Gonzalo Lira's Redux On Signs Of An Upcoming Hyperinflation

Tyler Durden's picture

Submitted by Gonzalo Lira

Signs Hyperinflation Is Arriving

This post is gonna be short and sweet—and scary:
Back in late August, I argued that hyperinflation would be triggered by a run on Treasury bonds. I described how such a run might happen, and argued that if Treasuries were no longer considered safe, then commodities would become the store of value.

Such a run on commodities, I further argued, would inevitably lead to price increases and a rise in the Consumer Price Index, which would initially be interpreted by the Federal Reserve, the Federal government, as well as the commentariat, as a good thing: A sign that “the economy is recovering”, a sign that “normalcy” was returning.
I argued that—far from being “a sign of recovery”—rising CPI would be the sign that things were about to get ugly.
I concluded that, like the stagflation of ‘79, inflation would rise to the double digits relatively quickly. However, unlike in 1980, when Paul Volcker raised interest rates severely in order to halt inflation, in today’s weakened macro-economic environment, that remedy is simply not available to Ben Bernanke.
Therefore, I predicted that inflation would spiral out of control, and turn into hyperinflation of the U.S. dollar.
A lot of people claimed I was on drugs when I wrote this.
Now? Not so much.
In my initial argument, I was sure that there would come a moment when Treasury bond holders would realize that they are the New & Improved Toxic Asset—as everyone knows, there is no way the U.S. Federal government can pay the outstanding debt it has: It’s simply too big.
So I assumed that, when the market collectively realized this, there would be a panic in Treasuries. This panic, of course, would lead to the spike in commodities.
However, I am no longer certain if there will ever be such a panic in Treasuries. Backstop Benny has been so adroit at propping up Treasuries and keeping their yields low, the Stealth Monetization has been so effective, the TBTF banks’ arbitrage trade between the Fed’s liquidity windows and Treasury bond yields has been so lucrative, and the bond market itself is so aware that Bernanke will do anything to protect and backstop Treasuries, that I no longer think that there will necessarily be such a panic.
But that doesn’t mean that the second part of my thesis—commodities rising, which will trigger inflation, which will devolve into hyperinflation—will not occur.
In fact, it is occurring.
The two key commodities that have been rising as of late are oil and grains, specifically wheat, corn and livestock feed. The BLS report on Producer Price Index of commodities is here.
Grains as a class have risen over 33% year-over-year. Refined oil products have risen just shy of 13%, with home heating oil rising 18% year-over-year. In other words: Food, gasoline and heating oil have risen by double digits since 2009. And the 2010-‘11 winter in the northern hemisphere is approaching.
A friend of mine, SB, a commodities trader, pointed out to me that big producers are hedged against rising commodities prices. As he put it to me in a private e-mail, “We sometimes forget that the commodity markets aren’t solely speculative. Most futures contracts are bought by companies who use those commodities in their products, and are thus hedging their costs to produce those products.”
Very true: But SB also pointed out that, hedged or not, the lag time between agricultural commodities and the markets is about six-to-nine months, on average. So he thought that the rise in grains, which really took off in June–July, would hit the supermarket shelves in January–March.
He also pointed out that, with higher commodity costs and lower consumption, companies are going to be between the Devil and the deep blue sea. My own take is, if you can’t get more customers, then you’re just gonna have to charge more from the ones you got.
Coupled to these price increases is the ongoing Currency War: The U.S.—contrary to Secretary Timothy Geithner’s statements—is trying to debase the dollar, so as to make U.S. exports more attractive to foreign consumers. This has created strains with China, Europe and the emerging markets.
A beggar-thy-neighbor monetary policy works for small countries getting out of a hole of their own making: It doesn’t work for the world’s largest single economy with the world’s reserve currency, in the middle of a Global Depression.
On the contrary, it creates a backlash; the ongoing tiff over rare-earth minerals with China is just the beginning. This could easily be exacerbated by clumsy politicking, and turn into a full-on trade war.
What’s so bad with a trade war, you ask? Why nothing, not a thing—if you want to pay through the nose for imported goods. If you enjoy paying 10, 20, 30% more for imported goods—then hey, let’s just stick it to them China-men! They’re still Commies, after all!
Furthermore, as regards the Federal Reserve policy, the upcoming Quantitative Easing 2, and the actions of its chairman, Ben Bernanke: There is an increasing sense in the financial markets that Backstop Benny and his Lollipop Gang don’t have the foggiest clue about what they’re doing.
Bruce Krasting just yesterday wrote a very on-the-money précis of the trial balloons the Fed is floating, as regards to QE2: Basically, Bernanke through his WSJ mouthpiece said that the Fed was going to go for a cautious, incrementalist approach, vis-à-vis QE2: “A couple of hundred billion at a time”. You know: “Just the tip—just to see how it feels.”
But then on the other hand, also just yesterday, Tyler Durden at Zero Hedge had a justifiable freak-out over the NY Fed asking Primary Dealers for their thoughts on the size of QE2. According to Bloomberg, the NY Fed was asking the dealers how big they thought QE2 would be, and how big they thought it ought be: $250 billion? $500 billion? A trillion? A trillion every six months? (Or as Tyler pointed out, $2 trillion for 2011.)
That’s like asking a bunch of junkies how much smack they want for the upcoming year—half a kilo? A full kilo? Two kilos?
What the hell you think the junkies are gonna say?
Between BK’s clear reading of the tea leaves coming from the Wall Street Journal, and TD’s also very clear reading of the tea leaves by way of Bloomberg, you’re getting a seriously contradictory message: The Fed is going to lightly tap-tap-tap liquidity into the markets—just a little—just a few hundred billion dollars at a time—
—while at the same time, the Fed is saying to the Primary Dealers, “We’re gonna make you guys happy-happy-happy with a righteously sized QE2!”
The contradictory messages don’t pacify the financial markets—on the contrary, they make the markets simultaneously contemptuous of Bernanke and the Fed, while very frightened as to what they will ultimately do.
What happens when the financial markets don’t really know what the central bank is going to do, and suspect that the central bankers themselves aren’t too clear either?
So to sum up, we have:

    • Rising commodity prices, the effects of which (because of hedging) will be felt most severely in the period January–March of 2011.

    • A beggar-thy-neighbor race-to-the-bottom Currency War, that might well devolve into a Trade War, which would force up prices on imported goods.

    • A Federal Reserve that does not seem to know what it is doing, as regards another round of Quantitative Easing, which is making the financial markets very nervous—nervous about the Fed’s ultimate responsibility, which is safeguarding the U.S. dollar.

    • A U.S. economy that is weak to the point of collapse, where not even 0.25% interest rates are sparking investment and growth—and which therefore prohibits the Fed from raising interest rates, if need be. 

    • A U.S. fiscal deficit which is close to 10% of GDP annually, and which is therefore unsustainable—especially considering that the total U.S. fiscal debt is well over 100% of GDP.

These factors all point to one and the same thing:
An imminent currency collapse.
Therefore, I am confident in predicting the following sequence of events:

    • By March of 2011, once higher commodity prices reach the marketplace, monthly CPI will be at an annualized rate of not less than 5%.

    • By July of 2011, annualized CPI will be no less than 8% annualized.

    • By October of 2011, annualized CPI will have crossed 10%.

    • By March of 2012, annualized CPI will cross the hyperinflationary tipping point of 15%.

After that, CPI will rapidly increase, much like it did in 1980.
What the mainstream commentariat will make of all this will be really something: When CPI reaches 5% by the winter of 2011, pundits and economists and the Fed and the Obama administration will all say the same thing: “Happy days are here again! People are spending! The economy is back on track!”
However, by the late spring, early summer of 2011, people will realize what’s going on—and the Federal Reserve will initially be unwilling to drastically raise interest rates so as to quell inflation.
Actually, the Fed won’t be able to raise rates, at least not like Volcker did back in 1980: The U.S. economy will be too weak, and the Federal government’s balance sheet will be too distressed, with it’s $1.5 trillion deficit. So at first, the Fed will have to let the rising inflation rate slide, and keep trying hard to explain it away as “a sign of a recovering economy”.
Once the Fed realizes that the rising CPI is not a sign of a reignited economy, but rather a sign of the collapsing dollar, they will pursue a puerile “inflation fighting” scheme of incremental interest rate hikes—much like G. William Miller, the Chairman of the Fed from January of ‘78 to August of ‘79, pursued so unsuccessfully.
2012 will be the bad year: I predict that hyperinflation’s tipping point will be no later than the first quarter of 2012. From there, it will accelerate. By the end of 2012, I would not be surprised if the CPI for the year averaged 30%.
By that point, the rest of the economy—unemployment, GDP, all the rest of it—will be in the toilet. By that point, the rest of the economy will no longer matter: The collapsing dollar will make 2012 the really really bad year of our Global Depression—which is actually kind of funny.
It’s funny because, as you know, I am a conservative Catholic: I of course put absolutely no stock in the ridiculous notion that “The Mayans predicted our civilization’s collapse in 2012!”—that’s all rubbish, as far as I’m concerned.
It’s just one of those cosmic jokes that 2012 will turn out to be the year the dollar collapses, and the larger world economies go down the tubes.
As cosmic jokes go, all I’ve got to say is this:
Good one, God.

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JimboJammer's picture

The  Perfect  Storm  is  here..... right  now .....

Sudden Debt's picture

Not only in America. Also here in Europe. A few months ago, I had already seen numbers of 12 to 13% inflation here.

I only means we still have 12 to 24 months to prepare against the inflation nightmare.

Walter_Sobchak's picture

Gonzalo, I think the major question now is...can TPTB manipulate gold prices long enough to establish their new monetary system and leave gold holders holding the bag?

Arius's picture


"leave gold holders holding the bag?"


que passa?  am I missing something here?

tmosley's picture

Just wild speculation.

The only bag holders of gold will be left with is the bag holding their gold inside.  The bullion banks are just about out of ammo.

Oracle of Kypseli's picture

They can only manipulate a calm market. The current conditions are too powerful to be manipulated. This market will do what it must with everyone including institutional investors run for cover. A few banks, even with tons of Fed money, can not stop the wave of wealth preservation mode. 

kiwidor's picture

'They' can manipulate anything they want.  As for the 'wave of wealth preservation mode', that started as early as 2004. That's when the smart money started relinquishing large [read: very illiquid] properties.  Proof of the change-of-mind was shown in sept/oct 2005; gold went up 75/oz one month and 125/oz the next.  [btw, I interpreted that gold move as a 'get out of the market' signal, figuring that we had about 3.5 years to see the real effects.  I was slightly off the mark]

So who is left in the market?  A: 'Them'  and some idiots.

'They' knew the derivatives were worth nothing, and have probably compensated already.  Next phase, trash your own market, and make a killing on commodities.  with the profits from that, buy up what you don't already own.

Next signal to watch for (amidst the confusion)  :  Large and/or well known companies being bought outright and de-listed. 

[ok, it's a prediction..but i couldn't bear to repeat the usual "gold's going up/gold's going down" stuff]

spinone's picture

Economics is not a science, much more a social or political theory.  Economics is really an extension of political policy.  As such, if 2012 goes as you predict, a political response or solution won't be too far away.

SWRichmond's picture

Economics is not a science, much more a social or political theory.  Economics is really an extension of political policy.

Bless you.  Economics is about how things get made, politics is about who gets to keep them.  Since both are about human behaviour, neither is a science, and should not be trusted or treated as one.

LeftCoastRefugee's picture

In this scenario I guess the only safe haven would be PMs.

CrockettAlmanac.com's picture

PMS? So we're going to unleash a pack of menstruating harpies on the bankers? That ought to be fun to watch.

kathy.chamberlin@gmail.com's picture


no shit sherlock, that would hellarious†

Steve Zissou's picture



If you wargame this out what does the average day of driving to the store, buying a loaf of bread, some PB&J, maybe some Funyuns and a pack of magnum condoms look like?  Say...fall of 2011 and fall of 2012.  

Would there be bread on the shelf in the fall of 2013?



spinone's picture

Price controls and rationing

Steve Zissou's picture

By what means.  Do you get to the register and they say.....sir, you can only buy one box of magnum condoms?  Would a national food stamp program be in place you think?

SWRichmond's picture


Bugs Bunny from 1943.  Fast forward to about 7:30.

You know how it is with these "A" cars.

Arius's picture

oppsss...what do you say to the second girlfriend...honey, i already spent my one box of condoms..sorry

Oracle of Kypseli's picture

Learn to recycle the condoms. Rince and repeat.

For bread: stock on yeast, flour and make your own. 

kiwidor's picture

There's always room in the back.

Sean7k's picture

I have one problem with your analysis: you claim the FED does not know what it is doing. Unfortunately, it is a really big flaw. Like most pundits, to begin with a false assumption and apply traditional economic theory to the result is dangerous.

Just as many have ended up wondering how the FED can pretend and extend as long as it has, it is simple- WE don't know what THEY'RE doing! We can guess, but unless we are in the room- we're blindfolded trying to hit the pinata.

The destruction of the dollar and most global currencies may be their goal- to bring in the SDR. Or it may not be. Commodities: remember this- most grain buyers have not been giving future contracts to farmers. This may become a game changer if farmers decide to hold out for better prices. Storage silos are not that expensive.

Loss of imports- we have done this before (the Great Depression). It does not destroy the country, but has been pointed out by others, it does allow for a transfer of wealth through the purchase of lower priced assets. People can live on food, clothing and shelter. In America, we have more housing than we need now, we are an exporter of food and we are capable of making our own clothing- we do grow a tad bit of cotton. 

I think the FED hasn't shown its' hand. It is still moving us towards the corral. I think when they start pushing us up the loading shoot, we will have a better idea. Until then, I suggest you stay on your toes.

strannick's picture


Exactly. They are more evil than they are stupid. Maybe they're planning for SDRs, maybe a Treasury bond default. Maybe a reevaluation of gold. Be alert for the writing on the wall, and the signs of the times.

Green Leader's picture

The forums @ Infowars report crops have been chemtrailed all over USA and that failures & reductions in yields have been geoengineered.

Where I live chemtrails busted plantains, bananas, pumpkins, fruits & other goodies. Pollinizers were all but wiped out, along with bats.

The imminent Iraqi Dinar revaluation will shuffle the cards globally. We are about to witness something REALLY big.

Better have a walking relationship with the Creator. Babylon is about to resurface.


tmosley's picture

You just keep thinking that, bagholder.  Enjoy having the screws put to you by a third world central bank.  I hate to tell you, but a non-convertible currency isn't going to be revalued higher in this lifetime.  Iraqi Dinar have no fungibility outside of Iraq.  Any price you pay for them will be WAAAAYYYY over their market value in the country, because it is being pushed by shucksters as the next big "investment".

Next you'll be telling us the Venezuelan Peso (or whatever) will be the world reserve currency.

Also, "chemtrails" are nothing but ice crystal formation around vaporized particulates in jet fuel.  If "THEY" really wanted you dead, or if "THEY" wanted crops to fail, they would fail, and you'd never see any evidence.  All it would take is an engineered virus that attacks bees (unlike the current bee die-off, which is caused by the combination of a funal infection and a bacterium or virus--I don't remember which).

Or, if they wanted to be sneaky, they would pump a herbicide into the aquifer (namely the Ogalalla), which would leave little or no evidence, and could never be shown to be artificial.  Dropping some chemical from 35,000 ft ensures that it will NEVER hit it's target, but rather will be carried by the winds out to somewhere in the middle of the Atlantic.  Notice how the "chemtrails" never seem to actually fall, and you can see them for hours after they were "dispersed"?  That's because they are as light as air, and very slight updrafts will keep them aloft for weeks, while the winds blow them every which way in a totally unpredictable manner.


Green Leader's picture

1) All Central Banks report to their masters in the Metropolis.

2)Chemtrails are sprayed by unmarked planes *and* jet powered drones for lower altitude missions. The spray can be turned on and off at will, it's not 'condensed ice crystals'. I have witnessed it. Some are for meteorological manipulation, some for 'the shield', others for more evil objectives.

3) We know what they are spraying and how to fight it. Yahweh sent us an antidote.

4)I am a scientist, too...from one of these institutions that have buildings with exterior walls covered in vines.

5)Time will tell.

ArsoN's picture

My stinky french cheeses are already twice as expensive!

Stuck on Zero's picture

Gonzalo is dead wrong.  As long as government agencies determine the CPI and as long as the main-stream media announces the results inflation will never exceed 2%! 

EscapeKey's picture

Absolutely! And as long as you feed your family with meat-flavoured brusk sausages, overripe melons, and strawberry squash which doubles as a disinfectant, then your BLS basket of goods has in fact only increased by 0.3% over the past 5 years!


buzzsaw99's picture

What’s so bad with a trade war, you ask? Why nothing, not a thing—if you want to pay through the nose for imported goods. If you enjoy paying 10, 20, 30% more for imported goods—then hey, let’s just stick it to them China-men!...


This person is an idiot. Does he think we here in the usa can't make a toaster or frying pan? What part of "trade war" does he not understand?

tmosley's picture

Find me one toaster or frying pan factory in America.  I dare you.

TheSettler's picture

Lodge Manufacturing Co. is the sole domestic producer of foundry seasoned cast iron cookware in the United States. Founded in 1896. Great stuff. 

tmosley's picture

Excellent.  I need a new set of cast iron cookware, having lost mine in a house fire last year.  I will look into buying some from them.

RockyRacoon's picture

I'd think a house fire would season a good skillet just right!

tmosley's picture

Only if you love the take of burned plastic in your food.

I might have been able to save it, but I didn't think about it, and the kitchen was the worst hit area (more by the firemen than the fire--had a lot of food in there, and they managed to get it ALL onto the floor, along with everything that was in the cabinets.

And I'm pretty sure one of them took my 9mm that I had next to my bed.  I wan't happy about losing that.

Nels's picture

Lodge makes somewhat crude pans.  The interior of the frying pans still has the lumps and bumps from the sand casting.  They used to (but no longer) sell them with the interior ground smooth.  It's a bit more expensive, but you can get a better pan on the used market, and still get made-in-the-USA.  If it's more important to support an existing company, buy the Lodge, but maybe also a grinder (or find a machine shop) to grind it down.

Trying to fry eggs on a 90 grit surface isn't so much fun.

Big Red's picture


I usually find that some box store or dollar store sells one quality item at a quite reasonable price. You can buy Lodge Logic cast iron at Walmart. Not a great selection, though.

Pears Soap (wikipedia that!) has now changed their formula, no longer hypo-allergenic, could get for $1/bar at Dollar Tree.

FreedomGuy's picture

Actually, he has it right. We can make a toaster. It will cost 30% more than the Chinese one. However, it might actually work.

tmosley's picture

The toaster I have works just fine.  Don't deprive me of cheaper goods just because you don't understand economics.

If your economic solution to any problem requires the initiation of force, then it is wrong.  It is as simple as that.

CrockettAlmanac.com's picture

Indeed. How bizarre that some would insist that you must purchase one toaster rather than another at the point of a gun.

kathy.chamberlin@gmail.com's picture

i have to disagree. being female i have acquired quite a taste for domesticity. everything is just pure and simple crapola now. the cheap big furniture made overseas, no integrity in style and design. everything is just filler and bulk. square edges and corners are sharp. new shit furniture manufactured to just hurt you while cursing around your house. my father bought some cherry trees and had a lot of our furniture made like the Amish styling. smooth edges, not heavy nor glued or this new stupid peg method or this new screw looking mechanism. the small appliances are just cheap shit plastic, especially the new toasters. just cheap base materials are used any more in construction. the damn furniture costs are more in the shipping costs, cause it all weighs so damn much. try to return a media center if you don't like it. the retailer will just say it costs more to ship back than it cost to buy. american made antiques sure were fine back in the day. even picture frame making was a craft in america. potters, weavers, glass blowers we use to respect these professions now they are the butt of all jokes. we have just lost our soul to china and cheap manufacturing. oh yeah, forgot about IKEA. i have never in my life experienced shopping HELL in that ass backwards store. to push onto the american public that this is the new shopping experience. pleeeeaze. now that is a dumb down american experience. christ i will never go into one of those stores ever again and buy a DIY piece of crap furniture.

Dingleberry Jones's picture

Apparently the taste for domesticity has destroyed your taste for producing posts with legibility.  Capitalization, punctuation, and most importantly, usage of paragraphs is greatly appreciated.

Thanks for your future cooperation.

FWIW, I agree with your premise that cheaply manufactured and designed products go the way of the dinosaur. They are terrible.


Careless Whisper's picture

caps + paragraphs = waste of time. bold worthy.


kathy.chamberlin@gmail.com's picture

im junking you, cause your judging me.

traderjoe's picture

"Thanks for your future cooperation." - who died and made you lord of readability of posts? Don't like 'em, skip past. Easy to do. Diversity of opinion and style is good. 

Dingleberry Jones's picture

Paragraphs and caps were invented for a reason. It helps people read. It's one giant rumbling run-on rant.

Diversity of opinion and style is good. Being able to read the actual ideas underlying is better.

trav7777's picture

i don't buy that shit.

Ethan Allen or Bloomies, thanks.  A lot of shit made in america; it's bulletproof.  I have a couple things from France and Italy too; they are very nice but not as solid.

Dingleberry Jones's picture

I *think* that you are agreeing with her, actually. I think her point was that chinese stuff is pure crap.

American made stuff is awesome. Agree about Ethan Allen. Also, I do have some awesome Amish stuff. You can find quality, and sometimes don't have to pay through the nose for it.