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Finally, a Hyperinflation Argument That Persuades
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.
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So history gives us not a single example whereby political phenomena have caused the herd to behave in unintended ways? Do feelings and viewpoints of any human exist in perpetuity or are we capable of change?
What I want to know is how exactly one can be a deflationist AND ignore the inevitable loss of faith in the currency (for example, through failed auction)? It seems to me that both deflationists and hyperinflationists are both hyperinflationists... they only disagree about what is in between now and our hyperinflationary depression. I'm not really sure it is even a fruitful exercise to try and guess... Given some rudimentary constraints (such as insurmountable debt), all camps are logically hyperinflationists.
$10 says it'll be bad either way. No matter what stupid shit you take time to write, or regurtitate via your keyboard.
i will second that and add $990 to that.
most all answers lie in WHAT is happening, not WHY. The why will reveal itself later. you can take the WHAT to the vault and hire all the WHY's so they can feed themselves and their families.It's just the right thing to do. Otherwise society will be a mentally broken place as the WHY seekers...just cannot understand why this is happening.
Now THAT is a well-spoken response. +1000
Why did you take the time to write that "stupid shit?"
$10 says it's because you, like everyone else, me included, can't STAND to just let things be.
Respect for a considered change of heart. FOFOA's ideas are very interesting. I wish he had more sentiment for silver, though. I think inflation is here to make us all get on the precious metals bandwagon before the monetary change from paper to metal takes place.
.
Rick, welcome aboard. I retract my comment about you being the blogosphere equivalent of Jon Nadler (the actual Kitco stooge, not any anonymous forum poster.)
Freegold, bitchez!
I am a Lesbian! a Loud and Proud Lesbian!
Just kidding, I am done with those evil fucking bitches!
Let them ALL! get half from some other idiot!
On a lighter note, I also cop to being a raging lesbian.. Trapped in a man's body..
They have a surgery for that. ;)
Ha, no thanks..
You have earned my respect. A reversal of your position took guts. I went throuhg FOFOA's post and it has caused me to re-think my silver positions.
I contemplated FOFOA's opinions on silver, too.
He is brilliant, no doubt, but the multiple reasons I started buying silver in 2003 remain in full force and effect.
Ain't sellin' mah silva until it reaches my target.
If it gets to $150 I will have been long gone.
It is INSURANCE. Nothing more.
(Besides I have liked silver coins since I was a kid.)
I am so sorry. This is embarrassing. What does FOFOA stand for?
Friends Of Friends Of America.
http://fofoa.blogspot.com
The best rational debate around about why you should be a gold-bug ;)
There are many places to start when discovering FOFOA here are three:
http://fofoa.blogspot.com/2010/09/shoeshine-boy.html
http://fofoa.blogspot.com/2010/12/freegold-in-proper-perspective.html
http://fofoa.blogspot.com/2011/01/reference-point-gold-update-1.html
ANother started posting on USA gold over 10 years ago.
Friend of Another carried on the "view from a far"
Friend of Friend of Another 2.4 years ago started his blog which rounds up and collates the amazing insights of A/FOA whilst adding some more than a few of his own.
FOFOA is the reason I am a gold bug.
Enjoy.
Here's your shoeshine boy:
I just got done texting with a very young, very good old friend of mine who lives in Texas, is relatively poor, a waitress, is newly pregnant, unmarried and in many ways sadly unfortunate. But suprisingly intelligent all that notwithstanding...
She said: "I think things are about to get a lot worse...."
Another Texas gal here. I admit that I thought the root of the problem was political at one time. Got over that. Was a reader on Roubini's blog before the collapse and had a ringside seat so to speak. I used to send articles and posts to friends. They weren't generally appreciated. After the fall when the MSM picked up a bit I dropped it.
Just this past weekend I was at a salon and the esthetician mentioned that she used to work at a luxury spa that went under; said that she thinks things are going to get much worse than most people expect. Makes me wonder how many of "us" are around.
Not surprising. Give people more credit. The only people I talk with who don't understand that "things are about to get a lot worse" are people who are trapped on the left side of the left-right paradigm, the Obama "true believers." To them, anyone who believes that things are about to get a lot worse are racists. That is the extent of their analysis.
I don't fear black, I fear red
second that. Soft spoken, visionary, brilliant.
Friend of Friend of Another
Quite CRYPTIC, no?
Friend of Friend of Another
Quite crytic, no?
It all started with Another's (Thoughts), here:
http://www.usagold.com/goldtrail/archives/another1.html
First was Another. Then Friend of Another. Now Friend of Friend of Another.
If you like gold, and have a few months of free time, dig into their database of previous articles.
This one referenced by Rick is well worth the time to read.
Friend of a Friend Of Another
Thank you. Now: why should it be paid attention to?
I am not FOFOA's publicist. Read the information and make up your own mind or would you like me to tell you what to do, I can do that if you need it..
No, thank you smart ass, It's just that I'm not afraid to expose the fact that there are things of which I am unaware. I was simply looking for someone's rationale for paying attention to this particular blog. I had never heard of it. Sue me.
Sheesh.
mtomato2,
I'll give it a go, though I'm by no means professionally qualified to do so.
Why listen to FOFOA?.......3 part answer:
1.) From my own due diligence of network observation. After 3+ years of studying our monetary system and 'going down the rabbit hole', so to speak, I've felt my way along an enormous network of thoughts and ideas by various bloggers and financial experts. Along the way some of these formed, what I will call 'nodes of ideas' or, 'nodes of expertise'. I discovered ZH to be one of these nodes over 2 years ago. Mish, Jesse, Rick A., John Hussman, Jeremy Grantham, Bill Gross, etc.. formed others. Once in a while there comes along a node of expertise that is a 'super node' - one which is a common denominator of several respected nodes. FOFOA is one of these super nodes in that many, highly respected industry thinkers know and respect his writings.
2.) Sometimes, when you hear the truth, it combines many of your own thoughts into a clearer picture than the pieces formed on their own. There is no other way for me to say this other than, "try it and see for yourself!"
3.) After reading Rick's words, if he doesn't lay down a damn good reason to listen to FOFOA, then what would it take? A Fast Money appearance? ;)
FOFOA, iTulip, and Martin Armstrong present thoroughly researched positions that are quite long. They publish these on a fairly infrequent basis. They put the stuff out there and don't get into personality tiffs or debate. You either read and agree, or you don't.
I learn from all, even Mish and Denninger.
I differ from all to some extent or another.
One must develop his own world view and theory.
Follow Happy FOFOA Bunny down the rabbit hole of fiat destruction:
http://fofoa.blogspot.com/
'You may be able to pay off your mortgage with proceeds from the sale of just a handful of gold coins.'
Gold is an essential component of a multi-asset portfolio, because of its tendency to be anticorrelated with stocks during the worst secular bear markets. This occurred in the 1930s (I'm speaking of gold stocks, since Frank Roosevelt seized bullion); the 1970s; and again in the past decade.
However, 'paying off a mortgage with proceeds from the sale of just a handful of gold coins' has rarely if ever happened. It requires, first, that you have a substantial fixed-rate mortgage. Most of the countries which have experienced hyperinflations (e.g., Latam in the 1980s; Zimbabwe) had primitive cash-based property markets where mortgages were rare, or unavailable except in sounder foreign currencies.
Second, one needs the exquisite timing to sell one's gold holdings just before hyperinflation's spike top burns out. This sell decision is no easier than determining, for example, whether today's silver price is the top of a spike, or just the low leading flank of a much higher run.
Third, ideally, one needs the ability to sell one's gold in an outside, stable country, where gold dealers possess the capital to pay in a sound currency, and then move the proceeds back into the wrecked hyperinflationary economy to buy at pennies on the dollar. Typically capital controls and harsh punishments for black market currency trading make this task difficult or impossible.
The upshot is that despite having read accounts of a number of hyperinflations, ranging from Weimar in the 1920s, to Lat Am in the 1980s, to Yugoslavia in the 1990s, to Zimbabwe in the last decade, I have yet to encounter a single documented instance in which someone paid off a mortgage with a 'handful of gold coins.'
If Rick Ackerman knows of such a case, I would be delighted to read about it. Otherwise, I will declare that his notion of obtaining an 'orders of magnitude' gain from gold coins is far-fetched, naive, and in fact should be interpreted from a contrarian standpoint as indicating a short-term top in precious metals prices. His essay is a standard version of the 'tiny to trillions' fantasy. It comes true occasionally -- for winners of the PowerBall lottery.
Good luck, punters, and call me when you get rich!
The point of paying off your mortgage with just a few gold coins is not that you'll get rich in doing so. Paying it off simply gets rid of debt that most people would otherwise carry through life. The people with first access to the churned-out cash will always be ahead of the rest of us in preserving purchase power, thus your house will be difficult to sell under a hyperinflation senario to people whose income is trying, but failing, to keep pace with inflation. The money you get for the house in a hyperinflation senario will be multiples of what it would sell for today, but the purchase power of that cash will be a fraction of the purchase power of the cash you'd get for it today.
I dont know about timing, but I do know if I can pay off my house with one gold coin, I'M DOING IT!!! top calling be damned!
Your post is so silly I almost didn't bother responding.
first, that you have a substantial fixed-rate mortgage.
Many Americans have that. Check.
Second, one needs the exquisite timing to sell one's gold holdings just before hyperinflation's spike top burns out.
Not true at all. One merely needs to have enough gold to sell (bought cheaply) at a substantial paper "profit" to choose an exit point for the portion of the gold bought for the purpose of paying off the mortgage. Check.
Third, ideally, one needs the ability to sell one's gold in an outside, stable country, where gold dealers possess the capital to pay in a sound currency, and then move the proceeds back into the wrecked hyperinflationary economy to buy at pennies on the dollar.
Wrong again. To pay off my USD-denominated mortgage, why do I need to convert my gold to foreign currency, then reconvert to USD? Check.
It takes some pretty big balls to admit you were wrong about something about which you have been so passionate about for so long, including up until the last few weeks. And for that I have a great deal of respect for Mr. Ackerman.
Whoops. This was supposed to be a reply to the article, not a reply to the above comment.
What's crazy is that Bernanke has the economic fate of the world in his hands. One guy. Unelected.
That's "THE Bernank" to you...
FOFOA ....... explains how all of the hyper-leveraged paper underlying the bubble is likely to be redeemed at face value.
Indeed, this has already happened as the Fed bought $2.5 trillion of MBS from the banks.
The old wisdom held that the Fed reduces money supply by selling the bonds it holds, but much of the toxic paper is worth 5 to 30 cents on the dollar. This implies 70 to 95% monetization that is irreversable.
The economy did not stop when that $2.5 trillion in toxics was monetized and it probably won't when $250 trillion is monetized. Of course then a gallon of gas will be $25 and a loaf of bread $15.
Rick Ackerman just proved he can change his views, which is more tha can be said for Denninger or Mish.
This also explains the rush to bailout AIGFP at 100 cents on the dollar. The elite wanted their money, so they could get full value for it before the denouement.
Welcome to the club....
You were "insprired by a man who said all the banks will be forced to repay all their debts." Yet they never have--ever. "We" own gold for the simple fact that interest rates and sovreign debt defaults are "only no biggie to the world financial media." Now "how much gold to buy your country again?"
Thanks for the article Rick. I appreciate your honesty and the willingness to admit a change of opinion/theory.
Rick, when QE2 ends will you go back to being a deflationista again?
QE will end when the system "prints out"...
before endlessly blubbering about inflation/hyperinflation
LETS FUCKING DEFINE WHAT INFLATION IS
#GOVERNMENT /FED
inflation is when prices+wages grow across the country
#monetarist
its when money +credit aggregates grows
#guy from street
its when prices are rising
#manufacturing guy
its when money/wages grows more then supply of stuff
or/and when cost of production grows (aka cost inflation)
so what is it ??? I don't now
I DO KNOW PERSONALLY that HYPERINFLATION IS WHEN GOVERNMENT PRINTS MONEY AND GIVE IT AWAY.. this is exactly what USA government have done for last 3 years
alx