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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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I'll put it in math terms cause it is easier to understand.
inflation = increase in money supply, either reserves or credit. Money velocity > 1
deflatoin = decrease in money supply, either reserves or credit. Money velocity < 1
Hyperinflation is when Money Velocity = 0. To some of you that won't make sense, but think of it this way, prices do not go parabolic because of a rise in money supply, they go parabolic because of limited supply. Hyperinflation does not occur because their is a lot of money floating around, it is the loss of purchasing power that causes hyperinflation. When people stop accepting a currency as payment is when it collapses.
@Burnbright
thats the problem.. WHO FUCK SAID THAT ?
is it like Einstein's mc*c , or r Archimedes's PI?
I dont think so
tell me exactly who declared (names & what year) what inflation/hyperinflation..
its just concept like what is good burger w/ or w/out onions ?
and stop bullshiting about 'Money Fucking Velocity'
there's hundred billions financial transactions in world per year and w/ billions of people..
HOW FUCK CAN YOU EVEN CALCULATE VELOCITY (aka rate of change) ?
thats all look cool in PHD's book and fancy formulas, in real life where's NO such thing like money velocity..
if you can calculate money velocity for whole country , so you must be able do it for yourself ?
what was your personal money velocity in 2010?
cant wait to hear
alx
You make a very basic mistake. If you pour water into a bucket, the level increases, except if there is a large hole in the bottom of the bucket. You are ignoring the hole in the bottom of the bucket.
Most people here are monetarists. They would claim that if you increase the money supply without a commensurate increase in real economic goods for sale, prices will increase as people bid them upwards with the increased amount of money.
But despite all of the money pumped into the system from 2008-11, the money supply has fallen when measured by the M3 definition.
http://www.shadowstats.com/charts/monetary-base-money-supply
Massive amounts of credit have become destroyed. That fact supports the faction here that describes the current phenomenon as "bi-flation", where assets, like homes, requiring credit to purchase, are declining in value, while items usually paid for in cash are seeing price increases.
I see the hyperinflation/deflation argument as basically depending on whether the Fed can balance credit contraction against QE in an atmosphere where they cannot significantly increase interest rates to control the credit component of M3 due to the national debt and current budget deficit. Seems to me they are playing with fire, and it pisses me off that such power has been ceded to such a small circle of fallible men.
M3 is the wrong metric to measure commodity exposure to the inflationary pressure of printing.
My Websters unabridged defines inflation as:
A persistant substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency.
Any other definition is just smoke and mirrors designed to cover the fact that you are being screwed by the Fed and your elected officials.
Try reading the FOFOA article linked and your "I don't know" maybe solved (as Rick's was).
we've HAD financial asset inflation... it deflated...now it's back with a vengeance...we've had RE inflation...it's deflated, but not enuff!...we've had commodity inflation and sovereign debt inflation...and it's not deflated, on the contrary growing every day. As is RE inflation in China...so we need a major correction that WS and the FED DON'T want to admit, nor China...So now for two years we have general staginflation which will now go to hyper inflation if there is QE-3...Too many balls up in the air in the inflation spiral...capito?
After 30 years, confronted with the same evidence, you flip flop? Sounds like your subscription where down and in order to sell more blogs, you decided Hyperinflation would be more marketable. Joke.
I agree, and i doubt that Rick was won over. Notice how he claims to change his mind, yet the whole confession is short of facts.
dr no +100......
Don't think the title of this piece is accurate. Should be, Finally a hyperinflation argument that gets through my thick head.
:-)
Well if you want people to endless tout their wrong thinking all day long, you can always read up on Robotrader, Mathman, HarryWanger, Schmailes, etc.
Otherwise - it's better for someone to finally change their mind for rational reasons instead of touting wrong ones all day long. The world will be a better place if the Banana Bens and the Baracks of the world realize their own mistakes in their thought process..
Rick didnt. He changed his mind because of a blog post. He has seen the same data for 30 years, but no change in stance. Changing his mind because of steady increase in money supply data, rising CPI, and rising oil price would be based upon reason. He changed his mind because someone made a blog post.
Maybe he got tired of being a Jeremiah Johnson type deflationist, contrarian, out in the wilds, and finally joined the herd by riding into town...sad in a way...but maybe wiser!
I think Rick got wedded to a concept 34 years ago, and then on FOFOA he saw something that made him seriously re-examine his schema for the first time. Now he wants a divorce. It can be a no-fault divorce.
He ate his blackbirds, so why not move on?
Comments like this make me wish ZH had an "ignore user" feature.
It takes a big man to NOT ridicule someone who changes their mind based on thoughtful conviction.
Dr. No is NOT a big man.
I junked you. Not "LowProfile."
You guys make me laugh. A guy carrys a deflation flag for 30 years in the face of rising CPI every year, but continues steadfast. Then, when inflation fears are all the rage, FED balance sheets busting at the seems, he switches because of someone's blog post. Now he is a hyperinflationist. Not just an inflationist mind you, but a HYPERinflationist. Talk about playing to blog readers fears.
Whatever it takes. At least he is correct now. He will find that the hyperinflationary hypothesis proves truer and truer every day he holds it.
You can say that debt is money all you want, but that doesn't make it so. Only gold (in addition to associated metals) is money. When viewed through the prism of gold as money, then the deflation argument is actually exactly correct. Money gains value over time.
What deflationists don't understand is that money is not arbitrary. Only a certain set of real things can be used as money, and few of those (namely gold and co) are real, long term money.
Yeah right on tmosely. Paper isn't true money, it is fake money which temporarily functions as a medium of exchange. It has a life cycle, is born, ages, and then has a stroke and falls in front of a speeding bus - blood EVERYWHERE! Gold passively remains money at all times and all places, just one that is not favored by the masses because governments removed it from the market by force, by taxing it, and by not enforcing contracts denominated in it.
People forget that we use paper as money today not because it somehow superior to gold, but because gold has become "outlawed".
If you read FOFOA you would understand that hyperdeflation and hyperinflation are the same thing. It's just a question of the numeraire. Theoretically the dollar could radically strengthen in our massive credit deflation as capital fled risk into safety. But because the political will to maintain the system will print to fill deficits, the safe haven status of the currency is destroyed, and people are forced to move again into gold. We are going through the greatest deflation in history, but simultaneously the safe haven of cash is being trashed, sacrificed in the name of socialism and a military empire that the home economy (tax revenues) cannot support. It's not complex, and it has happened many many times all over the globe. Why is it so difficult to grasp when you can read the play by play recaps of 100s of these events throughout history?
But deflation and hyperinflation are the exact same thing. It's just a question of what you view as money. So Rick didn't move far at all, he just rethought his stance on what the political will was - keep strong, or sacrifice paper money.
Stop already. The whole "flation" debate is bullshit, just like modern economics.
All that matters, as an individual or company, is whether or not you will have buying power, period.
Inflation is a threat to all economic systems.
PM's mean nothing to the aggregate. Oil does and is the trigger of death within the whole equation.
Now defining "hyper" is what is bullshit. Same as trying to define what love is.
They print money to replace money lost through ponzi and fraud, of their own design. They are using the assumption that giving the banksters a trillion is less of a problem than giving a billion to the people.
In 2007 they were talking "soft landing" bullshit. It is more like a soft crash and slow motion depression.
You CANNOT INFLATE when CREDIT is collapsing. The inflation that has occurred over the past 30 years has been through CREDIT EXPANSION
We are in a period of CREDIT CONTRACTION.
Google: "Biflation." It's all explained right there. Items requiring credit deflate, Commodities and cash items inflate. Perfectly consistant.
Only a fool clings to a theory when faced with contradictory empirical evidence.
Time for a new theory.
Tictawk, you're never going to convince the goldbugs here. You also can't inflate when wages are stagnant and falling.
And then there are rising commodity prices: Rising costs of raw materials (ie: "input costs") coupled with decreases in spending power (rising unemployment/stagnant wage growth), equals margin collapse and a capacity overhang.
That's 100% deflationary. No Ands, Ifs or Buts.... Oh, except there's one 'but'.
..BUT ...this is Zerohedge....
The goldbugs here are convinced that the rises in gold and silver are attributable to declines in the purchasing power of the dollar. Show me those graphs buggies. Overlay the USD with Silver for me, and try to tell me it correlates 1:1.
It sounds like you didn't bother to read the essay, or maybe couldn't understand it. The point is that what would otherwise be a deflationary environment becomes hyperinflation when the government prints unlimited quantities of money to bail out the ruling class at 100%, and the ruling elite then turns around and immediately spends that money on precious metals and other strategic assets, leaving the clueless citizenry holding carloads of worthless paper, and minus the assets that would have carried them through. In the US, of course, these looters and ruling criminals will probably be awarded the Medal of Freedom for "services" rendered in "saving" the now-bankrupt system.
You deflationary flat-earthers are nothing if not persistent in your obstinate desperation to ignore ALL of monetary history in the defense of your absurd fiat currency deflationary thesis --- which, again, you steadfastly refuse to acknowledge is an outcome that has NEVER happened, not once, in all of monetary history, whereas currency collapses and hyperinflations, not to mention garden-variety inflations, are too numerous to count. Well, they can in fact be counted --- there is a one-to-one correlation between them and the number of fiat currencies which have ever existed. But "this time it's different", right?
Time after time, chronically overspending governments, saddled with insurmountable debts, have resorted to (or been forced into) debasement of the currency. This has happened HUNDREDS of times, and the outcome is ALWAYS the same, varying only in magnitude and minor details. So what makes you possibly think that this time, the outcome for the USA will be any different?
Give it up already! Rick Ackerman has ---- what is your deal?
Yes you can. The "political will" of the connected will not allow them to take a haircut in this "shrinking credit" environment. Their "credit assets" will be purhased for full face value (bailout!) even though mark to market price is much less. We have seen several iterations of this bailout political will already.
Those persons with access to this money (bailout) first have the advantage of spending it first, but those after have less buying power due to "price inflation."
Sure "credit is shrinking," but the "overall credit" printed to "bailout" under the "political M.A.D. will agenda far outstrips the "shrinkage."
It does take time to bathe in FOFOA. And to put aside one's "deal."
:)
Great for you Mr Ackerman. !!! :)
Blah, blah, blah. My company has expenses and revenues. You will have buying power, or you won't. How some retarded economist who's models are based on "mark to fantasy" bullshit won't change that. Buying power can take many forms (regardless of the type of crash/collapse/flation).
There is no shame about admitting that you are a lost deflationist and a newly found, 'born again', hyper inflationist. It's like a man with a long lost, flaccid dick, who thinks he will never get a boner again, suddenly finding he has eaten fukushima grass and is sparkling all again; full of rise and shine!
Never say never! Just remember that what goes up must one day...but I'm anticipating...that is a word out of Benocide's mouth ! All rise...all hail the Oracle of the FED!
Lot’s of talk here about why rick changed his mind.
Just read the FOFOA link and try to use deductive reasoning .
I said it yesterday and I’ll say it again….
RPG/Freegold the only way out.
Fiat flexibility with sound savings!
Rick says he's been forecasting deflation since 1977. So, how does a reasonably intelligent guy face down 34 years of rising CPI without saying, "Maybe this isn't working out so well..."?
In 1977, CPI-U (urban worker/consumer) was 58.5; today it's 223.5, and there was not a single year between 1977 and 2011 in which CPI went down.
http://www.inflationdata.com/inflation/Consumer_Price_Index/HistoricalCP...
Next, we'll hear that Prechter's changed his mind and gone to work for Antal Fekete.
What FOFOA is really talking about is monetization AFTER the credit collapse and Rick has bought into this idea. Here is what is relevent. The debt balloon has sprung a leak and credit/debt is SHRINKING. The Fed is pumping furiously i.e. monetizing bad debt. But that is just a TINY FRACTION of the collapsed credit. That collapse has already occurred. The Feds monetization has NOT increased property values, or raised employment. They CANNOT print wealth. Once the debt balloon has a leak, no amount of pumping can bring it to its original size. The economy will NEVER be the same as in the days of easy credit. The balloon must DEFLATE COMPLETELY and repaired before any pumping (expansion) to take hold. That means a CASH AND CARRY MARKET.
Cash in circulation $3 trillion? debt balloon size $150 trillion? By suggesting HYPERINFLATION, proponents are saying the FED will print $150 trillion because any pickup in the pace of monetization will drown the FED's ability to print. Every available credit source will DRY up instantly AND CASH and CARRY will rule.
Our economy is largely credit based and it is only AFTER credit collapses, that the FED can selectively monetize debt to its favored interests. The game has not yet played out. After credit collapses in a big way, the financial landscape will be vastly different than today. Rules for GOVT AND THE FED will change. People run the bastards out of town.
Thank you, very sober thoughts. I suppose that this article, among other "Gold will rise forever" articles flooding both mainstream and ZH-like web resources recently, makes for perfect socionomic case of human herding. The other article here has proclaimed Dollar is officially Dead... Something nasty is going to happen...and it likely wont be that most people expect to.
"
maybe this will help visualize it.
In a HYPERinflation scenerio, the debts get paid off with currency of shrinking purchasing power. BUT from a banks accounting sheet perspective, loans are paid in full and the bank is made whole. They have a vault full of depreciated fiats, but assets they do take possession just might be rising in value. The books are balanced and they are an ongoing concern.
In a deflation, when people walk away from the debts, first the banks lose a revenue stream. Then they take a pounding on the loss on the outstanding loan value. Then they take possession of assets whos value is a fraction (or possibly zero) of what they were listed on the books, plus may take on carrying costs. Their balance sheet is in tatters, their cash flows are gone, and then THE BANK'S CREDITORS come a calling.
Which scenerio will they use all of their political muscle to make happen? Never underestimate the crazed flailing of a desperate cornered animal.
That would be "Oracle to the world" actually. And I am being serious when I say that.
I hope you speak chinese and can convince Peking duck!