Guest Post: How Hyperinflation Will Happen

Tyler Durden's picture

Submitted by Gonzalo Lira

How Hyperinflation Will Happen

Right now, we are in the middle of deflation. The Global Depression we are experiencing has squeezed both aggregate demand levels and aggregate asset prices as never before. Since the credit crunch of September 2008, the U.S. and world economies have been slowly circling the deflationary drain.

To counter this, the U.S. government has been running massive deficits, as it seeks to prop up aggregate demand levels by way of fiscal “stimulus” spending—the classic Keynesian move, the same old prescription since donkey’s ears.

But the stimulus, apart from being slow and inefficient, has simply not been enough to offset the fall in consumer spending.

For its part, the Federal Reserve has been busy propping up all assets—including Treasuries—by way of “quantitative easing”.

The Fed is terrified of the U.S. economy falling into a deflationary death-spiral: Lack of liquidity, leading to lower prices, leading to unemployment, leading to lower consumption, leading to still lower prices, the entire economy grinding down to a halt. So the Fed has bought up assets of all kinds, in order to inject liquidity into the system, and bouy asset price levels so as to prevent this deflationary deep-freeze—and will continue to do so. After all, when your only tool is a hammer, every problem looks like a nail.

But this Fed policy—call it “money-printing”, call it “liquidity injections”, call it “asset price stabilization”—has been overwhelmed by the credit contraction. Just as the Federal government has been unable to fill in the fall in aggregate demand by way of stimulus, the Fed has expanded its balance sheet from some $900 billion in the Fall of ’08, to about $2.3 trillion today—but that additional $1.4 trillion has been no match for the loss of credit. At best, the Fed has been able to alleviate the worst effects of the deflation—it certainly has not turned the deflationary environment into anything resembling inflation.

Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”.

Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right?

Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.

Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about. In fact, most sensible people don’t even bother arguing the issue at all—everyone knows that only fools bother arguing with a bigger fool.

A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.

This outlook seems sensible—if we fall for the trap of thinking that hyperinflation is an extention of inflation. If we think that hyperinflation is simply inflation on steroids—inflation-plus—inflation with balls—then it would seem to be the case that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous.

But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.

Right now, the U.S. government is indebted to about 100% of GDP, with a yearly fiscal deficit of about 10% of GDP, and no end in sight. For its part, the Federal Reserve is purchasing Treasuries, in order to finance the fiscal shortfall, both directly (the recently unveiled QE-lite) and indirectly (through the Too Big To Fail banks). The Fed is satisfying two objectives: One, supporting the government in its efforts to maintain aggregate demand levels, and two, supporting asset prices, and thereby prevent further deflationary erosion. The Fed is calculating that either path—increase in aggregate demand levels or increase in aggregate asset values—leads to the same thing: A recovery in the economy.

This recovery is not going to happen—that’s the news we’ve been getting as of late. Amid all this hopeful talk about “avoiding a double-dip”, it turns out that we didn’t avoid a double-dip—we never really managed to claw our way out of the first dip. No matter all the stimulus, no matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that the economy has been—and is headed—down.

But both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy”—stimulus on the one hand, liquidity injections on the other. (See my discussion of The Deficit here.)

It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008—and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left, after trillions in stimulus and trillions more in balance sheet expansion—

—but they have accomplished one thing: They have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.

In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.

So this is how hyperinflation will happen:

One day—when nothing much is going on in the markets, but general nervousness is running like a low-grade fever (as has been the case for a while now)—there will be a commodities burp: A slight but sudden rise in the price of a necessary commodity, such as oil.

This will jiggle Treasury yields, as asset managers will reduce their Treasury allocations, and go into the pressured commodity, in order to catch a profit. (Actually it won’t even be the asset managers—it will be their programmed trades.) These asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell.

It won’t be the volume of the sell-off that will pique Bernanke and the drones at the Fed—it will be the timing. It’ll happen right before a largish Treasury auction. So Bernanke and the Fed will buy Treasuries, in an effort to counteract the sell-off and maintain low yields—they want to maintain low yields in order to discourage deflation. But they’ll also want to keep the Treasury cheaply funded. QE-lite has already set the stage for direct Fed buys of Treasuries. The world didn’t end. So the Fed will feel confident as it moves forward and nips this Treasury yield jiggle in the bud.

The Fed’s buying of Treasuries will occur in such a way that it will encourage asset managers to dump even more Treasuries into the Fed’s waiting arms. This dumping of Treasuries won’t be out of fear, at least not initially. Most likely, in the first 15 minutes or so of this event, the sell-off in Treasuries will be orderly, and carried out with the idea (at the time) of picking up those selfsame Treasuries a bit cheaper down the line.

However, the Fed will interpret this sell-off as a run on Treasuries. The Fed is already attuned to the bond markets’ fear that there’s a “Treasury bubble”. So the Fed will open its liquidity windows, and buy up every Treasury in sight, precisely so as to maintain “asset price stability” and “calm the markets”.

The Too Big To Fail banks will play a crucial part in this game. See, the problem with the American Zombies is, they weren’t nationalized. They got the best bits of nationalization—total liquidity, suspension of accounting and regulatory rules—but they still get to act under their own volition, and in their own best interest. Hence their obscene bonuses, paid out in the teeth of their practical bankruptcy. Hence their lack of lending into the weakened economy. Hence their hoarding of bailout monies, and predatory business practices. They’ve understood that, to get that sweet bail-out money (and those yummy bonuses), they have had to play the Fed’s game and buy up Treasuries, and thereby help disguise the monetization of the fiscal debt that has been going on since the Fed began purchasing the toxic assets from their balance sheets in 2008.

But they don’t have to do what the Fed tells them, much less what the Treasury tells them. Since they weren’t really nationalized, they’re not under anyone’s thumb. They can do as they please—and they have boatloads of Treasuries on their balance sheets.

So the TBTF banks, on seeing this run on Treasuries, will add to the panic by acting in their own best interests: They will be among the first to step off Treasuries. They will be the bleeding edge of the wave.

Here the panic phase of the event begins: Asset managers—on seeing this massive Fed buy of Treasuries, and the American Zombies selling Treasuries, all of this happening within days of a largish Treasury auction—will dump their own Treasuries en masse. They will be aware how precarious the U.S. economy is, how over-indebted the government is, how U.S. Treasuries look a lot like Greek debt. They’re not stupid: Everyone is aware of the idea of a “Treasury bubble” making the rounds. A lot of people—myself included—think that the Fed, the Treasury and the American Zombies are colluding in a triangular trade in Treasury bonds, carrying out a de facto Stealth Monetization: The Treasury issues the debt to finance fiscal spending, the TBTF banks buy them, with money provided to them by the Fed.

Whether it’s true or not is actually beside the point—there is the widespread perception that that is what’s going on. In a panic, widespread perception is your trading strategy.

So when the Fed begins buying Treasuries full-blast to prop up their prices, these asset managers will all decide, “Time to get out of Dodge—now.”

Note how it will not be China or Japan who all of a sudden decide to get out of Treasuries—those two countries will actually be left holding the bag. Rather, it will be American and (depending on the time of day when the event happens) European asset managers who get out of Treasuries first. It will be a flash panic—much like the flash-crash of last May. The events I describe above will happen in a very short span of time—less than an hour, probably. But unlike the event in May, there will be no rebound.

Notice, too, that Treasuries will maintain their yields in the face of this sell-off, at least initially. Why? Because the Fed, so determined to maintain “price stability”, will at first prevent yields from widening—which is precisely why so many will decide to sell into the panic: The Bernanke Backstop won’t soothe the markets—rather, it will make it too tempting not to sell.

The first of the asset managers or TBTF banks who are out of Treasuries will look for a place to park their cash—obviously. Where will all this ready cash go?

Commodities.

By the end of that terrible day, commodites of all stripes—precious and industrial metals, oil, foodstuffs—will shoot the moon. But it will not be because ordinary citizens have lost faith in the dollar (that will happen in the days and weeks ahead)—it will happen because once Treasuries are not the sure store of value, where are all those money managers supposed to stick all these dollars? In a big old vault? Under the mattress? In euros?

Commodities: At the time of the panic, commodities will be perceived as the only sure store of value, if Treasuries are suddenly anathema to the market—just as Treasuries were perceived as the only sure store of value, once so many of the MBS’s and CMBS’s went sour in 2007 and 2008.

It won’t be commodity ETF’s, or derivatives—those will be dismissed (rightfully) as being even less safe than Treasuries. Unlike before the Fall of ’08, this go-around, people will pay attention to counterparty risk. So the run on commodities will be for actual, feel-it-’cause-it’s-there commodities. By the end of the day of this panic, commodities will have risen between 50% and 100%. By week’s end, we’re talking 150% to 250%. (My private guess is gold will be finessed, but silver will shoot up the most—to $100 an ounce within the week.)

Of course, once commodities start to balloon, that’s when ordinary citizens will get their first taste of hyperinflation. They’ll see it at the gas pumps.

If oil spikes from $74 to $150 in a day, and then to $300 in a matter of a week—perfectly possible, in the midst of a panic—the gallon of gasoline will go to, what: $10? $15? $20?

So what happens then? People—regular Main Street people—will be crazy to buy up commodities (heating oil, food, gasoline, whatever) and buy them now while they are still more-or-less affordable, rather than later, when that $15 gallon of gas shoots to $30 per gallon.
 
If everyone decides at roughly the same time to exchange one good—currency—for another good—commodities—what happens to the relative price of one and the relative value of the other? Easy: One soars, the other collapses.

When people freak out and begin panic-buying basic commodities, their ordinary financial assets—equities, bonds, etc.—will collapse: Everyone will be rushing to get cash, so as to turn around and buy commodities.

So immediately after the Treasury markets tank, equities will fall catastrophically, probably within the next few days following the Treasury panic. This collapse in equity prices will bring an equivalent burst in commodity prices—the second leg up, if you will.
 
This sell-off of assets in pursuit of commodities will be self-reinforcing: There won’t be anything to stop it. As it spills over into the everyday economy, regular people will panic and start unloading hard assets—durable goods, cars and trucks, houses—in order to get commodities, principally heating oil, gas and foodstuffs. In other words, real-world assets will not appreciate or even hold their value, when the hyperinflation comes.

This is something hyperinflationist-skeptics never quite seem to grasp: In hyperinflation, asset prices don’t skyrocket—they collapse, both nominally and in relation to consumable commodities. A $300,000 house falls to $60,000 or less, or better yet, 50 ounces of silver—because in a hyperinflationist episode, a house is worthless, whereas 50 bits of silver can actually buy you stuff you might need.

Right now, I’m guessing that sensible people who’ve read this far are dismissing me as being full of shit—or at least victim of my own imagination. These sensible people, if they deign to engage in the scenario I’ve outlined above, will argue that the government—be it the Fed or the Treasury or a combination thereof—will find a way to stem the panic in Treasuries (if there ever is one), and put a stop to hyperinflation (if such a foolish and outlandish notion ever came to pass in America).
 
Uh-huh: So the Government will save us, is that it? Okay, so then my question is, How?

Let’s take the Fed: How could they stop a run on Treasuries? Answer: They can’t. See, the Fed has already been shoring up Treasuries—that was their strategy in 2008—’09: Buy up toxic assets from the TBTF banks, and have them turn around and buy Treasuries instead, all the while carefully monitoring Treasuries for signs of weakness. If Treasuries now turn toxic, what’s the Fed supposed to do? Bernanke long ago ran out of ammo: He’s just waving an empty gun around. If there’s a run on Treasuries, and he starts buying them to prop them up, it’ll only give incentive to other Treasury holders to get out now while the getting’s still good. If everyone decides to get out of Treasuries, then Bernanke and the Fed can do absolutely nothing effective. They’re at the mercy of events—in fact, they have been for quite a while already. They just haven’t realized it.

Well if the Fed can’t stop this, how about the Federal government—surely they can stop this, right?

In a word, no. They certainly lack the means to prevent a run on Treasuries. And as to hyperinflation, what exactly would the Federal government do to stop it? Implement price controls? That will only give rise to a rampant black market. Put soldiers out on the street? America is too big. Squirt out more “stimulus”? Sure, pump even more currency into a rapidly hyperinflating everyday economy—right . . .

(BTW, I actually think that this last option is something the Federal government might be foolish enough to try. Some moron like Palin or Biden might well advocate this idea of helter-skelter money-printing so as to “help all hard-working Americans”. And if they carried it out, this would bring us American-made images of people using bundles of dollars to feed their chimneys. I actually don’t think that politicians are so stupid as to actually start printing money to “fight rising prices”—but hey, when it comes to stupidity, you never know how far they can go.)

In fact, the only way the Federal government might be able to ameliorate the situation is if it decided to seize control of major supermarkets and gas stations, and hand out cupon cards of some sort, for basic staples—in other words, food rationing. This might prevent riots and protect the poor, the infirm and the old—it certainly won’t change the underlying problem, which will be hyperinflation.

“This is all bloody ridiculous,” I can practically hear the hyperinflation skeptics fume. “We’re just going through what the Japanese experienced: Just like the U.S., they went into massive government stimulus—hell, they invented quantitative easing—and look what’s happened to them: Stagnation, yes—hyperinflation, no.”

That’s right: The parallels with Japan are remarkably similar—except for one key difference. Japanese sovereign debt is infinitely more stable than America’s, because in Japan, the people are savers—they own the Japanese debt. In America, the people are broke, and the Nervous Nelly banks own the debt. That’s why Japanese sovereign debt is solid, whereas American Treasuries are soap-bubble-fragile.

That’s why I think there’ll be hyperinflation in America—that bubble’s soon to pop. I’m guessing if it doesn’t happen this fall, it’ll happen next fall, without question before the end of 2011.
 
The question for us now—ad portas to this hyperinflationary event—is, what to do?

Neanderthal survivalists spend all their time thinking about post-Apocalypse America. The real trick, however, is to prepare for after the end of the Apocalypse.

The first thing to realize, of course, is that hyperinflation might well happen—but it will end. It won’t be a never-ending situation—America won’t end up like in some post-Apocalyptic, Mad Max: Beyond Thuderdome industrial wasteland/playground. Admittedly, that would be cool, but it’s not gonna happen—that’s just survivalist daydreams.

Instead, after a spell of hyperinflation, America will end up pretty much like it is today—only with a bad hangover. Actually, a hyperinflationist spell might be a good thing: It would finally clean out all the bad debts in the economy, the crap that the Fed and the Federal government refused to clean out when they had the chance in 2007–’09. It would break down and reset asset prices to more realistic levels—no more $12 million one-bedroom co-ops on the UES. And all in all, a hyperinflationist catastrophe might in the long run be better for the health of the U.S. economy and the morale of the American people, as opposed to a long drawn-out stagnation. Ask the Japanese if they would have preferred a couple-three really bad years, instead of Two Lost Decades, and the answer won’t be surprising. But I digress.

Like Rothschild said, “Buy when there’s blood on the streets.” The thing to do to prepare for hyperinflation would be to invest in a diversified hard-metal basket before the event—no equities, no ETF’s, no derivatives. If and when hyperinflation happens, and things get bad (and I mean really bad), take that hard-metal basket and—right in the teeth of the crisis—buy residential property, as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added companies, like tech, aerospace or industrials. The reason is, at the peak of hyperinflation, the most valuable assets will be dirt-cheap—especially equities—especially real estate.

I have no idea what will happen after we reach the point where $100 is no longer enough to buy a cup of coffee—but I do know that, after such a hyperinflationist period, there’ll be a “new dollar” or some such, with a few zeroes knocked off the old dollar, and things will slowly get back to a new normal. I have no idea the shape of that new normal. I wouldn’t be surprised if that new normal has a quasi or de facto dictatorship, and certainly some form of wage-and-price controls—I’d say it’s likely, but for now that’s not relevant.

What is relevant is, the current situation cannot long continue. The Global Depression we are in is being exacerbated by the very measures being used to fix it—stimulus is putting pressure on Treasuries, which are being shored up by the Fed. This obviously cannot have a happy ending. Therefore, the smart money prepares for what it believes is going to happen next.

I think we’re going to have hyperinflation. I hope I have managed to explain why.

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kengland's picture

The inflation will come when debts are forgiven in mass. Until then...deflation bitches

Azannoth's picture

REPENT!                                                (the debt)

dlmaniac's picture

As far as Japan goes, I think they only managed to delay the inevitable mass inflation as their savings have been drained by years of irresponsible fiscal policies. With little savings to back up that huge government debt, they are now in for either default or print as well.

 

As for hyperinflation in US, it will happen but not for very long as they'd quickly switch back to gold standard to end the madness as by then even the dumbest politicians would scream for gold standard to cover their behind.

hedgeless_horseman's picture

Thank you.  I appreciate both of your insights, and have learned from each of them.

tictawk's picture

Massive Deflation will happen BEFORE Hyperinflation because the Fed CANNOT purchase all the debt out there.  The author is making the ASSumption that the Fed is in control of everything financial.   Events of the last couple of years just prove otherwise and Remember the ratio of "debt" to "cash in circulation" is 50:1.   I believe that nobody is bigger than the market and ultimately the market wins.  Politics inflate and Markets deflate.  The DEBT bubble has more latent deflationary power than all the Fed's ability to print.  The Fed is a pimple on the ass of a $100+ trillion dollar debt bubble and Bernanke is the prick that will burst it. A dash for the exits from any large bond holder will be enough to raise interest rates at the long end (remember the Fed does not control the long end, it can only influence it over the short term) making the debt burden untenable.  The spread between the long and short end will widen incredibly to a point where borrowing will cease and Cash will be king.  After a period where a significant amout of existing debt has been reconciled via default, restructuring or paydown, it might be politically expedient to inflate the rest but I doubt it.  I think once borrowing and lending cease, the Fed will be forced to make the dollar a hard currency in order to attract capital to our shores. 

Spitzer's picture

hahaha, just when we though we might have made some progress with these deflationists along comes this tool.

If the economy contracts as much as you say it will, there will be no tax revenue to service the debt. The dollar is backed by this debt. The dollar will sell off as fast as the bond bubble bursts.

tictawk's picture

The dollar is NOT backed by anything (it is fiat) but is a debt instrument.  It is a Debt based fiat currency.  There aren't enough dollars to satisfy the outstanding debt.  What is it that you don't understand about debt:cash ratio of 50:1?  Debt/credit is not the same as cash.

Spitzer's picture

The dollar is backed by the full faith and CREDIT of the US government.

^I didn't make that up.

Why did the Euro inflate when it was on the cusp of debt destruction then ?

Why didn't the Euro gain in value(DEFLATION) when Greece was unable to service its debt ?

ATG's picture

The dollar and the euro have two quite different central bank objectives and backings.

The primary objective of the ECB is to maintain price stability across the EEC, not in each member state.

http://en.wikipedia.org/wiki/European_Central_Bank

The Fed has multiple and sometimes conflicting objectives, including maximum employment, moderate interest rates, stable prices, averting financial panics and strengthening the US Economy:

http://en.wikipedia.org/wiki/Federal_Reserve_System

Meanwhile, the EC has far more gold than the USA and any other regional bloc in the world...

http://www.gata.org/node/104

kengland's picture

What other liquid assets are there to buy? The world is drowning in dollars. CB's need the liquidity for a myriad of reasons. The debts of the world are net denominated in dollars. How are they going to pay those debts back? Yen?  Revenues or no revenues, they will covet the dollars until they can't.

tictawk's picture

@kengland

"the world is drowning in dollars"

No the world is drowning in dollar denominated debt, i.e. dollar denominated IOUs that need to be satisfied with dollars /cash.   Debt / cash in circulation ratio = 50:1

ATG's picture

Lord spare us from would-be Italian filmmakers and writers who, with limited market experience, somehow think they are smarter than Fed, 0 Advisers and Wall Street, who already made a muck of things with their failed national socialist central planning agenda.

There is absolutely no hyperfinflation evident like the Revolutionary War Continentals or Civil War Greenbacks. Zero. Zilch. No hedge.

M3 is -8%, the adjusted monetary base growth is -90%, total credit is declining at -9%, the real cost of mortgage money is the -35% decline in real estate plus the nominal 5% on mortgages, or 40%, and the money multiplier is less than 1, losing 15 cents for each additional dollar the Fed creates trying to prop up dead mortgages and insolvent Treasuries.

The Fed well knows if it monetizes all Treasury liquiditions, every banker, CEO or CFO will be dragged out of their corporate jet easy chair and crashed, defenestrated or piked.

Rather, the tipoff to any repudiation of the dollar will be interest rates going crazy as people sell everything in a mad dash scramble for cash.

Every single hyperinflation was preceded by runaway interest rates, from Argentina to Zimbabwe.

Meanwhile the 83 cent currency-weighted dollar is targeting 115 after a respite from 70.70 and 80.08 lows, still shy of 120 in 2001 before endless imperial wars became neoCon policy for both parties with their CIA candidates...

http://stockcharts.com/charts/gallery.html?%24usd

Eternal Student's picture

"Smarter than the Fed"? That's hilarious! You mean you're in awe of the same group who not only caused this mess, but couldn't see the disaster of 2008?

Goodness, man. My grandmother is smarter than the Fed, and she's been dead for over 20 years.

Eternal Student's picture

Sorry, but by your "Lord spare us from" comment I was under the apparently silly impression that you didn't like non-PhD Economists. I'll take them any day over those with PhD's. That includes the disparaged "Italian filmmakers and writers ... with limited market experience". Even a monkey with a dartboard is probably preferable.

ATG's picture

Fed, 0 Advisers and Wall Street, who already made a muck of things with their failed national socialist central planning agenda.

Usually, integrity and values more important than intelligence.

Anyone who understands Henry Hazlitt's Economics in One Lesson, may appreciate better economics than most PhD government economists, who create more blowback with central planning, than common sense practical Constitutional workable economic solutions like uniform taxes, gold and silver money, limited government and the protection of private property.

Anyone who thinks they can predict the markets to a T is kidding themeselves, as ZH comments and 0 Economists proved time and again, with their failed No more than 8% unemployment forecast...

Bendromeda Strain's picture

He did. You said "somehow think they are smarter than 0 advisors". Once you stick a fork in Orszag and Romer, you are left with Summers, because we know he isn't listening to Volcker.

I'll take Sergio Leone over that crew...

ATG's picture

Me too.

The present author is no Sergio Leone or Clint Eastwood, yet...

http://www.imdb.com/name/nm0001466/

GoinFawr's picture

M3 this, M3 that.

LvMises says,

"Hunh."

M2, TMS

Regards

technovelist's picture

The US hyperinflation will be accompanied by runaway interest rates, as the Fed becomes the only purchaser of Treasurys. I'm betting they won't stop before they destroy the dollar, as if they do make any attempt even to slow down the rate of purchase, it will cause a deflationary crash to appear immediately, which will cause them to panic and open the spigots wide.

dark pools of soros's picture

well who buys the treasuries besides the FED during this dump off?  Why does the FED have to buy them?  They make the market since they are the only bidder.  So they can IGNORE all the ones the banks and asset managers are trying to dump...  NO SALE..    BUT the price of the new treasuries can continue as before since the buying is totally rigged anyway...

 

you are going to have to be more of a con man to con these cons

bigkahuna's picture

you are going to have to be more of a con man to con these cons

That is the best way I have seen that stated. People just do not get that though. I tell people all the time that everything down to legal tender laws will be, as a previous commenter said, defenestrated, meaning "thrown out the window". We are so darn crafty to be ahead of the wave of people who will be blind-sided by all of this, but even most on this forum do not understand that the rules are optional right now--and they will certainly not be followed during ANY kind of destabilization. People think they will be able to use dollars to pay for anything? Including a mortgage? Nope. The bank is just going to say, "We'd rather take your house/land/car/whatever". This will get very ugly if/when it happens.

mophead's picture

Aren't you over stating things? It doesn't take everyone to dump their treasurys to cause a collapse, no more than it takes a few traders to pump up a stock. There will likely be enough buyers and sellers to crash the treasury bond market.

trav7777's picture

Dude...let's take a step back and look at this.  Deflationists seem to miss the forest for the trees.

The USG is the most heavily indebted entity on the planet.  How would THEY be able to tolerate deflation?  It'd kill them as surely as it nearly killed every levered player in 2008.

The USG can incontrovertibly not repay ITS debts.  How the hell can the FRN maintain worth in the face of that?  I understand that the "math" says that the FRN becomes more worthful as deflation sets in, but this simply defies any common sense or intelligence, because the FRN is the note of a bankrupt sovereign and a bankrupt central bank.  Only in bizarro world can that become more worthful.

Eventually as deflation continues to grind, confidence in the FRN will evaporate.  Military or not.  Nukes or not.  Reserve currency or not.  And then it is all over in a heartbeat.

Is that TODAY?  No.  Obviously not.  Is it coming?  Of course, just as surely as a Pound Sterling is a fraction of a pound now (11 pounds to the ozt of Ag) despite the UK having suffered "deflation" in the 1930s and god remembers how many wars and the South Seas bubble and all that shit along the way.

The Pound's march toward ever-smaller fractions of an ACTUAL pound of sterling silver has been RELENTLESS.  So shall it be with the dollar.  By hook or by crook man.

Study freakin history.  Deflation precedes devaluation as surely as night follows day.  It is the ONLY way to make the math work.  I marvel at precious dollar FRNbugs, I really do, thinking that this time will be different from every other time in history and the FRN will simply live forever.  It won't.

So, you can either prepare now for that or try to be a vulture and pick up wallets and cellphones and watches DURING the panic stampede out of the burning nightclub.  FRNbugs must fancy that there is some exit that the rest of the patrons don't know about, or that they are fireproof, or Batman.

boiow's picture

well said,  that man.

sid farkas's picture

I feel bad for you son...

The economy's got 99 problems and inflation ain't one.

Spitzer's picture

I can tell by that comment that you have a mind that is not well suited for investing. You are one of those people that cant precive time. Your mind is always in the now, it is stuck there. You are fucked up

kathy.chamberlin@gmail.com's picture

well, i don't know about that.

sid farkas's picture

Yeah, that's why I rode the gold bull from '03-'09. Now I'm long USD, you'll realize I was right in about 6 months, until then there's no point in arguing.

I pity the gold bugs that are about to lose their ass, but I see there's nothing I can do to help.

 

Turd Ferguson's picture

Well, Sid, differing opinions make a market.

Thank you for selling me your gold. Lose my ass or not, I'm glad I have it.

Spitzer's picture

The real unmolested low for gold, when you discount Gordon Brown dumping the UK gold like shit, was about $480 to $500.

So you think that a price that goes from $500 to $1200 over 10 years is an over heated market ?

Is that really bubble territory in your mind ?

sid farkas's picture

Overheated, not one bit, gold doesn't change in value (much). Saying that gold has gone from 500 to 1200 is really saying the USD lost value. I was long PM's to be short USD, but I don't think USD will lose anymore value over the next few years due to a reduced supply of dollars (i.e. deflation).

My current shorts on PM's (among other shorts) are a way to be long dollars against something of constant value. It really says nothing about my view of gold.

 

While I hold austrian school in high regard I don't think they got everything right. Specifically I disagree with their definition of money. If you want to calculate real interest rates I think M3 is closest to the true definition of money. We'll see shortly, if you use M1 or M2 or TMS you're going to come to the conclusion that real interest rates are low or negative, in which case long gold would be a great idea. I use something close to M3 which leads me to the conclusion that real interest rates are positive (and pretty high), which tells me I should be long USD.

Escapeclaws's picture

Sid, I'd be interested to hear what you have to say about gold vs euro. Currently, gold seems to be in perfect negative correlation with the euro. Does that mean that real euro interest rates are negative?

sid farkas's picture

I'm no expert on the euro, but it seems like there is a whole lot more going on over there which you would need to take into account.

Village Idiot's picture

"I can tell by that comment that you have a mind that is not well suited for investing. You are one of those people that cant precive time. Your mind is always in the now, it is stuck there. You are fucked up"

 

 

I am not in a position to comment, but that may be the funniest thing to come out of your spitzer in a while. LMAO

wake the roach's picture

Deflation precedes devaluation as surely as night follows day.

 

Yes, and this is because modern economic ideology does not appreciate the fact that the value of money is determined by each monetary units energy value (the slice of the energy pie, energy consumption that allows the production and exchange of goods and services within an economy). 

Deflation is a loss of energy value per monetary unit (purchasing power) just as inflation is.

Both are a loss of energy value per monetary unit as a result of the increase (inflation) or decrease (deflation) in the total supply of monetary units  within an economy, without a relative increase or decrease in the supply and consumption of energy within an economy (as a result of overproduction or as a result of a nominal increase in the price of energy, pick your cause, energy supply or demand?).

However, it is only through the destruction of these non existent fantasy monetary units known as credits that gives the word deflation any meaning to us at all. Yes, when credit units are destroyed, the real energy value that each credit "represented" is transferred to the pure money supply.

This increase in the energy value of the base money supply via deflation can only be maintained if it once again leads to a sufficient increase in economic activity (energy consumption) that allows the total money supply to return to its previous energy/credit equilibrium and within a time frame that does not lead to a  further serious fall in economic activity (reduced economic activity=reduced energy consumption per monetary unit= less energy value/mon-unit=inflation).

But, if the destruction of debt on balance sheets does not occur allowing asset prices to fall to regain a monetary energy value equilibrium that leads to real economic growth (energy consumption and so increased demand for credit units), people will begin to lose faith in ever regaining the market value paid for the assets they purchased with credit.

Hyperinflation is as much as a result of a loss in faith of asset values as it is the loss of faith in the value of the currency. Obviously, this trend is picking up momentum.

I rushed this explanation but I hope it made sense to someone besides myself and Frederick Soddys ghost. Hyperinflation is assured unless the public has trust that the assets they purchased with credit will regain the previous real market value, or unless uncle Ben can somehow increase the supply and thus lower the nominal price of energy to the point that sustained the previous two decades of credit bubble growth (economic growth can only be produced through an increase in energy consumption, or an icrease in energy efficiency)

Oh, and Mr. Lira mentioned the distribution of credits/ration cards . THAT IS THE END GAME! And let me add that these credits will be given purchasing power not by the energy value each credit buys, but by the carbon units each credit buys. Welcome to the new world folks, if we don't blow the world to hell first.

 

Spitzer's picture

i get what your sayin.

I have some issues with the reasons you think people will lose faith in the currency unit. The spenders in the closed economy will not have as much of an effect on the loss of value of the unit of currency as the holders of debt denominated in the currency will.The debt holders will get the ball rolling before the peasants in the closed economy knew what happened.

 

 

wake the roach's picture

Yes I agree with you... I've already waxed the old longboard, all set for the bond mega tsunami ... Just trying to make a point on deflation but I have always been a useless writer ;-).

 

superuser's picture

This is after a few glasses of wine, so please be gentle (I realize that's not possible on ZH).

Based on your first sentence, are you assuming "energy" = consumption towards some production of a "useful asset"? i'm a bit of a plebe, but if that's your definition of "energy," then doesn't pretty much the consumption of "pure entertainment" shrink your "energy pie?" And if that's the case, don't things like virtual goods accelerate deflation at an even more rapid pace, assuming they gain scale (give a signal) w/o mass adoption (not sustainable)? Sounds like our economy for the past n years...but I'm a plebe.

BobWatNorCal's picture

No, I think he has a point.
Inflation: economy running too hot.
Hyper-inflation: everyone trying to get out of fiat currency.
The trigger could be widespread collapse of CRE, causing a domino of regional bank failures, the FDIC is overwhelmed and payoffs are slow.
People withdraw from weak banks, the domino becomes a firestorm, and we've reached the 3rd gate of financial Hell.

The Alarmist's picture

I dunno ... there is potential energy and there is kinetic energy. 

Inflation is like when you pour a little more water into the glass and thereby increase the potential energy.  Hyperinflation is when you break the glass and find yourself awash in cash that you wish could be contained rather than simply sloshing all around anything that will hold it.

Wait ... maybe inflation is like an electron jumping from one orbit to another ... same mass, but perhaps a different charge to that atom.  Hyperinflation is when the whole atom breaks apart.

Nah ... never mind. Too theoretical for me.

ATG's picture

They may have no choice.

Markets are bigger than the Fed and government,

as derivatives already proved several times in panics.

Unfunded agency mandate liabilities dwarfing the GDP may be about to prove that again,

with default, not inflation.

Repossession is not inflationary... 

Spitzer's picture

Are you aware that we need no money printing and no QE to have hyperinflation ? Looks like not..

When the treasury goes bust because the real economy cannot service the debt, the dollar will go bust. Its that simple.

If there was no bailout in 08, the dollar would have been done by May of 09

ATG's picture

Spitz, arrogant tone does not become you or cover up for lacunae.

Maybe you could tell us how many dollars are actually in circulation, as opposed to virtual credits on the internet that can disappear with the flick of a switch?

Hint: currently a whole lot lot less than inflationary amounts, less than a trillion in a $14 T GDP.

In fact, the average life of a paper dollar is 21 months.

The reason Jefferson and other founding fathers feared Central Banks was their ability to inflate the economy with debt, and then secretly deflate and foreclose it for controlling ownership.

That's what the IMF and World Bank did with a large part of the world, coming soon to a country near US.

Bailouts and stim programs only accelerate the process.

Every inflation since 1776 relied on the dollar as de facto currency when times got tough and dollars got scarce. Argentina, China, Germany, Hungray, Japan, Mexico, Thailand, Vietnam and Zimbabwe were no exception.

Assuming the Fed can and will print its way out of trouble indefinitely might be quite an expensive portfolio mistake.

Currently, all money supplies are slowing or contracting, and the USD is targeting 115, hardly the harbinger of inflation, let alone hyperinflation...

http://stockcharts.com/charts/gallery.html?s=%24usd

 

 

 

 

 

SWRichmond's picture

Tell me how the U.S. will service its sovereign debt in your scenario.

MsCreant's picture

I would like an answer to this too.

kathy.chamberlin@gmail.com's picture

hey seet pea do you think we can get up to a 1000, and celebrate with a party? i will help and leave lots of dumb and stupid comments about off topic things of course.