Are we past the tipping point toward hyperinflation?

We are somewhere in the course of a giant deflation.  The joint collapse of the housing and stock market bubbles in 2008-2009 was one for the records books, certainly the biggest collapse in history and time will tell if it’s  the last in a long string of dollar-denominated bubbles born of deficit spending, low-interest rates, trade deficits, global wage arbitrage, rampant and risky financial “innovation”, 20 years of Middle East wars, and uh…oh yeah, FRAUD.

Regarding the collapse of credit bubbles, such as the 3 big ones we’ve had in the past decade, Ludwig van Mises said, “The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” I think Mises may have created a bit of a false dichotomy here, as there could be other alternatives to the two mentioned above, especially if the credit expansion doesn’t involve an entire economy, but come on, this bubble had a good 30 years of easy money behind it and jilted every economy in the whole frickin’ world. That’s pretty damn big.

I think we’re too far down this road to have any really good or easy options at this point – more of a predicament you might say, than just a tricky problem easily fixed by policy adjustments. No, no, the only question now might just be which of Mises’ aforementioned extremes will play out.

ritholz.com

As you might have suspected, I have no major arguments with the deflationists.  It is the main trend after all: credit vastly exceeds credible collateral, key resources are starting down the far side of their respective depletion curves, and Mother Earth can only take so much of a beating without exacting some degree of vengeance: violent weather, floods, crop failures, species eradication, etc. These are all key factors driving deflation.

So, I can take deflation as a given. The response to it, however, is not. We can either have ourselves an immediate big depression, for example, where “everything” spirals down in price and cash is king.

Or… we can keep up asset prices and pay off the bad debts and government deficits by printing money.

Of course when I say “we” I don’t mean us.  I mean the powerful people that run the central banks, powerful politicians, and corporations.

Either way, be it a depression or hyperinflation, the old system must die and a new system must rise from the ashes – one based on economic reality, not fantasy, of course.

Everything goes through cycles, including what is “perceived” as money.  Most of us have grown up under the “easy money” meme: paper money created by ever enlarging bubbles of debt.  It’s the only system we’ve ever known, so it’s difficult to see that we may be near a tipping point.  A point where the predominant conception of “money” cycles from one paradigm to another: paper money based on debt…to gold and paper assets… to real assets.

I believe the writing is on the wall, for those with eyes to see, writ large on the grumbling bulwarks of edifice that is fiat-Ponzi economics, written in following letters: TARP, TALF, ZIRP, HFT, POMO, MBS, CDS, QE1, QE-lite, and QE2 .  It’s an alphabet soup of bailouts, money printing, crony kleptocracy, and political chicanery that spells H-Y-P-E-R-I-N-F-L-A-T-I-O-N.

It really started with Greenspan, but accelerated in 2008.  Bernanke and his minions (Wall Street bankers and corrupt politicians)  had to pick a poison. Unwilling to abandon further credit expansion and haircuts for the banks (Mises option 1), they taxed the people and printed money out the wazoo  to cover all the bank’s bad bets (Mises option 2). In so doing, they doomed the dollar to heavy debasement, if not eventual death.

Our dear friends at the Federal Reserve have and likely will very likely continue to print dollars to buy up whatever junk the banks and Uncle Sam need to unload: both their “crap” and “soon to be crap” assets and and T-bills.

In general, i call this “trading trash for freshly printed cash.”

You see the Federal Reserve is currently exchanging new printed (really digitally created) dollars for the banks junk assets and the governments junk debt. How long can this go on before the value of a dollar is 3/4, a 1/2, or a 1/4 of its current value? Who knows?

The mechanism by which the Federal Reserve keeps interest rates low is by buying up the newly auctioned U.S. debts. This artificially raises the trading  price of the bonds and artificially suppresses interest rates.  Considering the financial health of the U.S. government, who do you think is gonna buy Treasury debt if the Federal Reserve doesn’t. Bill Gross at PIMCO? Ha, ha, ha. His bailing on his T-bill positions. China? Ha, ha, ha. They said there not buying anymore. In fact, they thinking of selling some of their holdings.  It may get to the point that if the Fed is not buying the Treasury’s debt, no “buyer of size” will.   What happen then? Interest rates skyrocket and the U.S. government goes bankrupt because it can’t service all the trillions of debt at higher interest rates.

Rather than let the U.S. government and the Wall Street mega-banks go bankrupt in a abrupt credit crash, the Fed is going to try to delay the “come to Jesus” moment as long as possible.

It’s a bit complicated, but here’s how things seem to be playing out.

Banks will continue to gladly dump trash (bad debts basically) onto the Fed’s balance sheet in exchange for fresh cash. Then they’ll take the new printed dollars and stealthily buy up real stuff: gold, oil, farms, mines, silver, phosphate, diamonds, art, collectibles, natural gas, coal, wheat, corn, rice,  etc.  They might also go play HFT casino on the NYSE.

Yeah, they know the the dollar is going to depreciate, but as long as bankers are among the first in line for the newly printed dollars, those new dollars are not going to drop in purchasing power ’til after they’ve spend it on stuff that supports their wealth and standard of living. Being a primary dealer has it’s privileges after all.

Pretend you’re a greedy banker for a moment. You know what the game is now – it’s hyperinflation. Why foreclose on a rapidly depreciating asset, for example,  when you can sell it to the Fed for top dollar and get cash to buy bonds in India, farmland in Brazil, Swiss Francs, some Chinese factories, or a few tons of gold?  Why are you going to lend out a 30-year mortgage when you know that the dollars with which you’ll be repaid are gonna be worth much less than those currently sitting in your pocket?  Why lend when the proposed collateral will depreciate right along with the debtor’s wages and thus, the ability to pay you back. Not really a sound strategy if the dollar is getting toasted.

Why aren’t the banks turning around and lending again? Can’t they make money the old-fashioned way? Via fractional reserve banking? Answer: No. Banks aren’t lending because all the usual “collateral” is deflating: houses, cars, and your wages. Why risk it? 30 years is a long time after all. The dollar might not even exist by then.

Deflation is the worst of all possible world for banks.  They’ll chose the lesser of two evils from their perspective. They have to go “slow and easy, of course, because if they divest of U.S. dollars to quickly, their remaining cash reserves won’t buy as much. No, it’s not right. Yes, it’s immoral. But there’s not a lot you can do about it. It just is what it is.

So, hyperinflation, especially a slow, steady one, lets the rich get out of depreciating assets by being first in line to trade “trash for cash” and spend it on real stuff.

By the same token, Uncle Sam has and will take freshly printed cash to pay for Social Security, Medicare, Medicaid, and to keep the military-industrial-complex blowing stuff up around the globe.

Pretend you’re a pathologically narcissistic politician for a second. Why would you even think about gutting entitlements? Nice re-election strategy genius.  Austerity pisses people off after all. You don’t want to piss people off,  especially the Baby Boomers who need their pensions and full-service Medicare, nor the oil supply chain protection crew over at the Pentagon. You might to need them for martial law eventually, too.  And don’t forget those campaign contributions you got from Wall Street. They scratched your back, now you’ve gotta scratch theirs. Yes, you know the dollar is going to depreciate, but you get to keep your head and stay in power.

Hyperinflation, especially a slow, steady one, lets the powerful stay powerful by ensuring the “nominal” value of entitlements and keeping the military going for a few more years.

Secondary players like pension plans and insurance companies will play along with the hyperinflation game because they’ll take less heat if they make good on long promised returns. Since the real economy won’t be up to the task, money printing will provide the juice for their portfolios, albeit in dollars possessing grossly diminished purchasing power.

As a matter of fact, I think I might start calling my 401K my “cotton-candy portfolio.” It might taste good initially, but in the end, I’ll just have a stomach ache.  Me in 10 years: “Hey, there’s $300,000 in my 401k. Sweet. Maybe I’ll buy  myself a used pick-up truck.”

Considering the alternatives (banks loaded with rapidly depreciating assets, a bankrupt treasury, sudden, severe austerity for an already angry citizenry, and a military deprived of its war chest), the Wall Street CEOs and spineless politicians will clamor to the front of the bailout line to snatch every freshly printed dollar from Bernanke’s trembling, ink-stained fingers.

What about you? You’ll get the 14th, 89th, 176th,…or 999th crack at the new money, but by the time it’s in your hand, it’s buying power will have been whittled off by the cronies who got to spend it on real stuff long before it trickles down to you. You just get “already been used” crap dollars to go shopping with. “Trickle down poverty,” it’s been called.

So, my fellow tax-paying, go-to-work-everyday, saving-for-retirement, main-stream-news-imbibing, American-idol-worshiping dolt are the chump in cross-hairs. The mark. The useful idiot.

Prices for everything you need are going to go through the roof as the dollar declines, in fits and starts first, then possibly in a “waterfall” death cascade. When it finally dawns on you that it’s not really rising prices that are killing you, but the fact that your dollars have become worth less and less and are on their way to worthless, it’ll be too late to do anything to protect yourself.

the-laughlins.blogspot.com

The rich and powerful are sneaking off their end of the teeter-totter to buy gold, commodities, farms, and oil. You’re going to be left high and dry and come down with a whump. Sure you might have a fist full of hundred-dollar bills, but of course they won’t be worth much. Oh well, look on the bright side. At least you’ll have toilet paper!

Wise up folks. The rich and powerful are in the process of shuttling their wealth from the “debt-easy-money-fiat-paper” paradigm and in to the “hard-asset-no-debt-gold” paradigm. And it’s not just the dollar that’s in trouble. Most of the major economies in the world are deeply in debt, less productive, and over-extended militarily.  Money printing is all the rage all around the world.

I  can’t give you advice, but this is what I plan to do:

Get a year supply of food now. Store some water and fuel. Get some “off-grid” ability. Plant a garden. Get out of debt and stay out. Invest in gold, energy, and farmland.  Develop practical skills that your community can’t go without. Get as much education as cheaply as you can. Connect to family and community.  Buy local.  In general, boost your “resilience” quotient.  Get those around you to do the same.

No one can time this stuff. No one has crystal ball. The best case scenario is “slow and orderly”,  but don’t forget that complex, unstable systems are prone to sudden collapses. We’re in black swan territory now.  Some small, yet critical event could perturb the whole house of cards.

My hope is that things will crash slow motion like, giving us all time to adjust and prepare, but who knows, it could fall apart pretty quickly.

Adopt a “golden phoenix” mentality. There will be very trying times ahead of us, but something will rise from the ashes.

If you prepare, there’s a chance that something will be you.

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