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Here’s Why Hyperinflationist Lira Is Wrong
First, let me say that I’ve long enjoyed reading the rants of over-the-top inflationists like Jim Willie, but also the relatively subdued essays of Gonzalo Lira — even if the latter sometimes comes across as the kind of guy who could wear out a mirror. I feel a comradeship with both because, predictions about the financial endgame aside, I agree with much of what they have said — most particularly about the robust defensive role that bullion seems likely to play no matter what happens. But that is not to say that I agree with all of Lira’s and Jim Willie’s arguments. Some background is in order. My instincts concerning deflation were hard-wired in 1976 after reading C.V. Myers’ The Coming Deflation. The title was premature, as we now know, but the book’s core idea was as timeless and immutable as the Law of Gravity. Myers stated, with elegant simplicity, that “Ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender.” Inflationists and deflationists implicitly agree on this point — we are all ruinists at heart, as our readers will long since have surmised, and we differ only on the question of who, borrower or lender, will take the hit. As Myers made clear, however, someone will have to pay. If you understand this, then you understand why the dreadnought of real estate deflation, for one, will remain with us even if 30 million terminally afflicted homeowners leave their house keys in the mailbox. To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit.
Expanding on that point alone, I could dismiss Lira’s entire argument with a wave of the hand, invoking the killer question that blogger Charles Hugh Smith has asked of overheated inflationists, to wit: Why would the rich and powerful men who control the Federal Reserve, and who would be wiped out by hyperinflation, allow such a thing to happen? The obvious answer is that they wouldn’t. And won’t. I’ve made this point myself many times before and in many ways, sometimes asking rhetorically whether we should expect Joe Sixpack and tens of millions of other underwater homeowners to be able to retire their mortgages using the confetti money that a hyperinflation would produce. Mortgage lenders would be big losers, of course, but so would anyone hoping to ever own a home — or to borrow money, for whatever purpose.
Unbearable Cost of ‘Escaping’ Debt
One of the best places to find the inflation vs. deflation argument deconstructed to a fine science, and to confront the horrific – and, as I am about to argue, unbearable — cost of “escaping” debt via hyperinflation, is the 1993 book The Great Reckoning. Co-authors Jim Davidson and Lord William Rees-Mogg went to great lengths to refract every aspect of the debate. It was this book, and a subsequent dialogue that I had with Jim Davidson, that hardened my deflationist ideas, convincing me – as they likely would many of you, though perhaps not Lira — that a deflationary path would at least be less ruinous than a hyperinflationary one. To be sure, vast amounts of real wealth would be destroyed in either case. But deflation would have the virtue of inflicting pain on debtors more or less in accordance with their sins, bankrupting those who most deserved it. That said, one needn’t drag in moral baggage to explain why the powers that be are extremely unlikely to pursue a hyperinflationary course.
And “pursue” is the correct word here, since, as The Great Reckoning made clear, hyperinflations don’t simply happen; they can only occur following the willful and deliberate decision of a sovereign government to hyperinflate. We need only consider the catastrophic consequences of hyperinflation to understand why such a scheme is so very unlikely to be promoted and effected by the Masters of the Universe. For starters, savers and lenders as a class would be wiped out, since their financial assets would become as worthless as the dollar itself. Bond markets and all other institutional conduits of saving and investment would cease to function in the absence of trust – trust that would take many years for capitalists to earn back. From day one, a darkening economy would subsist on cash transactions, which in turn would bring on the hardest of times, little economic growth, and a drop in the standard of living so steep that it might take a generation to rekindle even a glimmer of the American Dream.
Deflation’s ‘Virtues’
Deflation, on the other hand, would leave the bond and stock markets intact, sparing those with little or no debt from its worst ravages. For those who owe, a tidal wave of bankruptcies would mete out punishment commensurate with each borrower’s sins of profligacy and/or greed. Businesses would be starved for credit, but whatever savings were available would go to the most promising of them. Most advantageously for an economy on-the-mend, it would be many years before capital would be hijacked by the paper-shufflers and feather merchants. In both the public and private sphere, Americans would be forced to live within their means.
I won’t belabor Lira’s arguments where he attempts, not entirely without success, to “slice and dice” my logic when it is at its weakest. But his main criticism — that I have not made a case for deflation, only one against hyperinflation – is disingenuous. For in fact, I have stated the case for deflation thus: Someday very soon, following the precipitous failure of the world’s banks and securities markets, we will all be too broke to push the price of anything sky-high. Hyperinflationists assume we will have vast piles of cash at-the-ready, physical or digital, to exchange for real goods in a panic or along the way to hyperinflation. But will we? Read Lira’s smug hit-job a dozen times and you will find no mention of how that cash will get into our hands, much less into our hands if the banking system should go blotto. He avers only that, well before a collapse, via quantitative easing, the government will “ram” money “into the economy.” As if that hasn’t been tried to death already.
No Middle Way
If you believe that one or the other, deflation or hyperinflation, will eventually do us in, then you may find yourself won over by my argument simply on the evidence I muster against hyperinflation. Read on and judge for yourself. For what it’s worth, Lira’s ruinist essays suggest that we do see eye to eye on one thing – that there is no “middle way” that might allow us to avoid the catastrophic liquidation of a global debt bubble whose notional value has been estimated as high as a quadrillion dollars.
Let me dwell for yet another moment on this idea that Americans could go broke overnight. Lira apparently believes this unlikely, if not impossible, and he could be right. But not very, since it is beyond conjecture that the day-to-day economy would grind to a halt quickly if digital money were thrown into chaos and disrepute for more than a few days. And it’s not as though Americans are so very confident in electronic money’s soundness at this point that the banking system could withstand even a minor crisis. Unfortunately, and as we all know, there are no minor crises any more, especially in the financial realm.
We’ll All Be Broke
So, broke is what most of us will be when the dust settles, and it is perhaps only a matter of the rate at which we go broke that divides inflationist from deflationist. How quickly could the financial system come tumbling down? Last May’s “flash crash” on Wall Street demonstrated that it could occur in a trice. Picture the Morning After the next flash crash, but assume that, this time around, the Plunge Protection Team has been unable to arrest its spread into bond markets and other securities markets around the world. Hardly a stretch, right? But it’s a big stretch to imagine a hyperinflation arising from the smoke and rubble of the creditless world that would result.
Will we have gone broke without having had the chance to pay off our mortgages in snide? I say yes; Lira, for his argument to hold, is obliged to say no. I hope he’s right. Then again, maybe hyperinflation will unfold so slowly that we’ll all have time to trade piles of shrinking dollars for real stuff currently owned by…fools?
Whatever happens, I wouldn’t put much store in Lira’s assurance that even small branch-banks keep scads of cash around. Try to withdraw $25,000 from your own branch if you want to find out the truth. He’ll probably say that the banks, with a nod from Uncle Sam, could refill everyone’s account with digital money overnight. I say, think about that for a moment – about the economically fatal traffic jam this would create instantly in the world of real transactions.
Deflationary Gas-Bag
Lira’s arguments, although certainly not his ungentlemanly, preening condescension, are at their weakest when he attempts to explain how quantitative easing will inject a hyperinflationary sum of dollars into the real economy. He says our bankrupt government will simply spend limitless quantities of funny money into the “wider economy.” If it were that easy, why are home prices still falling after trillions of dollars worth of “stimulus”? And why have wages failed to rise? Granted, fuel and grocery prices have been going up. But how long can that trend continue with incomes stagnating and household discretionary cash plummeting? (That was not a problem in 1922 Weimar, by the way, for reason that I shall explain shortly.) And how many seats will the airlines fill this summer if prices stay above $500? With respect to the inflation of stock-market prices, we’ll let Lira shoot himself in the foot if he wants to argue that Wall Street’s cosmic gas-bag is other than a deflationary juggernaut waiting to implode. Meanwhile, a vastly larger gas-bag in the form of a global derivatives bubble is set to implode with irresistible force. Hundreds of trillions of dollars’ worth of collateral are destined to shrink to the vanishing point. That is the true measure of deflation’s force, and when it starts to snowball again as it did in 2008, no puny multitrillion-dollar monetization by the Fed will even begin to counteract it.
Finally, we cannot let Lira evade the question of how, specifically, the government will “ram” (his word) QE3/QE4/QE5 money into the economy, especially when the state and local governments who in earlier times would have been the most eager and efficient conduits for these sums have begun to refuse them, knowing as they do that each new stimulus dollar will only create more debt for future taxpayers. We’d like to believe that the common sense of Republican and Tea Party governors and legislators alone will suffice to smother any inflation that might otherwise seep into the economy via supercharged outlays of cities, counties and states. In fact, the deflationary opposite is happening as local and state governments expand layoffs and pare budgets to the bone. Which leaves only the private economy to receive a wage stimulus sufficient to catalyze hyperinflation. On that score, just as we’ve asked hyperinflationists to wake us when we can sell our home for a quadrillion dollars, we’ll ask them now to send us a job application when GM is paying assembly-line workers $800 an hour.
When Money Dies
Big employers effectively did so in Germany, allowing weekly wage settlements with then-pervasive trade unions to track hyperinflation almost step-for-step. But you’ll need to read Adam Fergusson’s book about the Weimar hyperinflation, When Money Dies, to understand exactly why the U.S. is legally and practically constrained from duplicating Germany’s dubious feat. If you believe otherwise — believe, as Lira evidently does, that the Fed could somehow put a google of dollars into circulation on demand — then you should be buying real estate hand-over-fist right now. When Money Dies is a great read even for those who’d rather not be disabused of the notion that today’s USA, economically and financially, is not 1921’s Weimar. I particularly recommend a chapter that recounts how the most extreme periods of German hyperinflation occurred while the country’s money-printing presses were idled by strikes. Turns out, some of Weimar’s largest employers had been authorized by the government to print scrip in the event that crates of official money didn’t arrive in time to meet payroll. Imagine what such a policy could do for Detroit! For the whole world!
Rather than argue that this couldn’t happen, we’ll say only that if it did, it would be but a momentary blip in a deflationary collapse in real estate that Lira doesn’t even mention. Just wait till the incipient collapse in commercial property values hits full-bore. This is yet another deflationary juggernaut that the arrogant and pompous Lira has conveniently failed to notice. He will soon, though, and the shock of it may yet distract his attention from an inflation that so far has barely overflowed the lettuce bin.
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Ackerman.....Rename
Ackerdouche
The future will unfold with events that the most powerful men on the planet cannot control: climate change, food shortages, oil shortages and water shortages.
Fiat currency, gold, silver, oil for that matter, becomes worthless when you can't grow food or you don't have access to clean water.
TVO had the first episode of a documentary, 'The Future of Food'. Scary stuff and they travelled the globe showing what is happening with food production and water scarcity. The most powerful men in the world are useless in the hands of Mother Nature. We are about to find this out over the coming decades. All political decisions will be made around food and water availability and wars will be fought over it.
http://www.thefutureoffood.com/
Food and energy production locally in a community setting centered around small scale alcohol production is going to be one of the keys.
www.LiquidEnergyOasis.com
http://www.youtube.com/watch?v=jV9CCxdkOng&feature=related
"We’d like to believe that the common sense of Republican and Tea Party governors and legislators alone will suffice to smother any inflation that might otherwise seep into the economy via supercharged outlays of cities, counties and states."
Ha, I stopped reading at this point. I have to guess then that Lira's right. After all, having lived through hyperinflation myself, it's not that THEY (the state or the "massas") want to have it, it's just that things end up going out of hand. They first print money to cover shortfalls, then they go devaluing, and it all continues until there's a confidence crisis. And money is just that, trust. And when that happens, it's all over.
If as you say, there's gonna be crisis in paper markets, then the masters are going to have a bad time too. After all, they're masters... in paper.
Achtung, I think that this was one of the most valuable comments in this entire thread. Thank you.
I run the risk of asking a stupid question here...
If a house is 100% comprised of commodities, and commodities go to the moon, wouldn't housing (by default) have to go along for the ride?
You are asking a good question that you should have learned in high school, but because "they" don't teach what money, inflation, credit, etc. are in reality, you are asking this "stupid" question now.
Check this out: www.no2foreclosures.info (see chapter 4)
I cannot access individual chapters from the link you provided.
Here's my question in another form:
If commodity prices sky rocket, sooner or later the raw materials of a house could be worth more (piece meal) than they could be as one unit?
Is it not conceivable that salvaging the parts of a home could be worth more than a house itself?
Maybe I'm way off base, but I'm trying to wrap my head around how commodities go up, but real estate goes down, since real estate is made up of commodities. ( I understand that real estate had been run up way too high, and that further correction is needed, but at some point a house which is valued under replacement cost is undervalued...no?)
Also, isn't shelter a basic living need like food, gas, toilet paper?
hey rick! thankz for comin on zH!!! i've enjoyed yer deflationary argumentz for 2+ years, and have them filed with bonner's which are pretty much the same, imv.
i'm not gonna get into you & gonzo's dance, here, except to thank tyler for throwing the fukin party! truly dialogical, and truly fun!
i like what you do and how you do it, which should halve yer readership and kill yer business, too! i blogged on yer site for the first time recently: that little ditty to yer young guest writer about the subtle, social enticements and embrace of error, the flying sp. monst., and the "metaphysics" of uno-who was from yers trooly, dude.
i missed yer hula @ revised location last month. did you leave CO & do it? link?
by coming on this site with this huge word-dump, you have reached the status of arch-idiot in slewie's Hierarchy of Being and, for better or worse, dragged gonzo up with you. congratulations & i'll see ya on the funway!
The argument of Charles Hugh Smith, that the "men in control of the system will never allow hyperinflation to happen" is not a 'killer argument. It is instead the child's argument. The child who believes someone is in control.
As someone pointed out upthread, the history of fiat currency going to zero was accompanied every time by "men in control of the system."
Irony: it's our "men in control of the system" who do not prevent hyperinflation but instead are the cause of it. Decades of politically-driven price-fixing of money will do that.
GG
I can't watch this any longer. I have to step in now. lol
So fooks, interesting discussion whether deflation or inflation will take over America.
Let me first pose this question to all: Did it ever occur to people that monetary deflation (debt leveraged asset classes) and price inflation (think commodities, or: search for yield!) can occur at the same time in a world of globalized capital flows and fiat currencies?
Remarkable that people don't READ (#books for instance) the differences between Weimar and USA today. Back in the '30s errybody was on a gold standard. As Ackerman rightly points out, Fergusons book clearly tells the tale of the Reichsbank presses running full steam most of the time, while money velocity couldn't be kept up as prices kept rising on an hourly basis, in the end.
Every seller of goods (e.g. a farmer on the countryside) would keep his produce in the barn, because money lost its exchange value so rapidly, nobody wants the paper shitload anymore.
People inside Weimar thought it was the speculator (Jews anyone?) who drove down the exchange value of the Mark. That analysis wasn't correct, as the mark went down because of printing ... COMPARED TO FOREIGN currencies, still on the gold standard.
The words are out.
In a world of competitive devaluation, hyperinflation will not occur that easily, because everybody who debauches equally, goes equally downhill. When a printing press runs amok, look around you at other currency values. Take a look. COMPARE. ;) It's all relative.
Except for gold of course, thats a global currency. Always was, always will be.
Debt deflation is inevitable. The deflationist are right about that. Hyperinflation is only possible when the dollar goes down so fast, compared to other floating currencies, that confidence in the paper dollar is lost and velocity picks up. It can happen, if the Bernank is mad enough to print his way to competitiveness.
Remember one thing though. Banker families don't like global inflation just as much as the grandma around the corner, living on a fixed income.
On the other hand. Ultra rich banker families (Rothschild anyone?) do wuv deflation. Because outright monetary deflation, gives the liquid fella's opportunities that are induced by the incompetent people who borrow and spend, inflation stocks, homes and what not. When the bill comes due, and deflation takes hold, the afluent step in and buy it all up.
Besides, Keynesianism is so passé. Austrian based macro economics is the future bitchez. Issa fact. You just don't know it yet. Big banker families do. Just watch... deflation always wins the argument.
Debtors have more or less been blinded by low interest rates and fake prosperity due to the credit booms. Those sins will be corrected in deflation and rightfully so. Savers and retirees are the prudent. The Bernank doesn't give a damn about those fooks, but his banker friends in the EU, probably do give some damn, out of experience...
Never forget how capital formation occurs... savings first, then capital formation, next: investments and finally consumption. Hyperinflation destructs everything and all. Wages never keep up. Everybody knows that. Only the smart money who lock their cash (liquid) into the base of the pyramid (gold) will have the ultimate liquidity when the SHTF, if Bernanke really wants it. But I doubt it.
Final thought: The world has changed. One thing didn't. It's all relative. ;)
Hughe Crapper
Funny, then, how the world has seen literally HUNDREDS of currency collapses and hyperinflations as a result of chronic government overspending and unsustainably growing indebtedness, and yet not a single example of a fiat currency RISING in value in any putative deflation, ever.
No, it is inflation and currency collapse that wins the day, all ivory-tower deflationary flat-earth arguments to the contrary. I suggest you pull your head out of your Keynesian textbooks and learn a little history --- it will probably shock you.
"deflation would have the virtue of inflicting pain on debtors more or less in accordance with their sins, bankrupting those who most deserved it."
As of right now, the savers are the ones atonning for the sins of the debtors with rock bottom interest rates and continued loss in purchasing power due to the Benny's printing press. This is not going to change.
Hyper inflation will happen because the creditor's will opt out through the purchase of precious metals and commodities. The debate is over. We are seeing this right before our very eyes with the dollar flirting with a break down to the all time lows and gold, silver and oil breaking out. I can't believe they're still sounding the deflation alarm.
I know! It would be hilarious if it were not so pathetically blind and ignorant of them.
We are more likely to see Elvis return, riding on a unicorn, than we are to see a true deflation under a fiat currency monetary regime. Ackerman, like Denninger and many others, is just spreading misinformation if not active disinformation on this subject.
Hyperinflationary Great DepressionEven with the government's spending, debt and obligations running far beyond the ability of the government to cover with taxes or the political willingness of the government to cut entitlement spending, the inevitable inflationary collapse, based solely on these funding needs, possibly could have been pushed well into the next decade. Yet, the printing presses already are running, and the Fed is working actively to debase the US dollar. Actions already taken to contain the systemic solvency crisis and to stimulate the economy, plus the ongoing devastating impact of a severe economic contraction on tax revenues, have set the stage for a much earlier crisis. Risks are high for the hyperinflation beginning to break in the year ahead; it likely cannot be avoided beyond 2014.
It is this environment of rapid fiscal deterioration and related massive funding needs, the US dollar remains open to a rapid and massive decline and to the dumping of US.Treasuries. The Federal Reserve would be forced to monetize significant sums of Treasury debt, triggering the early phases of a monetary inflation. Under such circumstance multi-trillion dollar deficits rapidly would feed into a vicious, self-feeding cycle of currency debasement and hyperinflation.
Lack of Physical Cash. The United States in a hyperinflation would experience the quick disappearance of cash as we know it. In Zimbabwe, there was the back-up of a well-functioning black market in US dollars, but no such back-up exists in the United States. Shy of the rapid introduction of a new currency and/or the highly problematic adaptation of the current electronic commerce system to new pricing realities, a barter system is the most likely circumstance to evolve for regular commerce. Such would make much of the current electronic commerce system useless and add to what would become an ongoing economic implosion. It also could take a number of months to become reasonably functional.
Some years back, I happened to be in San Francisco, having dinner with a former regional Federal Reserve Bank president and the chief economist for a large Midwestern bank. Market rumors that day had been that there was a run on a major bank in the City by the Bay. So I queried the regional Fed president as to what would be happening if the rumors were true.
He had had some personal experience with a run on banks in his region and explained how the Fed had a special team designed to handle such a crisis. The biggest problem he had had was getting adequate cash to the troubled banks to cover depositors, having to fly cash in by helicopters to meet the local cash flow needs.
The troubled bank in San Francisco, however, was much larger than the example cited, and the former Fed bank president speculated that there was not enough cash in the vaults of the regional Federal Reserve Bank, let alone the entire Federal Reserve System, to cover a true run on deposits at the major bank.
Therein lies an early problem for a system headed into hyperinflation: adequate currency. Where the Fed may hold roughly $200 billion in currency outside of roughly $50 billion in commercial bank vault cash, the bulk of roughly $860 billion in currency outside the banks is not in the United States. Back in 2000, the Fed estimated that 50% to 70% of U.S. dollar cash was outside the system. That number probably is higher today, with perhaps as little as $250 billion in physical cash in circulation in the United States, or roughly 1.7% of M3. The rest of the dollars are used elsewhere in the world as a store of wealth, or as an alternate currency free of the woes of unstable domestic financial conditions. Those conditions would change severely in the event of a US hyperinflation.
Given the extremely rapid debasement of the larger denomination notes, with limited physical cash in the system, existing currency would disappear quickly as a hyperinflation broke.
For the system to continuing functioning in anything close to a normal manner, the government would have to produce rapidly an extraordinary amount of new cash, and electronic commerce would have to be able to adjust to rapidly changing prices.
In terms of cash, new bills of much higher denominations would be needed, but production lead time is a problem. Conspiracy theories of recent years have suggested the US Government already has printed a new currency of red-colored bills, intended for some dual internal and external US dollar system. If such indeed were the case, then there might be a store of "new dollars" that could be released at a 1-to-1,000,000 ratio, or whatever ratio was needed to make the new currency meaningful, but such would not resolve any long-term problems - as seen in the multiple Zimbabwe devaluations - unless it was part of an overall restructuring of the domestic and global financial and currency systems and unless the US government could put its fiscal house in order.
From a practical standpoint, however, currency would disappear, at least for a period of time in the early period of a hyperinflation.
Where the vast bulk of today's money is not physical, but electronic, however, chances of the system adapting there are virtually nil. Think of the time, work and effort that went into preparing computer systems for Y2K, or even problems with the recent early shift to daylight savings time. Systems would have to be adjusted for variable, rather than fixed pricing, credit card lines would need to be expanded daily, the number of digits used in tallying dollar-denominated transactions would need to be expanded sharply. I have had assurances from some in the computer field that a number of businesses have accounting software that can handled any number of digits.
From a practical standpoint, though, the electronic quasi-cashless society of today likely also would shut down early in a hyperinflation. Unfortunately, this circumstance rapidly would exacerbate an ongoing economic collapse.
Barter System. With standard currency and electronic payment systems non-functional, commerce quickly would devolve into black markets for goods and services and a barter system. Gold and silver both are likely to retain real value and would be exchangeable for goods and services. Silver would help provide smaller change for less costly transactions. One individual I met indicated that he had found airline bottles of scotch to be ideal small change in a hyperinflationary environment.
Other items that would be highly barterable would include bottles of liquor or wine, or canned goods, for example. Similar items that have a long shelf life can be stocked in advance of the problem, and otherwise would be consumable if the terrible inflation never came. Separately, individuals, such as doctors and carpenters, who provide broadly useable services, already have services to barter.
American's believe the US can't go into hyperinflation. But since most US dollars are held outside of the country, it doesn't matter what Americans believe. If the rest of the world gets tired of the US dollar, hello hyperinflation. If a loaf of bread costs 3 dollars this month and 5 dollars next month, to me that IS hyperinflation.
The assumptions about reality are amusing. Does the author believe that shit tastes better roasted or fried? When there is a discussion about energy, does the sun not come in to the discussion? Blindness is institutional.
One of the better essays on ZH in a long time.
+1
Agreed! Great discussion. Not one post where some smart ass tried to prove how intelligent and important he was with a snide attempt at gallows humor. The way the ZH threads used to be before they all degaded into sewer talk and insults.
Icarus
I agree with the trolls on this one. There can't be hyperinflation because it destroys the banking establishment. They will destroy the middle class in an epic deflation before they will take a risk of inflation getting out of control. It is much more important that fiat survive rather than starving children. Count on it.
However gold will still go to 36000....eventually!
With a 99% excise tax on PM transactions and the death penalty for tax evasion. Not confiscation mind you, just fair and equitable revenue enhancement.
That might work, in the US.
eg. How long has the UK taxed silver? Since Ag was at all time lows? So how successful would you say that policy was?
++ "They will destroy the middle class in an epic deflation before they will take a risk of inflation getting out of control."
Thats the bottom line right there boys and girls.
how, specifically, the government will “ram” (his word) QE3/QE4/QE5 money into the economy
thats easy, the feds can inject funds into the economy through direct means tested benefits and subsidies, the feds will bypass the states entirely and go directly for the votes-just like in Weimar, like they're doing now with the EITC and the energy & home loan rebates, think of a "earned income tax credit" for everybody with a heartbeat earning less than 25K per year.
As far as burning savers & investors, my dad whose 78 has always said the state has always burned savers and investors his whole life and will continue to burn savers and investors into the future.
Another note, its no QE 3 or 4 its QE∞
As far as RE goes, portable assets particularly things you need to live like food, water and energy, will experience hyperinflation, fixed and immovable assets will crater as they will become state tax targets.
"To repeat: We do not make debt disappear by walking away from it; someone will have to take the hit."
Thus far, the debt gets repaid via taxpayer bailouts/stimulis and Fed Treasury purchases. What the Federal Reserve, "Too Big To Fail", and Federal Government is doing is attempting to setup Japan's perpertual taxpayer fueled spend and tax loop. Charles Hugh Smith has written articles on this.
"Expanding on that point alone, I could dismiss Lira’s entire argument with a wave of the hand, invoking the killer question that blogger Charles Hugh Smith has asked of overheated inflationists, to wit: Why would the rich and powerful men who control the Federal Reserve, and who would be wiped out by hyperinflation, allow such a thing to happen?"
1). The question ignores that the Federal Government has placed such rich and powerful people under the category of "Too Big To Fail"; therefore, these entities's losses are socialized via taxpayer funded bailouts/stimulis. Additionally, the Federal Reserve has purchased Treasury Bonds from such entities allowing these largely otherwise insolvent systems to chase returns in other currencies, commodities, and assets.
2). With the Federal Reserve being the primary if not sole purchaser of Treasury Bonds, the debt incurred becomes public debt thus paid for by taxpayers, so it is a presumption that these powerful people are the ones expected to take the loss.
3). When Charles H. Smith asked "where would these people park their assets", I have to admit; I was surprised. First, these same entities are (lacking a better term) married to globalization/supranationalism, so these entities are less impacted by (I believe the term is) diversified porfolio or laid eggs in more than one basket. Secondly, these largely globalist entities have largely bet against the US Dollar. Thirdly, globalization allows (particularly) developing nations less dependency on US Geopolitical influence; this is a shift in the global balance of power effectively placing the US Dollar as the world's reserve currency as well as lessening US influence. Fourthly, I am given to understand that hyperinflation is derived by loss of confidence in the currency in this case US Dollar due to the greatly (should I say deflated purchasing power of the US Dollar?) reduced purchasing power of the US Dollar to the point of meaninglessness/useless.
"unbearable — cost of “escaping” debt via hyperinflation"
"But deflation would have the virtue of inflicting pain on debtors more or less in accordance with their sins, bankrupting those who most deserved it."
1). In other words, your assessment is based on Weimar's attempt to bypass the war debt reparations described by the Treaty of Versailles through debasing the German Mark thus decreasing the purchasing power of the currency in an attempt to either pay its war debt reparations with junk currency or have the debt forgiven. This varies from the US's attempt to spend itself to prosperity and attempt repaying its debts via debasment is different in what way?
2). The Federal Reserve and US government are obviously disinclined to force the "Too Big To Fail" to pay the piper for mal-investments but have granted these entities a get out of jail pass to continue its criminal activities in lieu of the alleged economic catastrophe that would incur by allowing these mal-investment entities to collapse and be replaced by solvent and competitive entities to replace them. It should be blatantly obvious that with "Too Big To Fail" (a parkable investment and an immortal entity) will never ever be allowed to pay for their mal-investments and other sins. Or, do you mean the consumers who over-bought items on credit, which is ironic since the US Dollar truly doesn't have any instrinsic value of representation on it thus the currency itself is credit.
"Deflation, on the other hand, would leave the bond and stock markets intact, sparing those with little or no debt from its worst ravages."
Why am I suddenly thinking about Zimbabwe?
1). In the US, the entities referred to above presently own something like 70% or more of the assets of the US. (I'd say that their wealth is quite protected and diversified).
2). Frankly, I think that this is wishful thinking.
A). Presently, the upper class possess the effect of 70% or more of the wealth of the US kinda like going into the Great Depression.
B). Wages are stagnate or in stagflation.
C). The US economy is a consumer economy that used spend baby spend and worry about the debt later. Employment is mostly Public/Service while other more capital creation employment shipped overseas. In essence, it certainly seems like the Dollar creation and Dollar Credit creation are quite ahead of capital creation effectively making prices reflected by inflation.
"Will we have gone broke without having had the chance to pay off our mortgages in snide? I say yes; Lira, for his argument to hold, is obliged to say no."
Well, this is a dubious question. As I understand it, hyperinflation is a loss of confidence in the currency/a currency debased to worthlessness through loss of purchasing power thus confidence.
1). Your answer here strikes me as incredibly dubious.
2). In hyperinflation, the mortgage cannot be repaid in the US Dollar as the dollar has no confidence of purchasing power. For all purposes, you seem to agree with Lira here.
"On that score, just as we’ve asked hyperinflationists to wake us when we can sell our home for a quadrillion dollars, we’ll ask them now to send us a job application when GM is paying assembly-line workers $800 an hour."
lol...
What do you surmise a quadrillion dollars or $800 per hour during hyperinflation relates to the value of the currency?
I am going to wade in here.
What's frustrating to follow is the line between rhetoric, sarcasm, and genuine fact oriented discusssion about the topic and problems at hand. There are clearly some well defined, unflinching beliefs held by the regular readers of this site. Most of these are pinned on inflation or an inflationary future.
I would assert that none us have ever lived in anything but a period of modest inflation. It's all we have known. It's been evident for the last 50 yrs. Secondly, there is strong empirical evidence that inflation in America (incl my country Canada) has rarely come about unless there has been solid wage growth underpinning it. Simply because wages are the largest cost component in the producion of finished goods.
If we can agree on that, then its a matter of comparing the fiscal and monetary conditions of the times and I think we all agree that these conditions today are much different: More debt, larger deficits, debt monetization, interest rate manipulation, weaker opposition to the entrenched political systems, etc.
I believe it is possible for people to lose faith in a fiat currency without having a massive increase in that currencies money supply. Perhaps investors don't like having debts socialized, or facing unlimited tax increases, or they don't trust the political elite to manage that countries affairs. As result you have investors looking for alternatives as a reasonable store of value.
That store of value used to be housing, but that hasn't worked out so great lately in many places. So now they are looking for hard assets: gold, oil, silver, farmland, edible grains, grain storage, food processing, maybe even rare cars. Someone can always afford to drive, might as well be in high style.
The shift into these assets is inlationary (causing the price level to rise) simply because we have more buyers relative to current supply, and many of these markets are small and illiquid relative to the much larger bond and equity markets where that capital may have shifted from. Capital always needs to find a resting place and it is incredibly fluid. It is entirely possible to have inflationary pressures even though the money supply itself, incl debt and credit, may not be increasing.
The counterpoint is that debt matters. Once created it rests on someones balance sheet. Much of the debt of the last 20 to 30 yrs has not gone to productive uses. It has been used for consumption. (like Greece whose debt has simply paid early pensioners) It has to be either paid down or written off, and that is a massive deflationary force. It the debts are socialzed, then Govt's have to cutback somewhere else as their debt service obligations increase. This is happening all over the Western world, and in cities and states.
It appears to me that we have this tug of war happening as the debtors and creditors struggle for supremacy. It may take years to resolve, and we may see inflation in many assets and deflation in many others. It may not be an all out win by either side.
If you are referring to the stagflation of the 1970's as a "period of modest inflation" then you did not live through it, not as a wage earner or head of household at any rate. I was in the Air Force then (1975-1979) and I can tell you there was nothing modest about it, in three years alone, 77, 78, 79, we had 13, 14, percent inflation, and do not think that just because they have a dozen tricks now to evade truthful reporting of inflation that they reported the full inflation then either. At the same time we got COLA's of 1.2%, 0.75%, etc. I estimate that just in those three years we service members lost close to 40% of our wages to inflation, but it was really worse than that because as in any such event the lower paid you are the larger the share that has to go to necessities which were then and usually do rise faster than general price levels.
Every married GI with kids in my unit was on food stamps, most of us had second jobs in the community, I worked at a Shell station 18 hours a week to suppliment military salary for $2.65 per hour. In 76 I was paid 386 per month in basic training and was still only making less than 900 after 4 promotions and four years, by December of 1979 I had had enough and left. Do the math, that is not even 12 grand a year, which one could have gotten by on in 1959 but not 1980.
But even those paltry wage increases would be welcomed now since I see inflation today higher and faster than it was then, and the COLA's now in the third year running are ZERO!
excellent summary, my feelings as well.
"Why would the rich and powerful men who control the Federal Reserve, and who would be wiped out by hyperinflation, allow such a thing to happen?"
Hmmm. Hyperinflation has only happened, oh, about 1,000+ times in human history. Observable fact. Q: Why did the rich and powerful men in control of those currencies allow it to happen? A: They didn't, it mowed them down like a grim reaper harvesting dying souls....
Faith in the omnipotent power of the Federal Reserve has to be one of the most damning arguments a debator could choose to use....
I hope your right that there are more powerful forces out there than the fed.
You make inflation sound like a force of nature, which i guess it is.
but has man not also learned to harness and tame forces of nature to advantage?
obama can combat inflation anytime by simply sending everyone checks in the mail,
i dont see why the fed will not just keep extending us credit.
UHM...
how much money is invested in 401K's? IRA's? bank accounts? US Dollars outside of the US?
If all this money floods into commoditities how do we not get Hyperinflation?
you dont, you just get steady inflation.
I call it the $2000 steak.
The money to buy the commodities comes from somewhere and that means selling whatever it was "in" before. how much the selling affects the buying is the subject of this debate put forth.
Armstrong - "Hyper-inflations is a collapse in the confidence of Government. It is the absence of future stability".
The question is ...... do you have confidence in the US Government?
I'm STILL waiting for WB's 'Rick vs. Lira' claymation death match.
The money has already been printed and distributed to US banks, GM, public employees, foreign banks and central banks, etc, etc, etc. The inflationary caked is mixed and baking in the oven. The $1.4 quadrillion dollar question (BIS numbers) is: have we printed enough money to compensate for the money destroyed in debt "abandonment" or "reserve loss"?
Note Uncle Sam is the world's largest debtor and he will benefit most from inflation. How could the USA ever pay pay back all the recently created money in an environment of deflation, with appreciating cash values? No way, except through hyperinflation or devaluation or revaluation of the dollar.
This movie has been screened many times and the value of the currency is what is destroyed when wars are waged and not paid for and currency-issuing governments' debts are incurred and not repaid. Bread and circuses have been identified for a long time now, don't confuse technological advance with reality in history and politics. See it big, keep it simple. Real wealth will endure, we just don't know what the unit of accounting will be, except gold is a constant and all currencies are defined in their relation to it. Just ask yourself why the worlds' central banks keep so much gold on deposit, or claim to.
Oh...oh...oh my sweet Lord <dabbing my eyes with a handkerchief>. Please PLEASE keep posting stuff by Ackerman. I need a good laugh nowadays.
Ackerman is the most unintentionally hilarious guy who wants to be taken seriously since Lindsey ("Miss Lindsey") Graham.
Laugh it up fuzz ball..
your probably one of those guys up to ears in debt with your new house and cant stomach the choice of having to sell your house at a loss or your harley for 2k to pay bills.
if its that funny, throw me a quote.
i need a good laugh.
Doesnt matter whether he owns his home out right or is up to his eyes in debt according to Rick we will all be broke anyway. So who really cares. Wealth according to this dude is going to be completely destroyed. Who knows how but trust him and signup for his newsletter.
when Rick the Dick has to bring Jim Willie into the mix to Bash Lira, you know he just ate crow last night what a douchebag. FYI Rick, your newsletter fucking sucks
A plot of your favorite non-PM financial or hard asset in terms of Au or Ag, over 10 or more years, may be a way to see the resolution of the inflation/deflation debate, otherwise hiding in plain sight.
CA $400k mid-level houses worth 1000 ozs. of $400 Au in 2005 are today, at $200k and $1457/oz, worth 137 ozs.
The deflation that Rick, Mish and many others have called for may be arriving now, in disguise, and with delayed, disruptive consequences worse than the advocates have anticipated; I'll guess little things like credit, trade, banking, equity, bond, and further RE collapse.
Be careful what you wish for, and predict.
my two bits: I think that we need to get back to serving others as a society and not self-serving. I think Cheney made a big mistake when he said that the banks were too big to fail. They should have been allowed to fail. But who really is going to do that in political office. Weimar Germany might only happen in the middle of world war like it did, but we are taking over the world right now.
Rick's writing is better than GL's and he appears more magnanamus.
++ one day Karma will catch up with Cheney and it wont be pretty.
Not to get too far off topic, but...
What if (today) a Hank Paulson clone told us that he needed $700 billion to save his buddies in the TBTF class ?
And why didn't the Bernank simple print the $700 billion for his masters in the first place ?
This financial cancer is killing the host and Benny bandages aren't going to do the trick.
Is not the general agreed upon endgame a new world currency after the dollar is "purposefully" destroyed?
If thats the long term plan then how will TPTB convince americans to give up their national sovereignty for a world currency when the stock market is at 75,OOO and obamas sending checks to every household in america so people don't walk on washington?
I think the only way americans will be forced to agree on a world currency and give up their sovereignty is at the bottom of a deflationary spiral.
Rick, I find those who think all debts must eventually get paid is an extremely naive understanding. Not surprisingly, such thinking usually comes from people who are very intelligent, correct on many things but often so clouded by judgement from a singular position that they are ruled by a Grand ruling hypothesis instead of using multiple possibilities.
Rick you go through extensive logic at great lengths to present your argument where brevity is lost in translation. Understand that I do respect your thinking, but anytime something is made complicated it means that person does not truly understand it.
Brevity is the soul of wit and if one can not make it simple, they don't understand something.
Expanding on that point alone, I could dismiss Lira’s entire argument with a wave of the hand, invoking the killer question that blogger Charles Hugh Smith has asked of overheated inflationists, to wit: Why would the rich and powerful men who control the Federal Reserve, and who would be wiped out by hyperinflation, allow such a thing to happen?
Wasn't it also CHS who stated that the arguments for deflation look good on paper, but probably won't play out in real life is because the deflationists discount the fact that the government and their clients (wall st. bankers), will simply change the rules or ignore them? Case in point, the debt ceiling theatre currently playing out in DC. I may be mistaken, but I'm sure it was CHS who made this point.
The fact that they will simply change the rules defeats any points about being constrained from dumping googols (the correct term, not google) of money into system. If you don't think they would do such a thing, well perhaps you've never heard of the Patriot Act, the suspension of mark to market, the illegal invasion of Iraq... etc.
Finally, I thought that a true hyperinflation was a political phenomenon not necessarily tied to the printing of money, but the loss of faith in the currency, with the money printing coming later.
Overly verbose and strewn with preconceived rigid ideologies based upon past events with no lines drawn to connect them to the new realities of database fiat, computerized trading, cultural cancer, or societal leprosy.
Mr. Ackerman, is it possible that our economy is actually diverging into two streams, one that involves the extremely wealthy and one that involves the rest ? The future economic propects of these two groups seems so different right now that I wonder if considering them seperately has some merit. If they could be considered seperately, perhaps each gruop will experience a different inlationary/deflationary experience. Certainly if the power elite could choose one to benefit themselves and another to inflict more pain on the middleclass they would. So could they?
I am 100% certain Hyperinflation will happen because...
Well, I said so!
Rick Ackerman completely ignores the issues of a deflationary collapse. The FED cannot allow a long term deflationary collapse to occur. If we have a deflationary event, debtors will go broke trying to pay off their expanding obligations. Who is the biggest debtor in the history of the world? The United States Govt. The USG will have no way of paying off its debt as tax revenue falls in the deflationary collapse. The FED will be left with two choices: print the money or default on the debt. Printing will lead to hyperinflation. Mr. Ackerman believes the FED will not do this, but he ignores the obvious consequences of a US default.
A US default (without hyperinflation) must result in a severe reduction in US spending. The USG will have to make mammoth cuts to social security, medicare, and defense. Now lets pretend that we live in a Neverland where the politicians would not be strung up as soon as this happens. There is still the problem of the dollar. Though the dollar will strengthen, the "full faith faith and credit of the federal reserve" will have taken an enormous hit, and the dollar may lose its reserve currency status immediately. Even if the psychological faith in the dollar remains (a stretch), Mr. Ackerman forgets the real reason the dollar is the reserve currency...oil. The US petrodollar system forces virtually every person to purchase oil in dollars. This system rests in the arms of the US military. There is no way the petrodollar will remain without an enormous military. A military that cannot be funded in a deflationary collapse because as Mr. Ackerman says, "Everyone will be broke." Without the need to hold dollars for oil purchases, you can bet the vast majority of foreign dollars will return to the US and then...hyperinflation.
There may be a significant deflationary event. However any significant deflation must be followed by a US default and hyperinflation.