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

[ATG]

http://www.hereinreality.com/insidertrading.html

Who are we to believe, the SEC and 9/11 Commission,

or our own eyes and common sense?

And exactly how does this relate to the thread?...

[Obnoxio]

I believe Hugh Hendry has it right regarding Inflation/Deflation as we have a recent precedent to the USA in Japan.

http://www.youtube.com/watch?v=cQjD2sw_eg4

Hyper-Inflation may arrive but it may still be 10 to 20 years away. It will be informative as events unfold in Japan as Kyle Bass belives things will go badly there as well.

[nope-1004]

"If the Fed loses control....."

"If the TBTF get nervous...."

"If we aren't like Japan and save less than them....."  (Even though there is a proven model of deflation).

If If If..... appreciate your view points, but just about anyone can come up with a bunch of IF scenarios.  And doing so on a gold bug blog is only going to feed the hysterical behavior that inflationistas believe in.

[RockyRacoon]

There is nothing wrong with exploring possibilities. If you don't agree with them that is fine as well.  As I say above, being prepared includes knowing what could happen.  IF his scenario plays out nobody could say, "Hey, nobody saw that coming!".

[faustian bargain]

All of the future is a bunch of Ifs. If you're uncomfortable with Ifs, stay away from speculating about the future.

[Bonesetter Brown]

We could see loss of faith in a currency and hence hyperinflation, but I don't see how lightning strikes first at the USD.  USD/Treasuries will remain the safe haven until they aren't.  Expect to see a hyperflation event in Japan or the Eurozone before it happens in the US.

How the US responds to Yen/Euro event determines what happens next for US.

I for one think there is a real chance that a Yen event leads to a US-led restructuring.  We give a haircut to Soc Sec obligations, Fannie/Freddie, etc. and move on from there. USD survives a near death experience and becomes de facto one world currency.  It will be painful, just not hyperinflationary painful.  Goodbye Boomer retirement plans.

[RockyRacoon]

Younger workers will be taxed into oblivion, boomers will not be sacrificed.

That's just the way it works.   Yeah, I know, Russia and all that.  The boomers here have a lot more clout than any other set of old farts anywhere.

[Tic tock]

There are other options; why is there a rush into bonds now? come september, a stock market crash, maybe. then a buying opportunity.?. In a sense, this post is measuring the growth rate of trees by standing in a forest.. we are already well into the situation of extreme monetary phenomena, we're watching them play out- but we're watching extremely large, organized players who actually own the entire financial universe: that was the purpose of a fiat-based sytem, which we have. ...the isue on the today's desk is the issuance of AAA bonds- suddenly there is a demand for them. But we've been overbought on bonds on fundamentals for a long time already... so technicals are provided. I'm guessing the Banks are selling this rally. ..I also think that central banks will, one night, cut nominal holdings by accord and restore currency value by reducing debt interest component.   

[Nonconformist]

The ultimate outcome of our current depression will be determined by politics, not the Fed.  We already know what the Fed can and cannot control.  We already know they will provide as much liquidity as they can possibly push into the system.  The unknown is how much stimulus the government is willing to provide as well as what is done with tax, tariff and regulatory issues.  In addition, there are foreign policy and military issues that will also contribute to the final outcome.  Looking at just the monetary issues does not give a complete picture of all the possible outcomes.

[Bubble Shooter]

Gonzalo

Thanks for this great text. I like to imagine the worst scenarios, gives me discipline.

Could you or anybody somehow relate what you wrote to what happened in Argentina at about 10 years? When their goverment decided not to back up their Peso to the US dollar anymore, the crowd went crazy. And banks would not accept US dollar withdrawals.

Suddenly the Argentine Peso was worthless and they almost created another currency.

That's all I can remember...

[Jim Billy Bob J...]

"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. "

Excellent, excellent, excellent.  Finally someone who is willing to play out the current scenerio without fear of being called an idiot.  May or may not be on the money, but it is always best to think about what could happen and be prepared.  The prepared may live to see another day..the unprepared definitely will not.

[Chemba]

Things I can't pay for with oil, wheat, gold, or any other commodity:  15-Apr IRS taxes due, property taxes, credit card bills, mortgage payments, rent, car payment, food.

As demand and employment and incomes weaken, making debt service more difficult, the one thing people are going to need is dollars.

Deflation until the credit contraction is over.

[gmak]

<quoted from the article above>

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.
<end quote>

Brazil had hyperinflation to the extent that they replaced the currency (several times over several decades). Were the people with financial assets dumping them and buying commodities. No. The stock market soared - same as Zimbabwe. It was one of the few available alternatives to currency.

When faith is lost in a currency, people will find something to replace it - not necessarily commodities. Whatever they choose goes up in price. In Venezuela, they are not using oil or precious metals - but automobiles.  In Brazil, it was hard assets.

The "escape" of choice depends on an individual nation's circumstances and the ability of people to buy something with their money. That something cannot always be predicted. The author says commodites. Maybe. I would argue that US hard assets (real estate, businesses, patents, copyrights and so forth) would come under price pressure as another possible destination for the purported growth in currency. Imagine this under a scenario where the owners and producers of commodities decide to accept another currency instead - creating a new de facto reserve currency. The US would be swamped with foreigners (if only virtually) looking to buy real assets and legitimize their currency.

Hyperinflation doesn't occur because of a loss of faith in a currency. It occurs because the loss in faith occurs with the ever-increasing supply of that currency - which leads to the vicious circle of price and/or wage spirals.

You cannot have inflation or  hyperinflation without the supply of money / credit growing faster than the supply of goods and services. The author believes that this will happen because the FED will purchase all treasuries that it can get it's hands on - effectively creating money and putting it out into the global economy. Otherwise, it looks like it will be deflation for the time being.

[RockyRacoon]

Hyperinflation doesn't occur because of a loss of faith in a currency. It occurs because the loss in faith occurs with the ever-increasing supply of that currency - which leads to the vicious circle of price and/or wage spirals.

...talk about your spirals....

[Patriot]

Gonzalo

Great Article.  Question  Will they revalue my debt, pre or post H-Inflation?

When do you want to take your commodites, sell them and pay off your debt like mortgages, or do you want to wait and renegotiate with mortgage holder?

[Return2Sanity]

Interesting thought experiment, but I think the weak link is the idea that the Zombies will sell Treasuries. Remember that the Zombies have capital reserve requirements that must be met. They can only meet these by holding cash or AAA investments, like Treasury bonds. Commodities won't cut it. Plus, if commodity prices start to rise, then we will see loan defaults increase as a result, so banks will need to raise and hold even more capital, and their demand for Treasuries will increase. That's why I think a bond collapse would start outside the US instead. As other countries become increasingly concerned about the credit-worthiness of the US, they could sell Treasuries and bid up commodity prices globally.

[faustian bargain]

What is the likelihood that capital reserve requirements will remain the same as they are today? I'm serious - if the Fed is interested in stealth monetization, this seems like a possible tactic.

edit: stealth QE, probably a better term

[Return2Sanity]

The Fed is primarily interested in 1. making sure Treasury auctions continue to be successful, and 2. stopping deflation. All QE is conducted in the service of these two goals. The capital requirements assist with #1, so they will stay put.  The Fed will happily let banks pretend their worthless assets have value, sure, and they may throw open the discount window to anybody with a pulse, but they won't do anything that allows banks to become net sellers of Treasuries.

Even though I think the Zombies aren't going to be the flashpoint for hyperinflation, there are some other things that could be. One of the points Lira makes (with which I happen to agree) is that the Fed seems totally blind to the possibility that a currency crisis could even occur in the US. They've become convinced that QE is good tool to use during economic downturns, and do not appear to understand that it undermines confidence in the dollar.

[JR]

“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…” -- Gonzalo Lira

“CONCERNING THE U.S.A.,” this prediction was made by Thomas Babington Macaulay in a May 23, 1857, letter to H.S. Randall:

“Either some Caesar or Napoleon will seize the reins of government with a strong hand, or your republic will be as fearfully plundered and laid waste by barbarians in the Twentieth Century as the Roman Empire was in the Fifth; with this difference, that the Huns and Vandals who ravaged the Roman Empire came from without, and that your Huns and Vandals will have been engendered within your own country by your own institutions.”

Thirteen years into the Twentieth Century the private institution, masquerading as a government instituion, was created: the U.S. Federal Reserve System.

[b_thunder]

"—because in a hyperinflationist episode, a house is worthless, whereas 50 bits of silver can actually buy you stuff you might need."   sir, what medication are you on?  regardless, i suggest you start taking something much, much stronger.

House is worthless?  Even in the poorest of societies house is worth something. In fact, if you hold the title for the land and property, and the property right are respected in that given country, the house is worth a lot more than something.  A house has utility.

Can silver buy you stuff that you need (assuming you don't need a house to live in)?  Only if the seller of that "stuff" is convinced he'll be able to trade silver for something else later.  Are you convinced that such trust will prevail?  What if it's a "Mad Max" scenatio, where only fuel and small arms ammunition have value?   Then your only use of that silver is to tie it around your neck and jump off a bridge.

[pitz]

The problem with housing, in Weimar Germany, and in Detroit is not the value or utility of the structure and the land itself, but rather, the expense of keeping it heated and supplied. 

If hyperinflation hits the United States, fuel will simply become unnaffordable for most unless their jobs have a clear nexus to the energy industry, or to export-oriented firms that can manufacture stuff to generate hard currency.

This is how house prices collapse under hyperinflation.

[OursideObserver]

Incisive post Gonzalo, however, I don't think it will happen as you indicate...

I'm sure the Fed's trading desks have standing orders vis-a-vie any 'burp', enough to buy Treasury and the Fed time to organise a media blitz... Warren Buffett and Bill Gross would be on CNBS in minutes telling the world there is no run on Treasuries... at the same time quietly strong-arming the PDs to support them. As hyperinflation is a mass psychological event all thats needed is a reasonably successful bond auction no?

[Gonzalo Lira]

Thank you for your kind words. 

As to the Fed's reaction—you're right, there'd be a PR campaign of some sort, without question. 

But see, there are enough semi-big players who are nervous about Treasuries. No matter how you cut it, with 10% of GDP fiscal deficits per year, Treasuries are bubbling. So big players—Buffet, PIMCO, etc.—might toe the Fed's line and talk up Treasuries, enough medium-sized bond-holders might decide to sell off now while they can. 

A panic happens not when the little guy runs, or even when the big guy runs—it's when the medium-sized guy runs. 

GL

[JR]

+++

RE: Buffett, Gross, Gates, et al. --  “If all the rich men in the world divided up their money amongst themselves, there wouldn’t be enough to go around.”  (Jules Bertillon)

[RockyRacoon]

I'd put nothing past these jackals, from JPM on down to community banks, and -- dare I say it -- Bill Gross.

[CitizenPete]

I am prob missing something, but I didn't like the wand that was passed over the gold price in this scenario, and how the primary holders of T-debts (Japan, China, BRIC, OPEC, etc...)  (or even the BIS) don't intervene to cover their losses. 

So two questions:

1) How will the gold price be contained and by whom, because the FED could dehoard many tons if the price went moonward;

and 2) Why would the major holders of US T debt throw in the towel at that point? In for a penny, in for a (ass) pound... no?

[luckyky]

What's not to understand? If Fed action cause and effect were a balance sheet, Deflation/Hyperinflation are one side and Inflation on the other. Perfectly plausable.

2000- QQQQ Peak

2005-Housing Peak

2010/11- Govt. Bond Peak

And to those that think that a trip to the mini-mart for $5.00 and $10.00 gas and $5.00 loaf of bread can't happen with high unemployment, high Gov. debt, and falling tax revenues - you need to wake-up! 

[ATTILA THE WIMP]

My two cents worth of prediction: HYPER PRICE INFLATION WITHIN 4 YEARS

Here’s why: China is fed up American military encirclement of their homeland which the Chinese can only halt by no longer accepting our currency and rolling over our debt. Imagine the howling in Congress if the Chinese were building up Chinese military bases in Canada and Mexico and we were loaning them tons of money at the same time. Do you get it now?

Also, the Chinese are fed up with sending USA freeloaders more and more real goods in exchange for more and more paper that keeps losing it value. This is a race they know they can’t win - one printing presses will always beat any amount of factories.

The USD share of world currency reserves has dropped from about 71% to 62% since our Glorious Empire kicked off this “Global War Against Terrorism” on September 11^th 2001 when the horrible, terrible Islamo-fascist Osama bin Subcontractor of the Tavistock Institute attacked us because he doesn’t like our Freedom Fries or some such bullshit. Every war brings on price inflation in commodities and this one is no different.

We will have HYPER price inflation in (especially imported) commodities and it will begin when foreigners (most likely led by China) stop taking our paper. At that point I don’t care what the Fed/Goobermint does or doesn’t do. All the USD and Treasury IOUs overseas will come back to America to roost, the only place (not counting perhaps Panama) where the USD is legal tender. Imports way down + money supply way up = HYPER price inflation.

My time frame - four years. My suggestion - gold, silver and canned food. May the Cyclops eat you next to last.

[-Michelle-]

[ATG]

Some 385 comments later, it becomes clear this is a vital topic in the battle for financial survival, with many varying opinions.

To yet again paraphrase Fabian Socialist Pederast Cambridge Kings College Mathematics Don, Wildly Successful Money Manager and Nobel Laureate Lord Baron John Maynard Keynes:

Not one man in a million comprehends the debt deflation that began in the Jubilee Year of 2000 in real terms.

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

http://www.jubileeprosperity.com/

[Gonzalo Lira]

ATG, you wrote:

Lord spare us from would-be Italian filmmakers and writers who, with limited market experience, somehow think they are smarter than Fed.

First of all, I'm Chilean, not Italian. Second, I'm not a "would-be" anything—I've released pictures, I've published books. Third, even when I disagree with people, out of simple courtesy, I pay attention to their positions, and make sure not to distort them just to score easy points. Fourth and finally, I certainly wouldn't dream of condescending to people, once I realized they have a genuine concern which I might not happen to share, but which sincerely worries them. 

If I did any of those things, it would make me pretty much of a dick. Don't you agree?

GL

[Kelly]

ATG has been remarkably patient and didn't call you a dick. You have also been wonderfully helpful and patient. Thanks to both of you. 

The Fed's source of power is the $. For that reason the last thing they will allow is confidence to be lost in the $.  No dollar, no Fed.  

Most folks here don't seem to understand that debt=money. The Fed will have to do vastly more printing to keep up with debt destruction. But then I'm just a J6P, what do I know?

[RockyRacoon]

The system is designed to self-destruct, and it's right on track.  Many have written on similar schemes and their demise.  You may be a J6P but you have no problem understanding the scenario and preparing for it.

FWIW, Gonzalo called himself potentially a dick.  It was not an epithet that was sent his way by others.  That just demonstrates to me his flexibility and his potential for entertaining other points of view.

[ATG]

GL, thanks for clarification on your nationality and bona fides. Hola amigo.

Your provocative essay on hyperinflation certainly garnered more comments than seen on ZH for some time. Felicidades.

I am of Swiss Heritage from Basel with over 50 years in markets and education, beginning with collecting silver dollars, including one of the leading financial firms and universities in the world. I lost a lot of money and learned from the money masters, some of whom spoke at my classes. I am retired and still put out two annual money-back guarantee private subscription portfolios, one @ $2000 per annum for Quarterly Closely-held Dividend Discount Values that was up over 1100% last year, and one @ $4000 pa for Weekly Asset Allocation that is up 1347% year to date. I limited private accredited incentive accounts over $100 M to a dozen and blogged in the public domain occasionally, posting widely-traded extreme values from time to time, eg BP>26.75 and the Hindenburg Omen 11 August 2010 before many noticed. I make more than my share of mistakes, cut losses quickly and stay with winners, having bought gold in 1975 and sold it a few times in 1980 and 2010.

http://www.jubileeprosperity.com/

I have not read any of your books or seen your films.

Congratulations on the Miramax option on 2002 St Martin's Acrobat.

When will the film be released?

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

Nothing in your background appeared to reflect professional investment market experience.

Do we agree ad hominem attacks do little to advance arguments or get closer to the truth?

I and some others commented repeatedly why we thought your essay was aggressively wrong and could lose a lot of money betting with the ZH rabid gold crowd on a simplistic popular headline notion of hyperinflation, when all the US economic, historical and monetary evidence so far was debt default deflation.

With respect for your intelligence and accomplishments, the bargain book counter is littered with bold financial forecasts of the future like yours.

Anyone who thinks they are a better poker player than Bass, Bernanke, Buffett, Doerr, Gates, Rockefeller and Rothschild Brothers, may be making expensive assumptions not yet in evidence.

Since 1492, the USA did not experience hyperinflation, although New World Gold caused a boom and bust in the Old World, notably John Law's Mississippi Scheme and the South Sea Company that at one time owned sovereign debt as a workout, while gold was confiscated, counterfeited and stolen repeatedly throughout history.

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

http://www.international.ucla.edu/economichistory/eh_papers/quinnucla.pdf

http://www.sharelynx.com/chartsfixed/600yeargold.gif

Maybe this time will be different...

[Gonzalo Lira]

ATG wrote:

With respect for your intelligence and accomplishments, the bargain book counter is littered with bold financial forecasts of the future like yours.

You know, I was wrong: You're not a dick—you're just a regular asshole. 

GL

[ATG]

Good luck GL...

[rlouis]

Gonzalo - Thanks for an interesting scenario, you've put together some realistic potential events and consequences that could occur following a bond market collapse.  However, I don't believe hyperinflation leads to anyhting economically worthwhile.  Destroying the pricing structure throughout the economy will create an environment of great suffering and waste. 

A quote Ralph Foster provided in his 'Fiat Paper Money':  

“Once you lose confidence in your currency and its not backed by reserves of any kind-you can’t do anything! You would in no case deposit it with a bank; you would immediately buy anything tangible you could, useless as it may be, for you could resell it.  Nobody at that time who got money wanted to have it at the end of the day.  They would buy anything to avoid further and further deterioration of the paper money.”

[Hulk]

Another Ralph Foster quote:

"It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money."

 Friedrich Kessler, a law professor at Harvard and University of California  Berkeley, who experienced the Weimar Republic hyperinflation

[Panafrican Funk...]

I think the moving parts are all pointed towards a deflationary collapse.  This is a near certainty.  Just think this through tactically.  If the Fed is the power center, and the tool is the dollar, why shoot yourself in the foot?  Now consider your argument, that the banks will act in their own self interests, because they are not accountable to the government.  Now consider that the Fed is owned by the banks, and is not accountable to the government.  Now consider that the government is under the regulatory capture of the Fed/banks.  Get the trend here?  Monetization of the debt will only occur so long as it is profitable.  Pull the rug out, watch the scrubs get shaken out, snap up the remains.  Isn't this what happened in 2008?  Imagine it on a 10x scale.  This is what the last 2 years have been about.  I agree that the strat is to collapse asset values, I disagree that the mechanism will be PM's/commodities.  It will be the suddenly rare dollar that gets it done.

[Implicit simplicit]

The symbiotic relation between the gov., fed and the banks is the only question mark I have about hyperinflation by banks dumping treasuries.

They seem to be acting in a well rehearsed and synced underground play called "Do Whatever Ben Says"

[The Alarmist]

So we get deflation and the savings that I have been watching erode in terms of purchasing power parity for the last 10 years are now actually worth a little more.  Is that a bad thing?

Yep, because it means that the indebted peons who outnumber me by 100 to 1 and whose votes are desperately courted will run the politicos out of town. 

Deflation never was or is a serious threat here.  Inflation (which is a mismatch of money supply to value creation in the broad economy) as well as hyperinflation (a general loss of confidence in the currency as a store of value) are both certainties.

[redpill]

This is a key point that is often overlooked.

Deflation =>  power is transferred to individual savers

Inflation => power is transferred to central bankers

This is the central reason why deflation is not the game plan, and the central planners will do whatever they can to prevent it.

[CitizenPete]

Hmmm, based on all I have read, and the empirical data to date

it is more like:

Deflation=> power is transfered to Goldman Sachs

Infalation=> power is transfered to Goldman Sachs

This is the central reason why deflation does not matter, and why the central planners just say "whatever", as the rest of us try to figure it out.

[faustian bargain]

How much lower is your cost of living, with all this deflation? I'm not sure I see it, here in my life. The credit/debt-money system may be contracting, but so is the underlying fundamental economy - I would guess at an even faster rate, but I don't know the statistics.

[ATG]

Most people alive today were not alive in the last Great Deflation when cost of living went down substantially despite continuing government efforts to reinflate.

Even so, communication, computer, electronic and software costs all came down while improving performance.

Government regulated and subsidized industries like agriculture, education, healthcare, legal justice, military, prisons, transportation increased prices.

That may change as government loses more control...

[Nonconformist]

So, there is a run on treasuries.  The Fed steps in and buys.  The money flows into the banks who deposit it with the Fed.  What is inflationary about that?  We've been doing that for awhile.  Hyperinflation, if it comes at all, will more likely be the result of a major world political realignment that results in the dollar no longer being the reserve currency.  That won't happen until the developing world and resource rich countries are willing to write off their investments in the developed world and we no longer have the muscle to force them to stay in the current system.  When we get to the point where we are threatening other countries with nukes you will know that the game is up.  Until then, count on the US government to do everything it can to maintain the status quo.

[Panafrican Funk...]

Just to put this in a different way (hypothetical scenario):

Start with +10,000.

Debt -2,000

Bump up to +14,000.

Oh shit, debt is actually -10,000.  Our bad.

This is pretty much the upcoming scenario in a nutshell.  Note the net.  We are definitely, definitely headed for deflation.  Mark to myth is programmed to die.

[Grand Supercycle]

Updated S&P500 chart:

http://stockmarket618.wordpress.com

[laughnow]

Humbug. Fed will never let a run happen. Go back to sleep.

[maneco]

You probably also thought  Bear Stearns and Lehman could never go broke in the same year too!

[RockyRacoon]

You keep on snoring there, big boy, we'll tiptoe by you on the way out.

[maneco]

Hi Gonzalo, You are spot on with your article. I see your background is not in economics (history and philosophy) but what you write makes a great deal more sense than Krugman, Hatzius, Bullard or Bernanke put together! Hyper-Inflation, as you point out, is a currency event and nothing else. I grew up in Brazil in the 1970's and early 1980's and we had inflation and then hyper-inflation and it was not caused by a booming economy. I also think that the deflation trade (buy long term treasuries) and all the talk of deflation is a head fake by the Government and the Federal Reserve in order to keep the U.S. Treasury solvent and as you said it in your article one day the head fake will not be fallen for and all hell will break loose! 

All the best,

Mario 

[ddtuttle]

This is the only half-way intelligent description of hyperinflation I've seen. The idea that ordinary inflation and hyperinflation have nothing to do with eachother, I think is really important to understand. I had been thinking about this, but this description put it in focus.

The author understands we are in a deflationary spiral that is being fought off unsuccessfully by the Fed. His assertion that treasuries are a house of cards can be debated (like anything else), but this all seems plausible, if not probable.

However, treasuries are on the boundary of money vs assets: that is, treasuries are the safest form of money (except for gold), so if you loose faith in treasuries you move to real assets, not some other currency.

The one thing missing is an understanding of how other CBs will react. The dollar is the reserve currency, and that means other countries hold LOTS of dollars and don't want to see them go down. The idea they will act together and try to slowly debase all currencies simultaneously has been making the rounds, too. Perhaps this is already going on? Part of this might include plans to hold up all sovereign debt when it gets in trouble. So foreign banks will come the Feds aid when there is a small "glitch" in treasuries, nipping this scenario in the bud.

In the end collective debasing is intended to reduce the nominal amount all these debts to tractable levels, it will just take time.

[Nonconformist]

Collective debasing is exactly right!  The only question is, will the developed world be able to get away with it?

[Gonzalo Lira]

ONLY "half-way intelligent"? ;) 

Thank you for your kind words. 

Re. other Central Banks: If they see a panic in Treasuries taking place in the U.S., they'll get on that panic-wagon. CB swap lines worked once, back in '08, but I don't see them working to shore up Treasuries. I think they (the foreign CB's) would pile out of Treasuries and pile into commodities, like every other investor. 

GL

[Nonconformist]

Since Europe doesn't have much oil or a surplus of wheat or a military capable of projecting power, how long do you suppose they would last on their own?  A refusal to work with the Fed would be a formal separation of Europe from America.  Could happen I suppose if Europe is ready to join a Eurasian block with Russia and China who in turn would be willing to write off Europe's bad paper in return.

[Thunder Dome]

Only takes one CB to hit the exits hard for the whole collusion strategy to crumble.

[Charley]

Interesting scenario. I think what you are outlining here is the mode by which the epoch of money itself comes to an end.

[SgtShaftoe]

Gonzalo,

Your thesis is excellent!  I'm currently reading Ferguson's "When Money Dies" which rings with the same notion of truth and intuitive logic as your thesis.  It's scary, everybody keeps conducting their daily life, until suddenly this could change very quickly. 

[rapier]

There is no mechanism to get money into consumers hands so as to support hyper inflation. Let's remember the consumer is still 70% of the US economy.   All the Feds 'printed' money goes into and stays within the financial sphere. Oil, gold and some stocks may to the moon but little else will.  Nobody will have the $100,000 bills to buy a Happy Meal, if you get my drift. They are not going to print $100,000 or $1 million dollar bills. McDonalds will have to come out with the .1oz of beef and 1/4lb of sawdust burger to stay in business.  The Happy Meal with zeros galore at the end of the price line isn't going to happen.

[RockyRacoon]

Let's remember the consumer is still 70% of the US economy.

Au contraire mon frere --

Consumer Spending is *Not* 70% of GDP

http://www.businessweek.com/the_thread/economicsunbound/archives/2009/08...

The US Economy, Consumer Spending and the GDP Fallacy

http://www.safehaven.com/article/6618/the-us-economy-consumer-spending-a...

[luckyky]

Hyperinflation does not need to be "supported" by the consumer. The price of things will be adjusted as the value of the dollar shrinks. The cost spiral of any good is neither a demand or supply driven event. That "no one has $100000" for a Happy Meal and McDonalds goes out of business is just what he is saying. Price wipes out demand and profit as will not adjusting the price of things to a devaluing currency. 

If money becomes more worthless then prices for things will go up.  

[Spalding_Smailes]

Morgan Stanley

Better the Devil You Know
August 20, 2010

By Arnaud Mares & Joachim Fels | London

This is a perplexing time for central bankers. Inflation expectations remain firmly anchored in the neighbourhood of their targets. This should be comforting, yet it is not. The variance of medium-term inflation expectations has been steadily increasing (see also: "Priced for Perfection...for Now!", The Global Monetary Analyst, November 18, 2009). So stable inflation expectations are not so much a sign of confidence as of indecisiveness across the market as to whether central banks are more likely to miss their target on the upside or the downside. This gives a new meaning to the notion that risks are ‘finely balanced'.

Interestingly, central banks agree, or at least the Bank of England does. Based on its own projected probabilities of inflation two years down the road (taken from the August 2010 Inflation Report), assuming unchanged monetary policy, it believes that it is slightly more likely to miss its target than to reach it. The critical point is that it estimates inflation is about as likely to exceed 3% as it is to fall under 1%. Life was much easier in previous years. Up to 2008, the Bank of England was remarkably confident that it would meet its target without requiring much policy activism. In late 2008/early 2009, its confidence waned but it was at least secure in the belief that it if it was going to miss its target, it would be to the downside. Which policy stance to adopt in response seemed therefore straightforward at the time. Now the central bank still believes that it is likely to miss its target but, with no certainty on which side that might be, the policy response is anything but obvious.

Forced to choose between two evils. With extreme outcomes plausible rather than merely possible, central banks' reactions are likely to be shaped by their relative degree of aversion to inflation or deflation. In other words, which outcome do they most want to avoid? We believe that there are good reasons for all major central banks to fear deflation more than inflation.

The devil you know. First comes the weight of experience. There have been many successful (albeit at times painful) victories over inflation in past decades. There are only two significant episodes of sustained deflation in the past century: the US in the 1930s and Japan post-1990. Neither inspires a great deal of confidence that the means to emerge from deflation are well understood - and effective.

The zero bound is not overcome yet. In a truly deflationary environment (think Japan), central banks lose much of their ability to control their primary tool - the level of real interest rates - because nominal interest rates cannot be reduced below zero. If the risks of inflation and deflation are balanced, it is reasonable to expect that central banks would rather find themselves in a situation where their armoury remains effective. In other words, they would rather have an inflation than a deflation problem. Many suggestions have been put forward over the years to improve monetary policy effectiveness near the zero bound for nominal interest rates: expanding the monetary base (or bank reserves), purchases of long-dated public and private sector assets to push yields and spreads lower, commitment to low nominal policy rates for a protracted period, direct lending by the central bank, and currency market intervention to push the exchange rate lower and thus generate imported inflation. Most have been implemented to some degree in the recent crisis, or earlier in Japan. Neither - with the possible exception of the latter, which is obviously not available to all central banks simultaneously - genuinely overcomes the zero bound to nominal interest rates. There remains the proposal, made by Marvin Goodfriend in 2000, to impose a tax on central bank liabilities (bank reserves) to force nominal interest rates into negative territory. Independently of the merits of this proposal, it is again reasonable to expect that, given a choice, central banks would rather not be put in a situation where they have to conduct yet another monetary experiment.

Independence in inter-dependence. Central banks might be independent, but in this crisis the concept has acquired a Gaullian accent of ‘independence in inter-dependence'. The balance sheets of central banks and governments have become ever more entangled, as central banks have purchased government bonds and governments underwritten the risks assumed by central banks. Aggregating, as one should do, the balance sheet of the government and the central bank, one can see that quantitative easing results in the substitution, on the ‘whole of government' balance sheet, of long bonds for bank reserves. This has two effects: shortening of the maturity of government debt (by three years in the UK) and an increase of the sensitivity of the government's cost of funding to policy rates. Assuming that central banks were equally averse to missing their target to the upside or downside, they should prefer the outcome that is more favourable to government finances: that means inflation.

Inflation might not help a lot, but it would help at least a little. Inflation is no panacea for governments. With a substantial share of government liabilities indexed directly or indirectly to prices (in the UK, unfunded civil service pension liabilities for instance), inflation cannot be expected to fully bail out governments with overstretched balance sheets. This is not to say that some inflation would not help a little. It would certainly help a lot more than deflation (see also "Debating Debtflation", The Global Monetary Analyst, March 3, 2010).

So do central banks really prefer inflation? Past experience might not be a reliable guide to future performance, if only because, as underlined above, the current wide and symmetric dispersion of inflation expectations is a rather unusual situation. But if past inflation outcomes are in any way representative of central bank attitudes to inflation versus deflation, then one would conclude that the Fed and indeed the ECB had rather miss their targets to the upside than the downside. Both the Fed and the ECB have more frequently missed their respective inflation targets on the upside rather than on the downside.

If in doubt, do nothing. Let us now assume that central banks do not share any of the arguments listed above and that their aversion to above-target inflation is just as intense as their aversion to deflation. Then, confronted with a situation where they expect risks to be broadly evenly distributed if policy were unchanged, the most likely policy reaction would be to do...nothing. In other words, to maintain their foot firmly on the monetary accelerator, and keep real interest rates well into negative territory until inflation risks become much more skewed to the upside.

No rush for the exit. The first consequence is that one should not expect central banks to rush for the exit. And this is indeed how our country economists see it:

•           In the US, Dick Berner and Dave Greenlaw expect the Fed to keep official rates on hold until 2H11. Also, the Fed's recent decision to prevent a passive tightening of policy resulting from MBS repayments by reinvesting the proceeds in Treasury bonds across the yield curve can be interpreted as buying additional insurance against a deflationary outcome. 

•           Likewise, in the euro area, Elga Bartsch foresees the first ECB rate hike in 2H11. Moreover, given the ongoing funding problems for banks, the ECB is unlikely to move away from providing unlimited liquidity through its refi operations anytime soon.

•           And in the UK, given the dovish tone adopted by Governor King in last week's press conference, Melanie Baker has pushed back her expectation of a first rate hike to May 2011.

Inflation still the more likely of the two outcomes. If risks are symmetric ex ante, but the response of central banks is asymmetric, then the risk that deflation settles in must be less than the risk of inflation creeping up. This holds at least as long as one believes that monetary policy bears some relevance to medium-term price trends. Against this backdrop, we think that investors would be well-advised to protect themselves against an inflationary outcome to tighten.

http://www.morganstanley.com/views/gef/index.html

[Mark Noonan]

Mildly curious as to why the author thinks that Sarah Palin would advocate printing money?  More likely, she'll advocate for a return to the gold standard.

The chances of this scenario playing out are small, but they are real - and if it happens, it might be intentional:  hyper-inflation would clear off Uncle Sam's debt and allow Big Government cretins a clean slate to borrow and spend some more.

[JR]

It’s become obvious, Mark, that Sarah Palin is the neocon candidate supported enthusiastically by the Hannitys and the Kristols, grabbed early while governor of Alaska because of her Israel-first positions.  The Israeli flag in her governor’s office and an Israel lapel pin were early clues but, immediately, she was the most pro-Iraqi war supporter of all competing politicians. 

And now her statements on the mosque, and torture, and unqualified support for every Netanyahu remark on settlements (even criticizing Obama’s coolness to Netanyahu’s visit following the settlement flap) solidify her position.  Everyone now knows that Governor Palin is 100 percent in the pro-Israel, pro-AIPAC camp.  If President of the United States, would she favor printing money?  Absolutely. Whatever the central bankers want, you can be absolutely sure she will deliver for it’s clear that fiat money and unlimited war are the modern partnership for empire.

“The Fed,” says Lew Rockwell, founder and president of the Mises Institute, “is the institution that has created the money to fund the wars.  In this role, it has solved the major problem that the state has confronted from all of human history.  A state without money or a state that must tax its citizens to raise money for its wars, is necessarily limited in its imperial ambitions.”

Rockwell explains that the Fed permits “Americans to fund, without taxes, the destruction of cities abroad and overthrow governments at will.”  He said, the central bank made it possible “for the U.S. to be at large-scale war in every one of every four years for a full century.  It was never pointed out that this institution would make it possible for the U.S. government to establish a global empire that would make Imperial Rome and Britain look benign by comparison.”

And you’ll never find a more pro-war candidate than Sarah Palin.  The tea party movement did not select Sarah Palin; her neocon supporters have tried to co-opt it, including helping to push her for featured speaker at tea party events.  The tea party’s primary issues are liberty and the dangers from an out-of-control socialized leviathan government. Palin and the neocons are trying to push the pro-war, anti-Muslim, pro-Israel issues into the tea party agenda.

So far, the leading three candidates for the GOP would be Palin, Romney (who will have a hard time getting supporters after quitting short of the goal line last time) and Ron Paul.  IMO, the Ron Paul/Palin split will go in Ron Paul’s favor because of Palin’s stand on Israel, i.e., war.

[Geoff-UK]

Could you be more focused on Israel to the exclusion of all else?

Having said that, I think Sarah Palin is as much a true conservative as John McCain.  Ergo, we're all screwed.

[CashCowEquity]

I welcome $5.00 bread because fat ass carbed up American DONT NEED IT !!!

We will all lose weight as a "side effect"

$10.00 per gallon gas will force people to walk, job and cycle to work.

Traffic problems will vanish into thin air.

Woo hoo !!!

[TeresaE]

Thank you, thank you, thank you.

Reality isn't always pretty.  Though I am sure it won't 100% follow the plan you outlined (damn humans always stopping the music and firing the band), but I would bet enough of it will happen, your timetable just may be slightly off.

Good luck everyone.

[bankonzhongguo]

Someone above made mention of the Happy Meal costing $1MM.  Operationally, I would spark everyone's regional awareness of the "Dollar Menu" at many fast food joints.  I would make mention that the Wendy's Jr Bacon Cheeseburger still costs $0.99 as compared to the same $0.99 15 years ago - factor inflation into that equation to check the current value in real dollars.  Now I understand the whole concept of loss leaders for consumers, but look at the response of the Corporate Fast Food Nation to the current deflationary enviornment.  Compare the price of feeding your family off the dollar menu tonight compared to going to the local grocery store for hamburger helper and salad.  The point here is THAT PEOPLE DO NOT HAVE THE PHYSICAL MONEY TO MAKE ENDS MEET RIGHT NOW.  Make gas $10 gallon and you are going to have 100 million ideal folks with zero capacity to refill their Prozac perscription, buy beer and order porn.  Congressman and their staffs will be swinging from the streetlights and your local Jewish Community Center will be an armed camp.  There won't be interstate commerce anymore, just local interests making due without the use of the greenback.

[rapier]

How do the $1,000,000 dollar bills get into citizens hand to buy that $750,000 Happy Meal?

I am not sure of the exact mechanisms that went on in Germany or Zimbabwe but have a vague notion and they don't play here.  All printing here goes into the financial economy.  Some assets will explode as QE2 and 3 and 5 proceed but there is no way for the system to put money into consumers hands.  They of the 70% of the economy. Before the quarter pounder goes to $50K it will be the Quarter Pound sawdust buger with a light lard glaze for $3.

[HungrySeagull]

I can withstand 20 dollar gasoline per gallon for a while, Then fall back to my own reserves that will keep at least one vehicle going for 8 weeks minimum without subtracting any routine.

Simple. Pump out of my truck's large fuel tank for a number of weeks and then crack open the storage.

But once that is out the net income over and above bills will not meet 20 dollar gas and we will have to stop driving.

That is ok too.

But this Nation will stop when the Truckers refuse to pay 16.00 Desiel and Gas Stations, Food Stores and Walmarts run completely out in that order. With future cargo delivery threatened across the board (Trains included) things will be pretty much blown wide open.

What is not ok is watching Mad Max from 1979 and seeing how they were getting fuel off a moving tanker truck. That I found disturbing.

[redpill]

Especially when it turned out to be full of sand, eh?

Oh I can't help it, wrist-mounted crossbows, bitchez!

[HungrySeagull]

That too. Or the tank is punched out a hole in it and youre empty with the thieves making off with a variety of containers filled with the gas you thought you had while sleeping one night.

It would be interesting indeed.

[RockyRacoon]

President Nixon Imposes Wage and Price Controls

http://www.econreview.com/events/wageprice1971b.htm

[geopol]

Good night,,,

http://www.youtube.com/watch?v=C8AH5Zvzu2I

[MsCreant]

Nice!

[assumptionblindness]

I have nothing to say...'just wanted to add to the comment total.  ZH rocks! 

[Turd Ferguson]

If Johnny Jizz ignores his homework and chooses, instead, to keep banging away on this thread, we might make it to 1000!

[RockyRacoon]

Oh, you can bet he's banging on something...

[kathy.chamberli...]

female john O, is adding to the count with her, nuff said.

[Strongbad]

I'm curious, what do all these deflationists think will happen when the dollar gains value and the FedGov and all the States have $60 Trillion (or whatever it is) in unfunded liabilities?  Do you really think we will just default and no one will be tempted to run the printing press? 

[Turd Ferguson]

The will certainly run the presses.

Keep in mind that, in the Forex market, the currencies all trade against each other. Relative strength and weakness are only a function of the strength and weakness of other currencies. In this way, some stability is achieved. But held against some standard such as gold, all currencies are in a race to the bottom, alternating the leads like horses running a mile and a quarter.

[Eternal Student]

I can't speak for all the Deflationists, but from my view it depends largely on the amount of Credit left in the global derivitives market at that point. That's the fatal flaw of the original article, it leaves this out completely. How one can ignore something vastly greater than what the Fed can cope with is beyond me.

I have to give the Inflationists credit (ahem) though. Last year, they claimed massive inflation was about to take place because of all of the Fed printing, and they all dismissed the impact of declining Credit and M3. This year it's the Bond bubble that's going to explode, and cause massive inflation due to the dollar crumbling. At least now they are adding in the arguments that the Debt Deflationists have been making. They still have it wrong, but at least that's progress.

But it's not inflation that's on the short term horizon. Again, the effect of a Bond Bubble bursting doesn't take into account the full Credit supply; most notably, the Global Derivatives Market. This is far, far greater than the GDP of all the world's counties combined. And those contracts are largely settled in the Reserve Currency. As those implode, the effect is deflationary, and far larger than any monetization. Think of it as the mother of all margin calls. The Fed probably will try to print. It will be able to get away with it for a while.

Afterwards though, when all of the Credit has destructed, there will be Hades to pay, and there won't be enough cash to do so. The Devil will probably only take gold.

[Geoff-UK]

A deflationist argument that doesn't go ad hominem and actually provides an argument.

THANK YOU!

[Thunder Dome]

I've been watching Man Vs Wild for three years know.  Saw a grasshopper on a walk today and am pretty sure it was edible.

[RockyRacoon]

Actually, the technical word to describe insect eating is “Entomophagy.”

http://coolbugstuff.com/recepies.php

[kathy.chamberli...]

i don't do bugs. i don't really do racoons either. they were always breaking into my house and making one hell of a mess. i couldn't trap him by myself so i got the animal protection people to trap him and change his location. just a couple of months ago i set some fruit outside to ripen and forgot to bring in at night. well of course a racoon smelled the apples and made a mess. not so good. but your pretty cute, rocky.

[ATG]

Pesticides?

[chindit13]

Don't know why the author dismisses Japan, giving it a relative clean bill of health.  While there are a dozen possible scenarios that might play out, I am of the view that the sparkplug for the great decline might be semi-invisible Japan.  (As an aside, I wonder the ramifications of Japan now being No. 3.  The national psyche did not take well to seeing all of those Japan as No. 1 books of the 1980's on the "steal me" tables at Borders.  Falling behind eternal rival China might well have implications that have yet to play out.)

Japanese "savings" are a 1980's thing.  Back in 1989 the rate was 17%.  Owing to years of "ZARuPu" (Japanese ZIRP), plus an aging population that now must dip into its nest egg, Japan's savings rate might go negative this year.  As for those "savings", perhaps like any country, Japanese savings are illusory.  There are supposedly trillions of dollars worth of savings in the Yucho (Postal Savings) and Kampo (Postal Insurance) accounts.  Good luck with that.  I repeat this incessantly, but those two major accounts suffer from the fact they were used to try (unsuccessfully) to prop up the Nikkei in the 1990's.  They also suffer from the peculiarities of Japanese accounting which encourage crossing winning positions to recognize gains, and holding losses forever to avoid having to recognize losses and thus offset recognized gains.  Just about all gains have been realized, leaving the equity portions of these funds deeply underwater and the JGB portions at or near current market. Japanese pensions are managed by the same rules.  Massive underfunding is not just an American malady.

While still needing to fund an already massive deficit, and adding to that deficit with planned new Supplemental Budgets, Japan will see the first hiccup in an auction.  Japan cannot afford rising rates any more (maybe even less) than the US.  JGB's back at 1990 levels would have 100% of total government revenues going to debt service alone.

Do rising rates destroy Japan?  Does Japan instead let the yen go?  Does Japan buy time by trying to dump its UST holdings?  Does the US, in response to a UST selloff initiated by Japan, repudiate by foreign-held CUSIP?

Or do we just stumble along for another five or ten years debating whether we get hyperinflation or hyperdeflation?

[Rob Jones]

People are pointing to Japan as an example of how governments can run big deficits for decades without defaults or inflation. However, I understand that Japan now has around 1000T yen of debt vs. revenues of around 36T yen/year (a debt to income ratio of 25 to 1). So if interest rates went up to 4%, all of their revenues would be required just to service the interest.

It seems that countries everywhere are piling up huge towers of debt and it is only a matter of time until one of those towers collapses, bringing all the others down with it. Not even the craziest subprime lender would have leant to an individual with a debt/income ratio of 25:1, or even 5:1 as in the case of the US government. But people are scrambling to buy treasuries yielding under 3%.

"Fools rush in where angels fear to tread."

[kathy.chamberli...]

H I    chinthe

how's burma?

well, you looking good as ever, keep up the good work, sir/

[RumCurrency]

No one is going to sell treasuries, especially the banks, since the spread between the Fed Funds rate and treasuries is still risk-free money.  If there is a sell of in treasuries, the big banks will just buy more since they will get an even bigger spread.  There is no reason to go into commodities because they are still dictated by the forces of supply and demand...  demand will continue to drop long-term as the average American becomes less financially secure.  Economic conditions will be choppy for many years to come.

[RockyRacoon]

Interesting, but you assume that all conditions will remain static and nothing will change in the relationship between the Fed and the TBTF banks, no change in public sentiment, no change in the manipulation of the metals markets, no change in the employment status.  Things change -- and any one of the above can foment an economic revolution.  "Choppy" does not describe it adequately.

[tom]

I like that the author is trying to think through how the endgame plays out. There are fewer and fewer chess pieces on the board and this does have to end somehow. But I don't find the scenario plausible.

The Fed won't overreact to some market jiggle. Ben and the other Fed board members do not have that kind of mentality. They like to ponder trends, they like to feel above the day-to-day. And when they act, they want political cover. They don't want to be the target of open criticism from either of the major parties.

After the Fed's latest decision to reinvest maturing mortgage bonds into Treasuries, I think it will be a while before the Fed moves again. I don't see them even openly talking about QE2 before plenty of figures have come in making it irrefutably clear that the economy is shrinking again. And then there's going to be some agonizing, some sniffing of which way the political winds are blowing. Treasuries will not be hurting; they will still be getting the strong safe-haven buy, especially since there will be so much anticipation of QE2. I do think Ben himself is already a proponent of QE2, but don't forget that he's a soft, cautious, ass-covering-by-nature academic. He won't do it without a strong majority on his board and a nod from both parties.

If and when QE2 is announced, which I think would be a full monetization of the deficit, there will be a gradual, building stagflation that will drive up interest rates. As interest rates climb, the Fed will face a new choice: either throw in the towel, letting yields on Treasuries rise and thus forcing the government to default and restructure, or move on to QE3, which would be monetization of the deficit plus debt repayments. That QE3 is where I see the possibility of hyperinflation.

Large-scale QE is an absolutely crucial prerequisite for hyperinflation. Without it, a massive spike in the cost of fuel would simply force people to stay home, even if that meant losing their jobs, and bundle up.

And one more point: commodity markets don't work like that. Before you go buying the hell out of futures, you need to be prepared to take physical delivery of enough of global supply to sustain the driven-up price, which won't happen in a day, especially not with a market as massive as oil.

http://keynesianfailure.wordpress.com/

[MsCreant]

tom,

If we all agree together that the treasuries are worthless, they are. The fact is they can't be paid back. Impossible. We already are there. Now we just have to have a moment where we realize everyone agrees. No large scale QE needed. We are there. Now. It is just a matter of socially co-constructing the definition of the situation. That's it.

That people can't see this, and chase after details not seeing this big assed elephant in the room, floors me. I am not so arrogant to think I know when this will happen. But I can't find a way to negate what this author is putting out there. I would like to.

[ATG]

If we all agree together that the treasuries are worthless, they are.

If we all agree black is white, is it, Taming of the Shrew notwithstanding?...

[MsCreant]

And so we will argue through the threads. The debt keeps growing. The interest keeps growing. There are many estimates out there regarding our unfunded liabilities that range from 76 Trillion on up. WE CAN"T PAY FOR IT ALL. There is a point we will borrow more than we can make payments on. I think we have already passed it. Tax base is shrinking (income is shrinking) yet we are borrowing MORE money to pay our bills? If everyone wakes up at the same time and defines it at the same time as worthless, no one will want to buy them and they will be worth NOTHING in that moment. If no one will buy it, it is worthless. It has no exchange value. 

The fed speaks about CONfidence so much for a reason. We must believe we will get our money back, and interest. There is a point you say, "Hell, just give me my money back." Then you say, "Hell, hope I can cut my losses." Then you say, "Good God, hope I don't lose it all." In that emotional state, you dive into anything that you do believe in at the moment. This make commodities a compelling choice. At least you have something besides an empty promise to be paid back someday.

The elephant in the room is that we all know it is insolvent. Who ever runs for the door first wants to do it quietly so as to not get run over in the stampede. 

[ATG]

We agree on the destiny of Treasuries MC.

So does Morgan Stanley today.

The long bond is still targeting 178 in a blowoff.

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

No one knows the time or place of the biggest bubble default, debt derivatives.

Meanwhile cash in hand may be safe and appreciate more than gold.

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

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

[wkwillis]

Germany got more in loans (that they didn't pay back, any more than the French, British, Italian, or Russian governments paid back) than they paid in reparations.

Germany got reparations, they didn't pay them. After Keynes wrote his essay (The Economic Consequences of the Peace) and the communists won the civil war in Russia towards the end of 1919, the West wasn't about to let Germany go communist under any circumstances.

So we paid them reparations. We even stopped the French, Poles, Czechs, etc, from stealing the land that belonged to the Germans in the German areas that were occupied by other governments.

Contrast what happened after World War II, when Germany lost half it's land and huge quantities of movable assets to Allied reparations.

[Reese Bobby]

These are the criteria I believe should be applied

'Cause I step in stride

These are the criteria I believe should be applied

[blindman]

i would guess hyperinflation of any currency can only

take place when a currency is dying and another

currency is available to do the job of a currency.

so to predict hyperinflation of  a currency is to predict

the rise of another to take its place.  what is the other.

and this can't happen by accident.

.

this is the discussion i overheard at the bank between

two customers who were on the floor as the bank was being robbed.

i couldn't believe that they were concerned about inflation / deflation

in the middle of a bank robbery?  go figure, intellectuals.

.

so i asked, "do you two think the net result of this bank

robbery and all the other robberies that have been taking

place recently will be inflationary or deflationary?"  they said,

that is a good question.  i don't know, but it is time to empty your

wallet.

.

[MsCreant]

No new currency needs to be on the horizon. We are bankrupt. All we need to do for this to happen is to run away from Treasuries and other paper assets at the same time. 

[blindman]

run to what?  we have to have something to run to

or we will stop running.  no?  currently people

run to fed res notes because that is what they are

taxed in.  when the government demands payment in

something else we will run to that or nix the gov.?

[kathy.chamberli...]

we have no place to runned.

[MountainHawk]

Now someone quickly take this script and make it into a movie

Or we could have the Taiwanese Animated News do a quick mock up!

http://www.nj.com/entertainment/tv/index.ssf/2010/08/jersey_shore_animated_taiwanes.html

[DavidC]

Thought provoking and interesting. Thanks Gonzalo.

DavidC

[Gonzalo Lira]

You're very welcome. 

GL

[LibertyIn2010]

I noticed on CNBS today they officially transitioned over from their normal positive spin of bad economic news to pre-empting bad economic news ahead of the markets (see Tuesday's home sales data). 

I think the band has just about stopped playing and people are starting to realize there aren't nearly enough lifeboats. 

[StychoKiller]

Ya know thing s are bad then the Govt. can't even run a hyperinflation event right!

[Oh Jesaulenko -...]

Dear Tyler,

this Johnny Bravo person seems to be posting a bit too often.  Perhaps you could limit people to, say, 10 postings per day?

[RockyRacoon]

Wouldn't be so bad if he had something to add other than the same old spiel.

We know where he stands after all this time, so what's the point in replying to him?

Sad.

[Geoff-UK]

Just skip Johnny Bravo's posts (and reply posts) until you get to the next comment.

Easy.

[ATG]

Amazing how easily some people are willing to limit other people's freedom.

What next, a comment rating Board?...

[kathy.chamberli...]

avatar police. i'll be the captain.

[ATG]

!

[StychoKiller]

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.

Govt Stupidity:  virtually infinite supply with ZERO demand!

[GetReal]

Besides this blog I visit Mish, Karl D, Peter Schiff and Reggie Middleton's websites regularly. As far a prognostications go, they all are lacking. Each, however, has its own strenghts and weaknesses as alternatives to the MSM -- which, everyone who visits these blogs knows, is a virtual 'front office' for the White House.

The Internet aids freedom of speech. Relish it and learn through the prudent use of it.

Thanks Gonzalo for your provocative essay. Could you please recommend other blogs, authors, etc. you have benefited from?

Much obliged.

GR

[ATG]

Disney, Google, T, VZ et al against net access neutrality...

[kathy.chamberli...]

you should visit M A X   K E I S E R, cause you get to look at him on some programs. i can't any more cause he makes me wet my pants, a bit.

[Geoff-UK]

In a world where I don't have time to assimilate information via talking heads, Max Keiser insists on his internet TV format.  Yeah, he's a smart guy but I barely have time to read financial info and still get work done throughout the day.

So yeah, he might be the smartest guy on the planet, but who has time for his daily audition tapes for a show on Fox Business?

[kathy.chamberli...]

e x c u s e   ME

mi scusi

[gloomboomdoom]

Peter Schiff and Ron Paul were wrong 2012?

http://youtu.be/ny5QxZBGJtY

http://youtu.be/RPSJDqx4Dq4

[GetReal]

Your point would be...?

[Teaser]

I logged in and this post had exactly 666 posts at that time.  I had to post just to get off that number. 

So, since I need to say something, take a stand, here it is.

All you deflation bitches out there?  Yeah, you peeps.  It's half time, your team is ahead.  But, You Are Phucked in the second half because Benny B has shaken off the first half jitters, and is going to proceed to stuff green pulp down your throats in the second half. 

[JR]

ZenO, below, has started us on Yogi witticisms and for your astute call on Benny B in the second half, all Yogi’d  have to say is: “Somebody’s got to win, and somebody’s got to lose, and that was us.”

[ATG]

Believe it when we see it.

Still no Ben Franklin Helicopters.

The $27 T Bailout Stim failed against $755 T derivatives and unfunded agency liabilities...

[kathy.chamberli...]

what does 666 imply?

[YuShun]

Gonzalo Lira,

Thank you for your insightful essay, particularly your succinct discussion of why some prices rise while others fall and your paradoxical comment that “In hyperinflation, asset prices don’t skyrocket—they collapse…”

 In your second paragraph you mention ‘the classic Keynesian move”. Am I wrong to think that domestic spending - repairing things (like bridges) and building things (like subways, light-rail systems, & high-speed intercity railroads) - would be a more “classic” way “to prop up aggregate demand” than spending hundreds of billions in fighting wars in Asia?  Wouldn’t switching from foreign adventures to domestic construction reduce the risk of, or at least postpone, national bankruptcy?

[Gonzalo Lira]

Thank you for your kind comment. 

As to how to prop up aggregate demand, certainly spending on infrastructure would be more useful than spending on wars. After all, war and war-making equipment are net losses to the economy, whereas spending on infrastructure adds to a nation's capital. 

However, both ARE in fact "stimulus spending"—both inject fiscal monies into the citizenry. What differs is the net long-term benefit to the country. Spending on wars—especially pointless, immoral wars—leaves a country with nothing, whereas spending on infrastructure, like the Japanese have, leaves you with a better country. 

GL

[kathy.chamberli...]

oh that is a beautiful neck with a red bill?

[MsCreant]

Black Swan Kathy, like you.

[kathy.chamberli...]

got it, ms C. still beautiful, i like it a lot better than the plain old white ones.

[zen0]

If the fans don't come out to the ball park, you can't stop them.

Yogi Berra

[JR]

I can see that happening. As Yogi says: "If you don't know where you are going, you will wind up somewhere else."

[Fix It Again Timmy]

Doing all the wrong things and expecting things to turn out right is a rather large leap of faith, it will be interesting to see how things play out.

[GetReal]

"If the fans don't come out to the ball park, you can't stop them."  Yogi Berra

Modern day translation -- and one I've grown to hate -- "It is what it is."

[spinone]

Hyperinflation happens when people are eager to trade their dollars for anything they can barter later.  A gross of letherman multitools, shoes that dont fit.  Anything to be a temporary store of value, that they can trade for food and necessities next week.  Its a panic.  Its desperation. Will we get there?  I doubt it.

Will we have an orderly re-valuation of the currency?  Yes, probably.  It will still be called a dollar.  And we won't need pennies anymore.

[tmosley]

Don't count on not needing pennies.  In the past, when currencies have been reissued, coins have retained thier face value in the new system.  People know this, and as such, small change disappears quickly during hyperinflation, and doesn't re-emerge until the new system is in place.  If the new coins aren't transitioned over to hte new system, they can simply be traded as scrap metal.

Of course, most people don't want to withdraw thier life savings in nickles, which is one of the reasons people buy gold and silver.  They transition just as well at least.

[ATG]

1909-1982 Copper pennies worth two cents...

http://www.coinflation.com/

[laosuwan]

I like your analysis of the difference between inflation and hyperinflation. Very insightful.

But I think a failed treasury auction will just mean higher interest rates, which would actually make the dollar more not less attractive, at least initially.

I also seem to recall people predicting the same thing happening to Japan more than ten years ago and its currency is doing pretty well still compared to other countries.

The world will end some day but nobody knows how or when. I am sure many people wish they had invested the money they wasted on textured vegetable protein in the 1970s

[RockyRacoon]

DOES THE FED MATTER?

Posted: 23 Aug 2010 11:30 AM PDT

Peter T Treadway, PhD
Historical Analytics LLC
DOES THE FED MATTER?
August 23, 2010

[anvILL]

There are many countries that went down due to hyperinflation.
But how many went down due to deflation or hyperdeflation?
There were often deflations prior to a hyperinflation, but its always hyperinflation that destroys an economy.
So in the end, what we should be fearing is hyperinflation.

I do take some vacations to the deflation camp every once in a while because it does happen,
but the inflation camp is where I live.

[Won_Over]

Overall it was a good article GL, Thank You. For all of you who after 750 comments (not that ZH doesn't like it) still cannot agree, I have this video.... http://www.youtube.com/watch?v=0K0byK-me3c&feature=related

Take it out and go to sleep...

[yabs]

I see hyperinflation as  aloss of confidence not just a large rise in the money supply. Howbere considering they are already monetenizing the debt there has already been a little loss of confidence. In the end though in a debt based ssyetm when it starts reversing I do not k now how hyperinflation will occur.

Did Zimbabwe have non debt backed money?

[chindit13]

Mr. Lira,

I believe you have set the modern day ZH record for drawing the most comments to an article.  It is almost Beamon-esque.

The only way this record will ever be broken is if TD runs an article about Israeli gold held in a solar powered bunker beneath Building 7.

[Gonzalo Lira]

Actually, for my encore, I was planning on uploading a video of me, sitting on top of my mountain of gold bricks in my underground bunker, singing "Kumbaya" on a ukulele, naked—except for my cock-ring. 

GL

[Village Idiot]

"Actually, for my encore, I was planning on uploading a video of me, sitting on top of my mountain of gold bricks in my underground bunker, singing "Kumbaya" on a ukulele, naked—except for my cock-ring."

This guy is human.  Thank you.

[spinone]

Pardon me while I gouge out my mind's eye.

[ATG]

!

[kathy.chamberli...]

whats a naked—except for my cock-ring?