So, it looks like I’m a hyperinflationist after all. Reminds me of the joke about the cowboy who chats up a woman at a bar – a lesbian, as it turns out. She tells him she spends her days thinking about nothing but women. “As soon as I get up in the morning, I think about women,” she says. “When I shower, I think about women. When I watch TV, I think about women. I even think about women when I eat. It seems that everything makes me think of women.” The cowboy goes home that night thinking that maybe he’s a lesbian too. Another tavern, another night: A stock broker strikes up a conversation with a stranger who seems obsessed with the idea that hyperinflation is about to wreck the economy. “From the moment I open my eyes in the morning, my head is filled with worries about how the financial system and the world’s currencies are hurtling toward disaster. Watching the stock market rise relentlessly, I grow more certain each day that it can only end badly. I think the real estate disaster has barely begun and that, for tens of millions of us, the American Dream is about to turn into a nightmare.” “Hmmm,” says the stockbroker. “I guess that makes me a hyperinflationist too.”

And so it goes. A conversation between a hardcore inflationist and an equally hardcore deflationist might meander for hours without generating much argumentative heat. That’s because both see the financial system in smoldering ruin after the smoke has cleared; it is only on the matter of how the disaster will unfold that they disagree. I’d thought until yesterday that deflation was far more likely to do us in, turning an endless Great Recession into a Second Great Depression. My scenario called for falling prices and wages, imploding asset values and an economy drowning in bankruptcies. Hyperinflationists are expecting a quite different endgame — one in which prices soar relative to fiat money, debtors pay off loans with confetti, creditors and savers are wiped out, and hoarders of bullion live like kings. I am now convinced, after stridently arguing the case for deflation since the late 1970s, that the hyperinflationists will be right.
Stunning Insights
Why have I changed my mind? For the answer, you’ll need to read FOFOA blogspot‘s latest essay,
Deflation or Hyperinflation? Nothing I had read before it even came close to making the case for hyperinflation, since the arguments seldom went beyond nebulous theories and shoot-from-the-hip speculation. This one does, though – and brilliantly: first by deconstructing my strongest arguments with great care and refuting them one by one; then by explaining how human nature itself, impelled by self-interest, will push our debt-addled financial system toward a hyperinflationary dénouement. There are some stunning insights along the way, the moreso because FOFOA is able to bring them to readers by making some heavy ideas go down like a soufflé. One of them, debated endlessly, questions whether the Powers That Be would “allow” a hyperinflation to occur, since that would render their financial assets worthless. FOFOA prepares us for his counterintuitive answer by recalling the joke about how, if you want to survive, you don’t actually need to outrun the bear that is chasing you and your friend. This could be said of the Masters of the Universe: They won’t have to outrun hyperinflation — only to outrun the madding hoards who will be as eager as they to unload dollars in exchange for real things.
FOFOA’s logic has extremely bullish implications for gold. I’ve always been bullish on the stuff myself regardless of whether it is hyperinflation or deflation that gets us. But I was never entirely comfortable with my own arguments, since deflation in theory would render hard cash more valuable than other assets, including bullion. Reading FOFOA’s essay, however, I had an epiphany when he cited a 2002 quote from inflationist Gary North: “I remember in 1975 hearing C. V. Myers tell attendees at a gold conference, ‘If you get this one wrong, you’ll lose everything.’ He was predicting deflation. He got it wrong. He didn’t lose everything.” The reason Myers didn’t lose everything was that he owned gold up the wazoo, even after it peaked at $850 in 1980. I know this because Myers wrote about it in his newsletter, but also because when I interviewed him at his Spokane home for a freelance article I’d pitched to Barron’s, he let me fondle the largest solid-gold nugget I’ve ever seen outside of the Smithsonian. It was sitting on his desk, along with rolls of gold coins that today would be worth as much as a house.
C.C. Myers’ Dictum
Some of you will know Vern Myers as one of my guiding lights. It was his 1977 book The Coming Deflation, with a logic that seemed immutable, that made me a deflationist. He argued, simply, that “Ultimately every penny of every debt must be paid – if not by the borrower, then by the lender.” This implied, for one, that if debtors walked away from their mortgages, it would reduce the wealth of their creditors by exactly the amount that had been owed. Deflationists would logically infer from this that a nearly quadrillion-dollar derivatives bubble that has yet to implode will shrink the world’s wealth by that amount when the collapse finally comes. However, FOFOA (whose identity apparently is a well-guarded secret) explains how all of the hyper-leveraged paper underlying the bubble is likely to be redeemed at face value. That would be hyperinflationary, of course, but those who are able to get their hands on the money first -i.e., the Masters of the Universe – will have a chance to spend it before it becomes completely worthless. This has implications for the mortgage debt that I have always insisted the Masters would not forsake by promoting a hyperinflation. More likely, explains FOFOA, is that home prices will go “hyper,” and that if you are prepared to swap gold for dollars at the perfect moment, you may be able to pay off your mortgage with proceeds from the sale of just a handful of gold coins.
This essays deserves to be read by the widest possible audience, since it explains so clearly why we must hold gold in preparation for the dollar’s collapse. As far as I am concerned, a more compelling argument for hyperinflation has yet to be made.
I agree with other posters that this has been a very fruitful debate. I didn't even know about FOFOA until I linked to it off of some blog I was reading a few days back. Lucky I did. Been reading old posts on it off and on for the past 2 days. Very thought provoking, indeed.
Rick has showed a lot of courage and perspicacity by being willing to adjust his opinion. That's the struggle we all have: to match our opinions and beliefs as closely to the real facts as we possibly can. This is harder than one might think when you consider all the baggage, propoganda, and shear amount of opinions and information out there.
My two cents: Credit deflation is a given. The political response to it is not. I tend to agree with the esteemed FOFOA that the most likely political response will be to inflate the currency, but there are other possibilities. Less likely, yes, but possible.
Nonetheless,TARP, TALF, ZIRP, QE1, QE-lite, QE2 tell us exactly which way the wind blows. It's blowing a tsunami of dollar debasement and a hurricane of hyperinflation right on to your front lawn. Prepare accordingly. http://therookiecynic.wordpress.com/
but I doubt any of them have been doing it for any other reason than self-interests.
Pfft! WTF other reason is required? Something along the lines of Marx...?
Err,,does the author of the piece have a blog? Does he have something to peddle? Why do Americans not do irony?
Question: If you'd subscribed to his blog for umpteen years, would you now ask for all those years' subscriptions back?
Hey Rick, cool to see your change of heart. FOFOA's a hard read for a fool like me, but even I managed this one.
Yesterday I tried to get our honorable Bruce of BKTV to chew on Fofoa vs Armstrong, but to no avail. He is big-gov-minutiae-man.
Rick, I'm stumbling for the difference between being a misguided lesbian and a dead wrong deflationist, but I digress. ;) I've followed the battle over the past few weeks with great interest. Credit where credit is due - you have been the lightning rod for the best debate I've seen on the net in the last 2.5 years, and you've been extremely honest. And it's not only been the best but I believe one of the most important debates. My hat is off to all who participated. You always had my respect even when you didn't have my agreement.
and FOFOA, hands down, an amazing piece.
Rick,
I hope this doesn't come across as patronizing, but it's damn refreshing to see someone publicly change their own 30 year old theory. You show much integrity. Welcome aboard, brother..
-Dave
Freegold, babies, freegold. Take it to $60k ie to the moon!
Some things will go up in price. Some things will go down. It will be the first hyper-inflationary depression, i.e. the very worst of possible worlds.
nut crackers suite!
There is one simple explanation for why hyperinflation is much more likely than deflation:
Hyperinflation benefits the very wealthy asset-owning classes. That is, their diversification and asset ownership allows them the "benefit" of riding out any kind of inflation on the back of increasing wealth that will minimally keep pace with the inflation curve. Meanwhile, the very poor lose nothing because they have nothing to lose. It is the middle class which will suffer.
Meanwhile, with deflation, the asset-owning classes will suffer dramatic losses in perceived wealth. In reality, they may keep pace with real wealth, but it won't seem that way. They will be faced with potential loss of payments on debt owed, further inhibiting their wealth potential. Meanwhile, the lower and middle classes will 'benefit' because their meager assets will be more "valuable" as compared to the relative prices of all things.
Deflation is dangerous and pernicious, but more beneficial to the poor and overall healthier for the economy because it performs a market based redistribution of wealth. Inflation is less dangerous but just as pernicious because it undermines the roots of wealth by eliminating the middle class and setting up a cadre of Oligarchs.
I'm not a class warrior. I don't believe that the wealthy are smart enough to have sat down and thought all this out and are doing because they seek to engage this warfare. No, I believe that it's happening because their perceptions of what is real and what is not real are very skewed. Bastiat wrote quit a bit about this kind of misperception, and it's amazing how people continue to fall for it all these years.
"And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works."
The people who own the $14T in US debt are really going to feel the pain. I think that lots of middle-income pension plans may own a bunch of this. In general, I think that inflation tends to help the young (who don't have many assets) and tends to hurt the elderly.
And those people who own short term US debt are also at risk. Someone might reason: "I only own 1 year US debt, so if inflation suddenly goes to 10%, that is the most that I could loose." However, the US government has a lot of short term debt that it needs to turn over, and if interest rates suddenly rise this could become a problem. So someone who owns a 1 year government bond might suddenly find that the government has unilaterally converted it to a 5 or 10 bond at the same interest.
Don't own US government debt people! If you feel you must own short term bonds, buy commercial paper, not government debt. Unlike the government, the private sector will probably not be allowed to change their repayment terms.
Fofoa sounds sexy if taken with cocoa and ginseng. Keep in mind the oriental touch from now on.
Very good post at Fofoa, I urge everyone to read it.
Anyone have a view, should the US go the hyperinflation route, how currenccies like the Euro & sterling might fare, or will we all be in the same boat.
I hope that in Europe/UK common sense might prevent hyperinflation, but who knows.
Must get some gold (after the correction).
You took the best view , a Giants view.
How would the bailout theory handle haircuts on Greek and/or Irish debt?
the .gov republican soicalists that built medicare part D want to turn medicare into a insurance subsidy... and push it with funding grants onto the states... if the tea party proves to not be a democrat ploy theres a real likelyhood of default (and not by inflation) but just people having to pay for their own bullshit theyve been selling themselves since the 80s (30 friggin' years)
.
deflation and the globalists are friggin' loosers boi
You can certainly have inflation and deflation at the same time. Currently there's deflation in wages, jobs, and middle-class investments. At the same time there's inflation in the cost of nearly all products with emphasis on food and energy.
... and taxes. There will certainly be inflation for years to come in taxes.
I do not know about of deflationists, but personally I believe that there must be a deflationary bust before a policy shift that spurs the start of the hyperinflation cycle. Where it seems that deflationists are polar opposites, at least in my deflationary view, it is only a matter of timing of which one comes first. The hyperinflationist waits for the "front Lawn dump" or the "helicopter drop", where the deflationist is seeking the events that will in the long run lead to mass printing. For the hold out deflationist, they are looking for the next wave the mortgage/ currency/ banking crisis that ultimately makes big ben feel the need for QE4 that Dwarfs the small numbers that they have currently been invented.
You're getting at a flaw in FOFOA's thesis. He says that if the asset side of a bank's balance sheet shrinks due to falling prices the liabilities, ie. deposits, remain. But the liabilities aren't deposits, they are book entries made in a fractional reserve banking system allowing for the creation of "money" out of thin air. When the assets decline in price this "money" goes poof, and because of massive leveraging capital is wiped out instantly. When this funny money disappears central banks will have to "print" countless trillions just to break even. They put a patch over this wound in 2009 when the did away with mark to market, but the lipstick will come off the pig eventually. Not to mix metaphors or anything.
Nice explanation R.
It doesn't take a rocket scientist to win this one. the inflationiists control all brances of government and the fed. so it won't be allowed to happen because these people make more with inflation than deflation. deflation helps the masses. when the currency is devalued, or they issue something new do you think these people won't already be in hard assets, that these folks don't know before it happens. it is only the sheep. like bernenke telling lies on camera that subprime would be contained all the time having secret meeting with the banks, treasury what to do when the thing inplodes.
Nothing worse than people who try to use logic for things. the goal is for the people to be the last to know, the bankers having hard assets, the people sell all their crap to pay for basics, the bankers have all. end game
maybe he has a large silver position, or Blythe told him to F-off when he asked her for a date.
Deflation or hyperinflation does not matter: either way, the elites have been totally recapitalized courtesy of Uncle Ben and have already been investing the free money (rather than lending like they said they would) into stocks and commodities especially oil. They are at least 3 steps ahead of the public and know very well how to play the game "heads I win, tails you lose". If another "black swan" event occurs, they will simply receive another bailout from their personal piggy bank: the Fed.
and why iceland is our only resort
So you buy gold, ride it to the moon, and pay off your house down the road with the trillions of inflated dollars your bullion buys you to do that wonderful trade. Then the IRS drops you a note saying, "Hey, we noticed you had a huge gain on your gold holdings, which is taxable, and, by the way, we decided to deem that the difference between what you paid off your debt for and its inflated value is a forgiveness of debt on which you owe more taxes." That is how this is going to play out for the average Joe and Josephine.
Maybe, but they better disarm the populace before they start knocking on doors to collect those taxes. I don't care what bank it is, who really wants to be a banker in a place like Afghanistan (which is where the world is headed)? In your scenario, the populace does nothing by eek out an existence. This is essentially a description of any third world country.
"In your scenario, the populace does nothing by eek out an existence."
Take away the credit cards and it sounds like exactly what we have now here in the USA.
or you go to bullionvault.com and get 404 or error: server not found.
Respect to you Mr. Ackerman for reading it and being open to new perspectives and reaching some new conclusion with your own meat computer. I love it and it shows tons of character and bravery. thanks you for caring enough to be someone who can do this.
I think there is possibly a third scenario in which the government declares a sort of financial marshal law. They put in price controls ala Zimbabwe. But then they also give allowances on all products. Sort of like WWII where you had to have a stamp to buy milk or gasoline. Sure some people will find a way to cheat like by getting homeless people to give them their stamps for pennies on the dollar, but overall I think it would be pretty effective. They could also say there will be strict penalties for anyone caught hoarding anything. It would be hard to enact which is why I think WWIII may be necessary. If they could get the opposition countries to agree to a non-nuclear war in which no super-advanced weapons were used (secretly of course), they could pull it off. We have always been at war with Eastasia.
I can see a scenario where we are in an actual war - not the ongoing 'kinetic military actions' we've had
for the last decade. The draft is re-instated, and rationing is implemented etc.
I love all the 'hyperinflationist' and gold silver guys jumping around and peeing on themselves these days as if these things are a lock.
Sure, cogent arguments can be and are made. I get it. I just don't think it is going to be so clear cut, simple or quick as people think. I can easily see a USD rally that cuts PMs in half this year and a larger deleveraging/deflation kick back in accross all asset classes. Then, when all the 'hyperinflationists' are stepping on their own dicks trying to explain what is happening and that maybe they are 'deflationists' we'll get a hyperinflationary event.
Furthermore, deflationists like Ackerman as well as practically all mainstream economists provide plenty of cover in the form of plausible deniability that hyperinflation would be the inevitable result.
Did he call you a shill Rick?
Rick deserves our applause for his intellectual honesty in changing his long held views in the face of cogent arguments. I too read the FOFOA article Rick referenced. Actually I had to read it twice to get the gist of it. Tough going, but very much worth the effort.
For what it's worth, after reading the original posts by Another and FOA, I believe FOFOA is better then the original. But then, I liked Godfather II better than the original.
What would happen if you converted term deposits in commercial banks into treasuries -these are not really deposits (checking accounts) but loans to the bank.
Leave the "assets" to so called risk capital and run utility banks to keep the payment system open.
The assets could be cleared using cash rather the credit and would get into rapid equilibrium with the economy.
Would you not increase the monetory base to a stable size relative to credit without Gold and inflation.
I know there is a flaw in my thinking but where is it ?
The flaw is that the banks have no capital.
Well yes, but I was not thinking of Banks providing credit.
In Ireland we now have banks that do not provide credit so therefore they have no function other then as storage units for currency.
Therefore why not hold goverment securities instead of term deposits !
The remaining cash / goverment securities will then clear the assets.
Under this scenario bank assets would much much less while the purchasing power of the currency would remain.
I know I'm missing something else however...................
Maybe outside jurisdictions with access to credit could distort the market again so therefore capital controls on inward flows of capital may be necessary.
But then again maybe I am missing something else.
I'm not sure exactly what you're suggesting. Maybe I'm just too dense. There have been suggestions in the U.S. to shift the overvalued assets to so-called "bad banks", but instead they eliminated mark to market accounting and injected liquidity into the insolvent banks by purchasing the bad assets at book value, thereby sticking the taxpayer with the loss.
@Richard E
Money in Banks is not really money - it is a artifact of credit.
Money is either goverment money - (cash / T bills) etc or private money (Gold , silver).
My suggestion is to effectively suspend the balance sheets of banks and let cash clear the assets on banks balance sheets.
The risk capital of banks can get 1cent on the dollar or whatever for these assets.
To provide a liquid large and democratic market all term deposits should be converted into cash / treasuries.
Basically I want to kill private credit creation stone f$£king dead.
Sounds like you want to get rid of fractional reserve lending. Lots of people are with you on that one.
Yep - Goverment money can be produced at let say 2% extra a year via a treasury and full deposit banks can risk their own money to get a return.
The system is self regulating as money is created or destroyed based on the PHYSICAL ECONOMY although its flaw is that it is vulnerable to outside CBs and foregin trade needs to be settled in some form of Gold settlement.
I admit to being a recovering deflationist...
Fool that I was!
That was before the Great Reverse Bank Robbery of 08.
lie for long enough time, and get enough to believe, and it becomes reality. Inflation continues until deflation is an extreme impossibility. greed, hope, fear and ignorance always remain as the markets and it's members change.
So Mr. Ackerman was was convinced to totally change his point of view by a 'talks the talk' Gold bug. Or did I miss something?
There's nothing in that blog that hasn't been said by a hundred other Gold bugs. Nothing new in it, or more convincing, as far as I could see.
I don't buy his reasoning for changing now, by reading THAT blog post, but hey!. Inflation has been going on for the best part of a century, why on earth would that change now?
I'm forever grateful that Gold bugs have been so vociferous (cyberspace-wise), but I doubt any of them have been doing it for any other reason than self-interests.
Read it 1.) in its entirety and, 2.) with an open mind absent confirmation bias before you comment. It's clear you did not do the first and may not have the capacity for the second.
Pfft! WTF other reason is required? Something along the lines of Marx...?
Hyperinflation is a loss of confidence in the currency; to some degree we have that now. Hyperinflation won't last very long, however, because there is no way to transmit it into wages. In Weimar, when the central bank printed it was distributed to people. In the current version, it goes only to banks. Money will never achieve hyper velocity because people are not getting their hands on any of this printed money.
You people should all read "When Money Dies".
Seems to me FOFOA's ideas in this department are potentially self defeating or, at least, self limiting. If hyperinflation is purely a political phenomenon and to "outrun the bear" the rest of us are tripped, have our shoelaces tied, etc., then why do the masses agree to go along with it? In other words, if the printing regime only benefits those who get access to the cash the quickest, then why will the rest of us stand idly by while our standard of living decreases and the cost of living skyrockets?
It seems as though the theory is based solely upon our political apathy. While I think this is a very fair guess (and certainly the last few decades would agree), I'm not certain that's exactly the trend... 80%+ of americans were against TARP... while I agree that we still have protests to collect more nominal entitlements, I'm just not as certain as FOFOA as to what will happen politically... especially considering some localities are net givers to the printer and have no incentive to continue with the printing regime... again, predicated on political apathy.
Seems to me there is a vice there... the more the printing regime benefits a select few, the more political pressure boils to benefit others... maybe they will continue to accept table scraps... but maybe not. [no need to mention the middle class because we are politically irrelevant].
Because the herd is either oblivious, doesn't know better, or doesn't care. You pick.