Wednesday, June 9, 2010
The Old Hyperinflation Question
I see this a lot. People say "the US dollar cannot experience Zimbabwe-style hyperinflation because:
A) it is the global reserve currency, and
B) all US debt is denominated in its own currency."
Other arguments I have seen have to do with low money velocity, which can reverse globally within a couple hours based on fear alone, and the shrinking quantity of "balance sheet money" or credit money. I'll address this second fallacious argument in a later post since it is more involved.
How wrong people are. FOA intuited this back in 1998:
Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold. Michael, you are absolutely correct in that the USA will see a hyper inflation of its currency and a gold price in dollars that reflects it. Unfortunately, for most investors, the gold price rise will be sudden and also hyper fast, as it will occur just after a rapid plunge in dollar based assets including, stocks, debt and the entire banking system. This action will destroy virtually all gold based paper assets as they are also dependent on a functioning economic system.
...So, dollar hyper inflation never arrived and gold did not make its run because world CBs bet your productive efforts on supporting the dollar reserve. In the process, the US standard of living was raised tremendously on the backs of most of the worlds working poor. But this is not about to last!
...A grand hyper inflation is now ahead on the trail. It should be ushered in with a large "crackup" in the currency derivatives market. Once this event is "in process" the paper gold markets will quickly rush to discount against physical gold. A discount that will break our gold market pricing and physical allocation system.
...Baloney! The evolution of Political will is now driving the dollar into an end time hyper inflation from where we will not return. That is our call. Bet your wealth on the other theorist's call if you want more of Their last 30 years of hard money success.
These are from FOA's posts between 1998 and 2001. Was he wrong? Or was he early? You decide.
The following is an exchange I had just today in the comments section of an older post, so most of you probably missed it:
You describe the inflation that will take place as "hyperinflation".
I am wondering if instead you meant strong inflation, e.g. a 1:5 gold revaluation upwards, as hyperinflation is usually attributed to Weimar/Zimbabwe-style inflation.
Currently debating this with a fine mind, so if you could clear this up, it will be much appreciated.
The circulating medium is what lubricates the real economy. As such, its specific value is meaningless except to say short-term stability of value is important to its function as a lubricant.
But the dollar is so much more than just a circulating medium. It is the very yard stick of a mountain of global debt that has reached its growth limit. And when that debt structure collapses it will bring down the value of a dollar to zero, or as close to zero as is physically possible.
Study the assignat and the mandat in France in the late 18th century if you want to see the future of the dollar. Study John Law's Mississippi paper. Every time a government that runs a debt and a deficit also gets control of issuing money, it always takes it to zero.
This has been coming at the dollar for a long time now. The hyperinflation is already present in all the debt. Every penny of one man's debt is a penny of another man's retirement plan. It will all be liquidated at the speed of a lightning bolt when the US Treasury market finally burps, or when the paper gold window finally mandates "paper only".
The dollar's value will already be decimated before Bernanke even gets started issuing the high denomination bills like we saw in Zimbabwe and Weimar Germany. Yet he will issue them, as that will be the only way for the US government to pay its current account, its debt service and its other liabilities, all denominated in dollars, some structural and indexed to inflation, others simply nominal. But it will be a mad dash to print like "crazy".
"Old money" and "public money" has seen this coming for a long time now. This is why the Central Banks in aggregate have switched from dishoarding gold to hoarding gold. When the debt brings down the dollar to zero and all paper investments tied to the value of the dollar evaporate, gold, in global aggregate, will inherit all the purchasing power lost in the dollar's collapse. Currency is a small part of this loss. Debt is the motherlode!
This is different than past currency collapses because the dollar is the global reserve currency. To view this properly, you have to realize that because gold is globally fungible, and the dollar is the global reserve currency and global accounting standard, gold's value reset will have nothing to do with inflation.
Gold's value reset will be from a shift in function, as it absorbs and inherits the global purchasing power that was previously stored in dollar-denominated contracts, including US Treasury bonds, on the balance sheets of the most powerful Central Banks in the world.
Everything else that is a fine store of value like fine art, classic cars, gem stones and commodities, will retain their present purchasing power (or close to it), but gold will be different. Gold will switch roles, from commodity to wealth reserve par excellence.
Central banks like China that hold a lot of dollars and a little gold will retain their present purchasing power at the least. The bonds will become kindling while the gold becomes priceless. A simple balance sheet weighting adjustment.
Anyone who tells you the global debt pyramid scheme has reached its mathematical limit, but then says the numéraire of that system will only see a gradual "strong inflation"; or anyone who tells you that the paper gold market's fractional reserves can fail and gold will only go up 5:1... hasn't thought through the real world implications very far.
We are playing 7-layer, multi-dimensional poker here. You have to be able to see beyond your glass fishbowl if you want to avoid the psychological trauma of reality when it comes crashing in.
Yes, we will see something resembling Weimar and Zimbabwe-style hyperinflation with the dollar. And the level of gold's revaluation will have nothing to do with this currency collapse. It will have everything to do with a separation of the monetary roles in the global collective conscience and on the balance sheets of the richest Giants in the world.
Gold will not rise like an undervalued commodity... 5:1 as you say. It will be more in the range of 50:1 to 100:1, and when you add in the hyperinflation, an ounce of gold will easily pay off the US national debt as it stands right now.
Of course the US will not be able to do that. Not if it wants to keep trading certain "essential" commodities with certain "essential" trading partners. It will have to honor certain paper gold contracts at the rate they were written to keep the "lubrication" flowing. So to speak.
Thank you FOFOA,
IMO the debate comes down to severity and (most importantly) timing.
AFA severity, I expect it will be anywhere from far more severe than the majority expects to catastrophic (EOTWAWKI).
I picked 5:1 because that would bring the paper currency in line with the modern metal US currency (the melt value of quarters etc. are worth ~20% of their nominal value). Also, it's my gut feeling that they think 5:1 can be 'gotten away with' (which is wrong, naturally, but they will try as there is nothing to lose).
20:1 is slightly less likely, and at that point the pain from a 50-100:1 devaluation is not that much greater, so I can see TPTB shrugging their shoulders and printing away.
AFA timing is concerned, on or around 2012 seems right, not just from the apocalyptic expectations (which will aid it), but because round two of US mortgage resets peak out at that time, making it patently obvious there is no escape.
Any thoughts on timing would be appreciated. Have a big to-do list between now and then, would be nice to schedule it properly. : p
Money and power, good and evil, right and wrong, grand conspiracies and plain dumb luck all play a role in building unbalanced systems and blowing bubbles. But when it comes time for them to pop or collapse, these human endeavors are all completely irrelevant. I don't employ moral judgement nor geopolitics in my currency analysis for this very reason; they are irrelevant. Collapse is only organized by the Superorganism and it cannot be stopped, although under special circumstances it can be delayed.
The dollar system should have collapsed between 1971 and 1980, but it didn't. It received an assist from Europe, the Middle East, and later from the Far East. The purpose of this assist was to buy the time necessary to build another currency large enough to lubricate international trade in the event of the disappearance of the dollar. That ended in 1999 with the launch of the euro. What kept the dollar afloat since then is anyone's guess. I have a few theories. But they all seem to be expiring in 2010.
The euro was special in two ways. And by special, I mean special on an astronomical time scale. It was the first man-made circulating medium to separate itself from the nation-state, from the very ones who always crush a currency to zero. And it was also the first to sever its ties to gold. In other words, it was the first unbacked, irredeemable paper currency that not only acknowledged but supported an external store of value, gold. This can all be found in a famous speech here.
I don't know how much of my blog you have read, but I don't find the euro's present troubles overly alarming or existentially threatening because I understand why it is the way it is. Some European politicians and political appointees today are doing it great harm, but not existential harm, yet. The currency exchange numbers today are meaningless because all mediums must devalue against the debt paradigm. "It's the debt, stupid" is more than just the title of one of my posts. But please forgive me for meandering "aimlessly" in this reply.
It appears to me that you are expecting a controlled devaluation of the dollar by the Fed and the USG. This is something that is totally impossible in my judgement. First of all, there's nothing to devalue it against today, technically speaking. The only thing they can do is print base money to fill the credit money hole and the USG coffers, and they are already doing this. And they must do this. And they will keep doing this.
For the sake of your question I am trying to imagine how a controlled devaluation might be attempted, were they stupid enough to try. If the USG was the world biggest creditor, they could possibly devalue the denominator of all that debt 5:1 by forgiving everyone of 80% of their debt while printing more currency for their own needs. But the USG is actually the biggest debtor. So it would instead be forgiving its OWN debt and punishing its creditors... out of 80% of their savings. Do you think those creditors will then say, "more please?"
The best analogy I can come up with is a steep, avalanche-prone ski area. The ski patrol knocks down some of the snow after every snowfall. Because if you let it pile too high, and get packed, the whole lot will come down all at once. Either by gravity, or by a ski patrol cannon, or by skier, or by a deer farting. Any way you cut it, it all comes down if there's too much of it packed on the mountain. Gravity does all the work.
This snow pack is to the mountain what global debt is to the dollar. There's no way to do a centrally controlled devaluation of the dollar at this end stage of its life. It prices and denominates too many things, too many contracts, too much debt in the world today. This is the real essence of the dollar. Its "unit of account" function is, not its medium of exchange quantity.
And the physical plane that underlies it is completely unaligned with this precarious 'snow pack'. It is not representative of reality, therefore it has no sticking power. It's ready to come down on its own, so shhhh... be quiet and very still and let's hope the wind doesn't blow.
Regarding timing, the best I can say is "sooner rather than later." ;)
For more, please see some of my older posts on Hyperinflation:
"What are you more afraid of? The dollar becoming worthless? Or losing your job and running out of dollars?
"The whole world is constantly shifting back and forth between those two fears, so money demand bounces up and down like a yo-yo, and velocity — the speed at which the money changes hands — does, too.
"These wild shifts in money demand and velocity have the same effect as massive, instantaneous shifts up and down in money supply. It's like we're having a huge inflation, then a deflation, every few hours — because our fears change every few hours — because the politicians have all this arbitrary power and we don't know what they're going to do to us!"
-Richard Maybury from "What Obama Does Not Know"
A Little Perspective
The Waterfall Effect
Shake the Disease
Call Me Contrarian
The End of a Currency
What Obama Does Not Know
Why All Paper Will Burn (In plain English)
All Paper is STILL a short position on gold
Hyperinflation by any other name
More Deflation/Hyperinflation Fun
Worst Case Scenario (12" Remix)
What Modern Hyperinflation Looks Like
Hyperinflation Germany 1923
Time to Warm Up the Printing Press
Deflation or Hyperinflation?
Like anyone would be
I am flattered by your fascination with me
Like any hot blooded woman
I have simply wanted an object to crave
But you, you're not allowed
An unfortunate slight
It must be strangely exciting
To watch the stoic squirm
Must be somewhat heartening
To watch shepherd meet shepherd
But you, you're not allowed
An unfortunate slight
Like any uncharted territory
I must seem greatly intriguing
You speak of my love like
You have experienced love like mine before
But this is not allowed
An unfortunate slight
I don't think you unworthy
But I need a moment to deliberate