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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.
OK we are not Zimbabwe, but not for the reasons you expect.
1) The VAST majority of our "currency" is just electronic float.
2) Our Central Bank controls supply of money AND banks control the velocity of money.
A simple "electronic banking holiday" will stop middle and lower class people from spending anything more than the cash they have laying around the house. The rich will, of course, move to foreign currencies when that inflation hits. Hyperinflation requires a cycle of both runaway spending and runaway money printing. This won't happen because they control the 2 factors which cause inflation.
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.
And what do you expect those "lower class people" to do when they run out of cash in their wallets and houses? Do you think they will starve with grace and stoicism?
The reason that so many countries get into the print and spend trap is out of political necessity. If they refrained from printing, the people would elect a new government or make other social changes. The case of Poland that the author refers to was a revaluation after the practical resignation of Communism.
I don't think that Washington will resign socialism any time soon; they have been printing and spending since 1913. That cycle will likely have to play out to the bitter end. I don't see any other reps supporting Ron Paul to end the Fed.
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.
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.
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?
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.
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.
the usa has a communistic socialized command
economy for the benefit of plutocrats....
just as senior soviet communist officials
luxuriated in plenty while the people toiled
in misery, so in the usa today albeit at less
extremes ...but the trajectory is set
and is irreversible..
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.
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.
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)
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?
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.
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.
I always tell people that the downside of $5000 an oz gold is $15 a loaf bread. Eventually somebody will listen.
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."
high multi year inflation, not hyper, is the beast, bernanke is trying to birth,IMO
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.
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
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.
We need a real war to fix this. Who ya gonna call?
Yeah - the math and the logic - that left the market in 07' - really....
Simple - US can not have inflation unless it decouples - meaning the world psyc changes - due to unanticipated circumstance - The US PR machine breaks - no longer the red, white, blue, land of liberty, fee speech, oportunity, etc - no longer the greatest sovereign super power... no longer 50 united states - could be a civil war, could be a blow to the military over seas... could be a forced conflict with China...
Could be the Chinese conflict that spills over into Pakistan - realized by mass destruction in India, and Iran destability via Syria -
think about it - logically, no one would want this - but, from a demand POV - the USA is screwed - we do not have the local MFG or infrastructure [electricity, etc] to bring back on shore Chinese production] - we do not have the skills nor facilites to on shore India's data centers - when "you" are the center of it - and inter-dependancy turns bad - its going to be catostrophic inflation.
Dont get me wrong - a rational China would not want this - they need to build credability and feed off ties with brand USA to take claim to global resources on the cheep [aka credit cost reduction] - but really -
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.
Ok, so there is a way forward that avoids hyper-inflation.
1) Arrest Dick Cheney (www.ae911truth.org).
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?
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.
18. Issue WIN (Whip Inflation Now) buttons leftover from the Nixon era to everybody with a job in the private sector.
In the interest of keeping down inflation, I will trade a box of these I found in the basement for a full tank of gas for my SUV. Warning: if this offer is not accepted, I will sell these on ebay for $5 dollars each to the Obama administration, thereby giving proof to the existence of inflation.
"Whip Inflation Now" was Jerry Ford's contribution to fiscal responsibility.
Other than that your offer is reasonable.
sounds good to me...
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).
Remix of 16: um.... stop restricting Cuban imports.
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.
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!).
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.
got DAG ?
Things go poof only, because they were meant to do so. No need to expect the poofer to go poof himself - he's got the "hoisted by his own petard" trick well under control. Years of experience handling combustible materials, you know... If you want black swans, however, you'll find an ample supply of them in China, currently being FedExed in large quanitites nationwide. Not sure if the poofer knows how to handle that poop... Not in the book, yet... Oh, well...
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?
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
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 spiral...at 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 public....it 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 somewhere....in 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?? ;-)
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.
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 over...how long can it last?
Again, the wild card is foreigners here...as 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?
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.
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 deserve...at the same time we will have to adapt to a new reality where we have to actually work to make a living..so 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.
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.
"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 productivity...is 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 value....zero."
François-Marie Arouet (1694 1778) French writer and philosopher known with the pseudonym of Voltaire
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.
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