This page has been archived and commenting is disabled.
That Rumbling Sound Is the Dollar Giving Way
For nearly twenty years, we haven’t flinched from our prediction that the massive debt build-up of the last generation would precipitate out as a deflationary bust. That is what we still expect, although we now believe there is likely to be a hyperinflationary phase at some point as the financial system implodes. But the bottom line is that no matter how things play out, America’s standard of living will fall more steeply than at any other time since the Great Depression. As for the deflation-vs.-hyperinflation “debate,” it is useful only to the extent it helps predict how mortgage debtors will fare as this economic cataclysm plays out. We seriously doubt they will be “saved” by the kind of hyperinflation that would put hundred-thousand-dollar bills in Joe Homeowner’s wallet. Imagine how mortgage lenders would react if Joe could peel off three or four of those bills and say, “Okay, pal, we’re square.” This scenario will seem particularly unlikely to those who believe that these economic hard times have been engineered by Masters of the Universe intent on stealing our property. Trust us on this: If there’s a hyperinflation, it is the rentiers who will get screwed most ruinously, not the little guys. Even so, that doesn’t rule out the prospect of a fleeting, hyperinflationary spike on the way down, since widespread notions concerning the dollar’s true value could change precipitously overnight. We mention this because notions are already beginning to change in ways that leave the dollar increasingly vulnerable to a global run. The exploding caldera of fear that will eventually bring this about bubbled to the surface yesterday when the Fed confirmed yet again that it is absolutely clueless about how to get the economy moving. The central bankers’ muddled talk of still more “quantitative easing” (QE2) is about as reassuring as the promise of more sanctions against Iran. Paul Krugman may be the last person in America who still believes that additional heaps of “stimulus” will do the trick. On Wall Street, however, the belief is clearly ascendant that QE2 will only wreck the dollar without providing any lift to the economy. That could explain why stocks fell yesterday while gold and silver soared. Not that the yahoos on Wall Street exhibited perfect knowledge. To the contrary, the broad averages shot up initially, driven by headless-chicken panic, and T-bonds finished the day with anomalously large gains despite the louche tittering about further easing. Schiff’s Scenario Peter Schiff has provided the most plausible scenario for a hyperinflation. He foresees a day when confidence in the dollar collapses, as it eventually must, forcing the Fed to become the sole buyer of Treasury debt. When municipal and corporate bond traders realize on that same day that there is no official support for their markets, private debt will go into a death spiral, forcing the Fed to monetize all bonds. Under the circumstances, the Fed would not become merely domestic debt’s buyer of last resort, but the only buyer. Voila! Hyperinflation. It should be noted that it is not some certain quantity of money injected into the banking system that will cause hyperinflation; rather, it will be the repudiation of all dollars already in circulation. Holders of physical dollars will panic to exchange them for anything tangible, causing the dollar’s value to fall to zero in mere days. Everything needed to trigger this collapse is already in the pipeline, and it is only the truly benighted, Nobelist Paul Krugman foremost among them, who cannot see the obvious. As for mortgage debt, you will still owe $250,000 on your home the Day After, except that your home will be much more deeply underwater than before – worth perhaps $20,000 instead of $180,000. Mortgage lenders will have to work with you – work with scores of millions of homeowners who are in the same boat – to bring about a reconciliation. No one can predict how already-unpayable mortgage debt will ultimately be paid, but it is almost certain to require a radical change in our laws in order to avoid the kind of social upheaval that could jeopardize the very rule of law.
»
- advertisements -
That is interesting that you claim such without the benefit of a citation. I just finished Defying Hitler, having read Fergusson's When Money Dies before that, and both had in depth discussions of life during the Weimar hyperinflation. I saw a reference to speculative borrowings (meaning loans taken specifically to profit from inflation) converted ex post to Goldmark value, but nothing about earlier fixed rate loans being forced to chase the dollar. Once hyperinflation took off, there were no fixed rate loans. Are you maybe speaking of lawless Argentina, and just included Weimar by mistake?
correct.
You misunderstand me. There were no fixed rate loans written. Earlier loans were accelerated and paid off, and it was only after a period that the Government tried to offer relief.
Lesson? Keep some provisions. Use devalued money to accelerate debt while the playing field is still level.
The thing with Weimar is that home ownership was extremely rare amongst the working class so the situation was very different from what we have now.
The book I read is this one :
http://www.amazon.com/Dying-Money-Lessons-American-Inflations/dp/0914688014
"all mortgages outstanding are converted by law to adjustable rate (you think the Govt wouldn't help the bankers and let the little guy pay off his mortgage with a worthless billion$ note?)."
Nonsense. Only 1/3rd of houses in USA are paid off which means that 2/3rds of American homes have a mortgage. This part of your theory fails because it is contingent on believing the banksters will continue to have more strength than 2/3rds of the public in teh face of hyperinflation. Blood will run in the streets before ARMs can be forced upon the people. And who exactly is going to enforce this change in the law? The police and/or armed forces that also have a mortgage?
No, hyperinflation is fantastic for debtors; terrible for rentiers.
First it's not 2/3 of the public. Of those 2/3 of homes with amortgage outsatnding how many are :
.rented? who are not going to be too happy to see their rent go up a thousand times while the owner pays the mortgage with chump change.
.have an ARM, an option ARM, a hybrid ARM, a fixed rate with suspensive clause? whose mortgage will go up with hyperinflation
.have already paid most of their mortgage? who have paid most of their mortgages with rates higher than inflation and not only see the value of their almost paid off house take a beating because of hyperinflation but also see recent home buyers pay their mortgage with chump change
what about people who have savings deposited in the banks who are going broke and loose all they had because mortgage holders are paying their mortgages with chump change
So it's much less than 2/3 of the public but anyway do you need more evidence than the last 100 years of history to convince you that congress will always do what's right for the bankers? In the USA and anywhere else for that matter.
And No, nobody will need to enforce the law. Mortgage holders will remain in the house. Except that it is now owned by the bank. And when hyperinflation finally collapses the currency and a new currency is introduced which happens generally within one or two years the Govt takes over all these houses and gives new currency in exchange to the banks. Real Estate becomes the main asset backing this new hard currency, and the only way to get it internationally accepted. Then the banks gradually resell those houses, on new credit terms in the new hard currency and the whole process starts again.
So in real terms it is worth $50K but I was levered 10:1 with my mortgage and seeing I can now pay off that $180K mortgage with chump change (real worth $180) I just turned my $20K investment into $50K which is a real increase of 250% in my net worth. I still come out a winner! :p
Unfortunately the IRS will see I bought my house for $200K and sold it for $50M. Those taxes will be a bitch!
Nope, because the interest on your mortgage is adjusted with inflation (inflation + premium for the bank) so your monthly payments on your $180,000 mortgage instead of staying at say 1000$/month become $1million/month.
So your $20K investment has now become $50 million but you still owe $180 million to the bank.
Many mortgages are already variable rates, the fixed rate mortgages usually have a suspensive clause that if rates go beyond a certain threshold they may adjust the rate, and if they don't you can be sure in the event of hyperinflation the Govt will pass a law forcing all fixed rate mortgage into variable ones, as they did in Germany and Argentina.
You're naïve if you think the Govt is going to let mortgage holders pay their mortgages with chump change.
Everything gets readjusted, mortgage payments, wages, and the price of things. It's just that the price of things of prime necessity have generally a higher hyperinflation rate than the rest. Houses do very poorly and many mortgages go underwater.
I think you will find that most mortgages are actually fixed rate. In any case if the govt. throws contract law out the window and adjusts fixed to variable it still has no bearing. We were not discussing mortgage payments. We were discussing how much the property changes in real terms and what that means to net worth.
So I am nieve thinking that the Govt is not going to let mortgage holders pay their mortgages with chump change. I guess you didn't own a house with a mortgage in the late 70's - early 80's. People were making monthly mortgage payments for less than the cost of their electricity bill!
The 70s and 80S wasn't anything like hyperinflation. The 70s/80s saw inflation at 15% per year. Hyperinflation is when the rate goes from a few % per year to more than 15% per day within a few months.
15% per year is way under the suspensive clauses of most fixed rate mortgages.
The Fed is completely incapable of creating +15% inflation, they can't even create 5%. But they might well cause a run on the dollar and hyperinflation instead. Hyperinflation is caused by a loss of faith in the currency and the Govt's ability to honour its debt obligations. Inflation is caused by the economy overheating itself. They both have the word inflation but they are two VERY different situations.
As far as your net worth, your 20K investment is now worth $50 million but you still owe $180 million to the bank. So your net worth instead of being +50 million is now -130 million. In constant dollars instead of going up 30K it has decreased by 150K.
Look run buy a house on mortgage if you think it's going to be such a good investment in the event of hyperinflation. But history shows that it has always been a total disaster.
exactly. This guy is clueless.
the so called 'rentiers' will do fantastically well with hyperinflation, their loans will be paid off with one day's earnings, their real assets will go way up in value, etc.
The losers will be those who have no power to raise the price of their labour or the products they sell, their pensions, etc. i.e, the little guy.
OK guy help me out. If Hy-In were to hit how would the money i have pay off my house? Would not a $10 bill still be a $10 bill ? And would wages also not need to be re-adjusted?
OK guy help me out. If Hy-In were to hit how would the money i have pay off my house? Would not a $10 bill still be a $10 bill ? And would wages also not need to be re-adjusted?
In a hyperinflation the first week Joe Blow earns $1000 a week, gas is $4 a gallon, a pair of designer jeans $250.
Next week Joe Blow earns $10,000 a week, gas is $40 a gallon,a pair of jeans is $2500.
The third week Joe Blow earns $100,000 a week, gas is $400 a gallon, a pair of jeans is $25000.
The fourth week Joe Blow earns $1,000,000 a week, buys groceries and a tank of gas, and uses the rest to pay off the $350,000 mortgage he took out 3 years ago before the hyperinflation started.
After 6 months no one will take dollars anymore. They will barter, or take Chinese yuan, or silver coins but no one wants dollars.
There is an old Dutch joke that dates back, probably to WW2. It is about a townsman who must barter on the black market to get enough to eat.
When they have nothing left to sell his wife unravels an old blanket and uses the wool to knit a pair of socks. Each week he trades the socks to a farmer for a few eggs, or a piece of meat.
Finally the wool is all gone. The townsman tells the farmer he doesn't know what he will do next week because his wife is out of wool. The farmer says "That's ok, my wife is unravelling the socks and knitting a blanket, this last pair will give her just enough wool to finish it".
Something else to think about:
If I wrote this in 1970 I would have started off "Joe Blow earns $100 a week gas is 40 cents a gallon and a pair of jeans costs $10.
If I wrote it in 1910 I would have started off "Joe Blow earns $10 a week, potatoes cost 4 cents a pound and a pair of work britches cost $1".
Hyperinflation is just a faster version of the inflation we live with every day but don't talk about as long as it stays below 10% a year.
Hmmm
Your $500 weekly wage becomes $500,000 new dollars (at a higher income tax rate)
and your $200,000 old dollar mortgage becomes a $200,000,000 new dollars mortgage
That's only true if you obtain a new mortgage. My new 500k weekly wage will pay off both my existing mortgages and I will own my properties free and clear.
One of the greatest practical side effects of hyperinflation is the de-facto transfer of wealth from the lenders to the borrowers. Deflation is the opposite, where there is a transfer of wealth from borrowers to the lenders.
"That's only true if you obtain a new mortgage."
Not true if there is a new currency. Just because the mortgage is priced in USD doesn't mean it has to be paid in USD. New currency with a USD exchange rate attached to it so that USD denominated assets can be paid in the new currency. This is legally enforceable.
Why again would we have a new currency?
No, a $10 bill would be worthless.To buy the same quanity of goods that your $10 does today, (depending on the degree of Hy-In),it could take a $100.
Likely the Gv't would do what they usually do,call a freeze on prices,which ultimately fails.
As for wages, who knows.
Don't worry, if there is hyperinflation, the Sherrif's deputies will be home trying to feed and protect their families, and won't evict you after foreclosure.
Come to think of it, the bank employees will be home trying to feed their families, and wont be there to process the foreclosure.
Sounds like a type of "Sudden Stop"
+100 On a scale of 1 to 10.
One of two things will happen on the Day After.
Nation is free and clear with much home buying going on based on 20 dollar bills in wallets and bank withdrawls or even credit card cash advances.
Or Nation is irrevocaibly broken until Minimum wage is raised to one million per week and everything becomes a joke.
If Society must suffer a break down and restore itself through tossing out the money people with torches and pitchforks then let it do so.
One way or the other the People must remain free to engage in work to make daily bread and wages sufficient to raise a family and do the things that will make the USA strong again.
Otherwise we would fare no better than say, Port Au Prince where plastic tarps for roofing and rain water catchments will be more valuable than a loan of any kind.
Bring on the Upheaval
In all the discussion of inflation/deflation and the rest of the world will stop buying our debt nowhere do I see a discussion of the military power of the US.
Do you think South Korea, Taiwan, Saudi Arabia buy our debt out of the goodness of their hearts or because they don't know or don't care about quantitative easing? No, it is because they must pay tithes to the empire! Don't make the mistake of looking at economics in a vacuum. US military might plays a large role in geo-politics and ergo the world financial arena.
Hi zenith19,
The USA spends @ 50% of the world's spending on the millitary because the dollar is the world's reserve currency.
You are looking at it backwards - how can the USA continue to spend such unseemly amounts to maintain its millitary dominance if the dollar fails?
Because if you don't pay your protection money I will either let your enemies eat you or send my own goons over.
If you do tank my USD because you are calling my bluff my military and nukes do not simply evaporate.
Exactly right! If you have resources we need we will eat you otherwise we will let you go over to the Chinese realm. The reason the ponzi ever developed and went on so long is that the US dollar is the world reserve currency precisely because it is backed by our military not our industrial might. Financial discussions always seem to revolve around the idea that when our trading partners wake up and realized they have been getting screwed they will pull the plug. The realty is that they know they have been getting screwed but they haven't had any alternative. With the rise of China, a viable alternative is starting to emerge but will take awhile to pull together into a new economic system. Meanwhile the western world will have to put up with an increasingly belligerent US who no matter what will still need 12m barrels of oil a day, iron ore, base metals, etc.
Right...because of our military might, and that we're still the world's reserve currency (still no better options as yet), I don't see a realistic chance of hyperinflation. Rather I see a brutally long, slow period of stagflation, where commodities/necessities become increasingly more expensive, assets/wages are flat or declining, interest rates stay at 0, QE infinity, increasing unemployment...could go on for decades. Of course the official inflation/employment numbers will continue to be cooked, with ever more increasing creativity, to hide what's happening.
True inflation will be felt in things such as your jar of spaghetti sauce shrinking to the size of a soda can, in an attempt by manufacturers to hide price increases.
Agreed - especially food price inflation.
However, a single black swan event can turn this progression upside down instantly ... trade wars, protectionism and currency intervention foment global instability ... where this leads no one knows! We are in uncharted territory ...
... and REE, which China conveniently, just turned "off" ...
Coincidence?!
Interesting. There is no doubt that a "soldier's boot up one's ass" is hard currency. Warplanes and missles are also very good "hard assets" What about the Soviet Union though? The capabilities are still there. Did you have any rubles?
Just a reminder ZH'ers:
"In the absence of a gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good and thereafter decline to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as claims on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to be able to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." -- Alan Greenspan, 'Gold and Economic Freedom' in 1966.
What is the easiest way, for just one man who thinks like this, to bring an end to the entire fiat system?
From the inside. He did it on purpose. We should thank him as much as we thank Ron Paul. Because in the end, it will be Greenspan who has brought an end to the Fed the fastest.
-bd
I used to ponder over this idea of Greenspan the destroyer, savior of mankind. I even discussed in emails with the Mogambo Guru, who at first, thought I was being sarcastic (then he laughed hardily at the idea). I'll admit, it all fits, except for one detail. Which is the idea that the other destroyers aren't prepping for the event, and that the common man will somehow be released from their clutches. Given that the elite have but one tool of control (destroy our self sufficiency), I can't imagine that this idea is anything but another trap, destroying nations in order to usher in global government. Sure, he may be the ultimate mole, but he may also be the ultimate patsy. My guess is that whatever his past convictions, they fade in light of his power-trip. His "gold is the canary in the coal mine" quote is just an attempt to remain relevant.
1. Greenspan was a social climber. He would have sold his mother for a nickle.
2. Assuming you are right then you are saying that to show how the crime is bad you inflict it on the victim in the most horrifying manner possible? That would be like showing young women that they should not trust people by setting them up with Ted Bundy. After old Ted is done with them, never quite the same.
The system would come down onit's own. The myth that Greenspan was some insider is pure fantasy. If it wasn't then where is his book "How I Destroyed America"?
I think the aforementioned book get released the day after the $$ hits the shitter, and methinks it's to become a best seller