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Ackerman Takes Fresh Look at Old Foe Lira’s Ideas
With deflation tightening its choke-hold on the global economy, we thought we’d drop in on our supposed nemesis, Gonzalo Lira, to see how he was coping in these very un-hyperinflationary times. To his credit, the erstwhile arch-inflationist, bending to reality, has acknowledged forthrightly that deflation rules the economic and financial worlds right now. “Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative) – in short, everything screams ‘deflation.’ ” He wrote those words a month ago in an essay entitled How Hyperinflation Will Happen, and although we are obliged to point out below certain dangers in relying too heavily on the scenario he describes, readers should trust, as we do, that he has gotten the big picture right. For, as he asserts, economic recovery is no longer remotely possible for the U.S. Nor is it a case of double-dipping into recession, as most economists and the mainstream media would have it. In fact, as Lira flatly declares, we never emerged from the first recession. The inevitable result, he says – and we must unfortunately concur — is that an epic financial panic centered on the dollar’s collapse is coming, and it will push the U.S. from intractable recession into full-blown Depression.
As to how we might prepare for this, Lira has his ideas and we have ours. Possessing physical bullion in any form, as he would doubtless agree, will be a part of the solution no matter what. Where we part company, however, is on the crucial question of whether any of us will be able to respond defensively, let alone advantageously, once the avalanche has begun. While Lira talks about shifting assets from paper to real goods as hyperinflation plays out, our fear is that the dollar’s complete destruction will occur so swiftly – think May 2010’s flash crash, but on a global scale – that there will be no chance for anyone to liquidate intangibles (to whom?) in order to replace them with real goods. For all we know, the world’s bourses will be shuttered for a week or longer, diverting angry mobs to branch banks that, as the mobs will discover, hold precious little cash in their vaults. Under the circumstances, it’s possible investors will have no opportunity to get money out of banks, or cash out of stocks, much less catalyze a hyperinflation by re-investing the proceeds in Lira’s short list of defensive assets: “residential property, as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added companies, like tech, aerospace or industrials.”
‘Burp’ Starts a Panic
Despite our concerns about the speed of the collapse, we think Lira’s description of how it is likely to trigger is not merely plausible, but riveting. Since a summary would not do it justice, we’ve supplied the link above In brief, however, he believes that a panic out of dollars will begin with a price “burp” in some essential commodity such as oil. A nervous market will seize on the idea as never before, turning it into a flight from U.S. paper and currency. Lira has imagined the entire collapse in such vivid detail that we expect most readers will find his scenario as compelling as it is plausible. And although we would not attempt to argue that what he describes is impossible or even unlikely, there will remain the question, for one, of how securities regulators will react. Will they quell the panic too quickly for events to play out as Lira has described? What if the commodity exchanges raise margin requirements to 100 percent as soon as panic hits? That would shut out nearly all players save those with cash. Where would that cash come from – and what would even constitute “cash” in our all-too-digital financial system? And if The Players can get their hands on piles of cash, miraculously liquidating stocks into a collapsing market and having their trades settle instantly, how much of that cash could they deploy, given that lock-limit rules would effectively bar all but a lucky handful of commodity bidders from getting aboard?
These are not niggling questions, but rather the reflections of someone who has spent quite a few years on the trading floor. Now that I have raised these issues, many more such questions should occur to you when you read Lira’s essay. The point is not to cut him down, but to help readers understand that it is impossible to predict with confidence how a hyperinflationary panic will play out. Because of this, even diligent hoarders of physical gold and silver should not be comforted by the notion that they possess the “ultimate hedge.” While ingots, Maple Leafs, junk silver and such may prove to have been the best possible defense against financial Armageddon, there’s no guarantee that these tried-and-true investables will not be decimated in the interim, as powerful deflationary forces currently in motion run their course. And if gold should reverse course with a vengeance thereafter, there’s no reason to think it will be easy to convert it, even priced astromomically in dollars, into farmland or other assets high on the pyramid of essentials.
We’re All ‘Ruinists’
We want readers to understand that, despite any public disagreements we’ve had with inflationists in the past, we view the theoretical distance between us as slight. We are all of us Ruinists at heart, after all, and it is not the imminent, smoldering, wreck-of-an-economy that we see differently, only the path that takes us there. If we have come to “see the light” of the hyperinflationists’ logic, it is via the realization that hyperinflation doesn’t need a push from rising wages or prices to occur, only the epiphany that looms of the dollar’s fundamental worthlessness. At that level, and even though we still believe a hyperinflationary spike will only very briefly punctuate an otherwise ruinously deflationary decade, we have no bones to pick with Lira or Gary North – nor, even with the volatile Jim Willie, whose work we have always enjoyed. Although they reacted with glee – or in one case, sadistic pleasure – when we wavered briefly in our steadfast commitment to deflationist arguments, we must concede that Lira had good reason to pounce. (Our wife, with a Masters Degree in Speech and Rhetoric, told us the day after that our essay had more argumentative holes than a wheel of Swiss cheese.) But if Lira and other hyperinflationists are honest, they will need to acknowledge that there is no predicting the course of the coming crash, let alone the very crucial matter of whether the dollar’s plunge into de facto worthlessness is likely to take an hour, a day, a week, a month or longer. Such details will matter greatly, but we should have no illusions about handling them advantageously when the Day of Reckoning arrives. Since the collapse could begin as soon as…TODAY??, now is the time to prepare. On that note, I’ll leave you with a link to the book that I consider the best work on the topic, Sean Brodrick’s The Ultimate Suburban Survivalist Guide.
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http://gonzalolira.blogspot.com/
the last trade on this old earth.
only two ways...
that you can repay an unpayable debt. etc..
"it seems increasingly clear that's the only way out, because
the united states government cannot default on its treasury
bonds. it can't for political reasons."
.
" the only exit is the devaluation of the dollar, somehow,
uhm, everybody knows this. " g.lira
.." and everybody in the financial world, everybody in the
bond markets is basically playing a game of chicken, or more
appropriately they are playing a game of musical chairs .
they are passing around these treasury bonds and they know, eventually,
the music is going to stop and these treasury bonds are going
to collapse in price. now, what i have been arguing is, if there
is this collapse in price, where are these dollars going to go to?" ..
...
. gonzo lira
.
America will never be destroyed from the outside. If we falter, and lose our freedoms, it will be because we destroyed ourselves.
—Abraham Lincoln
.
usury can do that.
Cigarettes and booze worked in Weimar.
This guy is so putting words into Lyra's mouth. He clearly doesn't see that we are following Lyra's hyperinflation script. He needs to re-read what Lyra wrote before he starts claiming Lyra said buy Real Estate and stocks at the start. He clearly said they would crash and you could buy them later at a huge discount to gold.
Gold is still the biggest winner. The Fed continues to panic prop Treasuries. We have interventionist price controls and scarcity developing in PM markets, soon to be followed in other markets. We have a crap economy, high unemployment and rising consumer prices. This is all what Lyra said was coming.
Point Lyra.
So PMs go down by half. Have you seend a DOW chart from 2000-2011, and then compare it to the PMs EVEN IF THEY DROP BY HALF??...... so the specs that came late to the game are getting burned. WHO FUCKING CARES??? Are the economic issues at hand settled??? Are we now relegated to go into a deflationary spiral??? So when "QE3" or "Euro bonds" gets more trial balloons, then what?? Anyone here think Uncle Ben is done printing??? Anyone here think the EU won't print somehow or someway?? When Greece goes, then what about Spain, Italy or Portugal???? You know they're next. For the record, I bet on the CBs printing.
Deflation kills debt backed paper money faster than inflation. Once people start defaulting on loans, demand for the money disappears overnight. And that is all the demand there really is for dollars--debt payment. The money was created from thin air at the origination of the loan.
It's difficult to take Ackerman seriously...
For the sole reason that he actually takes Gonzalo Lira seriously.
[Addendum: I misread the date on Lira's piece -- his blog is not one of my regular stops on the Web -- and it turns out that it was written a year ago in August, not last month as erroneously noted. As readers may have surmised, however, that does not weaken or change my argument. Nor would I claim it weakens his, notwithstanding the fact that a prediction he made more than a year hasyet to pan out. There is a lot of ruin in a global financial system, and although it sometimes seems as though ours may be no more than days from collapse, we all know how even terminal dysfunction, like lung cancer, can persist without producing the expected result. RA]
Rick, I have always had one of two scenarios in mind. The first unfolds slower than Lira might think, which gives the central authorities time to issue a new dollar. The classic "knock off a few zeroes" and trade in old for new. That said, the new would need some type of substantive backing to re-instill public confidence. Debts (public and private) are default upon to some degree or in totality. The problem would also be converting debt contracts from the old currency to the new. This is no small matter or issue. Indeed, it is far more important that knocking off a few zeroes and trading X number of old dollars for new. If the new currency stabilizes the financial markets and banking system and is seen as a long term solution, trade your gold for the new currency and buy other assets on the cheap, relatively speaking. If it's seen as a make-shift solution that will not last very long or a bridge to a more permanent solution, hold your bullion. Junk silver might be a temporary option or a parallel medium of exchange that fluctuates in value with the new currency until stability is reestablished.
The other happens as quick as Lira believes. Here is where hyperinflation meets hyperdeflation. There is no currency (the dollar has no value: hyperinflation), hence no market pricing mechanism (hyperdeflation). This situation is beyond the ability for political authorities to manage in a reasonable fashion. I couldn't imagine how old currency could be traded for new? Rebuilding confidence would be formidable, but would eventually happen over time. No doubt some form a bartering takes place first, concurrently with civil unrest. This is truly the worse case scenario. We all know urban settings would be a raging battle ground with group against group. Again, I would hold my bullion until a stable system comes into existence. At best, one would use gold for large transactions (property and bankrupt inventory) while silver would be used for day to day purchases (here is were junk silver would shine [no pun intended]).
The Economy is deflating (duh) and there is a massive debt overhang.
Given the impracticality and problems associated with other possible solutions, eventually the Fed and/or the larger federal government will print like crazy and hyperinflation will ensue.
The Lira/Ackerman debate seems to be whether this happens gradually or suddenly. The larger story (still) is that this type of scenario isn't even close to being considerd plausible by most interested parties
Wow, calling the game at half time. Not too smart. First by deflation then by hyperinflation.
But it is diffefrent in the USA, it can't happen.
Which will they do? Stop printing to fund a $1.3Trn deficit as all around them are screaming for them to print, gotta keep kicking the can or else face the screaming mob of new unemployed and crashed businesses across the countrty. 90 million on food stamps, 21% unemployed now PLUS add the newly unemployed when they stop funding the deficit....no politician or living Fed Chairman ever did such a thing.....they will print to rediculous levels.
If there is a crash, the print button will be repeatedly pushed in panic to keep paying to clean up the growing mess...
Human nature, bankster nature, politician's nature.
Hah, that's funny. If you really want to stir the millions on foodstamps into action, just make a loaf of bread cost $8 by printing money on a grand scale. The only solution to that little dilemma would be to increase the monthly foodstamp stipend, but then you get into a positive feedback loop where printing leads to higher govt spending which leads to more printing which leads to more govt. Nice try, but printing solves nothing.
But if Lira and other hyperinflationists are honest, they will need to acknowledge that there is no predicting the course of the coming crash, let alone the very crucial matter of whether the dollar’s plunge into de facto worthlessness is likely to take an hour, a day, a week, a month or longer. Such details will matter greatly, but we should have no illusions about handling them advantageously when the Day of Reckoning arrives. Since the collapse could begin as soon as…TODAY??, now is the time to prepare.
Whether it is Lira, Ackerman or any other wonk with a blog, the end result seems to be the same, a crash or collapse of the US economy. Who cares how it happens, in the end beans, bullets and bandaids seem to be the order of the day. PM's will offer a safe haven only in the hyperinflationist scenario. Immediately consummable tangibles will offer some solace to those who have the will, fotitude and presence to protect them. It could get ugly! Is now the time to finish preparing?
DaddyO
Gold and silver went exponential in local fiat in Weimere Germany, Zimbabwe, Argentina etc etc were effectively used to trade.
ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ
Lira is obviously clueless. He was flat out wrong and so were the 1000s of fools who heralded him as some economic blogger superstar. Where is Lira now? Probably hiding in shame.
Film students don't make great economists. Either do economists for that matter. But hyperinflation (note I am not talking about stagflation) can only happen in the USA if the Fed actually decides that is what they want to do. The idea of a total collapse in the currency, which is strictly a political issue, is not something you should bet the preponderance of your assets on. By all means in addition to owning gold, which is a smart insurance policy especially in deflations, get some oil, crop land and the like.
Meanwhile, we're waiting for the 30% per month inflation in 2011 the film student predicted
FoieGras,
On the Home Page look at the column on the left, you will find a link to Gonzalos Blog.
He has lived thru hyperinflation, and lived it.
So, believe, or not, still worth his perspective.
+1
Argentina gave us some insight into how things might play out here in the USSA!
DaddyO
I certainly hope everyone knows that nobody can accurately predict the exact speed or steps that will occur in the collapse. Especially in a world that can largely be controlled by few dozen proven predators-that-be in government, central banks and large financial corporations, it is impossible to predict exactly what they will do... except they will react to whatever events scream at them by protecting themselves and their co-conspirator co-predators in whatever way occurs to them at the time.
Bring it on. Let's get this collapse over with. If 95% of humanity needs to perish, then let the perishing begin from the top (predators-that-be) and work downward.
"While ingots, Maple Leafs, junk silver and such may prove to have been the best possible defense against financial Armageddon, there’s no guarantee that these tried-and-true investables will not be decimated in the interim, as powerful deflationary forces currently in motion run their course. And if gold should reverse course with a vengeance thereafter, there’s no reason to think it will be easy to convert it, even priced astromomically in dollars, into farmland or other assets high on the pyramid of essentials."
I cannot make sense of the last sentence. The "price" is high, but it cannot be traded? If it could not be traded for anything, i.e. if no one wants it, then the price would be low -- unless IT were hyperinflating right along with the currencies.
there is now a huge disconnect between 'price' and 'value'. PM is a good store of value, but they don't provide liquidity to the markets. fiat dollar is being used as instrument of warfare to enslave the masses, this is part of a major rethink into the functions of fiat currency.
all the crazy insanity around the USD, provides a platform for chinese to move in and make renmingbi the new global currency. it's a no win situation for US economy just as supercomputer war-games predicated. there was an interesting comment earlier which read 'until the fiat insanity stops my insanity of choice is gold'.
Seriously, you think the currency of a closed country with central planning that makes our central planning look amateurish, with banks more overdrawn than those of the USA in 2008 -- as a result of ghost cities and prices too high for the average Chinese salary -- will really be a better currency than the USD? If you doubt me ask Hugh Hendry. That man gets it
Stop worrying about hyperinflation. Hyperinflation destroys banks. If you read ZH, surely you must believe banks call the shots. I don't see how the power elite banks are driving a course to kill themselves. You can either buy the hyperinflation story or the bank power elite story, but not both. Choose wisely -- your freedom and financial health depend on it
Dont Panic! Remain Calm! Nothing to see here! Snow!
I read the intro to Sean Brodrick's book The Ultimate Suburban Survivalist Guide. Ackerman recommends the book yet Brodrick relies on Homeland Security to identify a threat is the form of right wing groups such as militias. Once I read that, I knew that Brodrick's book and Ackerman's recommendation were bull. I find it interesting that there is no mention of left wing groups as a threat. I will not buy this book because anyone that relies on advice from Homeland Security is an idiot.
"Our wife, ... , told us"
Pluralis Majestatis - gotta remember to use the ol' majestic "we" at home, too...
At the end, the deflation argument gets punctuated all the time by the "if in danger, print more - proposition", IF deflation produces a crisis.
In theory, deflation could just creep in, slowly, over decades (think Japan).
I don't understand how Ackerman can propose that in the moment of crisis, the TPTB will, on one hand, shutter exchanges and close banks, yet, in the face of this calamity, fail to act with regard to liquidity & dollar demand.
I mean, how can you argue both ways? If (free) markets no longer exist, and all financial, political & social activities are centrally planned & coordinated, then what is to stop fed.gov from simply declaring a national emergency and unilaterally devalue the $USD by 10:1 or more?
Really, what restraint has been shown so far as each new outrage is absorbed & incorporated into our now "new normal"? This is where Denninger also fails; it seems all market adherents discount the effect of the dying ruling class/government's utilization of their nuclear option.
Because, at the end of the day, this entire exercise is simply about one thing: who's gonna be in charge when the smoke clears?
+1
Always nice to see a b9k9 post
Will bags of silver protect you when the dollar collapses? Well, yeahhhh. That's why we bought them.
But what will happen, will merchants want to take the face value of those coins? How will you convince them that they are worth the silver value of the coin?
Have you ever tried it - or do you just spout your mouth off in wild speculation?
I have tried it - and it works for the right merchants. Small shop owners that sense the growing discontent and disconnect. And after you have a relationship with them and show that you are a loyal customer. In those instances, and not infrequently, yes they do take the silver value.
And even in the attempt, there is an education of why a 50 cent piece is worth $13 or so.
Easy, offer them dollars as an alternative ;-)
They will be convinced as they stare into the barrel of a gun.
Truly pathetic. You'll be one of the first to go.