Guest Post: How Hyperinflation Will Happen

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.

Comments

[Turd Ferguson]

Johnny: Sometime, on a quiet afternoon here at ZH, I'd like to find out just where it is you are getting all of this economic/finance "education". It seems at though you are being fed a line of thought, an "indoctrination", so to speak.

The traditional liberal arts education would present multiple sides of an issue and allow you to seek your own answers. If "your own answers" are similar to what you've stated above, you've either drawn some totally incorrect conclusions or you are in the process of receiving an utterly inadequate and worthless education. 

[ColonelCooper]

He can't help it.

http://www.youtube.com/watch?v=VLnWf1sQkjY

I have officially designated myself Johnny's personal troll.

[trav7777]

Except in this case, he is CORRECT.  He is merely repeating me.

There is no demand for money at 4%.  There will be even less at 18%.

18% is a recipe for the most savage deflation you have ever seen or ever will see, precipitating immediate collapse.

The other guy posting about debts getting sold off is why high rates are associated with inflation when in fact they are deflationary by themselves.

Rates CANNOT go organically to 18%.  They are already ridiculously low and there is STILL NO DEMAND.  The banks and Fed are *following* the market.

An artificial rate regime at 18% would destroy everyone who has any paper.

[Red Neck Repugnicant]

Had the Fed and Treasury not intervened in 08/09 and allowed the system to collapse, where would rates have gone?

Would they have gone to zero to reflect no interest in acquiring new debt, or would they have gone to 20% to reflect no availability of capital to loan?

[Spitzer]

they would have went to 0 after the run on treasuries.

[Turd Ferguson]

So....Volcker decided to raise rates in 1980 because he wanted to rein in the unbridled economic excitement of the late 70s. Is that what you're claiming?

[Hephasteus]

That's not how it works. 18 percent is designed to get debtors. It's to get investors. It's to get people to put money into banks.

Great depression. Australia is deep in the shit. I'm not talking bad. I'm talking bank the fuck rupt in about a week. They insta jack the prime to draw money into the system. People open up money market funds pour money into bonds. It's not a lot of money globally. But enough people run to it to cause a problem. Europe is sweating, america is sweating  what do they do.

America jacks up rates once. Then a couple days later jacks em up again then AGAIN. We go from like 1/2 percent interest to 3.5 percent interest in the span of a week. It draws some money it. That sets off instabilities elsewhere. They get the word from some one somewhere. Drop it or we die. They plummet interest rates back down to 1/2 a percent. The money FLIES out of the banking system.

2nd leg down big crash hits.

Bernanke sees this as a mistake. He sees this as something that can be navigated around. It can't. You can't go broke and find a way through.

High interest rates have nothing to do with borrowing. It has to do with getting people to dump gold so you can get your paws on it and to stuff banks with ye old bad money drives out good.

[tmosley]

You thinking is so persistently backwards.  The reason for the high interest rates was so that there would be a return for people holding dollars.  This stopped money from flowing into gold and silver, aborting the markets attempt to return to a metallic standard.  They can't stop it this time without a default, which is likely to prod other nations back onto a metallic standard even without market encouragement.

Saving is what is needed now.  A high interest rate will get rid of the crappy projects, and encourage people to invest in useful projects with a higher likelihood of generating returns.  With these low interest rates creating gigantic economic perturbations, is it any wonder few people want to borrow?

[aerojet]

Oh, please please please! 18% would beat the living shit out of all the people whom I hate and would be my reward for living within my means! Please, let that be outcome! It would immediately put an end to all the crap I hate--like DWI patrols funded with federal grants, and stupid, yapping politicians buying off the idle idiots who don't care to go to work.  Fuck them all!

[ATG]

We have 40% real interest usury right now, exactly why the economy is imploding:

(-35% real estate prices + 5% mortgages = 40%)

[Take 8% out for Shadowstats 1980 CPI methodology and we're still grappling with 32% real i rates, not exactly conducive to banks, business, consumers, credit, gold or producers.

We remain in the dormant Winter Depression Season of the Biblical Jubilee Cycle...

[Max Hunter]

Great post. This is how I envision it as well.

Nobody wants to be the last person out of a burning building.  Once events are triggered, the fall of the USD will be fast. It will happen suddenly and in spite of the perceived stability moments prior.

[Amish Hacker]

Agreed, but the trouble with the burning building metaphor is that it's not enough to be sitting near the exit. You won't be able to get out until you find someone else who's willing to sit in your seat, i.e. someone who will buy your position. This will happen at a price much lower than what you were hoping for.

[Fake Jim Quinn]

There is a post-roadmap for this...it is called Argentina 2000. Life goes on

[Turd Ferguson]

"There is a post-roadmap for this...it is called Argentina 2000. Life goes on"

Its just not that simple when the currency in question is the global reserve currency.

[Geoff-UK]

Exactly.  I'm guessing the main reason people are unwilling to consider that this time it's world-wide (for the first time in history) is that conceding that necessarily requires they envision the actual scope of the disaster that's coming.

[Brutlstrudl]

 If you hold physical gold and silver, you can afford to  wait and see how this is going to shake out. Yeah, I got cash too but it's not a perfect world. Keep your tanks topped off

[Bold Eagle]

The author has some valid points, but he also fails miserably at times. Who would unload hard assets (houses, cars, etc.) to get commodities during hyperinflation? Will I sell a house to buy heating oil? Hard assets will go up in value along with commodities (I went thru this during post-Soviet hyperinflation).

[Max Hunter]

Good point. But, there is a difference between those that OWN hard assets and those that make monthly payments on them.

I don't know about autos, but i'm certain housing will collapse. Too much inventory, with inevitable interest rate increase, unemployment and price pressures on food and energy will cause many to simply seek out more affordable way. For many this will include living with other family members or friends. This in turn will keep inventories for residence high and downward pressure on pricing to fill inventories.

[Bold Eagle]

With hyperinflation your house payment actually goes down as you salary goes up in the pursuit of food prices & other necessities. Plus, you can grow your own food on your lot. Certainly housing prices will not collapse in hyperinflationary environment with rent prices skyrocketing and housing payments staying the same.

[Max Hunter]

As a percentage of income, housing/rent expenditure will decrease, drastically. I read somewhere this is what happened after the Soviet collapse.

I do think it is hard to predict, but I don't think wages will go up enough to support current or increasing housing/rent pricing when food and energy will consume much of our income.

Residential inventories are massive and will stay that way. Unemployment is massive and will stay that way. Housing has plenty of room to fall in relative terms..

[Bold Eagle]

I am just trying to say that the basic necessities will do just as well if not better as commodities during hyperinflation. It is difficult to predict what happens with housing as mortgage rates will jump, but if you buy a house before hyperinflation starts and lock your rate at 5% you won't be willing to sell it. Rent will go up every month during hyperinflation, you can bet on it. Housing is one of the basic needs. People will try to get rid of paper and get any hard asset they can get. Buying commodities is not an easy option for a majority of population, that's why I think the author of the article is wrong in his assumption that only commodities will go up in value and everything else will collapse. Bonds, stocks will get destroyed. But I'd rather have a gun, food, water and a shelter than a gold bar when hyperinflation hits. 

[RockyRacoon]

So, go smorgasbord.  Have a little of everything.  Get some heirloom seeds and supplies to grow food, stock up on the niceties to trade with (everybody gotta wipe that nasty butt), have plenty of ammo even in calibers you don't own, and -- have a little gold AND silver just in case.  Who says you have to pick one path?  Think of precious metals as a hedge against a Mad Max scenario, in which case it would be worthless.  That is until things start to turn around.

[Geoff-UK]

"As a percentage of income, housing/rent expenditure will decrease, drastically."

Unless our govt follows example of Weimar Germany, RETROACTIVELY denominating debts in gold versus the fiat currency. 

And then those of us who made our mortgage payments become debt slaves for life.

[Max Hunter]

but if you buy a house before hyperinflation starts and lock your rate at 5% you won't be willing to sell it.

Yes, as long as you have a job and you can make the payments.

If not, then that house will go on the market and then the 15% APR loan to get it would cement the decrease in value.

Anyone that owns their house out-right will keep it. We agree on this.. 100%. Anyone in a house now and is able to make the payments will stay.. Again.. I agree..

The problem is, with the economic turmoil ahead (primarily unemployment) few will be in the position to purchase houses and the inventory will be there for years to come in addition to increasing over the next 5 years until employment improves.

[kathy.chamberli...]

bold eagle, i like your name.

bald eagle. i do eagle pose, it is my personal power pose.

[dan22]

It's not deflation and it's not hyperinflation it's a YO YO

Marching Towards a Yo-Yo Depression

[MrSteve]

YOYO= You're On Your Own, so make friends with your neighbors now.

[chunkylover42]

Interesting thought experiment.  And I like that you put an approximate date on it:

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.

[Gonzalo Lira]

Thank you. 

As to putting a date on my prediction: After all, the name of this site IS "zero hedge". So either I'll be right, or I'll be proven wrong. Hedging what you think is for pussies. 

GL

[AD70]

Okay. Let's imagine a collapse of Treasuries.  This is deflationary isn't it?  It would mean a collapse of the entire bond market as yields go up to attract additional demand.  And what happens to the savings of the retail investors that just went from stocks to bonds?  I am aware of a recent HY offering that went 90% retail.  Where is retail going to get the cash for a $100 coffee after their portfolio is wiped out in hours?

To prevent a truly systemic collapse, the IMF, EU, Japan, UK would all line up to buy our debt, guaranteed.  Won't be pretty, and you'll make a killing if you hold TBT, but I don't think there are enough dollars in public hands to get us there.  What do you guys think?  Am I wrong?

[Yikes]

Forgive my lack of familiarity with your acronym.  Whats "TBT"?

[AD70]

It's the ticker for an etf that performs twice the inverse of the Barclays Capital 20+ Year U.S. Treasury index

[deadparrot]

http://finance.yahoo.com/q?s=tbt

[Quintus]

Where is retail going to get the cash for a $100 coffee after their portfolio is wiped out in hours?

From the same place Germans whose portfolios were destroyed by hyperinflation got the Trillion mark notes to buy their coffee afterwards, of course.

[AD70]

But this isn't what the author seemed to be suggesting.  He's assuming his scenario works without the government being so stupid as to print into the problem.  If it does I agree with you.

[YouAreBliss]

They have no other choice, the alternative is anarchy

[Turd Ferguson]

I think you need to consider an even bigger picture.

Half of the total US government debt now has a maturity of under 4 years. Any rise in interest rates will only exacerbate the deficit/debt problem and accelerate the ultimate collapse. Therefore, rising rates cannot be allowed if TPTB are to retain power. 

"To prevent a truly systemic collapse, the IMF, EU, Japan, UK would all line up to buy our debt, guaranteed".

This statement of yours is undeniably correct but TBT is not the answer because rates will be forced to remain artificially low. 

[ATG]

Therefore, rising rates cannot be allowed if TPTB are to retain power.

Thus illustrating the inevitable failure of centrally-planned and run economies and markets.

Gold of course a proxy for real interest rates...

[YouAreBliss]

"Okay. Let's imagine a collapse of Treasuries.  This is deflationary isn't it?  It would mean a collapse of the entire bond market as yields go up to attract additional demand"

You assume the Fed would let that happen.  No problem, with the ability to monetize all outstanding obligation of the US gov't, the Fed just prints and buys.  They can set rates and prices to any level they like - in Nominal Terms.  Not in Real terms though - that is where he mentions commodities prices begin their hyperbolic rise.  It not that commodities rise, as much as the purchasing value of the dollar dissolves. (from my post above).

And what happens to the savings of the retail investors that just went from stocks to bonds?

Treasuries get saved in nominal terms and what ever else the Fed throws it's arms around (decides to monitize).  But it doesn't matter much since the currency's purchasing power itself dissolves.  It's not backed by anything but blind faith, once confidence goes it goes.  Bonds get toasted, stocks rise (looks at what happened in Argentina and Germany) as they are a claim on "real" assets.  Do they rise enough to make up for the lost purchasing power, likely not, since the economy with be in a temporary state of turmoil.  Read the "Lords of Finance", the German economy did function quite well, for a while, in hyperinflation, until it reached the "wheel barrel" stage.   In today's world it's like to happen quicker and more chaotically then in the past.

Once this starts it will be very hard for the world to stop it, only if they monetize as well.  Then it's a race to the bottom.  Hence my argument against SDRs being a safe haven.

[InfinityZero]

If the bonds collapse, the spread will rise. There is always depression before a hyperinflation.

[Don Mattingly]

Not worth even 30 seconds to read. Flat out garbage.

[redpill]

Did you not read it then?  If so, how do you know it is garbage?  If you did read it, why don't you point out why you think it's wrong.

[RockyRacoon]

I just took a look at his history.

Member for  29 weeks 1 day

Seems to post 1 comment per article and moves on.

I wouldn't put too much credence in his opinion since he'll never rebut anyhow.

[YouAreBliss]

If you believe that Timmy has some 30 year bonds he'd like sell you.  3.68% sound fair, how many wouyld you like?

[thepigman]

Yeah, okay. But first you'll need
actual global demand for commodities rather than a bunch of traders wishing
for such. Ain't gonna happen in the
next two years.

[redpill]

If you don't think the treasury-fleeing capital would seek out commodities as a safe haven, where do you think it would go?  

The point was not that commodity prices would rise as a result of economic health, but rather because they would become the store-of-last-resort when a broad loss of faith in fiat currency finally takes hold.  Then all these trillions of dollars sloshing around will seek out a new home because no one will trust cash to hold its value.

[thepigman]

I'll worry about it
when we reach 190%
debt to GDP like Japan. I worry more about JGBs rates than Treasuries. When Japan
finally blows, we'll follow.

[redpill]

Didn't really answer my question Señor Swine.  But it is important to note that JGBs are broadly held by private, individual, domestic citizens in Japan.  USTs are traded around like monopoly money by huge banks and foreign interests.  I don't think it's unreasonable then to suggest that it would be more likely to see a swoon in price of the latter in a short time frame, which I believe the article author suggests would be ample enough to set off a panic.  It is less likely such a thing would occur with JGBs.

[doggings]

I'll worry about it
when we reach 190%
debt to GDP like Japan. I worry more about JGBs rates than Treasuries. When Japan
finally blows, we'll follow.

er hem.. big mistake in thinking, arent you already at 500% (ish) if you actually included all the debts instead of just pretending they dont exist? Fannie, Freddy, unfunded etc?

According to the Federal Reserve’s most recent report on wealth, America’s private net worth was $53.4 trillion as of September, 2009.

But at the same time, America’s debt and unfunded liabilities totaled at least $120,000,000,000,000.00 ($120 trillion), or 225% of the citizens’ net worth. Even if the government expropriated every dollar of private wealth in the nation, it would still have a deficit of $66,600,000,000,000.00 ($66.6 trillion), equal to $214,286.00 for every man, woman and child in America and roughly 500% of GDP.

If the government does not directly seize the nation’s private wealth, then it will require $389,610 from each and every citizen to balance the country’s books.

http://buygoldsilver.org/2010/01/gold-2010-beyond/

[ATG]

we exceed 400% total debt to GDP, higher than the Great Depression, including WWII.

Derivatives and unfunded government agency mandates exceed the GDP by more than 50 times.

100% taxes would not cover our total debts for 50 years...

[deadparrot]

That's a well-reasoned, perfectly plausible sequence of events. And therefore, the actual events will be completely different.

[redpill]

"Everyone has a plan until they get punched in the mouth."

About the only insightful thing Mike Tyson ever said.

[Dismal Scientist]

+1

[Eternal Student]

There are two types of fools. The first has no plan. The other does have a plan, but sticks to it blindly.

Just my experience.

[Double down]

Nice, but it opened the door for all the other possible events to occur.

[Tic tock]

Sudden Debt, Goods price inflation is based on the public perception of 'the maximum price that can be charged for an item'; currency appreciation/inflation is derived more rigrously through hundreds of markets, but which boil down to Supply/Demand multiplied by Stabilty. ..there's a huge difference.. like the price of onions between Kenya to France v. the complexity of their respective financial systems.

Tipping points depend on resilience - goods/production inputs have substitutes, so consumption patterns are buffered by being able to switch from butter to margarine, so-to-speak. Currencies, inter-bank lending is historically low, Central banks have tools in place to counter such a credit-squeeze, but they are designed as temporary measures- there is no framework beyond Sovereign bonds and Central bank lending to maintain a liquid economy. ..the tipping point was, effectively, the Fed stating it would purchase Treasuries- though it willl do so only out of 'the return from assets it absorbed during the rescue of Financial institutions' -which tempers things a little. 

There is no one instrument that can clearly deliniate the bearing stress - capitasl moves from instrument to another on, say, a weekly basis, forming cycles, scalping sometimes profits and cyclically becoming ever more risk-averse. And anyway, right before something does happen, there's sure to be the grandfather of short-squeezes.

[buzzsaw99]

That's messed up.

[tunaman4u2]

My only problem with this article is the ASSUMPTION that BAC, C, JPM are independent & will SELL treasuries in panic. I think they are much more likely on FED speed dial to BUY treasuries for continued favors. 

[redpill]

Valid point, and the reality is the ninnies at those institutions would probably much rather collude to preserve the status quo.  Then again if/when the treasury selling starts, it would only take one of them to give in and start dumping before it's a stampede.

[tunaman4u2]

100% true. Remember though that they are GUARANTEED survival buying treasuries and keeping the status quo. They also most likely have a GUARANTEE from the Fed that principle loss will be replaced. 

Why would banks want to upset the apple cart when they are rolling in it now? Selling bonds is the REAL risk. 

[Quinvarius]

I think part of what he is saying is that Treasuries will retain a high value during the hyper inflation no matter what happens due to intervention.  So you won't see the effects there as much as commodities.  Maybe I misread him or projected my own beliefs on it.

[Gonzalo Lira]

That's exactly right—Treasuries will be artificially bouyed, at least initially. 

GL.

[HankRearden]

Is "Lira" your stage name or just a happy coincidence?  Just kidding. Will you elaborate on why gold and gold miners will diverge under your sceario.

[Geoff-UK]

I think Lira makes a mistake in recommending mining stocks at the height of hyperinflation...mostly because:

Gold inside your home that the government doesn't know about is hard to seize.

Gold mining stocks in your portfolio held at E-Trade, Scottrade, etc.--not so hard.

[kathy.chamberli...]

Gold inside your home that the government doesn't know about is hard to seize.

how in the heck does the gov know about GOLD in your house?

i have gold jewelry so that is legal,  G E T  I T  ,

boyz bitchez

[web bot]

This is an absolutely brilliiant article. One of the first that tackles what is on the way.

[UncleFurker]

OK. But can you say the same for China? Especially if the USA is trying to choke Iranian oil exports at the same time.

[Internet Tough Guy]

I believe a hyperinflation is coming but disagree with some of this.

The idea that everyone selling Treasuries will pile into commodities is a stretch. Also, if commodities double overnight you can bet the exchanges in US and Europe will be closed until further notice. Ditto the stock exchanges to prevent a crash.

And then after you get a new currency things go pretty much back to normal? Why would the commodity exporters (Saudi) take new dollars? Such a hyperinflationary blowoff will have permanent, drastic changes. Things won't be the same; without the dollar as reserve currency the US is just another large, impoverished nation.

[MsCreant]

The idea that everyone selling Treasuries will pile into commodities is a stretch.

Why? In an on the street practical kind of way, that is exactly what I would do, on the ground level, when I believe my money will be worthless soon.  This happens at the macro level first (buy what you know folks will need) thus jacking up the price of what you need, then folks on the street (micro level) panicking and liquidating so that they can load up on what they need. That becomes a self fulfilling prophecy. They can shut down banks and exchanges, but that won't shut down the demand and the panic.  ITG, when those are shut down, what happens then? Faith is magically restored? 

I agree that normalcy may never return after such an event. The secret we all won't speak will be out in the open. 

[Internet Tough Guy]

Big money that is sitting in bonds isn't interested in gambling (mostly). That's why they accept such low yields. They would sooner run to the euro or corporate debt or foreign bonds...I just can't see Bill Gross buying billions worth of pork bellies, wheat, zinc, lead.

[ATG]

In the Crash of 1987, people lined up around the block to buy gold coins, expecting hyperinflation.

Gold then fell from 497.10 to 253 the following dozen years.

http://stockcharts.com/charts/historical/djiagold1980.html

[ATG]

Go ahead and junk the truth.

Your lack of comment says it all...

[Geoff-UK]

Well then the question becomes, does there come a time where people are NOT willing to go back into FRNs?

Or does extend and pretend last until infinity?

P.S. Surprised anyone junked you--you made a valid argument even if I disagree with it.

[ATG]

[ATG]

Sure, if/when there is actual hyperinflationary increase of the adjusted monetary base relative to debt defaults, or a money multiplier well above 1, certainly not in evidence now with adjusted monetary base slowing -90% this year and money multiplier 85.6% despite QE II headline gossip:

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=BASE&s[1][transformation]=pc1

http://research.stlouisfed.org/fred2/series/MULT

[Geoff-UK]

ATG:  I understand you to be saying you reserve the right to change your forecast to inflation when conditions reflect that inflation is happening.  Fair enough.

But the useful thing for all of us is to figure what's GOING to happen.  I think you and I  disagree on the likelihood that the printing press would be turbo-charged to whatever level is necessary to offset deflation--I say yes, you say no.

In short, you feel "Helicopter Ben" Bernake won't do what he has written he would do?  Or that he won't have the freedom to do so? 

[ATG]

G-UK

Found most prediction or speculation about the future a waste of capital.

Historically, corrective deflationary trends lasted at least two decades, longer if government interfered with free markets.

(Tough to have inflation without government.)

All I know is gold and stocks in a downtrend and bonds and dollar in an uptrend...

[pitz]

But there are plenty of listed and tradeable firms that are in the business of producing commodities or supplying products to commodity producers or users, who should experience a commensurate surge in profitability.

So why would the stock market crash?  If anything, the market that would crash in a commodities surge should be bonds and real estate, in particular, long-term obligations.

[tmosley]

Keep those exchanges closed for too long and the world starves while industry grinds to a halt.

[RockyRacoon]

And the reason for that is because there are too many people who don't know how to actually do anything other than shuffle paper.  They should get out more often and see how ordinary people add to the economy.

[tmosley]

There was, and still is a reason for those markets, as perverted as they have become.  You can't run a modern economy without a reliable supply line, and you can't have a reliable supply line without reliable access to raw supplies.  Without the commodities markets (and assumming that another form of commodities market does not spring up on a large scale), then you have to deal with individual companies, a much riskier proposition.

[RockyRacoon]

Gee, risk, imagine that.  My going down to the local farmers market and handing over a couple of silver dimes for a half-bushel of corn is a "market".  All will not die if the effing "exchanges" at the CME go bust and disappear forever.  Maybe an honest market of sorts would grow from the rubble.  (Agricultural metaphor purposeful.)

[MarketFox]

2006/7....Economy = 100/100

Today....60/100 going to 30/100

Where are $Trillions going as an alt to the US$ ?

There are not enough trees to print 70/100....Not even possible for Bernanke to print this....

The situation is that there are no pro football teams left....just the farm league....

The BIG D....

................................

One possible move....????

Complete tax structure change ....ie elimination of individual and corporate income taxes....replaced by a small monthly basis point charge on account balances....

As long as government policies stay on their current track....

THE BIG D....

China will be showing its true colors soon....they are going down hard.....then the commodity based emergers....go down hard....

Nothing but the "farm league" left....

[DoChenRollingBearing]

I agree re China going down hard.

...

Mr. Lira is to be congratulated for at least making a bold prediction.  He is now on record.  

Who knows how this will play out?  That is why I believe in diversification.  Hold gold and FRNs now.  If something bad starts for the USD, buy more gold.

[Quinvarius]

Good article.  I don't think you should be too quick to unload your PM's during the hyper inflation to buy stocks though.  In Weimar, the hangover after the hyper inflation killed the economy and the stock market.  The only thing that retained value was foreign money and PMs.  During the hangover is when you should start sniffing around on the bloody streets.  As soon as the hyper inflation stops goosing the economy and asset prices, those companies have to actually do real business again in a shattered world.  

[MrSteve]

PM and agricultural land held their value during the Weimar hyperinflation, hence references to "farm league" in posts here.

[trav7777]

inflation = decrease in value of money with respect to goods and services.  CAUSES: increase in money supply, decrease in faith in currency.

Deflation = the opposite.

The FRNbugs or deflationists don't seem to understand how this will work.  Credit is deflating.  However, most production is debt-driven.  As debt goes, so goes production.  Normal supply/demand laws with respect to remaining production means prices STAY UP.

The FRN will NOT ever be precious.  Anyone stockpiling the paper notes of a bankrupt state is a fool.

[akak]

Anyone stockpiling the paper notes of a bankrupt state is a fool.

In a nutshell, this is all that need be said.

[DoChenRollingBearing]

akak!  One of my favorites here.

Actually there is a case to be made for holding, say, 6 months worth of FRNs.  If we get deflation, then your $ buys more.

But, as you know, I hold (relatively) a lot of gold.  But, since I cannot predict the future, I think holding some $100s and $20s right there next to your gold is good diversification.

[Geoff-UK]

Also, don't dispute the benefit of having worthless FRNs to trade with while the average Joe still doesn't know the value of gold.  Why give away purchasing power when the dupes will still take the green toilet paper?

[DoChenRollingBearing]

dupe post, sorry

[thepigman]

I think it's all up to Mrs. Watanabe.
When she decides she
wants 3% instead of
1% on a JGB, it'll
spread around the globe.

[thepigman]

whoops...how do I delete a double post?

[realitybiter]

I think blindly dismissing this stab at the future as garbage is weak.

Was the Argentina experience nonsense?  Doesn't apply here?  Does anybody seriously think that American treasuries are sound?  Is Kyle Bass a moron?

Nobody knows how this will play out.  History tells us if you take on debts like we have, and gut your basic economy like we have, it will not end well.  The currency, which is an extension of debt, is doomed.  Prechter and will find his safety in treasuries lacking.  Government employees and their guaranteed pensions will be disappointed.  We simply lack the will to address our debt.  Therefore, it will address us.

Go ahead an mock this piece.  Buy Bernanke's treasuries.  Bon Chance.  Those yields are going to be carved up in a moment.  Look at Japan, look at Japan!  Go listen to Kyle Bass one more time....

[YouAreBliss]

Japan is in worse shape then us.  China and Russia have major problems as well, especially if we monetize. 

It may have been better in the old Commie days - they at least could Command and Control Demand.

[DoChenRollingBearing]

reality is completely correct.  No one knows how this will turn out.

Mr. Lira lays out a good possible scenario.

Since no one can predict the future, best be diversified.

[Gonzalo Lira]

Thank you—and you're dead right: No one can predict the future. 

I THINK I'm right about what what the future holds—but I could be absolutely dead wrong. 

The best way to be prepared, IMHO, is to plan for several contingencies, not just one. Because no matter how sure you are—positive you are—you can always be wrong. 

GL

[RockyRacoon]

I wonder what antagonism people have for the simple imagining (based on current economic conditions mixed with a lot of history) of possible scenarios?  Are they that afraid?  It takes a closed mind, or one frightened out of all reason, to call your article anything but well spoken and not at all out of the realm of possibility.   Not being blindsided is a form of preparation.

[MsCreant]

That is the conclusion I have had to come to as well, Rocks. They have set their path and the feel, I don't know, afraid, annoyed, to have to reexamine it. The reasoning here is very plausible. I have spent a lot of time lurking on this post. The author did a good job.

Thank you Mr. Lira.

[ATG]

They have set their path and the feel, I don't know, afraid, annoyed, to have to reexamine it.

Speak for yourself, please...

[MsCreant]

I never indicated you. Your reactivity is yours. I am very open to it that hyperinflation is wrong. But this is a pretty good argument I am having a hard time refuting. Lots of folks are trying. 

It is presumptuous of me to speak about you now, but you answered. I propose my remark may have hit a nerve. You are obviously smart. But this is allllll about emotion and this may just have the drop on you if you can't be flexible. I have zero need to see you hurt.

Consider the possibility. Run the thought experiment. Don't be attached to every specific point the author makes. For instance, I don't think a run on treasuries is necessarily going to be the catalyst.

[ATG]

Nothing personal here MC, but where exactly did I post you indicated me?

Instead of analyzing characterizing projecting onto others as reactive etc, let's stick to the topic.

The main reason I disagree with GL is the money supply is slowing or contracting and headline rumours of QEII are not in material evidence.

Rolling over a relatively few maturing mortgages into a large portfolio of Treasuries is hardly QEII, and the issue is still deflating assets and incomes with rising real interest rates from the scarcity of productive capital as measured by gold.

As Moses and the Egyptians knew, only debt Jubilee may release us from usury slavery, and the cold hard hearts of the bankers are not ready yet to let the people go, but raised taxes with 0 Care and other 0 fiats in a Depression.

Crimes Against Liberty made a compelling list of current government outrages.

Except for a 13-month bond and stock market rally, confiscatory QE I did not work for most Americans not working on Wall Street getting bonuses.

Since when did big corporate government programs work as promised, despite historical revisionism to justify political revanchism?

Some here suggested QE II would create $5000 gold.

Like the Great Leap Forward and Five-Year Sino Soviet Central Plans.

For that very reason, a gold liquidity trap destroying $755 T in derivatives and unfunded agency mandates and securities on bank books, Central Banks may unlikely to go that way again any time soon to fulfill GL's fantasy.

Those betting on significantly higher gold prices with debt deflation may be in for a rough ride that cash in hand might better serve.

Clearly, investing in hyperinflation the USA has not had in 418 years may have bigger risks. The USA is not Chile or Operation Condor.

It is one thing to assert gold held value 6000 years, another to put life savings into it after it quintupled the last decade and declined twenty years from 1980 to 1999.

Unlike homes, devaluing despite people needing a place to live, no one really needs gold to survive and prosper, especially if it goes down.

People lose their sense all at once in a mob, and regain it later, ruefully, one by one.

Put not your faith in rulers, or in the son of man, in whom there is no salvation.

But store up for yourselves treasures in heaven, where moth and rust do not destroy, and where thieves do not break in and steal.

Cheers MC for hanging in with the thread that refused to die...

[kathy.chamberli...]

Cheers MC for hanging in with the thread that refused to die...

like that one A T G, what's that stand for?

[EconomyPolitics]

I agree with the author on this post.  You can't print money like they have been doing and not have it affect us.  Typically inflation is one to two years off of quatitative easing. 

However, my problem with the article is its smugness.  They could be right.  But, then again they could be wrong.  All this money going from the Fed into the banks that is not being spent has a number of possibilities. 

If it goes into consumer spending we have general inflation.  If it flees the country and goes into Brazil or China, we could have a bubble there, while experiencing no inflation or even prolonged deflation. 

Also, everyone, especially the comments like to look at the past as a good predictor of the future (argentina, japan or weimar republic come to mind).  That is way too easy.  The US is on its own course, wether inflation, deflation, or hyperinflation, comparisons with past regimes are pointless and probably unhelpful. 

One thing is certain is we will default on our debt.  And if hyperinflation happens, it will happen fast.  The US as the reserve currency, could halve overnight. 

[ATG]

You can't print money like they have been doing and not have it affect us. Typically inflation is one to two years off of quatitative easing.

We are in the fourth year of quanititative easing, and banks, IOUs and shadow banks still delevering with the money multiplier below 1...

http://www.shadowstats.com/alternate_data/money-supply-charts 

[Zero Debt]

There's an interesting article in WSJ basically saying: gold doesn't care about inflation or deflation.

http://online.wsj.com/article/SB1000142405274870390870457543367077174288...

Instead, gold cares a lot about how the US dollar currency moves. Correlation between dollar and gold is -0.65 for the last 30 years. That is a sign that holding gold is generally a bet against the US dollar. Gold does not move like other "commodities". Gold behaves like a currency, a shadow currency of the US dollar. So, if you think that the U.S. balance sheet is beyond repair, gold is a sound currency to hold.

[Something Wicke...]

I agree with this author. Except...

I find it interesting that capital fleeing bonds would necessarily flee into commodities. Why? Why would you buy something that has no better chance of appreciating than the instrument that you just fled from. I don't get it. If demand is down in the energy complex why would I park dough there? Is the author more specifically stating the metals complex? I think that's what he meant, ok...maybe. I do get the distinction between inflation and hyperinflation.

This is what I know. The Fed and fractional lending has been, and always will be the problem. How do you convince a nation to eliminate that giant piece of shit when everyone moron in Congress, every TBTF bank and their employees, all rely on it for survival? An entire nation has grown to believe that it is essential when in fact it never was. In fact there is ample evidence that 16 years after the Fed was written into law, lending non existent money led to the Great Depression. The FED is the problem. It always has been and always be.

[weinerdog43]

"I find it interesting that capital fleeing bonds would necessarily flee into commodities. Why?"

You are thinking like a logical investor.  In the situation GL describes, it will be panic.  Logic will not apply.  The money will flow into anything that has perceived value whether true or not.  Oil, gold, pork bellies and the like are all perceived to have value.  I guess my point is that what else could capital flee to that does not have counterparty risk?

[tecno242]

Why would "asset managers" buy commodities like oil in front of an event (sell off in treasuries) that would cause the economy to go south and credit to contract further?

Last time those 2 things were happening, oil dropped to 25$ a barrel.

I agree that right now there is an obvious bubble in all income producing assets, especially junk bonds and riskier assets.  And that bubble will pop.

But it sure as hell won't create hyperinflation when it does.

When that bubble pops, "asset managers" will hoard every dollar they have.

[ATG]

Ask the Foundation, Pension and University Endowments that diversified into alternative universes of commodities, real estate, timberland and venture capital how they liked the results.

Wasn't The Governator hounding CalPers for poor performance before looking for a loan on pensioner backs?

http://www.sacbee.com/2010/08/21/v-print/2973258/calpers-loan-sought-by-...

[iPood]

The thing to do to prepare for hyperinflation would be to invest in a diversified hard-metal basket. 

 [A]t the peak of hyperinflation, the most valuable assets will be dirt-cheap—especially equities—especially real estate.

Why presume real estate will be "dirt cheap" at the peak of hyperinflation? After all, you can't live in a "diversified hard-metal basket."

[blindman]

i,

 that eyeball thing is the best!

[JR]

Bernanke prints while America burns...

On the Way Down: THE EROSION OF AMERICA’S MIDDLE CLASS by Thomas Schulz | Spiegel Online International | August 23, 2010 (translated from the German)

Excerpts …

Two weeks ago, Microsoft founder Bill Gates and 40 other billionaires pledged to donate at least half of their fortunes to philanthropy, either while still alive or after death. Is America a country so blessed with affluence that it can afford to give away billions, just like that?

Growing Resentment

Gates' move could also be interpreted as a PR campaign, in a country where the super-rich sense that although they are profiting from the crisis, as was to be expected, the number of people adversely affected has grown enormously. They also sense that there is growing resentment in American society against those at the top.

For people in the lower income brackets, the recovery already seems to be falling apart. Experts fear that the US economy could remain weak for many years to come. And despite the many government assistance programs, the small amount of hope they engender has yet to be felt by the general public. On the contrary, for many people things are still headed dramatically downward.

According to a recent opinion poll, 70 percent of Americans believe that the recession is still in full swing. And this time it isn't just the poor who are especially hard-hit, as they usually are during recessions.

This time the recession is also affecting well-educated people who had been earning a good living until now. These people, who see themselves as solidly middle-class, now feel more threatened than ever before in the country's history. Four out of 10 Americans who consider themselves part of this class believe that they will be unable to maintain their social status

…

Spiraling Debt

Because they lacked savings, Americans began borrowing money to cover all of their other expenses, including education, healthcare and consumption. American consumer debt now totals about $13.5 trillion.

Many people threaten to suffocate under the burden of their debt. Some 61 percent of Americans have no financial reserves and are living from paycheck to paycheck. As little as a single hospital bill can spell potential financial ruin. …

http://www.spiegel.de/international/world/0,1518,712496,00.html

[Goldenballs]

Welcome to the real world of cause and effect.The more people are on lower and lower pay and loose their jobs the more resentment grows.A country is rich if a dollar changes hand 20 times a day and every one takes a cut,a country is poor if it changes hands only once or not at all.Globalisation,poor wages and the increase of fewer people at the top owning a higher and higher percentage of the total wealth is destroying economies,countries and societies.Simple answer is there is very little money in most jobs compared to the cost of living.As people pay larger and larger percentages of their income on bills there is too little real money to go round.Its not rocket science,every wage cut is another nail in the nations coffin.Until people at the top realise that the millions of small consumers create real wealth we are all buggered and they will ultimately reap what they have allowed to be sown.

[Eternal Student]

Nice article. I have to disagree with a few key points, but it's nice to see an inflationary oriented article which mentions the reality of deflation today.

Most notably, I wouldn't say that we're in the middle of deflation. We've only started it, and it has a ways to run. But once all the excess Credit in the system has been destroyed, then I agree that we'll see serious inflation. And at some point the dollar will have to go to the graveyard, along with every other fiat currency that has been used.

[Cojock]

90% of US citizens are in debt to the other 10% who also own almost all unencumbered US productive assets. Unemployment is high and rising.

I'm struggling to see how purchasing power - whatever it is denominated in - is actually going to reach the people who actually go out and buy stuff, and thereby cause inflation.

Most of those who are liquid are not solvent, and most of those who are solvent are not liquid.

[MayIMommaDogFac...]

I'm struggling to see how purchasing power - whatever it is denominated in - is actually going to reach the people who actually go out and buy stuff, and thereby cause inflation.

You should have read the article.  An explanation of this was included.

[Cojock]

I did read it, and the assumption is that Joe Public - the pretty much insolvent 90% - actually has a way of getting his hands on the 'hyper-inflationary' dollars.

He doesn't.

I'm afraid I don't see the wealthy 10% driving around cleaning out Walmart and stockpiling gasoline any more than they are doing right now via ETFs.

[merehuman]

zimbabwe didnt have jobs either.

[Cojock]

Zimbabwe's domestic productivity collapsed due to catastrophic land reform.

Where is the shortage of production capacity in the US?

As modern monetary theorists point out, Zimbabwe's hyperinflation wasn't a monetary phenomenon. It was a fiscal phenomenon.

[TeresaE]

Have you noticed the unadjusted numbers of unemployed Americans, underemployed and food stamp recipients?

If you don't call what is happening a domestic productivity collapse, then I don't know what its going to take.

Well, I'll take that back, I think we'll soon enough find out what it looks like.

[Printfaster]

In Zim, the teachers and policemen always got paid to buy things. 

The rest of the population ate dirt and killed all landowners for food.  That was the land reform.

[tmosley]

They don't have to, anymore than they had to when oil went to $150.  The currency that pushes those prices up will not come from the average Joe, absent early redemptions of his retirement funds, kids college fund, etc.  It will come from capital that is currently invested fleeing from the corrupt whorehouse and saloon that is our stock and bond market, and plunging into the easiest thing they can get their hands on that they think will hold value.  Commodities are traded, so they are a good choice.  Other than that, the only real choice is FX, but you can't much count on that either, as the world's "strongest" currency jsut collapsed like a heap of pudding.

[Hondo]

I think Gonzalo is correct in his distinction between inflation as we knew it in the '70's and hyperinflation as in the Weimer Republic.  I don’t totally buy his commodity “burp” and Treasury “jiggle” thesis though.  One thing we do know from Japan is that these things can go on for very long times (extended policy errors).  If it were not for the money printing by every other country, including the EM’s, the dollar would have already collapse.  It seems everyone is in a race to debase their currency (so on a relative basis we all end up being the same again).  As this happens it seems gold should be rising against all currencies if not for the manipulation by the bullion banks (which surely can’t last much longer).  Commodities themselves are being dug up with inflated currency (higher nominal costs) everywhere they are found.  The only problem is the lack of demand strong enough to offset the currency weakness.  Without either (or combination of both) an increase in “real” wages or debt it seems to me demand will continue to fall especially in certain sectors of the economy.  Real wages haven’t increased in decades and there is already too much debt to service on a stagnant wage base.  It took nearly two years after Germany had thrown money out of helicopters before inflation started to take off…….but then we were still on a Gold standard and there were countries that weren’t able to debase their currency in a relative sense versus Germany.  We now can all turn on the printing presses to increase the available paper at 20%+ rates.  I’m not sure one is any better than the other.

[MiguelitoRaton]

Personally, I think a stock crash will create a selling envronment and a demand for liquidity where nervous bond investors will say, let's lock in our profits and sell. This will precipitate a pivot from serious deflation/market crash to decline in bonds. Then the foreign bond holders will panic and dump. This will cause a sudden panic of dollar selling and move into various alternative currencies and commodities, which will spark hyperinflation.

[romanko]

I'm not so sure house prices or even equities will collapse in an hyperinflationary event. At worst these asset classes would remain stagnant, while commodities go parabolic. In real terms, as measured in ounces of gold, they’ll go down, but nominally they may even inflate depending on the severity of the hyperinflation.

The necessities, such as food and fuel, along with commodities with the most intrinsic value with rise in price the most, topped by precious metals. Housing and real estate may rise moderately, so to equity – not everyone can or will be willing to buy gold bullion at $50,000/oz. But cars, big screen TV’s and most consumer crap will all be dumped by people seeking to raise cash to buy first food, then pay their utilities, and then if they have anything left over, to buy a few silver rounds for $500 a piece. Bonds and debt, well they might cease to trade altogether, their market price will go to zero.

[Gussiefink-nottle]

You are correct to draw a distinction between high levels of inflation and hyperinflation. The former is a monetary event where the supply of money circulating within the economy increases, the latter is a currency event, where the population totally loses faith in the currency and will not want to hold that currency at any cost and will try to exchange it for tangible things as fast as possible.

The Japanese Yen was always in demand during that country's various sessions of quantitive easing, because Japan consistently ran a trade surplus. Therefore loss of faith in the Yen was unlikely. The dollar is also in demand because it is the reserve currency, and so long as commodities are priced in dollars the USA will have the huge advantage of being able to pay for its imports with its own currency, which is to an extent the equivalent of running a trade surplus.

Hyperinflationary events seem to be limited to countries who accumulate unsustainable amounts of debt and simultaneously run unsustainable trade deficits. This was the case with Weimar, Argentina and Zimbabwe.

Should the rest of the world start to use other currencies apart from the dollar to carry out their bilateral trade, and there is some evidence that this is starting, then the hypothesis that you postulate would have more credibility.

[No More Bubbles]

There is no "money printing" going on.  It's just monetization.   All they are doing is barely keeping up with people withdrawing from whatever investment vehicles they are selling to pay their bills.  It's just keeping the payment flow system holding together.  They are simply running in place........

[hugolp]

Monetization is money printing.

[No More Bubbles]

Semantics.  The point is that it's vanishing instantly.  Its just filling endless holes.  It's a zero sum thing......

[tmosley]

No, it isn't semantics.  It is printing money to pay down debt.  The hole is only so deep.  You really think they can stop on a dime?  You also seem to forget the vast hoard of cash that exists overseas that can come flooding back onto our shores at any time.

[Printfaster]

The hoard of cash is coming back as we write to each other.

Check out the activities of Noble Affiliatiates.  This is not the Noble of the Nobel Prize.  It is the Noble of Noble House.

[Bluntly Put]

Liquidation value

Perpetual debt is more than toxic. It behaves like nuclear fuel: once the threshold is reached and exceeded, chain reaction sets in and the monetary system explodes. To understand the dynamics, we need to refer to the liquidation value of perpetual debt. This is a concept that, for obvious reasons, is not recognized by mainstream economists. If it were, they would be far more careful with their recommendation of unlimited government spending as panacea for all economic ills. Recognized or not, the liquidation value of debt acts as a trigger to a cataclysmic destruction of the economy looming large on the horizon, of which we have had a foretaste in the recent past. The tragedy is that the Big Fix cowboys want to use the same remedy that has landed the country in the present predicament in the first place. Home owners with a mortgage, car owners with a loan, credit card holders, students, state and municipal governments, and yes, the federal government, are drowning in debt already.

Burden of debt

The liquidation value of debt is the amount that would liquidate it here and now . It obviously depends on the rate of interest. The liquidation value of total debt is inversely proportional to the prevailing rate of interest. In particular, halving the rate of interest by the central bank is equivalent to doubling the liquidation value of total debt.

I have been writing about this Iron Law of the Burden of the Debt for many a year and have met with an almost total lack of understanding, judging by the feedback from readers. The lack is due to the reluctance of the mind to admit that cutting interest rates increases the burden of debt contracted in the past , because it contradicts one's intuitive expectation that it should decrease the burden of debt to be contracted in the future . To be sure, cutting interest rates does increase the burden of debt contracted in the past because liquidation value is calculated by capitalizing the stream of future interest payments. Since at the lower rate the present value of that stream is smaller, a shortfall is created that has to be amortized upon liquidation.

http://www.marketoracle.co.uk/Article8847.html

[dot_bust]

Since Bernanke is buying Treasuries to openly monetize the debt, it's counterfeiting. It amounts to printing money to buy money. Surely the U.S. Government's creditors will start to get very nervous, as the value of their Treasuries is in jeopardy.

What Bernanke is doing is the equivalent of my paying bills with a credit card after running out of cash. Eventually, the credit card bill will have to be paid. What will Bernanke do next? Will he pay his credit card bill with another credit card? He can't. He's painting himself into a corner very quickly now.

Without tax income, there's nothing to finance government operations. There's no GDP. Money is going out, and it's not coming in. The bills exceed the income. That's red ink. For businesses, that always leads to bankruptcy. In the case of the United States, it will lead to a currency collapse, which will cause hyperinflation. Dollars will lose value quickly, so goods and services will cost more.

[Gunther]

Gonzalo,

if the Fed or the government realizes what is going on, they might try to stop or slowdown hyperinflation.

To get rid of money someone has to have the money and the goods to exchange for it at hand.

Cash in a supermarket will do for example. How much cash do people in the US have on hand? As far as I know, not a lot. For electronic money there might be limits imposed or simply computers or the internet turned off. AFAIK that happened in Argentina a few years ago when bank accounts were frozen.

The scenario you describe is more similar to Weimar 1923 or Zimbabwe but with a way faster dynamic.

Another effect of hyperinflation in the US$ would be the stop of world trade or the immediate need to denominate and settle international trade in something different and stable.

[UncleFurker]

>Another effect of hyperinflation in the US$ would be the stop of world trade or the immediate need to denominate and settle international trade in something different and stable.

Cough, gold/silver, cough.

[MGA_1]

Nah - deflation first, then  QE2, then deflation, then QE3, then deflation, then Kaboom !

I think it's important to distinguish between a currency crisis and hyperinflation.  We could have a very serious currency crisis with foreigners dumping their dollars, but the dollar still retains it value.  Hyperinflation would happen next when the fed prints money to keep things going.

I doubt we'll see hyperinflation tomorrow, but it could be looming on the horizon...

[blindman]

http://www.chaostheorien.de/interviews?p_p_id=101_INSTANCE_rAD9&p_p_lifecycle=0&p_p_state=normal&p_p_mode=view&p_p_col_id=column-3&p_p_col_count=1&_101_INSTANCE_rAD9_struts_action=%2Fasset_publisher%2Fview_content&_101_INSTANCE_rAD9_redirect=%2Finterviews%2F-%2Fasset_publisher%2FrAD9%2Fcontent%2Famerica-a-walking-dead-zombie-country&_101_INSTANCE_rAD9_type=content&_101_INSTANCE_rAD9_urlTitle=america-a-walking-dead-zombie-country&page=2

Related to the deflation in the U.S., many pundits compare the United States with the deflationary Japan of the early 1990’s until today. Do you agree with this analogy or do you rather share the opinion as it was expressed by Egon von Greyerz, the co-founder of “Matterhorn Asset Management AG” in Zurich, who said that the U.S. is in a very different situation than Japan was and is?[3]

When Japan started their deflationary spiral, they had huge savings. America has no savings. The best comparison for me is to compare the U.S. in 2010 with Argentina in 2000.

Why so?

Because the problem in America is that the bankers and the politicians conspire to loot the country of whatever money they can yet steal. We see a kleptocracy in action and the people will be left homeless and starving.

This is done by design?

People steal money on purpose (laughs). The kleptocrats steal money, because they want to steal money. They don’t accidently steal money. It’s done on purpose. It’s premeditated. Thieves steal money, because they want the money.

...

..

http://en.wikipedia.org/wiki/John_Law_(economist)

[whiteshadow]

hyperinflation or Deflation hu??? how about stagflation....

check this out guys.... http://boombustblog.com/reggie-middleton/2010/08/13/the-spectre-of-stagf...

[septicshock]

I actually thought this post was pretty spot on.  Excellent job Gonzalo Lira.  Well thought out, logical and easy to follow.  First real article that actually recommends what to do.  The hyperinflation events that happened in the weimar republic was very similar..  argentina was a little different cause they went to dollars to trade instead of commodities. 

Not sure if commodities will be the only asset that retains value... I am sure farm land and tools will also retain a lot of value.  Residential properties have to fall, because no one is going to be able to heat up a home.. if the prices of gas/oil really does spike that high.   Stocks will crash, most companies will go bankrupt, and bonds will be worthless for sure.  Also, what are your thoughts on mass hunger, starvation and death?  Riots?  Destruction of property?  Martial law?  World War III? 

However, this article was excellent.  My only gripe was there was no inclusion of peak oil and how it will affect the future.

[weinerdog43]

Why in the world would someone junk you for this post?  I think your points are good as well, and agree about the farm tools also.

[septicshock]

Don't know... :)

[SilverIsKing]

This is the perfect thread for a question I was going to put to the floor but didn't want to hijack another and go OT.

Here's the example: You own a home with a market value of $1 million and are carrying a mortgage of $500k.  Would it be better to sell now, pocket the $500k in equity, and rent a place while housing prices drop further?

Two options as I see it:

1.  Sell now, rent a home, and put the $500k into gold and silver.  If interest rates rise and property taxes increase as one might expect, home prices will collapse and the value of the home may drop to $500k losing all equity.  Selling now preserves equity in form of gold and silver.

2. Alternatively, hold onto home and when hyperinflation hits, value of mortgage debt will become worthless so the home can be kept debt free.  Assumption here is that home owner has a stash of gold that can be used to acquire dollars to pay off mortgage.

Thoughts?

[ZeroPoint]

Are you going to be able to hide 250K worth of gold purchases from the government, which still has the confiscation law on the books?

Are you going to be able to transport it, or just guard it for that matter? It's roughly 12 pounds of gold, but I assume you won't want it in ingots of any size. They won't be easily liquidated.

I would suggest taking some of that money and diversifying it a bit. If hyperinflation comes to pass, food staples, toiletries, medicines, even old clothing - become very valuable as well.

The author doesn't believe in a Mad Max scenario, you don't need an energy crisis or a nuclear war to create roving gangs of outlaws. All you need is enough people pushed to the edge.

[SilverIsKing]

My question has more to do with which is the wiser strategy.  I would assume I can hide the gold although I'm not clear as to the confiscation law you refer to still on the books.

The real question is, during a hyperinflationary event, what happens to (a) mortgage value and (b) home prices?

[ZeroPoint]

It's a good question. I'd like to know myself.

My attitude towards hyperinflation is pretty evident from my first response - it IS a Mad Max scenario. Having multiple friends who lived in the Soviet Union when it collapsed, things were very bad. Granted, the US may not collapse entirely like the Soviet Union, but it's very hard to say what will happen.

Zimbabwe had (has) an oppressive military regime, which kept the people 'in check'. Would we do the same here? 300 million people? Thousands of miles of land? How are you going to pay your soldiers? Rome collapsed when the soldiers were no longer paid.

[RockyRacoon]

Are you going to be able to hide 250K worth of gold purchases from the government, which still has the confiscation law on the books?

The limitation on gold ownership in the U.S. was repealed after President Gerald Ford signed a bill legalizing private ownership of gold coins, bars and certificates by an act of Congress codified in Pub.L. 93-373  which went into effect December 31, 1974. P.L. 93-373 did not repeal the Gold Repeal Joint Resolution, which made unlawful any contracts which specified payment in a fixed amount of money or  a fixed amount of gold. That is, contracts remained unenforceable if they used gold monetarily rather than as a commodity of trade. However, Act of Oct. 28, 1977, Pub. L. No. 95-147, § 4(c), 91 Stat. 1227, 1229 (originally codified at 31 U.S.C. § 463 note, recodified as amended at 31 U.S.C. § 5118(d)(2)) amended the 1933 Joint Resolution and made it clear that parties could again include so-called gold clauses in contracts formed after 1977.

[tmosley]

How many homes do you think you will be able to buy with the gold and silver you bought with the proceeds from the sale of the house?

There's your answer.

[weinerdog43]

How about a 3rd alternative?  Take out a $100,000 HELOC and use that money to buy gold.  Sit on the gold until you can cash it in and use the proceeds to pay off the note and maybe even have some left over for investment.  Plus, you're still in the house.

[Horatio Beanblower]

"The Security and Exchange Commission Investigation into 9/11 Terror Trading -    In the immediate aftermath of 9-11, the media was filled with a flurry of stories about the “shorting” of stocks of the airline companies involved. Then the story died out in the mainstream media and shifted into the realm of para-politics and conspiracy theory. In April 2010, the Security and Exchange Commission opted to make a discretionary disclosure of a portion of their report into the short trading. It found that the increase in “put options” was the product of industry publications and that the the sec failed to discover 'any evidence that anyone who had advance knowledge of the attack sought to profit from the information by trading securities” and the trading was consistent with a legitimate trading strategy.”"
http://historyanarchy.blogspot.com/2010/08/security-and-exchange-commission.html