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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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Funding armies by deficit spending works until it doesn't.
The U.S. government should consider a "safe passage" fee for all Mideast oil.
All the Thugs and Knuckle-draggers in the Middle East have gotten a free ride, security wise.
Yet another misinformed person using the "where does the cash come from" argument to argue against hyperinflation.
When will you guys realize that both deflation and hyperinflation will occur? You are both right and the arguments being raised are nothing more than a matter of timing.
In this case, the debt deflation is on the consumer side and the hyperinflationary element is on the public/government side. That is why there will never need to be "cash on the streets" to trigger a hyperinflationary event because the cash never truly reaches the consumer. The money created is debt and the consumer has no further tolerance for this debt. The end result is that the extra money being printed creates no actual utility and therefore chases empty yield in arenas such as equities, commodities, and bonds. As we all know, bonds are falling out of favor rapidly and that will only leave a few avenues for those seeking returns. I'll leave it to you to figure out how fast prices will rise once every dollar "printed" reaches the market in a leveraged manner.
And I'll leave it to you to figure out how long it will take for widespread social unrest when people can't buy a loaf of bread. Hyperinflationists are such linear thinkers. They don't seem to understand that in a complex system, actions will affect other parts of the system, and these other changes will change the original action. You seem to think that hyperinflation can exist in a situation where the vast majority of people don't see the extra money and therefore can't buy the necessities of life. Was the French Revolution initially inflationary or deflationary?
Of course there would be widespread social unrest... I don't know what point you have just proven. How do people on unemployment and food stamps buy loaves of bread? It's called public financing and when that's the last resort to temper social unrest then you are introduced to the exact scenario that I laid out in my post above. Debt based government financing is the current driver of potential hyperinflation. When they finance your life as a whole, then sure the people can still eat for a while but eventually nobody is going to finance the exposed ponzi operation and the Fed is left to directly monetize every single transaction. Meet hyperinflationary conditions.
Again, the only deflation is occurring in the consumer and private sectors. Go to the Fed website and see the debt numbers by sector. Government up, private and consumer down. This DEBT deflation is what leads to public DEBT increases to balance the effect and eventually leads to DEBT backed hyperinflation.
+1
PS the definition of a shit is somebody that always HAS to be right.
i have 3 simple questions:
did you look at the price of PM's of late?
did you look at the price of oil of late?
and how about the price of, say, the basket of grains/corn/soy?
If you answer yes to any of the above Q's, then it would follow that inflation, not deflation, has already set in. Ergo there is no case for deflation specifically in light of the above. Ergo call it hyper call it manic call it hypo call it chicken call it anything you want, but prices are going up.....
Some prices are going up. But why are you guys always so eager to overlook the prices of things that are going down, such as real estate. What do you think collateralized the derivatives bubble?
Because housing was massively over valued and (by historical standards) remains so. Even if it were to drop another 20% (depending on the region), housing would still be inflationary but not when measuring from 2006 prices. Get it? 2006 prices ~200% overvalued 2011 prices still ~40% inflationary, though moving downward.
Rickak
Why are we looking up this dead dog's ass ? All the bubbles that Bernanke has created will keep expanding until they cannot. Greenspam's housing bubble lays before us; an American tragedy.
Since the Fed's sole objective is to keep the banking cartel from writing down worthless promises to pay, the real economy is going to continue to be prices up and prices down.
As a reward for cleverly ripping off the public, generous bonuses are dished out to all the piggies.
But ultimately this means no growth (after inflation) and no jobs.
It takes real income (cash earnings) to pay down debt, and that income is but a government accounting illusion.
Because us lowly serfs only care about not starving or freezing to death.
Why are you so eager to overlook the prices of food and commodities?
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?
Do you not understand how asset-stripping works?
Once they convert their USD into real assets, they will reap epic profits from the destruction of USD. Doesn't anyone play chess anymore?
The tooth fairy doesn't need to do anything to get the money to flow. All that has to happen is this: the Fed needs to stop paying interest on excess reserves. And if that isn't enough, it can start charging a storage fee. The Fed can shove that money into the economy overnight if it wants to. Why would the Fed take a $Trillion or so in MBS on its books if it didn't intend to reinflate or die?
More critique later.
Right on
Let's play forward that asset seizure in the only asset that matters: housing. While we may wind up renting the homes we now ostensibly own, the terms will be dictated politically. The rentier who plies his trade with a company-store mentality is going to get himself hanged.
If/at what point can we expect "guillotines" coming into play??
The rentier who plies his trade with a company-store mentality is going to get himself hanged.
Do you imagine it will be the democrats or the republicans who will be the strong advocates for the masses? What do you think the security state is for?
Precisely, it is about buying power and control. Buying power can take many forms, but the smart "money" always holds hard assets (productive real estate, productive companies, productive intellectual property, gold, silver, other PMs and rare earth required for manufacturing and control of production of commodities). The few true contrarians are your true masters.
Great read. I would love to believe in hyper-inflation, but I don't. As the author points out, there is simply no mechanism for it. Ben has done his worst, but it just ain't happening.
The perceived inflation consists of bubbles in oil, bonds, and stocks, more or less deliberately engineered by BS Bernanke.
Deflation in wages, real estate, pensions, and almost everything else, is being driven by market forces. Enough said.
Rees-Moog's Sovereign Individual is also a great read.
To our armchair quarterbacks:
We are repeating stagflation of the 1970's.
1. As the economy slowed, some suppliers dropped out, the remaining suppliers raised prices.
2. There is an ongoing supply crunch in various parts, and it isn't simply the Japanese quake.
3. Transportation, large and small, is costing more, lots more.
Disruptions in supply raises costs, so they are either passed on or the supplier dies. If the supplier dies, prices are raised by others.
Only in monopoly/oligopoly situations can costs remain relatively controlled over the short run. In the longer run, even this will not last.
Remember Buffet's investment maxim- never invest in a competitive market.
We are at the beginning of many years of stagflation.
Thank you Ben Bernanke (not).
Skimming and churning (faulty) promises to pay/deliver paper and electronic mirages does not an economy make.
You've stated the case much more succinctly than I. Thanks for the help.
My question to you would be, when in history has massive creation of money led to deflation? I am aware of no examples, whereas the opposite has happened hundreds of time. This time is different?
The money has been created, but it is stuck in the banks to cover their massive losses (more like a tiny fraction of their losses). The question is when and how, if ever, does that money flow through to the rest of the economy?
Now this is why I come here. I am easy to please when the writing good and there is effort of thought.
Thanks Rick
Kind of you to have noticed, Double. My deflationist essays had begun to slacken because I'd grown used to writing for critics less astute and nasty than Lira. In this latest commentary, I've taken my argument up a few pegs so that, while some readers may continue to disagree with me, they won't fancy themselves gnawing on my carcass.
"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"
This seems to be the true center of your argument, the lack of physical cash laying about in 55 gallon drums on every corner. As if lack of physical cash somehow precludes hyperinflation as I cannot distrust the value of my money without having a large pile of it available. Please explain how every picture of a child holding bundles of cash or Wiemar wives feeding stoves with piles of cash physically got this cash.. The vast majority of your reasoning is incomplete with insufficient evidence to support your conclusions, interesting but insufficient.
Please explain how every picture of a child holding bundles of cash or Wiemar wives feeding stoves with piles of cash physically got this cash..
Helicopters
Ha, in true hyperinflation it will seem as thought they are in fact airdropping it.
Fergusson explains how the child got the cash. You evidently don't know the answer to your own question.
Had I just read an article by Fergusson (sic) I would have asked him Rick.. I asked you to flesh out a point. I think your a bit sensitive, no?
Interesting writing but insufficient support for your points. Hyperinflation is a psychological phenomenon which then triggers the production and dispersal of physical cash to protect (falsely) the PTB. It happens fairly often in the recent historical record and it may happen here. I do not pretend to know what combination of stagflation, hyperinflation or deflation we will be subjected too but one or several of them is coming. Interesting read, keep up the writing..
Very good article. The one point I see that tilts the debate to a deflationary outcome is that Lira analyzes the US economy in an isolated manner. I suspect many of the other nations economies will implode long before the US has any sniff of hyperinflation. Watching Greece, Ireland, Spain, Portugal, Italy, Middle East crash against the shoals will clearly change the political dynamic long before things become "uncontrollable". That will raise the stock of the Tea Party.
I suspect investors in those troubled economies will be looking for a safe haven, and that is expected to be US stocks or US financial instruments. There will be some precious metals purchased but physical delivery would be needed, or storage of the PM in a safe jurisdiction.
At some point, there would be a rush to the USD, causing significant strengthening. I would expect many invested in the commodity currencies would make their move to the USD prior to the USD taking off. The US would try to manage the appreciation of their currency by printing more.
... The USD ends up being the one world currency.
Everything you say here sounds quite reasonable. I only have one nit to pick here. The USD cannot be the one world currency because of all the debt denominated in USD. In particular, the federal debt. This will need to be destroyed so that the US can start anew, as there is simply no possible way for US government debt to be repaid. I believe that once the federal government defaults, that is the end of the greenback and the beginning of the blueback. I can see this ocurring just after every other major currency is destroyed.
This is my belief as well. Haven't you already noticed that our masters have started adding additional colors to our paper fiat currency? I believe this is an attempt to condition us toward acceptance of a non-green currency when our currency crisis/devaluation occurs.
Trust is a relative concept. Everyone will trust the last currency standing... warts and all.
A lot of global debt will be monetized using the USD. The other currencies will fall by the wayside.
The US government will not repay the debt. The world will rollover the debt.
I'm not so sure. To me, the last currency standing won't be USD; it will be hard stuff - gold, oil, corn etc. If people witness numerous currencies and countries collapsing around them while seeing the same problems in the US, I find it a stretch to think that people will pile into the dollar. It could happen, particularly at the onset, but I don't see it lasting very long unless the US makes a 180 degree turn in fiscal responsibility.
You need to be able to transact on the internet, and electronically through the banking system. The hard stuff doesn't work that way. It needs to be denominated in something. The USD will be the global currency using much the same approach that Alexander Hamilton used to create the Federal system... consolidation of state debt.
Rick would be right if we were dealing with masters of their game. But we have no responsible adults at the NY Fed, Treasury and the White House. Zimbabwe is coming down the track.
Let's just call it Stagflation. Then, everybody's right!
Since nothing else has worked, perhaps the tooth fairy can make dead QE3 money migrate from banks' computers to our pockets.
Or perhaps that money just finds it's way into commodities all by itself and empties our wallets via higher pass-through prices for just about everything.
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In fact, the deflationary opposite is happening as local and state governments expand layoffs and pare budgets to the bone.
Sorry but that just isn't happening. Raising property taxes in the face of falling RE values to feed the Leviathan and not laying off a single municipal diversity counselor is more like it.
You know, it's possible that you both will be right, just not at the same time: hyperinflation collapses the economy and then, as any remaining economic activity proceeds at a fraction of its former velocity: big time deflation.
I think you just answered his question about why people are not buying real estate hand over fist right now. Property taxes. If they Government stops paying people's rents, the rents will crash down and not even be enough to cover the rising taxes. If the gov. were to pass a law right now abolishing property taxes forever that could not be repealed, money would pour into real estate. Instead the money is going into no-brainers. Things that people can't do without, and things that have always had purchasing power. Oil, food, gold, silver, and weapons.
Obviously the question is already being answered in real time. Deflation of unattractive assets and inflation in necessities and true stores of wealth.
Further more, the money should just disappear like he states, but it's not because of mark to fantasy instead of mark to market! All this fantasy money is chasing real assets.
"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."
They won't be wiped out, true - because they are not tied in to one currency and have a bit of a headstart in knowing when the SHTF is coming, no? It's the little folks that will be destroyed mainly.
That doesn't mean it won't happen, just that they of all people will profit from it.
Agreed.
Why would the rich and powerful men who control the Federal Reserve, and who would be wiped out by DEFLATION, allow such a thing to happen?
Unfortunately, the rich and powerful men that that control the Federal reserve and the central banks can not control the abundance/scarcity of energy in all points around the globe. Neither can they control the availability of fresh water. Both of these are but simply two physical things that any economy needs to have readily available in order to thrive in the current "growth economics" model used around the world by all governments and the private sector. The truth lies in history and the history of the Federal reserve is criminal and wrought with failure to meet any of their mandates, aside from enriching the masters.
The inflation/deflation arguments are ALL BULLSHIT (just like modern economics). All that will matter is purchasing power (for both the individual and businesses alike). You will either have it or you won't, and you will either be a slave or not.
Hedge accordingly (indeed every choice you make is a "hedge" so to speak).
+1
It's funny how even amidst all the failures of modern economics people still tend to harken back to traditional axioms. It MUST be inflation or deflation. They have no other conceptual context with which to frame their viewpoints.
I see deflation(assets) + inflation (commodities) + stagnation (wages).
How aboout we call it Suckflation? Or Bernankaflation?
How about "Collapse"?
Fine with me. I have many stores of value in my assets and my employees. As a former EMT and search an rescue volunteer I can tell you that when things get ugly, you find out real quickly who is actually useful. I say crash the system, the sooner we do, the sooner compensation will return to those that are actually worth a shit.
Here! Here!
I shut my handyman business down 5 years ago and I still get calls to fix things. There always seems to be a demand for people who can actually do useful things and are trustworthy.
Perhaps you are familiar with the book The Ugly American, a somewhat famous tome published around the time the Viet Nam war was ramping up.
The Vietnamese were being "helped" by the American Government. Bunches of worthless but pretty suits were trying to educate the peasants about democracy and capitalism. Some fat old guy in dungarees was there, too, IIRC, maybe via the Peace Corp. He had tools and could fix stuff, like irrigation pumps. The peasants called him "the ugly American". They wanted more like him, but got a lot of worthless suits, instead. Things ended up turning out badly. The title of the book makes you wonder who were the real uglies.
People who can actually do useful things and are trustworthy. You have clearly given us the root of all economic transactions.
I feel it lacks pizzazz.