certain to require a radical change in our laws in order to avoid the kind of social upheaval that could jeopardize the very rule of law.
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What is most likely to happen:
1) prices of necessary items
( Food, medical care,
gasoline) will go up in dollar terms.
2) prices of unnecessary items (mcmansions, sailboats, vacation houses)
will go down in dollar terms.
inflation / deflation simultaneously – not one or the
other
3) the dollar will remain the legal means of exchange
in America, although if it’s value comes in to
question by a majority of Americans and or
foreigners – government will issue the “new
dollar” in another color or style and pretend to
“back” it with gold or treasury bonds “special
drawing rights” or whatever. The people will
be forced to use it because they have no choice.
Foreign governments will be allowed to exchange
their dollar or dollar equivalent holdings for the
new dollars – merely a bookkeeping exercize.
from Wikipedia:
“The Rentenmark (literally, “Security Mark”) (RM) was a currency issued on 15 November 1923 to stop the hyperinflation of 1922 and 1923 in Germany.
The Rentenmark replaced the Papiermark. Due to the economic crises in Germany after the Great War there was no gold available to back the currency. Therefore the Rentenbank, which issued the Rentenmark, mortgaged land and industrial goods worth 3.2 billion Rentenmark to back the new currency.
The Rentenmark was only an intermediate currency and was not legal tender. It was, however, accepted by the population and effectively stopped the inflation.”
3)Of course, it is to US gov’t advantage to keep interest rates low and create a slow devaluation of
the currency – they have pursued these same policies for years – essentially stealing wealth from the public
and from foreigners holding dollars or paper which
must be eventually exchanged for dollars – without passing more taxes. This will continue to occur unless a crisis backs US government in to a corner.
Each year, your bank account or paycheck erodes in
value – you are purposely forced into the markets to
try to keep up with inflation.
4) Wages in America will fall for most people except for persons with high demand skills that cannot be outsourced – or if you work for a politically connected business or have a government
job – politically connected union – etc…..
5) As wages and benefits fall in America and rise in
other nations – some jobs will return – but this cycle
will take many years. America will never enjoy the
same advantages it had after WWII again.
6) Socialism has been accepted by a majority of politicians and the public. Most people do not pay
any income tax and a high percentage of people receive government handouts – “benefits” now.
This process will continue into the future meaning
home ownership, automobile ownership, nights on
the town, expensive vacations – Materialism – will
be severely restricted except for the wealthy.
7) A European style tax system with rates of 50% to
70% will be gradually instituted.
8) If a social crisis does occur, all the old FDRoosevelt remedies will be tried. At some point,
segments of the population will work for food. Rationing of essential items, in a social crisis situation, is likely. People on social security will go to
the store and buy red tagged items at fixed prices.
These items will be produced by suppliers on government contract – the difference in the cost of
production and the sales price will be made up by
taxes on the private sector.
9) Government’s entire reaction to the current chain of events will be totally ineffectual and counterproductive – in economic terms – but in political terms – the crisis will be used to further
cement and augment government power. That is why this is not so much an economic crisis as a political crisis.
10) What is really happening, and is vastly more important than the rise or fall in any particular asset
value – is the generational change in the hearts and
minds of the American Public, from formerly being
free actors – people who thought their fate was in
THEIR hands – to people who accept government
as their savior. If losing 20% of their jobs and half
their retirement in rigged markets while the government gives billions to their banker buddies
won’t make the public revolt – then nothing short
of hunger will.
11) The Main Stream Media – which is owned by
people who think all of this is good – are in bed with
the government – and want to cement the media power – guaranteed profits forever – will keep the
public misinformed about all this – as they have been
doing for many years. Honest reporters will find
no home in the MSM.