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Let's Think This Through Together
Discussion prompted by my recent commentary on hyperinflation continues to evolve and may yet enlighten us sufficiently to produce some useful conclusions about the banking system's looming endgame. Hyperinflation, or deflation? At this point, I'll concede that it could be either that brings us to economic ruin. But I will nonetheless argue in a forthcoming essay that the dollar could collapse without triggering a hyperinflation. Under this scenario, it would not be a question of paying $1,000 for a barrel of oil, or $100 for a carton of eggs; rather, those in a position to supply such basic necessities would simply stop taking dollars. This clearly implies that we would move rapidly to barter, abandoning a currency system that might conceivably have become useless overnight. (The spectacularly bullish implications this holds for gold are impossible to miss). To drive the discussion toward a conclusion, I would urge readers to immerse themselves in this idea. You can skip the commentary itself if you'd like, since whatever insights it might provide at this point pale in comparison to the gems that have turned up in the forum. Simply click on the "Comments" link above to enter the forum.
When you jump into the fray, argue not from theory but from the logic of how you imagine your life would proceed in the wake of a collapse of the banking system and the dollar. You might pretend that the catalyst for the collapse was a Treasury auction at which the Fed was the only buyer amidst wholesale dumping of U.S. paper by...everyone. To heighten your acuity and stimulate the imagination, make this catastrophe a personal one. Pretend, for example, that it is the first of the month, that your employer and your $100,000 job are unexpectedly in dire jeopardy, and that you are about to send your mortgage lender a check for $2000 drawn on an account with $10,000 in it. The evening news is filled with reports that the Federal Reserve will do everything in its power to keep the system liquid, but they note as well that the dollar has fallen steeply relative to other currencies. All interest rates have soared spectacularly, threatening to send your ARM in the same direction.
One Tough Nut to Crack...
If anyone needed convincing that the stock market has become invincible, yesterday was the day. Japan was shaken badly by another big earthquake, crude oil quotes were bounding above $110, Portugal was threatening to topple Europe’s financial house of cards, and the U.S. government was hours from shutting down. How did Wall Street take the news? Like a pro, actually. The stage-managed panic was over almost before it began. Stocks dove on word from Japan — but not in a way that showed even the slightest sign of fear. Rather, the market swooned in the fashion to which we’ve grown accustomed, violently shaking down widows, pensioners and a few other nervous nellies, but few “players.” A precipitous, 100-point loss in the Dow was recouped in minutes, and when the dust had settled it were as though the day’s headlines were no more alarming than the kind of routine stuff that fills the “Daily Roundup” box on an inside page. Now, I’m no Irving Fisher, and I don’t mean to suggest that stocks have reached a permanently high plateau. Far more likely is that they will give back in a week everything gained since 2009. In the meantime, however, it is clear that it will take far more to bring this market down than the latest evidence that the world is indeed going to hell in a handbasket.
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Tawd - the politicians will lose control because as you say their game of Pretend & Extend will take us to an even steeper an higher cliff edge from which to fall ....when that judgement day arrives i hope the libertarians win the day for free market money/economics and not the Tea Party retards wanting to erect a new centralised Govt/money system in place of the old failed Govt/money system
Superlative observation Tawdzilla. The Fed/Gov would be way ahead of a total dollar collapse with a new & improved North American or global currency. The most likely outcome, in my view. The road to it will be mighty bumpy. Still, I believe this means stock up on physical metals while you can.
What makes you think the Fed will be the final arbiter of which currency replaces a failing dollar? There are forces working at cross-purposes with the Fed, one of which is the International Monetary Fund. The IMF would like very much to see their own currency, the SDR, replace the dollar for purposes of international reserves and settlement.
Currency manipulations are only sorties in a larger war.
A dollar collapse IS hyperinflation.
What the hell is the difference between $100 eggs and no eggs? You either can't afford it or can't get it. It's the same thing. And on the way to $100 for eggs, it's going to be $8 at some point and that was already hyperinflation taking place.
Hell, eggs were 99 cents a few years ago and they're $2.49 now, what the hell is that? Deflation?
I suggest that you buy yourself some chickens and become the neighborhood egg baron.
Try Aldi. Sometimes eggs are still 99 cents a dozen. (In the future, they'll sell eggs at the bargain price of fifty dollars a dozen).
Shop at a different store.
I just bought Grade A Large for $1.79 a dozen. Still higher than $1.00, but not too bad when corn has gone through the roof from $2.50 a bushel.
I was thinking about this. The most common argument is that debt monetization drives equity and commodities.
But look at excess reserves at Fed, they represent c15% of M2, and number is increasinng. To me it seems that money created is just going back to Fed...velocity of money is low and has hardly moved lately.
What is driving equities and the rest, if money in banks just goes back to Fed? Am I missing something?
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Good comment. I completely agree. All of this cash the Fed is printing is being used to either 1) purchase Treasuries to cover our massive deficit (it does flow into the economy, but is not inflationary because it is being used to repair liquidity crisis, not give us all cash to spend), and 2) purchasing mortgage and other "solid" securities from banks to give them more cash to lend (which the banks don’t lend because their balance sheets are too week, or they can't find anything worth lending against, or they are just too afraid). This latter use of cash just adds to bank reserves (might as well bury it underground). So far, all this money printing is just keeping the U.S. government from running out of cash, rather than fueling inflation. If the Fed wasn't doing this we'd have deflation.
So while all this cash printing is not inflationary because it is just plugging a gap, it is certainly very strange and probably unprecedented. I.e., if it was so easy to plug deficits, why didn't we do this from the beginning? Well, all of this mechanically doesn't cause inflation but can have a serious psychological affect. That's why the Dallas Fed's Dick Fisher made public comments very clearly warning Bernanke to stop printing. What is happening is people (especial zero hedge readers) are unilaterally deciding the dollar isn't worth much anymore, even though core inflation is only about 1%. If all of you were barbers, you would say "haircuts are now $50, not $10, because I think the dollar isn't worth much." Nevermind there is a shortage of cash in the real economy: wages are going nowhere and most Americans are cash poor. Barbers can't charge more for haircuts unless everyone simultaneously raises their prices.
All of this convinces me that inflation is psychological, not monetary. The Fed can print all it wants but if the cash doesn't end up in consumers' pockets, we won't have serious inflation. But if we all just decide the dollar is worth peanuts because we don't like how the Fed operates, then we could have a dollar collapse. The inflation we had in the 1970s was due to excessive wage increases. If the dollar collapses now, it will be due to a lack of confidence.
Cantabrian: You don't have the faintest idea what you're talking about. The 1970's inflation was a direct result of the policy of the Fed under Arthur Burns, who caved into presidential requests to keep monetary policy extremely accomodative. That inflation ended promptly under Paul Volcker, who raised the target rate by 1000 basis points in five months. Try that today.
And this: " is being used to either 1) purchase Treasuries to cover our massive deficit (it does flow into the economy, but is not inflationary because it is being used to repair liquidity crisis, not give us all cash to spend)," is beyond ignorant.
Do you really think that Congress is spending the $1.7 trillion deficit on repairing bank liquidity? The money-center banks take their funds directly from the Fed via the various liquidity facilities, not from Congress. The Federal Govt spends all that deficit money on transfer payments, public worker salaries & benefits, gifts to corporations, Defense suppliers and a million other places, and EVERY PENNY of it goes into the national economy where it drives up prices, ESPECIALLY when the money is being spent by people who didn't actually work for it.
Any increase in the money supply beyond the rate of GDP expansion is inherently inflationary. Look at any chart of CPI, and you will see that the dollar has been collapsing for 98 years, since 1913.
The inflation we had in the 1970s was due to excessive wage increases.
Only someone young enough to have not been there is permitted to believe something this silly.
I guess I can accept that the Fed might try to manage a change to a new currency to end the current woes, but the logisitics of doing so are an couple of orders of magnitude greater than you suggest. The Fed can say $10 = 4 of the new currency, but will McD's still charge the same amount in the new currency (thus raising effectively raising the price) or will it change all of its prices to keep them the same? Same question for every other retailer. Either way, confusion and distrust will abound (NOT the age of Aquarius). Without a government mandate, it won't be uniform among retailers and people will have a pretty tough time figuring out how much they're spending (assuming the retailers convert correctly). With a government mandate, it won't be uniform and people will have a pretty tough time! You financial geniuses will make out, but most people would be shell shocked, and the fear and confuision will lead to disorder (though more likely guns than pitchforks. Who has pitchforks anymore??). Maybe the chaos will settle down faster than if the change weren't "managed", but there will still be chaos.
and how would the foreign holders of US paper take your magic mouse click?
if you think the Amerisheeple would be unhappy about cheeseburgers, how would China take their trillions in toilet paper, AND the realization that their export economy just got upvalued by 250%?
All fine and good, providing that the suppliers will take whatever the "new" paper is. Being in the agricultural side of biotech for some time now, I don't know if I would start accepting ANY paper. Silver and gold please. What no PMs? No soup for you!
And how will you verify the silver and gold is real and you have been given the correct amount of micrograms in exchange for providing a big mack or a hair cut? Do all of you PM fanatics really plan on transacting in gold and silver shavings? Will you carry scales with you? Who will mint the new coins (it can't be the Fed or the govenment since those institutions are run by satan, right?). We have a precedent in Rome for diluting metals-based currency. See this article on the potential for fake PM coins: http://www.zerohedge.com/article/rust-discovered-bank-russia-issued-999-...
I'd really like to know the answers to these questions.
Can't you just bite them like in the movies?
I'm long cigarettes.
That's where "junk" silver coins come into play. Just like in the 1930s, a silver dime will buy you a hamburger.
Each of my pre-65 dimes is worth somewhere around $2.50 and I have enough of those to get started. Then you have quarters, half dollars, and eagles. I don't need to shave anything.
I'm not sure how replacing one worthless currency with a new less-worthless currency solves any problems.
How are distorted asset prices going to be corrected?
Who is going to finance the unfunded entitlements?
I would assume this new less-worthless currency would be issued and controlled by someone else. Are they going to issue enough credit for businesses and citizens to resume normal activity?
And so on... I don't think swapping out one fiat for another addresses such questions. Maybe I am wrong and someone can explain this.
I agree. Issuing new scrip for old doesnt solve the underlying problem, which is not w/the scrip itself, but rather traces to a lack of integrity in the issuer. A loss of confidence automatically implies a loss of confidence in the issuer and his/her new money will be no more acceptable than his old money was.
Great post. Appears to be their only way out - "orderly" exchange. They maintain control and the music starts up for the next round. Only a massive, violent attack on American assets will derail their planned scenarios.
A dollar collapse = hyperinflation. They are identical. If it happens overnight, that is just faster than in the past. It doesn't matter what the new currency is called or is, if it is not backed by anything, it is the same, confidence will not be instantly restored.
In our current system, Money is backed by debt. Therefore when debt deflates, money deflates. Thus, inflation of "everything else".
I'll have to re-read my copy of the Constitution; I don't recall any Federal ability to seize private property and replace it with something else...
ooooo! I've got it! Using Emminent Domain, your property can be stolen and replaced iff it increases TAX REVENUES...already been decided by those paragons of virtue on the Supreme Court.
...so take your cash with a reverse split of 5 to 1, and the gummermint keeps 1/5 as a service charge. BRILLIANT!!
I think I'll front run this by buying more silver.
"private property"? I hate to burst your bubble, but the FRN's in your wallet are not in any sense private property, at least, not yours.
If you will visit the Federal Reserve's website, you will learn that every FRN in existence is a debt listed under "liabilities of the Fed". The Fed graciously permits you to borrow their currency for transactional purposes. But it ain't your currency.
The other bad news is that Executive Orders are already prepared that authorize federal authorities to seize the contents of your bank account or IRA (deemed "surplus wealth") your house, transportation and most any other personal asset, simply by declaring a national emergency, which a currency collapse would certainly constitute. They even have the authority to forcibly repatriate masses of citizens from one state to another.
http://www.archives.gov/federal-register/executive-orders/disposition.html
Other than that, I agree with you 100%.
Yes, essentially the loss of confidence in the currency. I can only imagine all the bewildered lemmings running to the bank Closed!and ATMs Access Denied!
People will still try to spend the cash they have on hand - many will unwisely accept it. Either you are prepared or not. I won't be panicking. Either way it will be a collapse. The question is whether or not the TPTB will be able to maintain control.
Hey! A uniform, a badge, and a gun...
You can be TPTB when the sheete goes down.
"confidence will not be instantly restored."
Exactly, Weimar recovered when a new currency was introduced but only after hyper-inflation had
destroyed the economy. To gain a People's confidence in a new currency it must be backed by
something other that debt, rather than just a name change.
It didn't quite happen that way in Weimar Germany. The Rentenmark had no more gold backing than the old mark. Von Havenstein's Reichsbank waited until the value of the mark sank to "one million million marks equals one Gold Mark" and then introduced the Rentenmark. It appears that people accepted the Rentenmark simply out of fatigue and desperation after years of unimaginable privation.
The Germans, before WW1, were an upright and moral people. After years of inflation culminating in a catastrophic hyperinflation, the saying circulated that "it is better to have a prostitute in the house than an infant corpse in the bedroom".
I wonder how it ends up when the nation's women are already largely prostitutes?
These days it must be tough for a woman to make a living as a prostitute - there is so much competition from enthusiastic amateurs who are willing to do the same thing for free.
They must simply learn to differentiate... I'm sure most of them have studied Porter...
The more I read of Rick Ackerman, the more I appreciate Jim Willie.