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The ‘How’ of a Collapse Is Not Our Only Concern
Our recent discussion of whether deflation or hyperinflation will lay waste to the economy elicited hundreds of responses. Two of particular interest are featured below. The first, from blogger Charles Hugh Smith, explains why it may be impossible to know with any certainty which of the two forces will prevail. The second, the thoughts of a Wyoming rancher, suggests that in a crisis, we may discover that our need for protein trumps concerns over gold, silver, Treasury paper and the dollar. Here’s Charles, in an excerpt from an e-mail I received from him several days ago:
I certainly wouldn’t want to debate anyone because my arguments are those of a trader, basically, not an economist. Maybe we will get hyperinflation, I don’t claim to know. What bothers me is the widespread conviction that hyperinflation is “guaranteed.” This smells like a one-sided trade to me, even if it more of a meme than a trade.
As we’ve both said, the other issue is, how do the Elites benefit from hyperinflation? The only answer I’ve ever received is “they’ve already bought gold.” Yeah, right. As I noted, there’s $7T in gold, total, half of which is owned by central banks, and there’s $160T in financial wealth to protect in the world. Even if gold went to $10K/oz there would be no more than $35 T in gold in private hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults, etc.) would be enough to establish a gold-backed currency. Meanwhile, the Financial Elites would have lost all their financial wealth. Have they really transferred all their wealth out of all financial instruments and totally into gold and land? If so, then owns the $160T in financial wealth?
This explanation — that the wealthy have already transferred their financial assets into gold and land and thus they don’t care if all money, bonds, mortgages, derivatives, insurance policies, etc. all go to zero and is wiped off the books as an asset—makes no sense because it doesn’t explain who is the bag holder to all this “fiat-based” wealth. If the wealthy don’t own all these financial assets, who does? Who did they sell it all to? Yet we know that the Financial Elites own all this financial wealth and thus it will not be in their self-interest to see it wiped out. Only debtors, i.e. Central States, want to see hyperinflation to wipe out their debt. But who considers all that sovereign debt an interest-paying asset? The Financial Elites, that’s who, along with politically powerful union pension funds, banks, etc.
Everyone seems to forget that debt is an asset to the guy on the other side of the trade. The debtor would love hyperinflation but the owner of the debt will resist hyperinflation with every fiber of his being — and that includes the Financial Elite who own the debt.
Only Political Choices
This is basically a “politics of experience” analysis, and very few are equipped to understand such an analysis, as it’s outside their econometric comfort zone. They prefer a deterministic financial analysis that there are “laws” of economics which lead to hyperinflation, etc. Meanwhile, for me, there are only political choices, a narrow band of which lead to hyperinflation and a bunch of others which do not. This kind of analysis doesn’t lend itself to refutation or confirmation by financial models of the sort being bandied about — it’s a behavioral analysis and a political one.
I have yet to see how banks and the Financial Elites would benefit from hyperinflation. Without getting too fancy, it’s obvious that holders of debt, those collecting interest on debt assets, would be wiped out by hyperinflation. Thus as a simple matter of self-interest, we can deduce they will not favor policies that lead to hyperinflation. If the owners of debt (Treasuries, mortgages, corporate debt, commercial paper, etc.) were politically powerless, then we could expect them to be steamrolled by those who would benefit from hyperinflation. But they are not politically powerless — it’s the debtors who are powerless, except for the Central State, and it’s beholden to the Financial Elites who have captured the political and regulatory classes that govern the State.
How Many Angels?
Maybe we will experience hyperinflation after all. I am a skeptic, not a true believer, but I am certainly open to it as a possibility. I think all the financial arguments are somewhat akin to biblical debates about how many angels can dance on the head of a pin. They are fundamentally deterministic and apolitical, while the actual process of setting policies that lead to hyperinflation is entirely political.
I have no econometric arguments against hyperinflation, I only have political ones. But since politics sets policy, then hyperinflation is necessarily a political choice. So a political analysis will trump an econometric one in my view.
But I could be wrong. As a basically poor person, I don’t have much of a stake in either outcome.
***
When Gold Wasn’t Valuable
And here, with the final word, is the rancher, who posted under the pseudonym Bed Rock:
The place I looked to see how to be prepared for a dollar collapse was in the journals of the pioneers who settled the frontiers in North America two to three hundred years ago. When moving to an unexplored region inside the frontier, and being months of hard travel away from any civilization where the necessities of life could be purchased, is basically where we all will be when commerce stops because of a dollar collapse.
Bartering works good, but money was not very valuable, even gold. The people needed a place to live that offered protection from the weather, water and food. Everything else was and is a luxury. The people who had the talents of building shelters and producing food prospered and those that came with family money either died or went home broke.
So what I took from this is, be prepared to use your hands. Surround yourself with good, honest people who have talents in the many life-saving areas needed to survive any circumstances that may be thrown at us. Raising chickens, making bread, treating sickness, making a garden, a carpenter, etc. You will know what you need for your area.
I am a rancher and produce enough beef to feed approximately 6,000 people. But having to do that without cheap fuel, fertilizer, and life-saving drugs for the cattle, I will produce much less. But protein is one of the necessities needed to survive and something the pioneers treasured. If you succeed and prosper as our great country makes its comeback, you will have moved up the ladder of social and economic ranking. Survival of the fittest, and we will be rid of all those who live off of government aid. So don’t be caught with just a lot of gold and silver when the collapse comes. Sell some and buy the tools you will need to survive so you can use the metals latter when civilization returns.
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That's my meter that S has not HTF in America, you still cant find anyone willing to work in the business.
Upon this thresh-hold of disaster
The birth of the eleventh plague
The fires burn at night,I begin to doubt
-The Smell of flesh-will ever fade away
The touch of Death is all around us
A thousand corpses block our way
A man-made germ makes almost everyone-
commit suicide
Just to rise and eat their dead
Night of the Living Dead
We're hunting humans
We're hunting humans
We're hunting humans
It's killing time everyday
Arable farm land is the only buy that has outpreformed gold and silver in the past 10 years, and for a good reason.
I do Aquaponics myself.
government price control bitchez
Forget it, Mr Ackerman may have been a long time deflationist, but it would seem he is starting to hedge his stance as he plays out the probabilities in his mind.
Changing the subject to the need for protiens only bring out the fact that this dumb farmer isn't going to accept paper for any veggies, eggs, or chicken. Silver, is acceptable, as well as other items of value. We prefer real toilet paper, so do take your FRN's elsewhere.
I bet you would accept farm hand labor for said items though.
corn cobs?
As someone who is still struggling over which side of the fence to fall on regarding inflation and deflation, I wonder if the good people of ZH could offer some thoughts brought up by this post.
1) If the banks are insolvent, and are essentially laden with bad debts that are kept off balance sheet, does this this not make them the debtors and not the lenders? Ergo, inflation may be just what they need to stay solvent.
2) Is it possible that there is a rift forming amongst the power elites as is evidenced by Bill Gross' actions?
3) Is there such a thing as hyper-deflation? Could this in fact be just as much of a doomsday scenario?
4) Fundamentally, I believe the "natural forces" of the market are moving towards deflation. It is only due to the enormous power of the FED to monetize that this is being prevented. Thus the scenario becomes... do nothing and allow deflation to occur. Or take action and cause inflation. This seems to make the inflationary scenario a matter of deliberate action lending credence to the poster's assertion that it will be a political consideration.
5) Am I correct in assuming that if the world decides to ditch the US dollar... those dollars will in turn come home and inflation will go screaming along into hyper-inflation?
Say what you will but this site is very educational. :)
"Fundamentally, I believe the "natural forces" of the market are moving towards deflation. It is only due to the enormous power of the FED to monetize that this is being prevented."
Every intelligent inflationist is inflationist precisely for this reason.
It is obvious that the natural outcome of the 2008 crisis was (hyper)deflation. The main reason why I hate deflationists is that they have not adjusted their speech at all since July 2007, conveniently ignoring the pharanoic support emanating from central banks and governments worldwide ever since.
Eggsxactly. I learnt that the hard way when i when i got my 6mnth+ puts in may june last year thinking that any more QE would need a severe market collapse before being instigated, nah-uh. QEII baby, just add it to the list of impossible ponzi perpetuation actions: negative real interest rates, QE1, QE1.5, QE2, TARP, suspension of M2M accounting, no penalties for wall street (hey just make those guys head of the treasury), bail-outs going straight to bonuses, etc etc etc! The writing is on the wall, your kidding yourself if you can't see it by this point.
Food & Ammo two words to live by in the coming year!!!! sold off all my gold & silver figured i will have plenty of it when i sell a few ounces of Beans,Rice,ect. when the shtf.
Currency is created and circulated through loans. When a loan is issued at a bank, an account is credited by the fed, and money can be withdrawn. When the debt is paid back or defaulted upon, the money disappears (comes off the books). And in order to pay for things like interest, there needs to be an ever increasing supply of new loans with increases the money supply. However, when this is not the case, the economy shrinks.
The real problem is that there is more debt than currency, which is shrinking the money supply and the real reason why the fed is printing money. And most consumers are tapped out, which means no more new loans.
Since, money is not lent from fixed pools or reserves but is created out of thin air when a loan is created, who is really on the other side of the loan? The bank? The bank is in the business in order to collect interest. Foreign debt? Just about all foreign nations print there own currency to purchase our debt. It is not like banks and governments have to earn the money that they create out of thin air.
The only real loser is the consumer who originated the loan.
i kind of like smith but i quit reading him a long time ago. he plays this game of pretend. and frankly i got tired of playing that game. so i moved on. denniger does the same thing.
"Bartering works good, but money was not very valuable, even gold."
Yep. Seems nobody wanted the stuff. Oh, wait, forgot about the '49ers, and the '51ers in Idaho, and all them folks. My bad.
Gold rush?
Blood Diamonds?
Steal the Silverware?
Next you'll be telling us that a pretty smile and a nice ass are worth something.
</sarcasm off>
A pretty smile and a nice arse still has 5 minutes of value for me...
Why don't the deflationists buy their FRNs in silence and leave us alone, instead of trying to spread their ridiculous and irrational beliefs?
If they were so convinced about the deflation hypothesis, would they need to come every week to inflationists to get some reassurance? I sure don't come to deflationist blogs.
Just four observations, because writing 1000 words about this stupid and outdated "debate" is not worth it:
1) No one said all the current elites were prepared for a serious inflation/an hyperinflation. Only the smart money. The 'new money' and show-business will get wiped out ; and paper money destruction serves exactly this purpose: redistribuate wealth with full force and brio, something deflation is incapable to achieve.
2) Deflation kills indebted States, hyperinflation reinforces them. Deflation prevents States from paying the police and the military, they get paid in priority when the printing presses are running. If you believe in deflation, you believe that the US government can sustain its debt when tax revenue is falling like a rock.
3) There has never been any deflation in Japan, except in the tortured mind of socialist macroeconomists and Keynesians, who think money equals intelligence and real goods, and that a 1% drop in nominal prices is an apocalyptic catastrophe. Instead of accepting the healthy market correction, which would have produced around 20% of CPI deflation, it has been fought will full force to maintain the economy in a zombified state. If there had really been a deflation in Japan, life there would be cheap, and it's absolutely not the case. Besides, when Japan experimented Quantitative Easing, it did create inflation, but did not stimulate bank lending, and was stopped a few months after starting for this reasons.
4) The 1929 deflation was really ridiculously low (just check the historical CPI prices), and stopped abruptly when Roosevelt ended the gold standard.
Daily I grow more and more convinced that it is because most of them (but not you, ZeroGovernment) are purposeful, agenda-driven disinformation agents for the political and financial elites, spreading misinformation, half-truths and outright lies to cloud the real issues and deflect attention away from the REAL threat (actually, a certainty), which is currency debasement along with the very real possibility of a US dollar collapse. I believe that most of this deflationary fearmongering is nothing but a disingenuous and dangerous smokescreen intended to prevent the average person from fleeing the fiat trap and seeking financial safety in the precious metals and commodities --- actions soon to be officially vilified, mark my words.
I don't think most are informed agents, because they are obviously too dumb for that and make too many spelling mistakes ; only those with big media exposition, like Nouriel Roubini or Paul Krugman. Roubini has been a fantastic tool to redirect the "doomer" crowd into deflation believing, thus dooming them to the same financial fate that awaits the sheeple.
When I'm talking about the "doomer crowd", I mean the people convinced by the end of the world, but who lack economic culture, in opposition to the people convinced by the end of the Western economy for legitimate economic and scientific reasons.
Those who are not informed agents are just economically and historically incult, repeating the anti-PMs and anti-commodities System mantra without ever thinking about the greater picture (in a few words: what would happen to the States and the ultraleveraged financial system if deflation is allowed to happen?).
Database warfare, fought with currencies, computers, binary data and theorems and algorithms; the citizens are the pawns (and the prawns).
Are there any real-life example of hyper-inflation we can learn from? Weimar, Zimbabe, south American counties? So, who benefitted from those situations? The poor, the middle class? Who ends up owning the hard assets, the property, the goods? Dunno, just asking.........
Yes. Sadly, there are innumerable real-world examples of high inflations, hyperinflations, and currency collapses that we can learn from --- a woeful legacy of the worldwide adoption of the perversion of central-banker fiat currency in the last century.
The lessons differ slightly from case to case, but one fact remains constant: it is the average citizen who is the loser, and the political and financial elite who are (sometimes) the winners.
In my mind akak, a winner is someone who can maintain their position of power through the disruption, attaining more assets at distressed prices cause you have the ability to borrow at the right time is just the gravy on top!
The people who benefit are those at the head of the system, its as simple as that. If you have the power the most assured way of losing it is the collapse of the system - banking can't deflation so the system relies on printing to sure up collapsing credit.
is QEII a fkn mystery to these guys!?!
how
The elites don't "own" the financial assets (ie bonds), that's for the pension funds. the elites enable the establishment and transfer of financial instruments. If you are the middleman in all financial transactions, what the fk do you care if the bonds lose value? Tell me how the instrument of the financial elite (banking) does in deflation? Its not about the end financial product but the intermediary system.
Fk the bonds, if you control the banking system you get to profit off the labour of society no matter where the value of money goes (providing you can survive deflation if it occurs: thank you mr. central banker).
Tell me brainiac - why the fk has the USD lost 96% of its value in the last 100 years and why has the GBP lost 91% in the last 40? Or that the pound sterling no longer = 1 pound of stirling silver? Cause the financial elite made an oopsie??
Edited for my shithouse spelling
This has been a nice thread, many fewer bobble heads than usual
What are any of you doing about it, even as a small scale hedge?
20lbs bags of rice at the grocery for 11.95 are my weekly comfort purchases. BOGO canned items with long shelf lives bought with manufacturer coupons off the net at 25% of retail. Guns, bullets, a couple of generators. Canadian mining companies. Some bullion, but it's hard to justify paying a 10% premium for bullion when you easily shop using the net for canned protein 75% off - I'll give Rick that point, protein is currency if all goes to shit. On the other hand, 2000 cans are harder to transport than an ounce of gold. And 5 oz of gold would be 10,000 cans, bought properly. The problem with Rick's argument for deflation is that deflation means the dollar buys more, and one thing the Financial Elite can't quite control is confidence in fiat currency, and they know this. It's not like all their preferred options are necessarily on the table.
I hope we don't get tired of rotating the stock pile of rice and beans and corn (and canned tuna and chicken). First in, first into our bellies!
It's good the silver and gold don't need stock rotation.
++
Rick, your logic overlooks the possibility that there are levels of survival the Financial Elite may be prepared to accept.
http://www.youtube.com/watch?v=H85hdn9a6KM
oH yEA, i FORGOT, IF WE CATCH PELOSI, IT CAN BE AN ''ALL YOU CAN EAT'' BBQ. THERE SHOULD BE PLENTY OF LEFTOVERS.
This whole situation with the so called ''elites'' is getting out of hand. I have my own special name for them that can't even be repeated here. I say that when the shtf, we eat the elites. That will leave a grand message for the future elites [if they so dare try again] Maybe a fundraiser for the downtrodden [there should be plenty after the collapse. ''ELITE BBQ to BENEFIT THE LESS FORTUNATE'' ''TICKETS $5'' [in silver coin]
The elites will do what they always do... steal.
They control the thugs and killers (cops and military), and as long as that is true, they will simply steal whatever they want. When collapse comes, it is not economics that keeps you alive, it is availability and production of basics goods combined with lots of guns, ammo and trained snipers.
While it is true that the elites will not benefit from hyper inflation, the elites nevertheless derive huge benefit from policies designed to keep the institutions alive that serve as their toll booths.
These policies are designed to produce "moderate inflation" which in times of protracted crisis can produce unintended hyper inflation.
Hyper inflation is the unintended panic out of financial assets denominated in a fiat currency. It happens quickly and is never the intention of those who put in place a monetary expansion designed to buy time for wounded institutions to heal. Print long enough for recency bias to kick in, and markets begin to assume the authorities will print forever. Then you are off to the races.
For elites in trouble, institutional survival trumps all other concerns, and their proximity to that trouble blinds them to the inflationary danger. "How can we have inflation when my bank/brokerage/investment bank is insolvent and is being propped up by central bank loans of printed money and suspending mark-to-market? As long as these institutions that all my friends and I depend upon for a living are in such terrible shape, the central bank can print all it wants.!"
That is how hyperinflation starts.
This is one reason why we need a sharp Mad Max collapse in which everything burns. Any laws and institutions that survive will be spores of corruption, like cells that split off from the main tumor. Also, individuals, communities, and the internet have much faster reflexes than the NWO. A ninja might have a chance against a T. Rex.
Some say,"You can't eat gold."
My response, "You can't eat beef!"
http://www.suite101.com/content/dangers-in-the-fridge-a274946
...or sea weed...or sushi...or tuna.....and so it goes.
ROFL.
Yeah but you can't EAT cattle.
Oh wait a sec...strike that.
Living on an island in the Pacific north west. Took over an old, long neglected homestead site. Have a couple of boats and harvest the sea. Plenty of game around to hunt - deer, pheasant, duck etc. Along with some farming, it looked pretty damned good!
Then along came Fukushima! Oh well. What can you do? Glow in the dark?
What would the Wall Street elite do? They do not have land to farm, or the tools to farm any land they may have. All of those living in high rises. What would happen without food or energy or even trash pick up. I do not envy them if there is collapse.
They will all be running to try to buy someones farm with all of their Gold but people will be unwilling to sell as they will need that farm to survive. And as one of your commenters said who wants Gold when what you need is land to make food. Maybe they will end up trading an ounce of gold for a good steak and that is assuming that someone will trade a steak for Gold.
WB, good choice of posts to contrast, but imho, the rancher has a better grip on the more strategic implications of what's going on worldwide that the trader as he takes a more tactical and focused view, makes sense though as he is a trader.
Me, I'm neither, just your AWM blue collar working stiff so I see things from the ground floor, and to be honest it's where I prefer to be.
And from this vantage point I see the economic maelstrom gripping the world as just one agenda of many that I'm thinking will culminate in a paradigm shift to the world order and how things work. The other agendas in play are the green IPCC climate knuckleheads, UN agenda 21 sustainable development goons, codex alimentarius proponents, king O & Sharpton race baiters, greedy turds, and so on. Much like a global chessboard the pieces being coerced to move by players both seen and unseen. Conspiracy theory, possibly. Either way, I for one am hoping for the best and preparing for the worst.
"Either way, I for one am hoping for the best and preparing for the worst."
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Somebody help me with my coffee prep please, Thats one thing that I cant live without...Whats the best long term solution/type/brand etc...
I always stock up at holidays for the entire year. Thanksgiving and Christmas. Maybe they will have some sales for Easter.
I still have some in stock I bought 2 years ago (the large canasters) for $4.99 Last Christmas I added at $5.99. It stays fresh and I never run out.
I think it's time to take a "Texas hedge" position in cattle.
(Texas hedge = 100% long)
Rick is assuming that the financial elites are choosing hyperinflation to benefit them.
There are two options only. To default and go bust or to destroy the dollar completely leading to hyperinflation. Under the former, they wind up with nothing. Under the latter, they'll still be in the position of power, to setup the new world order. Remember that they own a lot of the houses now. I see them becoming landlords.
"There are two options only. To default and go bust or to destroy the dollar completely leading to hyperinflation."
Either option will arrive at the same basic destination, the people will be screwed either way. The only advantage of destroying the dollar is that it buys time. There is that .00001% chance that a miracle will happen. You never know, aliens or God may come down to earth in the meantime and rescue us before TSHTF, in which case Bernanke will be considered a hero for delaying the pain. (or maybe Bernanke is God.)
Rick, thank you for provoking an important discussion - and for coming back after the body blows.
It's appreciated... even though I see printing as the only method corpgov has of staving off the masses. Not to mention the OTC derivs.
Learn something every day around here...
I lived in Israel during the early 1980's, inflation was rampant. Dollar bank accounts were restricted, I had to show my passport and a current visa to have a dollar account. Israelis had two currency substitutes that preserved wealth for the common, not wealthy, person. They were bus tokens and postage stamps. One was good for a bus ride, the other, like our 'forever' stamp, was good to mail a letter. They would be worth the same no matter the inflation, or if the currency changed to another 'new' shekel. None of this mattered to me, of course, I had dollars and was not an Israeli. The joke was going around that they were going to change currency to the dollar, like Panama, except Reagan called up and said "No you can't, we can't handle the added inflation".