Tuesday, January 27, 2009


On GIM right now there is an open poll. Open, in that you can see who voted for what. Initially hyperinflation was leading. But now inflation is leading in the poll. This is curious because I think "inflation" is the least likely of the options, by a LONG SHOT.

This (inflation) is what the Fed hopes for. It is what Ben prays for every night. And it would be a smashing success for the Fed. Whereas undershooting (deflation) or overshooting (hyperinflation) would represent a complete Fed Fail.

At this point it is like trying to throw a baseball and land it right on the fence. Most likely you will either not throw it high enough or you will throw it over the fence. (Remember these charts from Richard Mayberry?)

From http://fofoa.blogspot.com/2008/09/collapse.html

Both deflation and hyperinflation represent doom and gloom, and a return to inflation represents a return to normalcy. It is nice to hope for the best, but incredibly dangerous to prepare for the best.

I have said before, I give deflation about a 5% chance, hyperinflation about a 95% chance, and "normal" inflation about a 0% chance. And I have invested accordingly. Incidentally, my hyperinflation investments would do very will in deflation. But the reverse is NOT the case. So my investment strategy would also be correct for someone who gives hyperinflation and deflation each a 50% probability (in my opinion).

If deflation were to persist, the Fed would not be happy, but the spendthrift Congress would be perfectly happy. As this crisis continues they would get more and more bang for their buck. Those newly printed and minted bucks. As their make-work programs proceed, they would be able to print more and more dollars and those dollars would buy ever-increasing amounts of American labor and foreign and domestic materials like steel and fuel. Is this how you view the future?

These poll results surprise me mainly because the site is called Gold Is Money. I can only assume that those that voted for inflation don't understand that a.) inflation is the only economically healthy outcome, or b.) the extent and depth of what is happening right now. I can even understand the deflationists better than the inflationists.

After reading the statements of some of the leading deflationists, a couple similarities emerge. For the most part, they don't consider that Gold Is Money. They say things like, "gold will go down for a while, but overall it will perform better than most other investments". And the other similarity is that they all seem to view "hyperinflation" as a simple extension of inflation. As I have said before, the only thing inflation and hyperinflation have in common is in the name.

I would expect that regulars on a site called Gold Is Money would have a better understanding of what is happening right now. Because trust me, Asia understands very well what is going on in Washington, DC.:


Seigniorage is the revenue that a government raises by printing money. Suppose it costs one dollar to print a US$100 bill. As long as the world deems this bill worth $100, the US government receives the revenue of $99 every time it prints out a $100 bill (the difference being an approximation of the costs related to producing the bills) and circulates it to the markets at home and overseas. This is a perquisite of the US under the present world currency system. Neither Europe nor Japan, among other major economies, can enjoy the benefits of seigniorage globally because the euro and the yen have not become international settlement currencies.

"The US is the only nation in the world, as the key currency nation, to have privileges to earn huge seigniorage," Iwao Nakatani, a renowned economist in Tokyo, wrote in his recent best-selling book Why did capitalism self-destruct?, which is sparking a debate in Tokyo, the financial center of the world's second-biggest economy, over United States-led global capitalism.

"If the FRB [Federal Reserve Board] or the US government issues dollar bills and spreads them abroad, that's sufficient to earn enormous seigniorage - as long as people around the world see the dollar's value as stable," he wrote...

Bernanke's views on seigniorage
It's intriguing to note what Federal Reserve chairman Ben Bernanke, then Princeton University economics professor, said about seigniorage. He wrote in his Macroeconomics textbook, co-authored with Andrew Abel, that the government can print money when it cannot (or does not want to) finance all of its spending by taxes or borrowing from the public. In the extreme case, imagine a government wants to spend $10 billion (say, on submarines) but has no ability to tax or borrow from the public. One option is for the government to print $10 billion worth of currency and use this currency to pay for the submarines.

If you replace the word "submarines" with "bailout funds", that will mirror the present US situation.

Bernanke and Abel continue: "Governments that want to finance their deficits through seigniorage do not simply print money but use an indirect procedure. First, the Treasury authorizes government borrowing equal to the amount of the budget deficit, and a correspondent quantity of new government bonds are printed and sold. However, the new government bonds are not sold to the public. Instead, the Treasury asks (or requires) the central bank to purchase the $10 billion in new bonds. The central bank pays for its purchase of new bonds by printing $10 billion in new currency, which it gives to the Treasury in exchange for the bonds." [FOFOA: The Fed says it is going to buy the long end of the bond "to keep interest rates low" to help out the housing market. This will not work and they know it. It is simply the reason they give publicly for their REAL purpose which is to start monetizing the deficit!]

This is what the Bernanke Fed is thinking of doing in the coming months and years. It has already snatched up a big chunk of soured mortgage-backed securities guaranteed by beleaguered mortgage-guarantors Fannie Mae and Freddie Mac. Bernanke has also said the Fed may buy "longer-term Treasury or agency securities on the open market in substantial quantities", using the Fed's balance sheet and money-creation authority to aid the ailing US economy. [FOFOA: The reason it buys Freddie and Fannie is also NOT to help the mortgage market, which is not working, but to put a bid in for the Chinese that are dumping Freddie and Fannie, so they will keep buying Treasuries. This won't work forever.]

The latest Fed data showed the monetary base jumped to more than $1.7 trillion this month, more than double from around $840 billion in August - a vertical takeoff in the supply of dollars.

Temptation of seigniorage
The US economy has benefited from seigniorage by printing dollar bills to finance a huge current-account deficit, for which the trade imbalance is by far the greatest reason. This enabled Washington to take its expansionary monetary and fiscal policy amid ballooning debts.

Unlike Japan, China and Europe, among other nations, the US did not have to tap the market of its own goods and services desperately. Simply put, by just printing money, it could get whatever it wanted from abroad, even without any cash on hand...
Jan. 23, 2009 - Asia Times

Today, Chris Laird of the Prudent Squirrel put out this alert:

Here is an interesting personal story of a guy in Argentina (now a banker) who lived through their currency collapse earlier this decade. He describes the phases - steps that happen before the collapse. He is not totally english proficient but this is very interesting regardless...his story correlates well with the other stories about the Argentina currency collapse and what happened...
"4) The politicians "keep spending to the end"

>> These happened in most of the countries which headed quickly to total collapse. This is clearly visible in USA. The incoming president proposed the "Change" and brought more of 3) More deficit ( Obama plan 1 trillion dollar in february 2009)
This is EXACTLY what happened in Argentina. The "new president" proposed the "change", but he brought more spending and country collapsed later. He escaped in a helicopter. ..."


8:05 Central


And here I repost the above link in full because of it's importance:
lunes 26 de enero de 2009

Strongman Shelford 's experience and predictions with meltdowns for YOU NOW.

Hi . You all know me
For those who don`t know me, I am a bank analyst in South America .
I trading stocks for almost more than 10 years. I followed the US markets for years too.
I have lived my first hyperinflation times in full conciousness at the age of 9.
I remembered those times in a very clear way.
Times like 50% inflation per MONTH OR MORE. yES. Prices just double in matter of weeks.
I remembered the people talking about the DOLLAR ( save haven) every day every week.
The key was to collect your month pay, and run to buy all the food and stuff.
I remember that While we were shopping , a food store employee was changing prices with some kind of machine, can by can, product by product.
The key was to grab your food to the cashier before it got the new "price tag". ( not all the food store owned those codbars systems like now).

Life made me live in full consciouness the Argentinian collapse in 2001.
Just like the Iceland collapse of now.

Bank run, devaluation overnight... freezing bank accounts, mess, president and economy minister escaping in a helicopter... food shortages... riots...the whole mess.

I got a business degree some years after the collapse at a very prestigious university . With this knowledge, I looked backward and I could understand the crisis very well. There are "Patterns" developing before a total meltdown.

I am trying to build your confidence in my words. Since I am afraid to tell you that most of the American people and certainly most of the people in the planet CANNOT ACCEPT THAT AMERICA IS HEADING TO A TOTAL MELTDOWN SOON. I DON`T UNDERSTAND WHY PEOPLE LIVE IN DENIAL.
I HAVE ALERTED FRIENDS, RELATIVES, and even some co-workers.

But people live in "denial". America is "super power". "The dollar will not collapse." " It is "safe haven" for all the countries... " So, the whole sheeple of all the countries around the world live in denial about this great event that is going to take place , i believe, this year or next year.

I read 2 or 3 hours per day news from all around the world ( business news , market news: CNBC,BLOOMBERg,CNN MONEY,blogs, message boards, you name it).

And you can see a "shift in the paradigm" and these patterns developing that is SO CLEAR that you can`t believe why so many people cannot see it.

This guy , H. Paulson was a crook right?
Ok, now there is another "crook" who is taking care of the "Treasury" ( being looted thorough "stimulus package" and providing a real party of inside trading there for crook friends)

The new guy, T. Geithner> he is starting very well! ( Senate look away "his tax income issues" ...LOL)
AND THE arrogant stupid is telling CHINA ( country with the power to decide when USA is going to collapse) "hey you are manipulating your currency".
China, with their chinese patience, politely responded "mind your own business , moron. Eh, No, I am not interested in bringing you chaos right now. Go play with your printing press for now..."
IT is just unbeliavable.
And the SOLUTION: BUY THE PROBLEM. YES . Just create a bank to dump the garbage...or nationalize all the banks. let`s "buy the problem". LOL.
YOU CAN`T BUY THE PROBLEM!!! They are just winning time ( a.k.a looting the treasury to last moment) before everything goes to hell.


1) STATES or provinces collapse BEFORE federal government ( it happens in all collapsing economies. Just read economic history)

>> Pattern visible in USA: California and other states

2) DEBT/GDP > above 100% and rising
>> I think is above 300% ( not counting the biggest liabilities I think)


>> This was the thing that brought Argentina to its knees.
>> USA is totally visible. Both "twin deficits" formed a "guaranteed" pattern of doom.

4) The politicians "keep spending to the end"

>> These happened in most of the countries which headed quickly to total collapse. This is clearly visible in USA. The incoming president proposed the "Change" and brought more of 3) More deficit ( Obama plan 1 trillion dollar in february 2009)
This is EXACTLY what happened in Argentina. The "new president" proposed the "change", but he brought more spending and country collapsed later. He escaped in a helicopter.

5) Smart money escaped to foreign assets or hard assets.
>I am TIRED of reading about this. Thank GOD THERE IS smart and honest PEOPLE warning there like Peter Schiff to the sheeple masses.

6) Honest politicians are ignored or "minimized" by MAIN MEDIA.
>>> this is what happened to Ron Paul. They only congressman I heard that understood very well the situation of the general economy. Maybe there are more out there. I don`t know.

7) In this kind of "BIG meltdowns" people live "above their credit possibilites" too. Not just the government.
> pattern is clearly visible too. A "credit card bubble" and "home equity spending" ( home equity spending, that is just amazing! Americans do it big)

8) A minority of smart people started to get ready for the collapse.
> There is always a "smart minority" that take advantage of meltdowns.
I will tell you WHAT WAS THE BIGGEST BUSINESS in Argentina :

a) take a mortgage loan
b) buy a house ( in USA is difficult since a housing bubble burst simultaneously, so maybe it is not a fully applicable for the US meltdown)
c) convert all your saving to foreing and safe assets
d) wait overnight devaluation
e) brinng back your assets .
f) cancel your debt.
g) Shazaaam! A house for a tiny part of your savings! Well done !

Ok, enough of economic history.

Bond bubble is starting to burst.

gold & silver is moving up again.

1) Be careful with your pension "money" ( IRA)

These are my best wishes for all you.

It took me 20 minutes think and write this for you. I am sure it will help, and save you money!

Best wishes.

Publicado por Strongman Shelford en 17:39

Just as Strongman Shelford sees it so clearly, so do I. He talks about "patterns that are clearly visible". This is the emergence of patterns from the apparent chaos. And the end result is unavoidable regardless of the twists and turns along the way.

I said it before, Currency Collapse EQUALS Hyperinflation. This is the unavoidable end result. It is coming at us like a freight train. The arrival time of the collision is the only variable to consider.

Jim Sinclair sees it clearly too. This posted today:
Dear Friends,

They say this is impossible and will never happen in the West. The transition however is clear and common to all experiences of hyperinflation - a currency event whose foundation is in the sand of weakening confidence.


First is a contract between the issuer and holder as in the gold certificate. Then it is a piece of paper whose amount outstanding is politically motivated that promises nothing and contracts for less.

a. In Zimbabwe there was a transition from reputable management to special interest favouritism. Such a change has been considered by many as an example of Fascism.
b. In Zimbabwe government income was non-existent when compared to government expenditures.
c. In Zimbabwe the military became the favored industry for government spending.
d. In Zimbabwe all the economic initiatives failed miserably.
e. In Zimbabwe there are rumors of bank and public fund looting.
f. In Zimbabwe economic statistics are unreliable by many.

Could such a thing occur in the West or has it already? If it could occur or has occurred it swamps anything that ever happened in any previous example of hyper-inflation, a currency event based in the weak foundation of confidence.

The conclusion is clear. Gold is the only Honest money there is, has even been or will ever be.

Respectfully yours,

There is a lot of concern in the USA right now about our apparent turn to nationalized banks and car companies and our shift to obvious socialism and stupidity with the stimulous package that may pass tomorrow. This is all noise. It doesn't matter if they raise or lower taxes. We have already reached the point of maximum returns. It is diminishing returns from here on out. The work projects will fail. The socialism will fail. The Fed will fail. The bailouts will fail. The stimulous will fail. It will all fail. This is not what I hope for, it is just how it is.

This is the end of our monetary system and the end of the socialism we have been saddled with since the last Great Depression. That is why this depression is completely different. The last one led to 80 years of socialism. This one will lead to something else. I like to call it FreeGold.

I post this link one more time to Martin Armstrong's latest (10 page) pdf article. I hope you all will read it.
The Collapse of Capitalism - or is it Socialism? What does this mean for gov't?



FOFOA said...

This is a good article that calculates and compares all the irredeemable fiat paper money in the world with all the gold in the world.

Global Money Supply and the Value of Gold
by Dollardaze aka Mike Hewitt with Krassimir Petrov, PhD.
January 26, 2009

As an interesting aside, one may note that the present US debt of US$10.5 trillion easily exceeds the value of ALL circulating currencies in the world PLUS the value of all gold ever mined! A naive person may wonder just exactly how the American government ever intends to pay this debt off...

How? Seigniorage!

FOFOA said...

The Next Catastrophe

Here is something else that will have to be resolved through seigniorage.

And I expect this issue to enter the public lexicon in a big way before April 19th.

Just one more example of how the collapse of money is also the collapse of socialism.

Anonymous said...

Long time lurker just posting to say that your work is very much appreciated. Keep up the good work!!!
- the silent majority

FOFOA said...

Thank you. I appreciate your comment!

As I have said, hyperinflation and deflation look a lot more alike than inflation and hyperinflation do. The name is misleading, as are the placements on the spectrum. Hyperinflation is simply monetary panic in the face of deflation. And it is clear that our government is already panicking.

Found this post today on GIM:

I've said it before, hyperinflation is a form of deflation. In Weimar Germany the total circulating currency fell drastically when measured in terms of its true value. One economist stated that, "In proportion to the need, less money circulates in Germany now than before the war. This statement may cause surprise but it is correct. The circulation is now 15-20 times that of pre-war days, whilst prices have risen 40-50 times." In fact, the total currency when calculated in gold value fell from 7428 million marks in January 1920 to a mere 168 million by July 1923.

Despite the government printing billions of trillions of marks, the average citizen found it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks. Businessmen were strapped for money to buy materials and meet payrolls. The government faced the same problem. It appeared that there was not too much money around, but rather much too little. The clamor for more money grew on all sides. It seemed that any halt to the printing presses would bring business to a standstill and throw millions of workers out on the street. The government itself would be unable to carry on. On October 25, 1923, the Reichsbank noted that it had that day printed 120,000 trillion marks. Unfortunately, the day's demand had been for one million trillion. However, it announced that it was expanding production and the daily issue would soon be 500,000 trillion!

So hyperinflation or deflation, it's all the same thing, and it's very bad. But if you have gold and/or silver, it might be somewhat less bad.
-".41Dave" on GIM

FOFOA said...

And as for the delivery mechanism of hyperinflation (which is one of the questions continually asked by the deflationists), I repost this simple explanation. The key being that a panicked government feeling insecure will FIND a way to deliver the fresh money. This is not so hard to imagine:

In my view the most probable sequence of events resulting in hyperinflation and monetary collapse is as follows:

1. A broad based shortage of goods that are thought essential develops and this is not relieved in time to satisfy demand.

2. Consumers trying to acquire essential goods that they believe are in short supply become fearful and are prepared to pay increasingly higher prices and stockpile these goods further increasing shortages and accelerating prices as a sellers market develops.

3. Prices rise for essential goods in short supply as an increasing proportion of the money supply circulates in these goods, also with increasing velocity and as most of these goods are consumables with high turnover upward re pricing quickly occurs.

4. The proportion of available money circulating in goods that are perceived as essential increases and the demand for less essential goods diminishes I.e essentials become disproportionately more expensive than the norm against non essential goods displacing money towards the goods most in demand further fuelling inflation,

5. The shortage of essential goods accelerates as manufactures increasingly focus on short term survival, longer term risk is avoided and investment in the production cycle is reduced accelerating 1.

6. The normal balance of demand for all goods increasingly prefers those goods required to satisfy primary needs and people engaged in making and supplying less immediately essential or non essential goods become unemployed who then pressures governments accelerating condition 9.

7. Eventually goods not immediately required but none the less essential are needed and rapidly increase in price as they also become in short supply.

8. Consumers with least money first find it increasingly difficult to secure essential goods, become frightened and are forced to allocate greater proportions of their money on essential goods and demand greater income,

9. The demand for money forced by need and fear becomes irresistible so governments feel insecure and provide increasing amounts of fiat new money,

10. Consumers first to spend the new money see some value but soon as this new money is distributed and its value is lost, the velocity of money also accelerates as people rapidly exchange money for goods, wealth is seen as best protected when stored as goods rather than cash further increasing price and reinforcing condition 9.

Full post here

Anonymous said...

"In regards to inflation, money supply and consumer demand. From Brazil's hyperinflation experience
The next idea was that the problem was printing too much money, one of the basic causes of inflation. “We know from the textbooks that the money supply should equal the money demand. The Central Bank continually set a ceiling for the size of the money supply. They always met their target, but this was because the demand was falling—people were buying less--so the money supply did not need to grow. These are reasons why our country of 150 million people took 10 years following all of these theories and arguments to finally beat inflation."


FOFOA said...

Thanks Anon!

That article is great. Clearly we are heading down the same path. That article may require a post of its own. Did you find it on another site or linked in an article? Or just a random search? If someone else wrote about it, I would like to read what they wrote.

Thanks again,

Anonymous said...

Hi Fofoa

I did paste the link for the Brazil hyperinflation article earlier. One thing is clear from reading your posts and few other instances that hyperinflation does not have a specific cause… It’s more of a social/economic condition. The only thing that can be defined in case of hyperinflation is the affects it has on the society. The earlier post was to demonstrate how even with falling demand we can have prices going up…



FOFOA said...


I think your observations are correct. But I think we can also safely say that hyperinflation always seems to be preceded by grotesque hubris on the part of governments, politicians and banks with regard to deficit spending and currency printing. And that a lack of confidence in the public always accompanies the onset of hyperinflation.

And I think we can also safely say that America fits the bill at this moment in time.

Also, some argue that the American dollar will not be subject to a hyperinflation like Weimar Germany, Zimbabwe, Argentina or Brazil, because it is so much larger than those currencies, in fact it is the world's reserve currency.

But I would argue exactly the opposite. This largesse is actually its Achilles Heel. The dollar is present on so many fronts that "the shot heard round the world" could literally come from any corner of the globe. While those smaller countries were vulnerable only within their own borders to the confidence factor, the US dollar requires confidence the world over. It is completely vulnerable and its masters are dancing around like there's no tomorrow.


FOFOA said...

“Japan created a structure of production that did not meet consumers’ particular demands. Producing things that nobody wants and propping up mal-investments cannot possibly help any economy. This policy is equivalent to the old Keynesian depression nostrum of paying people to dig holes and fill them. Neither policy will revive the economy because neither forces businesses to realign their structures of production to match consumer demands.
The Federal Reserve will do anything to defeat deflation. Deflation is fatal to a debt ridden society. There will be many more stimulus packages after this one fails. Eventually, we will reach a tipping point where too much debt will result in a hyperinflationary crash.
It will catch us all off-guard, just like the current crisis caught them off-guard. Turning Japanese would be a best case scenario for the U.S."


FOFOA: Or... spontaneous currency collapse (a la Iceland) will bring us the end result of hyperinflation much sooner! Everyone thinks it's so mechanical when in reality, it is all psychological. One more panic and what are they gonna do? They've already made the FDIC god-like and "guaranteed" anyone and everyone's money. So if there's another bank panic, what tools do they have left to control the psychology of man by?

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