This page has been archived and commenting is disabled.

Guest Post : Stretch To Farthest Point Known - Thoughts on a Hyperinflation Event

Tyler Durden's picture


Stretch To Farthest Point Known:  Thoughts on a Hyperinflation Event


January 15, 2010

Thinking about Extremes

Let’s assume for a moment that Goldman Sachs is wrong.  After all, at most points in time and space, predictions tend to fail—except the lucky ones.  So it’s good to think through scenarios that one would consider extremely remote.  Active risk management means low probability / high catastrophic outcome tail events must be hedged, and as importantly, gain exposure to those pesky Blacks Swans in ways that lead to advantage.  To accomplish this, it helps to obtain a quantitative sense of their impact, to get a “feel for the cloth” as an wise former boss of mine used to say.  So let’s try here.
Hyperinflation and Currency Crisis

What if the Fed more than succeeds in reflating and the end result is hyperinflation?  As remote a possibility as I think this is, they really could print a way to another, completely different type of economic destruction.  All they have to do is print proactively, not reactively. 

Hyperinflation is rare, but not inconceivable.  It happened on multiple occasions in the last century alone.  It is indicative of extreme government failure as the state fails to perform a most basic function:  monopoly provision of acceptable currency.    

Above all, hyperinflation shows that mankind holds closely some constants that will endure, even though the world around us never stops changing.  Even in hyperinflation life doesn’t lose all of its familiar contours. 

Forget Argentina 2002.
Imagine a country carrying a crippling amount of external debt.  Its core financial intermediary system remains is on life support at best, at worst it is an explicit arm of government policy.  The central government and its affiliates control a large portfolio of residential and commercial real estate, and further subsidize the housing market though administratively controlled interest rates.
Banks with large loan books and scale are iteratively recapitalized as losses are realized, and are wards of the state, with increased political control over their operations.  Smaller banking entities increasingly do not exist through liquidation or absorption into special purpose vehicle that allocate credit on an uneconomic basis to specialized industries. 

Industries with “strategic value” (read: political connections) are completely nationalized, with taxpayer-forced liability to cover the cash burn.  Further, these socialized businesses compete with private businesses with smaller economies of scale that do not have the luxury of taxpayer funded advertising budgets, or a creditor that doesn’t care about funding loss-making enterprises through tax revenues.

To cover the increasing losses of all these commitments—in particular government losses on assets related to the mortgage market—the central government resorts to the printing press in real force.  A market forms to price in capital and exchange controls.  The currency is no longer used, and people practice currency substitution, the use of another nation’s currency as a store of value and in some cases, the medium of exchange.  The combined mass exodus from the currency and hyper-monetized national debt, causes the inevitable happens:  hyperinflation. 

Is this the story of the United States in 2010 or Poland in 1989?  

There’s a lot of difference, of course.   The United States doesn’t have exchange rate and capital controls (yet).  The degree of nationalization isn’t as endemic to our economy.  There is a thin veneer glossing over certain aspects of our political culture.  But there are some strong similarities as well.  
Importantly, the Poles realized there was something unique and historic about their macroeconomics of de-control/disintegration.  To record knowledge of their fate—and to preserve the jobs of as many bureaucrats as possible—the government statistical service preserved the minutest details on a monthly basis. 

The data source is various issues of the Biuletyn Statystyczny, the Polish household budgetary survey that consisted of a rotating 8,000 households in Poland.  Just so you know, through 1990 it excluded self-employed as well as household of persons involved in military or police service, so there was an underreporting of self-employed entrepreneurs.  

Reading the Bones

The Polish hyperinflation was a short-lived event but in the space of a year inflation rocketed up 300%.  After the huge acceleration shock, price increases only decelerate, but they don’t decline.  Note the chart below:  there were only seven months of real hyperinflationary explosion.  After that, prices stubbornly increased, but there were no seismic events.   

The data suggests that modern currency collapses don’t mean dollars or zlotys or any other bearer bond with no coupon go the way of the dodo completely, even in hyperinflation.  What you get instead is currency reform—a “new and improved” bearer bond with no coupon in exchange for the old one (an extreme haircut at redemption), and high real and nominal interest rates.  If there isn’t currency reform that toilet paper can hang around as a unit of account for some time.

Exchange Rates and Capital Controls

Shorting the currency would seem a no-brainer here.   However, there’s a high probability of a snag:  capital controls and “official” exchange rates—currency inconvertibility.  Such measure would screw up straightforward and profitable currency shorting, but the data shows they don’t work to dampen inflation.  People are cunning and they develop work-arounds to a dying currency.  Even if citizens must accept said currency as legal tender, they develop efficient ways to off-load it using market mechanisms.  Note price discovery on the black market for zlotys (Polish currency) before and after the exchange rate finds a hard peg, meaning interest rates start to bite. 

Cost of Living

This is where the “minute detail” comes in.  That household survey captured consumer prices by category during hyperinflation.  They show that hyperinflation is the ultimate in living for the now.  As prices for basic necessities go through the roof, the prices of non-essentials collapse.  Not only is capital stored in currency destroyed, the cost for food outstrips other consumer categories.  For the record, non-foodstuffs means clothing and shoes and electrical/mechanical goods for the home; entertainment means  newspaper expenditures, books (including school-books), movies and related items like concerts;  fuel (heating oil and gasoline) is not included.  Subsidies and usage differences make such comparisons inadequate anyway because few had a car when Polish communism collapsed.
There are some clear and profitable conclusions to this section.  Food (and fuel) is how one will profit in the initial stages of a hyperinflation, even as rents, non-food consumer goods collapse.  This is due to the fixed nature of rental arrangements and the immiserizing effect of inflation takes luxury goods out of reach.  Items for immediate consumption are the one that really jack up.  After the initial inflation shock, returns on other goods surpass foodstuffs. 

The biggest defect of the comparison is the exclusion of petrochemical usage, as it was a heavily subsidized and very differently utilized commodity in communist and transition Poland.  I believe it is safe to assume that gasoline and distillates in general would be most sensitive to any type of inflation shock. 

Inflation Equations

However, you could long inflation risk through US CPI futures settled in another currency OTC.  So let’s assume that one is associated with Taleb’s Universa Investments and want an explicit hedge to a hyperinflation event.  Consider the following inflation option-like product:  a non-stream cap security with a strike at X% inflation.  Think of such a cap as a call option on the inflation rate implied by CPI.  I know, I know, it is not exactly an option in that CPI isn’t a tradable product. 

Using some modified RBS methodology 1or here for… less exotic… inflation caps, the pay-out is:

Where N is the notional, κ is the strike, omega is 1 for a cap (-1 for a floor) and ψ is the contract year fraction for the interval Ti-1 to Ti; retrofitting with the data earlier shows that quarterly fractioning is efficient.  I(T) is inflation at time T, measured by CPI.  In the case of a non-stream cap like here, Ti-1 resolves to T0.

For pricing, assume away counterparty, institutional, rounding, and seasonality risk.  The pricing formula is rather complicated, similar to a cliquet option.  

Formula aside, I’m not sure what kind of quote you would get from a derivatives broker for a hyperinflation cap.  For options on inflation one generally has to rely on quotes from brokers like ICAP

  • 1. The Royal Bank of Scotland, 2003, Guide to Inflation-Linked Products. Risk

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 01/15/2010 - 21:46 | Link to Comment Hephasteus
Hephasteus's picture

When you run a fractional reserve currency system on a country with savings. It's a beautiful illusion that works wondrefully at counterfeiting the will and assets of the people in the system. Once the savings are gone you begin to look like zimbabwe.

So when Sheila Bair says. We are not zimbabwe, your deposits are absolutely safe. She means. Oh fuck we are not doing our magic any more. We are zimbabwe. Rotating bond crash ala Russia. Rotating deeply hidden mortgage security fraud in fannie freddie and social security/healthcare. Doesn't matter. It'll all come to the surface.

Sat, 01/16/2010 - 11:27 | Link to Comment Anonymous
Sat, 01/16/2010 - 12:46 | Link to Comment Hephasteus
Hephasteus's picture

And just what the hell do you think china is going to do when it finally extracts enough gold out of crimex. They are going to runaway spend dollars like you've NEVER SEEN. Japan too.

Sat, 01/16/2010 - 16:00 | Link to Comment Gwynplaine (not verified)
Sun, 01/17/2010 - 10:10 | Link to Comment the.spear
the.spear's picture

Gwynplaine: "And what do you expect those "lower class people" to do when they run out of cash in their wallets and houses?"


A most excellent question indeed.

Fri, 01/15/2010 - 21:55 | Link to Comment junkyard dog
junkyard dog's picture

It has to easier just to create a brand new currency and junk the old one. Everyone is already screwed with the present currency. Just print a new FRN, declare it's worth to be half the face value of the present currency, and give people 1 month to trade the worthless FRN in for the new and improved FRN.

Of course if one is China, this is not such a good idea.


Fri, 01/15/2010 - 22:35 | Link to Comment dark pools of soros
dark pools of soros's picture

if it gets yankees to spend like mad again, then China will sit and gladly take the medicine with us...  do you really think they want to carry the consumer torch?

Fri, 01/15/2010 - 22:07 | Link to Comment Mad Max
Mad Max's picture

Many of us don't consider hyperinflation in the US to be all that unlikely.

It isn't clear why you chose Poland and waived away Argentina.  The US is far more like 2000 Argentina than like 1989 Poland.  Argentina was a basically capitalist country with a very high standard of living.  Poland was coming off of communism and was quite different from us economically.  Of course neither had reserve currency status, but there are few if any examples of such countries going into hyperinflation.

Fri, 01/15/2010 - 22:33 | Link to Comment jm
jm's picture

The United States:

Nationalized financial system (in everything but name)

Nationalized healthcare (probably)

Nationalized backward heavy industrial sectors (very politburo-esque)

The government (Fed, Freddie, Fannie) owns an increasing share of commercial and rental property, and rents (or free-rides it) at uneconomic rates (How much more command economy can we get?) 

The choice of Poland is only marginally sarcastic.  The real point is that the event horizon lies in the exit strategy.  Just like Poland.   

Sat, 01/16/2010 - 00:03 | Link to Comment Anonymous
Sat, 01/16/2010 - 20:11 | Link to Comment WaterWings
WaterWings's picture


Anything else is myopic.

Why is hyperinflation rare? Ah, answered right here:

The currency is no longer used, and people practice currency substitution, the use of another nation’s currency as a store of value and in some cases, the medium of exchange.

But what happens if the king of counterfeiters stumbles?

Great article, JM. And your comments are interesting - too bad I'm already long precious metals and baked beanz.

Fri, 01/15/2010 - 22:44 | Link to Comment dark pools of soros
dark pools of soros's picture

the oddity of dual world economies is getting more and more realistic..   this has some serious hyperbole chest pumping but many good points are made (BRICs are sick of funding our military due to our printing press screwing their US assets...etc)


Sat, 01/16/2010 - 14:07 | Link to Comment Anonymous
Fri, 01/15/2010 - 23:30 | Link to Comment strike for retu...
strike for return to reality's picture

We can't have hyper-inflation because Ben's helicopter isn't capable of dropping enough money in Greenwich, CT.

We can't have hyper-inflation because hyper-inflation was never a problem encountered by the Roman empire.

We can't have hyper-inflation because the Chinese love to hold US govt debt.

We can't have hyper-inflation because hope and change means that our new masters are named Sachs, Goldman.

We can't have hyper-inflation because gold and silver prices always fall on the CRIMEX and the exchanges in London and Hong Kong are irrelevant.

We can't have hyper-inflation because food and energy prices are highly volatile and are not in the in the least bit essential to actual survival and so they don't really count.

We can't have hyper-inflation because the public is no longer capable of basic arithmetic.

We can't have hyper-inflation because the calculator used by the folks who issue TIPS is not capable of registering any number greater than 4%.

We can't have hyper-inflation because my wheelbarrow is broken, and there is no way I could use it to transport banknotes to the bakery for a loaf of bread.

We can't have hyper-inflation because...


BTW, without substantial inflation (say 100% over five years), how will that big pile of MBS on the Fed's balance sheet be anything other than worthless?

Fri, 01/15/2010 - 23:33 | Link to Comment jm
jm's picture

You're preaching to the choir here on deflation.

However, the Fed can create hyperinflation.  By putting trillions in the hands of consumers instead of trying to salve the gaping wounds on bank balance sheets.  Such would immediately jump start money velocity and put us on the path where we must abandon all hope after entering.

Ben knows it would destroy everything with it, and he can't put the d'jinn back in the bottle once he's done it.  There is no liquidity drain for that operation.     

Ben also knows that extreme deflation would destroy everything too--even moreso.  History shows that human mortality rates are signifcantly higher during periods of deflation.  So there is a risk that institutions with the ability could get really crazy. 

This should be un-swanned by thinking it through. 

Sat, 01/16/2010 - 11:37 | Link to Comment Nout Wellink
Nout Wellink's picture

If the Chinese throw all their dollar assets on the markets next monday, we have instant hyperinflation.

If trust in the dollar is lost today, we have instant hyperinflation.

Fri, 01/15/2010 - 23:36 | Link to Comment Anonymous
Fri, 01/15/2010 - 23:44 | Link to Comment lsbumblebee
lsbumblebee's picture

Derivatives for hyperinflation.

"An' it stinks so bad the stones been chokin'
'N weepin' greenish drops
In the room where the giant fire puffer works
'N the torture never stops
The torture never stops
The torture
The torture
The torture never stops."

-Frank Zappa

Fri, 01/15/2010 - 23:52 | Link to Comment delacroix
delacroix's picture

high multi year inflation, not hyper, is the beast, bernanke is trying to birth,IMO

Sat, 01/16/2010 - 00:15 | Link to Comment Mad Max
Mad Max's picture

YES.  However, intentional moderate inflation can accidentally turn into mass inflation or hyperinflation in several different ways.  People never have as much control over systems as they think, and the higher up and more arrogant they are, the more they are mistaken about their level of control.

Sat, 01/16/2010 - 01:21 | Link to Comment delacroix
delacroix's picture

I take it, Bernanke, would not be your choice, for midwife.  yes, if people thought moderate inflation, was the beginning of hyper, there would be a run on the banks, and a spending frenzy, like venezuela, which would be contagious

Fri, 01/15/2010 - 23:59 | Link to Comment strike for retu...
strike for return to reality's picture

Seriously, the key to avoiding hyper-inflation is to keep all the newly created money out of the hands of the rabble (99.999+% of the people).

This is contra-indicated by the need to prevent the start of a revolution that turns Greenwich, CT to a color that is not green.

Sat, 01/16/2010 - 00:01 | Link to Comment JohnKing
JohnKing's picture

We need a real war to fix this. Who ya gonna call?

Sat, 01/16/2010 - 00:17 | Link to Comment Mad Max
Mad Max's picture


Sat, 01/16/2010 - 00:30 | Link to Comment Anonymous
Sat, 01/16/2010 - 15:47 | Link to Comment Hephasteus
Hephasteus's picture

Ya. I'm sure china is really interested in building credibility with Goldman Sachs and making sufficient offerings to them to get involved in the lucrative you're getting fucked by CDS market that they are dragging the entire US economy into.

Sat, 01/16/2010 - 00:47 | Link to Comment strike for retu...
strike for return to reality's picture

Ok, so there is a way forward that avoids hyper-inflation.

1) Arrest Dick Cheney (

2) Pardon GWB (too stupid to know which way to hold a child's book).

3) Send a Hallmark FU card to China. (Please accept this complete collection of James Bond movies from UA in place of all Treasury instruments in your possession.)

4) Replace Timmy, Larry and the other stooges with Volcker.

5) Restore rule of law in the US.

6) End the absurd wars of occupation.

7) Tell the Isreal that they need to dump the Nazi gig and recognize that Palestinians are people, too.

8) Send Hank Paulson, Robbie Rubin, Jimmy Dimon and anybody that they know to prison.

9) Don't forget Cash and Carry over at Treasury.

10) Staff the SEC with people who care about enforcing securities laws.

11) Drop the income tax in favor of some sort of VAT.

12) (Better yet, just shut down the Federal govt and let the individual states sort things out.)

13) Give Bennie a bus ticket back to Princeton.

14) Tell the Saudi ruling family that they can have a really, really nice compound in Switzerland with all the dancing girls they want in place of all the oil in their country or they can ask the Shah's son how his imperial majesty is managing these days.

15) Ask Abu Dhabi who builds palm shaped islands at the edge of a greasy sea just to cover them with ugly McMansions and expects it to be a sensible business.  Also, a side question on why you would build an indoor ski facility in the desert instead of an nice outdoor surfing venue.  Just 'cause I'm sort of curious.

16) um.... make a nice five cent cigar?



Sat, 01/16/2010 - 01:06 | Link to Comment Mad Max
Mad Max's picture

Outstanding.  While it has something to offend most, it has a lot of truth and good ideas.  Which guarantees none of them will take place. 3, 12 and 14 are especially good.  I would cite #5 but since it's painfully true I can't laugh at it.

Sat, 01/16/2010 - 01:20 | Link to Comment Joe Sixpack
Sat, 01/16/2010 - 11:37 | Link to Comment Anonymous
Sat, 01/16/2010 - 14:48 | Link to Comment Cpl Hicks
Cpl Hicks's picture

"Whip Inflation Now" was Jerry Ford's contribution to fiscal responsibility.

Other than that your offer is reasonable.


Sat, 01/16/2010 - 05:07 | Link to Comment Anonymous
Sat, 01/16/2010 - 05:40 | Link to Comment dark pools of soros
dark pools of soros's picture

we invaded Iraq and Afgani and didnt have the decency to take the oil and poppies for the american public wealth...  nope.. we are all slaves to the global interests that are pulling the strings..


all this talk about what's best for america is a total joke.. no matter what WE THE PEOPLE do, it will not benefit US  (as in us and United States).

Sat, 01/16/2010 - 21:17 | Link to Comment WaterWings
WaterWings's picture


Remix of 16: um.... stop restricting Cuban imports.

Sun, 01/17/2010 - 02:23 | Link to Comment strike for retu...
strike for return to reality's picture

As another poster wrote, there is the possibility that Treserve is simply lying about the success rate with treasury auctions.

In this scenario, foreigners are not buying US govt debt and the additional money is being printed into existence.  This would be parallel to the Roman Empire experience of reducing the silver content of their coins (well also that of cutting the copper from pennies a couple of decades ago and silver coins in the sixties).  If true, this would show up in constantly rising prices of energy and food.

Sun, 01/17/2010 - 05:06 | Link to Comment WaterWings
WaterWings's picture


Oh, that kind of slipped me. I bet they get a chuckle everytime Ron Paul brings up an audit (Haha! They'll never, never! see our books! Never!).


Sun, 01/17/2010 - 12:22 | Link to Comment Anonymous
Sat, 01/16/2010 - 01:34 | Link to Comment Wheatman
Wheatman's picture

Hyper-inflation is impossible over next 2 years. USD = reserve currency globally, + Fed will not openly monetize for political reasons. The next chapter of the book is stag-deflation, and a crash of the stock market in real (and possibly nominal) terms. This disaster will be an implosion, not explosion. Then, if the Fed is forced to monetize we may get hyper-inflation (at least 3 to 5 years) away. Deflation in everything priced in wheat.

Sat, 01/16/2010 - 09:36 | Link to Comment Anonymous
Sat, 01/16/2010 - 03:00 | Link to Comment Anonymous
Sat, 01/16/2010 - 03:52 | Link to Comment Segestan
Segestan's picture

Hyper inflation has been the only possible out come from the beginning. A financial crisis that requires bail- outs is potentially hyperinflationary, by default. . Without a crisis that can be bailed out the system would implod. Got Gold?

Sat, 01/16/2010 - 05:09 | Link to Comment CEOoftheSOFA
CEOoftheSOFA's picture

When Helicopter Ben stops sending cash to China via the AIG black hole and the Fannie / Freddie black holes, China will start quietly dumping dollars and will have a good portion of their dollars spent on commodities before anyone notices.  This will cause the hyperinflation.  The chance of this is a lower probability event now.  But the probability increases the longer we continue this financial charade.  Maybe we should relocate Wall St. to Orlando.

CEO of the SOFA

writing from THE KINGDOM of Saudi Arabia

Sat, 01/16/2010 - 08:29 | Link to Comment saturno_v
saturno_v's picture




Very intriguing analysis

As I mentioned in my comments several time, Zimbabwe did exhibit a similar pattern...price for necessities went through the roof but luxury items collapsed in real terms...this is very typical of hyperinflationary periods...same thing happened in Hungary in the second half of the 1940s which witnessed the most serious hyperinflationary event recorded in history with the highest banknote denomination ever, the 100 million b. -pengo in 1946 (1 followed by 20 zeroes, 100 million of billion)

I disagree that the only initial trigger to hyperinflation is putting the currency in the hands of the citizens....the initial event is likely to be the unwillingness of foreigners to buy our debts, this would send interest rate through the roof and send the country in an tremendous recessionary that point Uncle Ben would have no choice (the political pressure would be enormous) but to put currency in the hands of citizens....for necessities, as "citizen loans" (never to be repaid), etc....definitely they do not lack creativity in coming up with something inWashington D.C..... then the hell breaks loose.


I already read somewhere that the Federal Reserve may consider loaning money directly to the has been discussed. 


By the way, we are already putting currency in the hands of idling citizens though a constellation of programs and unemployment benefits extensions (some of them may be hidden from sight as Zero Hedge reported)...and all these bank bonuses will end up an environment where companies are cutting productive capacity.


Sweeping pengo bills from the streets in Hungary




The 100 million b.-pengo, the largest banknote denomination ever created...can Uncle Ben beat that?? ;-)




Sat, 01/16/2010 - 12:41 | Link to Comment jm
jm's picture

I could be wrong, but I'll defend my deflation position here.  To me, inflation is an extremely low prob event.

True, the Federal government is stimulating/borrowing like crazy, but this is more than offset by state budget implosion.

So you have stimulus/stimulus II versus a Cali, Il, and Mississippi default, among who knows how many other states.  Local and city governments are in even worse shape.  I'll bet on deflation to win that battle.

So you have QE/MBS purchases up the rear and excess reserves coming out the nose.  Well, that crap is really only making the financial system whole, MAYBE.  I would wager that all those excess reserves are goin to go up in smoke because things are really, really bad.  And I believe credit prefromance problems are accelerating.   Plus banks aren't going to lend anyway as long as that jackass pays them interest to park their reserves with the Fed.

We have personal, RE, CRE, and soon corporate default problems.  When is critical mass?  I don't know but it is not conducive to inflation.

By the way, I own a 100,000,000 Pengo note from 1946!  I keep it as a monument to human stupidity.  Hungarian superhyperuberinflation was a deliberate effort on the part of the communist government to destroy a very lively middle class by wiping out their capital in one stroke.  The Fed CAN hyperinflate.

Sat, 01/16/2010 - 18:17 | Link to Comment saturno_v
saturno_v's picture




As you have already mentioned, the Fed is really in a box....Hyperinflation destroys a currency but deflation does that too...the money "vanish" into thin air as is created in the same way...the folly of fiat currency backed by debt....we are the hamsters that need to spin that wheel faster and faster to keep the system going.


Do not forget the wild card ot foreigners refusing to buy our debt, a problem, for example, Japan does not have because its debt is mainly financed internally.

That event will send interest rate through the roof and at that point the government will be forced to put money directly in the hands of the people...again, I read somewhere that the Fed contemplated lending directly to private citizens if the commercial banks refused to do so.


Basically I think we have reached the limit of debt load vs. income in our current fiat currency system so the government is taking long can it last?


Again, the wild card is foreigners long as they keep accepting the three card monte of the right hand (Treasury) issuing debt and the left hand (Fed) buying it as well as buying every other garbage in sight (MBS, Agencies, etc..) is all good... the illusion can go on, as long as the magic wand of the Fed is perceived as "capital creator".


Me and other investors already decided that the dollars are not worth the paper are printed on and the number is increasing.


Yes Japan did executed QE without much consequences but, again, the bulk of its debt issuance went to its citizens and institutions and Japan is a net creditor with the rest of the world. The country had trade surplus and the world enjoyed the very high quality automobiles and world class electronic products and components.


US is different (net debtor, higher private debt, trade deficit).

Can Boeing, Apple and the software industry save the day?? And yes, the ultimate backing to our currency are our aircraft carrier battle groups around the world...but for how long the rest of the world is going to pay this protection money?

Sat, 01/16/2010 - 21:46 | Link to Comment jm
jm's picture

You make very good points about foreign buying.  But here is my take. 

As deflation darkness falls deeper, I actually expect there to be less foreign buying, not by choice, but because they can't. As US imports implode, the world will simply not be awash with dollars anymore. 

I find it hard to imagine that Japan gets their credit rating smashed and they continue pile up gov deficits and accumulate Treasuries at the same time.  Instead, I find it more realistic that they will balance their budget and shed reserves to expedite the process.  

So yields go up.  Big deal: it won't be an extraordinary jump.  They will rise until domestic buyers find them attractive.  I actually expect yields to decline in the short term. 

Credit risk will adjust itself as the Federal budget aligns to reality, and govvies will do just fine relative to any other asset class.  Because the United States with its shitty government is a good credit risk when mercantilist nations are on the mat. 

Sat, 01/16/2010 - 23:23 | Link to Comment saturno_v
saturno_v's picture




You said "So yields go up.  Big deal: it won't be an extraordinary jump."



American consumers are so levered up that even a relatively modest rise in yields would be disastrous and grip the country in a horrendous recession..this is when the desperate government will put money directly in the hands of people (it's already doing that)


Governments do not want deflation in a fiat regime and they will do all they can to avoid it...deflation destroy the credit system, money vanish, banks go belly up in a pile of smoke..I take Helicopter Ben to his words. 


"They will rise until domestic buyers find them attractive."


Who gives the money to the domestic buyer to buy? Eventually capital = productive capacity. Let's not forget how all it did begin with bartering...farmer Joe trade his potatoes with fisher Paul....later on they agreed to trade in seashells and eventually in gold which represented claims to Joe's potatoes or Paul's fish


My take is that at some point China will take (it should in my view) take its lump of coal and let its currency appreciate...initial disruption but in the long run it will help its citizens acquire the purchasing power they the same time we will have to adapt to a new reality where we have to actually work to make a actually I'm very positive in the long long run.


I think China stockpiling of physical commodities and acces rights to it is exactly going in that direction. 

Sun, 01/17/2010 - 00:24 | Link to Comment jm
jm's picture

I hope you don't get the idea the my "big deal" means things are just great.  We are on the precipice of a really icy type of hell.  So bad that I don't see how all the copper and physical commodities are worth what is priced in today. 

I have no problem with gold per se, but look at what the first crack in the Dubai veneer did to the price.  It showed to me front and center that gold is leveraged up to the gills like every other commodity, and it will get smashed like every other commodity. 

I sure don't have a problem with Chinese peasants getting wealthier.  But the macro story is ahead of reality.

We aren't in disagreement in the main.  But no institution or bureaucrat can summarily screw every creditor to help out the minority of debtors that max their cards and acts as though they are entitled to drop paying anything, or live in a house without making a mortgage payment for over a year.  They deserve the ass-ream they are going to get.

Things have to be far worse asset-pricewise than it is now before Ben can unleash the beast I described in the article.  That's when I'll be all in on risk.

Sun, 01/17/2010 - 02:03 | Link to Comment saturno_v
saturno_v's picture


"I have no problem with gold per se, but look at what the first crack in the Dubai veneer did to the price.  It showed to me front and center that gold is leveraged up to the gills like every other commodity, and it will get smashed like every other commodity. "


You are absolutely right...GLD is leveraged up, however in a protracted "fear shock" it's interesting what physical gold would end up doing it....let's distinguish clearly physical and GLD.


"But no institution or bureaucrat can summarily screw every creditor to help out the minority of debtors that max their cards and acts as though they are entitled to drop paying anything, or live in a house without making a mortgage payment for over a year.  They deserve the ass-ream they are going to get."


Totally agree with you...however so far uncle Ben is doing exactly that to the savers and investors.


The madness of the fiat currencies is just that...frenetic competitive devaluation, a race to the bottom...the system allows governments to delay the day of reckoning until the roof caves in....nobody wants to face reality and bite the bullet, kick the can down the road as much as possible, no bitter pill to swallow today.


In a fiat money system and with the problems associated with it (devaluations, manipulations of every sorts, etc..) it becomes increasingly difficult to make sound long term business decisions, it does alterate the "logic" of investing (no more long term thinking, dividends do not count anymore, it's all about equity prices in the short term) turning it into a casino, real productivity improvement become secondary.

Big inefficient lazy companies in a  fiat currrency regime can become even more big and inefficient because of their easier acces to cheap financing which allows them to swallow smaller more nimble and innovative competitors.


With sound money, deflation should be welcome because sustainable improvements to standard of living come only with real improved the tech industry doomed because of its endemic deflation? Quite the contrary.  

Fiat monetary regimes distorts economic reality, they turn logic upside down, we live in a  parallel universe where "reality" shifts continuously.


"Paper money eventually returns to its intrinsic"

François-Marie Arouet (1694 1778) French writer and philosopher known with the pseudonym of Voltaire

Sun, 01/17/2010 - 13:25 | Link to Comment trav7777
trav7777's picture

Your points are all logical, but I have to repeat my axiom:  deflation destroys leveraged players.

The USG is the most leveraged.  Therefore, deflation is an existential threat to them.  Nevermind every bank, also leveraged, and all the big boyz, leveraged too.  All the FIRE economy depends upon the inflation wave and they have the levers of power.

Deflation helps people with money in mattresses.  I can't see their interests prevailing.

Deflation or inflation, the FRN is still a debtmoney-based instrument.  So long as the future seems to hold contraction, its "worth" is in peril.  The FRN's very existence is at odds with reality right now.  I would not expect paper based on debt to come out of this with real worth because there simply is now no way to pay the interest.

IOW, we have to go to pure fiat at some point; our economy simply cannot back a production-based currency because we don't have the production.  We cannot back it with debt or a promise to produce/pay more in the future because the future doesn't hold more, it holds less.

Therefore, I conclude that paper, debt, etc., the "way things have been" for 400 years is what is facing the crisis in confidence.  Our ability to make good on the FRNs, electronic or real, faces discounting just as surely as a promissory note from a person who just lost their job and faces a balloon payment at the end of the month.

That's how I see it.  Deflationists seem to think "the system" is not imperiled and I think that it clearly is for reasons I continue to articulate.  I don't think a system of dependency upon a growth future can reconcile itself with a real future of contraction.

Sun, 01/17/2010 - 13:48 | Link to Comment jm
jm's picture

Forget the USG debt:  some of my other comments have shown why it will inevitably work out non-apocalypically.

More to your point, the USG is operated to the benefit of a few key individuals that operate within it.  These few individuals make decisions in their best interest, not in the interest of any collective group.  This is precisely because the entire system, govt and financial, lives off the skim.   

Destroying the system through hyperinflation would not be advantageous to those few individuals.

If things got so bad that it would be beneficial to those interests to bring the system down, rest assured it will happen.  We are nowhere near that point, and probably will not reach it in my lifetime.

Some posters have said the inflation only hurts the creditor.  Quite right.  This is precisely why debtors that have stopped paying will be horribly screwed in the near-term.

Sun, 01/17/2010 - 14:11 | Link to Comment gator gatlin
gator gatlin's picture

well said, grasshopper.....your analysis has the ring of truth on a very bedrock fundamental how does the prudent investor play this situation?  (acutually this was directed to trav777)

Sat, 01/16/2010 - 09:08 | Link to Comment gator gatlin
gator gatlin's picture

Very interesting, smart gents and ladies.  No doubt we are headed for an economic and practical hell on earth here in the US thanks to our government.  Real question is how to prepare for it and protect present dollar wealth against it aside from owning some gold.  How about turning your creative minds to some realistic ways to deal with that issue (maybe that is what TD is trying to engender with this silly derivative suggestion). 

Sat, 01/16/2010 - 11:27 | Link to Comment Anonymous
Sat, 01/16/2010 - 12:58 | Link to Comment jm
jm's picture

An implication of what I wrote is that KISS won't be that easy because little guys get cut out of the opportunities via government attempts to handle the situation.  

Find a good hedge fund that can take advantage of opportunities.

Play on a harmless human weakness and addiction:  sugar.  Look at what sugar does in inflation. 

Long commodities that can't be produced and thus completely controlled domestically like tin and cocoa.  Cocoa trades like a crazy she-bitch any old time.

Forget hoarding gold.  Too expensive and it is not liquid enough for a small investor that would need liquidity in hyperinflation.  Go to your bank, request canadian dollars, stuff in the cookie jar.  Modestly accumulate CAD over time, as diversification from the dollar anyway. 

The article provide some indication of stock plays and sequence of positioning.

As I think that deflation will be the enduring curse of the present, I think these are all poor trades, CAD being the least offensive.  I am a quant providing my two cents, not an advisor. 

Sat, 01/16/2010 - 09:42 | Link to Comment MarketTruth
MarketTruth's picture

The Federal Reserve Note, aka US Dollar, is backed by NOTHING but 'faith'.

Wake up Neo.

Neo: What truth?
Morpheus: That you are a slave, Neo. Like everyone else you were born into bondage. Into a prison that you cannot taste or see or touch. A prison for your mind... called the need to earn US dollars. 


Bank Run Bitches!!!

Bank Run Bitches!!!

Bank Run Bitches!!!

Sat, 01/16/2010 - 10:51 | Link to Comment Anonymous
Sat, 01/16/2010 - 23:53 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

A prison for your mind... called the need to earn US dollars. 

Very well put. Replace "US dollars" with any fiat currency of your choice and it is still true. The majority of humanity is living in slavery today; in "a prison that they cannot taste, see or touch".

Sat, 01/16/2010 - 10:31 | Link to Comment Anonymous
Sat, 01/16/2010 - 10:34 | Link to Comment Anonymous
Sat, 01/16/2010 - 11:01 | Link to Comment bugs_
bugs_'s picture

Thanks JM

Sat, 01/16/2010 - 11:15 | Link to Comment Anonymous
Sat, 01/16/2010 - 11:41 | Link to Comment Stevm30
Stevm30's picture

JM - interesting post.  Couple thoughts/questions...

Why do you say that one of the state's basic functions is to provision acceptable currency?  Is it?  Why MUST the state be involved in that - what theory of economics justifies that link?

Is 300% per year hyperinflation?  I thought hyperinflation is defined as 50% or more a month... 300% is a lot, but more manageable than 5000% like Brazil saw in the late 80s - a level that actually destroys, as opposed to damages, the currency.

Seems to me that it's almost impossible to compare the US to other nations, since our currency has served as the basis of the global monetary system since 1944... for that reason this crisis will be much deeper, much more profound, globally, than currency crises in other countries.

Wouldn't gold, silver, whiskey, dried food etc... serve the same purpose as buying a future (in regards to hedging hyperinflation)?  Plus you'd have the benefit of not having to collect in what might be a "disordered" environment.



Sat, 01/16/2010 - 13:16 | Link to Comment jm
jm's picture

Money provision:  no theory to which I ascribe. Rather, I observe that the state holds internal supremacy on enforcing the rule of law. Legal tender is currently a part of this rule that state will enforce.  Without a gold standard, states derive an immense proft form seignorage.  They will not give this away.

Inflation hit over 75% in one month in Poland, and was over 50% for six months.  Not saying the hyperinf was long, but it was fierce, and probably similar to the burst modern economies would feel before authorities had to act to slow it down.

Comparisons break down, and reserve currencies usually face a sclerotic demise, like the "sound as a" pound.  Central banks still hold it as a reserve.

See a prior comment for my thoughts on whiskey and such.  Nothing wrong with it, except I think you are going to get hurt being on the wrong side of the issue. 

You need to fear more than exchange controls.  The 70s had price controls on gas.  Imagine it on food and such.  Thus futures may not be available to profitably settle delivery.  Warehousing volumes of stuff is too expensive and asking for trouble.

Sat, 01/16/2010 - 12:45 | Link to Comment Anonymous
Sat, 01/16/2010 - 14:18 | Link to Comment Chopshop
Chopshop's picture

just love how everyone (Tyler included) continues to shit all over GSCO for putting out actual research and says: "no, really, it is different", while offering up shoddy history replete with recent analogues that are wholly incorrect for comparison. 

its not different, it never is; you're just not looking that far back into history to realize it. 

and, again, anyone citing zimbab or weimar as analogues is just so insanely far off the mark it is funny; yes, i know, it is almost too sexy and easy not to, that is, unless one wants to be accurate instead of simply sensational / appeal to the masses. 

here's how we can end this crap right now: before stating your opinion about inflation today, NOT inflation expectations but actual f'ing inflation ... everyone ought have to repeat what they said / wrote / thought on 7.15.08.  gold-bugs this means you; wha'd ya think of oil and rough rice then? bueller?

Sat, 01/16/2010 - 15:49 | Link to Comment Anonymous
Sat, 01/16/2010 - 14:31 | Link to Comment Instant Karma
Instant Karma's picture

Seems to me it all hinges on the exchange rates of the US Dollar.

If the USD continues to fall, commodities like oil, wheat, and other "essentials" continue to rise. At the same time, currently, there is deflation in the housing market, and deflation in discretionary expenditures like vacations and consumer electronics.

So, over the last 2 years or so, your US dollars buy less oil, or gasoline, or bread, or copper, but they actually buy more house, more computer, or more vacation. It's weird. Imagine you bought a house with Euros a few years ago, sold today, took a 30% hit on the price and a 20% hit on the currency. Ouch. 

The US, with its pre-eminent place as the world's biggest consumer, is in a unique position. If stuff gets too expensive due to inflation, we buy less, of course. Then, the price falls because without US consumption their is oversupply. One sees this effect in flat screen TVs, for example, or cruise prices.

However, even reduced US demand has not brought down oil prices, nor copper prices, etc. That's real inflation.

The shit hits the fan when the world can afford to have US consumption drop dramatically without creating a reflexive decrease in price. When that happens the US Dollar will drop like a rock. Unfortunately for us here in the US, as other economies grow and develop, the clock is ticking.

Sat, 01/16/2010 - 16:28 | Link to Comment Anonymous
Sat, 01/16/2010 - 17:15 | Link to Comment jm
jm's picture

Can't speak for others, but I believe that govts will stop funding its huge budget deficit because it will have to, not because it wants to. 

By "stop funding" I mean live within its means.  To do this, it will raise both taxes and cut spending.  It would be advantageous for govts to do this is in a controlled way, rather than let market forces do it for them in its most violent fashion.  

Printing or no, this is will happen.  Print too much: foreign creditors won't fund and you have to tighten the budget.  Don't print crazy: high real interest rates will force you to tighten your belt.  

Sun, 01/17/2010 - 13:35 | Link to Comment trav7777
trav7777's picture

ok, let's explore this.

How do you prepare for that?  Cash?  They're going to tax the shit out of everything.

The economy will have the life taxed out of it.  We're bankrupt, and we cannot tax our way out of that.

I see no political will to live within means and to do so means 40% of the economy goes poof.  This isn't the way things have gone in the past, even among empires.

Sun, 01/17/2010 - 13:55 | Link to Comment jm
jm's picture

Political will has nothing to do with it.  The reality of the market will demand it.

Don't fret for the govt.  Those that rely on govt handouts are ones that the future will screw, although I agree it won't be as easy-tax for anyone. 

Sun, 01/17/2010 - 14:08 | Link to Comment Anonymous
Sat, 01/16/2010 - 17:26 | Link to Comment Madcow
Madcow's picture

there is no mechanism in place that can induce inflation - 

and there is no way to stop "poof, its gone"

no borrowing, no new money. no new money, no way to feed the debt / covenants / expectations apparatus.  

so you get the mother of all flights to quality - and quality being tightly defined as cash money, gold and silver, food, water, gasoline, batteries ... things that are of obvious and enduring value. 

as all the rents break down, you get deflationary collapse. and at some point - probably to prevent the food supply system from shutting down. 

Hyper-inflation is the poison pill for the Federal Reserve. If the deflation is bad enough, and we're basically looking at mass poverty and bankruptcy and state dependency and years and decades of lawsuits, congressional hearings, and etc ....

The 'Feasury' (or the 'Treasury Reserve') wants high inflation - so they can basically double the money supply and put it in the system to generate rents. I'll bet they eventually get what they want. 




Sat, 01/16/2010 - 17:43 | Link to Comment Anonymous
Sat, 01/16/2010 - 21:03 | Link to Comment Anonymous
Sat, 01/16/2010 - 21:26 | Link to Comment saturno_v
saturno_v's picture


Lots of people expected the crash in 2007 and it your point is??

Either post thoughtful articulated analysis or do not waste precius bytes on ZH servers.

Sun, 01/17/2010 - 09:15 | Link to Comment perchprism
perchprism's picture


I can't believe the crap being posted here...


It must be horrifying to discover that the emperor really has no clothes. 


How can the beginning of the premise be that foreigners refuse to buy US debt?


What, you think they're going to supply our crack habit forever?  China has already stopped buying treasuries. 


Nothing dramatic is going to happen like USD defaulting etc is going to happen in your life times. If you guys like intrigue start watching the bermuda triangle and stop this nonsense.


Awww, do you need a hug?


Sat, 01/16/2010 - 21:19 | Link to Comment Anonymous
Sat, 01/16/2010 - 23:11 | Link to Comment Anonymous
Sun, 01/17/2010 - 13:38 | Link to Comment trav7777
trav7777's picture

categorically WRONG.

Look at what the banks did during the 2008 deflation.

They went TITS UP.

Everything you think you know is based upon a very superficial understanding of who is a lender and who is a borrower.  The banks are BORROWERS, which is why deflation nearly killed all of them.

Sat, 01/16/2010 - 23:46 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

You could go with that fancy looking (but ultimately worthless IMHO not in the least because the CPI data is completely fudged) formula or you could just buy Gold.

Sun, 01/17/2010 - 01:18 | Link to Comment Anonymous
Sun, 01/17/2010 - 22:40 | Link to Comment class of 68
class of 68's picture

Jm, Saturno,

Began purchasing Gold in 1980, major purchase at $440, but I am still buying. As a further way to hedge US$ position am considering

a body off 67 corvette 427 coupe $80k, all the numbers etc. Would be interested in your opinions on a corvette for cash

purchase now.




Do NOT follow this link or you will be banned from the site!