Friday, July 23, 2010
FOA on Hyperinflation
The answer is yes, "deflation" is what we want. Because we realize that a "normal" level of inflation through credit expansion is impossible at this point and deflation is the shortest route to renewed prosperity. But we also know that you will not let it happen. You will not let the piper be paid by those that owe the piper. You will make sure that payment to the piper is spread as far and wide as possible. You said so in 2002 in Deflation: Making Sure "It" Doesn't Happen Here.
We know that aggregate demand for new debt is dead, making it oh, so hard to push on a string that has no one on the other end to take up the slack (except, of course, the USG). And yes, we do know that you have other options, as you told us in your speech. Just because we don't want to borrow more money from you doesn't mean we won't take your freshly printed cash when you offer to buy our garbage at crazy prices.
But don't worry, Ben. We know it's not all on you. Your hands are pretty much tied. This was baked into the cake long ago. We had the chance to pay the piper by letting the price of gold explode freely many times, 1961, 1968, 1971, 1980, 1999, 2008 (and a few others that never made the papers, but I'm sure you are aware of) and each time we pushed the true and necessary devaluation of the dollar off into the "great unknown" future.
Here, read this. It might make you feel better to see how powerless you really are. It was written two years before you were even in public service, two years before your famous speech, back while you were still teaching 'nomics in Jersey.
Trail Guide (10/24/00; 10:58:56MT - usagold.com msg#: 39784)
Your words first, then
The Traveler (10/24/2000; 0:25:21MT - usagold.com msg#: 39771)
Deflation Scenario II
Greetings and warm regards to all.
Tonight, I will address the inflation or deflation debate that was highlighted this weekend by the formidable and never to be dismissed Trail Guide. Forgive me as I tell you my view from 30,000 feet. Much closer and the details would get in the way of full understanding by many here.
First, I thank Trail Guide for referring to me as a smart hard money thinker. His companion comment that I and many others walk forward down the gold trail but are looking backwards is similar to saying generals always fight the last war during a current conflict or that you can't see the economic pot holes down the road if you are always looking in the rear view mirror. Fair enough.
I however reply with a well-known admonishment from Lord Acton. This Cambridge historian of the 19th century wrote that those who do not know history are doomed to repeat it. I have devoted a professional life and investing life to knowing "something" of economic history - both domestic and international history. My summary viewpoint as expressed @ 39423 is reproduced below.
The economic lesson is ... ... ... ... ... .
Deflation is everywhere and always a monetary phenomenon -- a lack of sufficient currency and CREDIT in the economy to support prices. When the growth in credit slows or turns negative due to higher interest rates and higher default rates, then the above illustration [about the collapse of real estate] plays out.
================Mr. Traveler: conversely: the "real" inflation I point to is largely a cash phenomenon, where all the past massively over-created credit instruments are bought up by the money making authorities and paid for with printed cash or allocations to the owners digital cash accounts. ================= more
Some wise ones here state inflation is the curse waiting for us over the horizon. I doubt it because we are already highly inflated. I point you to the NASDAQ's PE, home prices and auto prices for but three easy references.
================ Sir, your three examples are the beginning "price" results of our highly inflated financial credit structure. However, as I pointed out above, that structure today is in the form of "highly reproduced" (inflated) credit instruments. In addition add to that mix all the vast paper derivatives in place and we can see how very different our present money inflation has been. Even as it only begins to raise prices. =============more
For hyperinflation to occur, even more credit would have to flow from Mr. Pump.
============Not true, sir. As your own examples pointed out above, rising prices in your examples above indicate how we are already receiving the effects of a hyper inflated credit system. Again, these are only an advance example of price inflation that's beginning to reflect the "real" amount of "credit money" we have created over 20, 30, 40 years. ============more
But to whom? The consumer is over leveraged already. The consumer has binged on easy credit to the point that debt service now takes more than 90% of disposable income for 80% of consumers according to the St. Louis FED. See why the economy has soared. If the above illustration does play out, most consumers -- still anguished by their recent credit traumas - will avoid the credit trap and thus Mr. Pump will be "pushing against a string".
Remember, the consumer represents 65% or so of the GDP. As credit goes so goes the economy.
=================Good point! It's one we have used to explain why deflation in a credit inflation is always a real possibility. But, hyperinflation cannot happen in a credit society unless the credit starts being made into cash. Our (yours and mine) "pushing on the string" scenario is predicated on pumping more credit to those that don't need it.
However, in the real hyperinflation that's coming as it follows our current credit inflation phenomenon it's not the borrowing class that's liquefied, it's the lending class! Remember, out there in our vast dollar world, for every dollar a consumer has borrowed, some entity holds the other side of the credit instrument. Our classic deflation begins when these holders are no longer being paid, resulting in the write-down of their assets. Across the land, banks, credit unions, citizens with lend able funds and every other form of lender no longer own a credit instrument that's sellable at par. That's 100 cents on the dollar.
Hyperinflation begins when pushing on the string no longer is an option. As you pointed out; "the consumer is binged out"! But there is more (smile).
We would not embark into such an obvious currency destroying process if we could drag the rest of the world with us into a cleansing recession. Call it an "almost deflation" where we start the inflation / deflation circle over for one more credit cycle. This is our record from most the dollar's life.
No country ever hyper inflates for the pleasure of the ruling class, as many want to believe. They / We inflate to keep the domestic system in use and do so because it's the last resort. In other words you are forced into it! Today, the advent of the Euro has created a currency competition that will allow world investors to run from any deflationary, restrictive policy the US can offer. Our currency will be lowered to non reserve status no matter what route we take. Just as in many other historic examples and present examples around the world, nation states always choose hyperinflation when no other way out is offered. No nation on earth has ever cascaded themselves into deflation once they are off the gold money system.
Below Traveler addresses some of the very aspects I detail in the above.======================== More:
Our worthy Trail Guide declares in his fireside chat along the Gold Trail @ message 43 that it will be different this time. It may be but as Cavan Man, a Missouri resident, might say: "Show Me". In part, Trail Guide states:
The US cannot walk away from hiking our ""gold trail"" now. Because "this process" is one of the few tools available to them for keeping the dollar perception in a good light. In effect by slowing the currency transition process they are doing exactly what world dollar holders need them to do. They will inflate these derivatives until in effect; our modern gold market bankrupts itself as supply is exhausted. I say, good! (smile) But once we get to that stage, I expect that a super US economic downturn will ensue.[*] Then the fed will go wide open and cover everything in sight to keep us going! The ongoing price inflation will be driving everything from physical gold to real estate through the roof.
[And a paragraph later... ... .]
Yes, it eventually breaks everything! But this is nothing new for us gold history buffs and it's what has happen in countless modern national fiats around the world today. Nations that don't have a reserve currency to play with. We will do like their citizens do, continue to use dollars but carry in our pockets whatever new reserve is in fashion, as a backup! Be it gold or Euros or both. In addition, our entire financial structure (like in these other nations) will change to operating in an inflation economy. Money will be lost, big time and made big time, but things will still be financed, bought and sold. Houses will double, triple then double again in price, even as financing rates approach 35%, 40% or whatever. We will also follow the (then) prevailing world policy concerning physical gold, solely because it will make economic sense to our officials.
Do read the complete message for a fuller context and more vivid understanding. Your wealth and your grandchildren demand this of you.
Perhaps the point of debate between us is: (A) Does severe deflation come next at [*] above followed sometime later by inflation and eventually hyperinflation, or (B) Does the US go directly to hyperinflation? This debate has many, many dimensions and is complicated to map. But let's give it a whirl.
ORO @ 39481 has stated that the FED will do the bidding of its owners (the banks) if events don't get too far beyond their control. I agree. Do banks and other holders of debt instruments (loans, mortgages, gov't and corporate bonds) want their wealth withered by hyperinflation? I don't believe for a moment that the creditor class is this egalitarian.
==============No Traveler, I doubt the creditor class as a group is seeking to remove the financial inequalities that separate people through this coming process of hyperinflation. Far from it. As I stated above, the credit hyperinflation has already occurred. It's there, in place as we speak.
What is now faced by this non egalitarian lending crown is the choice of: having their debt instruments defaulted on and losing everything,,,,, or playing 'let the fastest runner win the game!'
My friend this is the choice you get when the currency your assets are denominated in hits the end of its "timeline".
Human nature has followed this path for thousands of years. You know the old joke about outrunning the bear? Well, these lenders will influence our financial policy as such. They will try to get their debt securities liquefied first, spend the fiat and in this process outrun you and I. Leaving anyone they can beat to the mercy of the hyperinflation bear eating their remaining fiat assets.
Your point above about deflation and then inflation is still valid; if we cannot get the borrowers to borrow more and in doing so stop the economy from servicing "OUR DEBT SECURITIES",,,, ! But we cannot risk the markets, in this particular time and place to make that decision.
Here, we and the world would for the first time make a "judgment call"; ---can the "dollar fiat system" our wealth is stored in endure the deflation / recession that must follow?---
To date, everyone stayed with the only reserve currency available. Tomorrow they will not because they have a choice. ==================more
According to the IMF, foreign holders of dollars (including Central Banks) have a $6.5 trillion stake (roughly 60% in debt instruments) in protecting the value of their dollar holdings. Do they wish to see their purchasing power drop TO 25% or so under a hyperinflation adjustment
============Again, dollar holdings by foreign CBs are worthless anyway when the nation issuing them does and must run a constant trade deficit. The money can never go home, only build further on digital account.
This is the reason most Hard Money Advocates fall so short in evaluating our present gold values using only the commodity use of gold. They completely miss the fact that current dollar pricing of gold vastly understates its wealth asset value.
Especially to CBs if their dollar assets dissolve in bookkeeping form, the way they would do in a hyperinflation. No, the billions in assets they hold in dollar debt instruments would not disappear, only be transferred through a massive devaluation of the dollar against gold.
or increase TO 175% or so under a deflationary adjustment?
My above explained why a deflation cannot be in the cards. But if so, foreigners holding even government guaranteed paper debt in a deflating currency is little more than bookkeeping wealth if the actual goods buying power of the currency is compromised.
Yes, our US would continue to print dollars to service its debt, making the accounts look good. But, in such a deflation situation, foreign exchange controls are a 100% guarantee. Foreign held dollar assets would not come home, at least not at the same exchange rate one needs to become financially whole!
When the world begins to abandon a currency at the end of its reserve timeline, deflationary gains on debt instruments are an illusion of bookkeeping. There would be no 175% real purchasing power gains allowed. ========================more
If those wise monetary strategists and Euro creators thought that the dollar would go "up in smoke", why do they continue to hold on to the US$ at an INCREASING rate of accumulation? The ECB holds nearly 80% of its assets in US Treasuries (with 15% more in gold and 5% more in Yen). Is this the position of a shrewd central banker or wealth builder who is nervous about the future purchasing power of the US dollar? Why have not foreign dollar holders transitioned more rapidly away from the dollar and into the Euro, gold and other vehicles that would protect their wealth from the confiscation of inflation and later hyperinflation. Given that it's "ShowTime", one would think that the transition would be more complete than still having $6.5 trillion "At Risk" of going up in smoke. (Actually, it is "ShowTime" but physical gold is a sideshow in the unfolding three-ring circus). I suspect all those foreign held dollars are still in the USA because of an explicit promise -- Your dollars will increase further in value as we deflate the debt bubble and you are able to buy hard assets for dimes on the dollar.
====================Traveler, I addressed this in the above. Still, their asset base is safe in any circumstance. Their gold sales are largely to each other and much of the very gold they are delivering to certain clients will return for Euros once a dollar transition begins. Indeed, there has been massive ongoing physical gold buys the world over. Who do you think has been buying all the gold non official "Paper Gold Advocates" have been divesting themselves of? The key to understanding the scope of this is in seeing through the dollar paper gold pricing system. Had the prices of paper gold been rising all these years, it would have indicated a continued support of the dollar based gold markets. As such, the world today expects this currency system to fail, taking its paper bullion markets with it!
These "shrewd central bankers" are no fool to the economic world nor the political world. The US is still a major military and political force and will continue to be for some time. Allowing the US to destroy our own system and offering an avenue of escape for investors worldwide is a master political play. Why dump your dollar reserves when such an action would make you the bad guy? Buy some gold quietly, yes. But, better to let your dollars dissolve and have your assets transformed by a dollar / physical gold devaluation. FreeGold will do just that! ======================more
To RossL, Nickel 62 and others, your question is thus answered. Those dollars sent overseas by the trade deficit have ALREADY returned to the USA in the form of capital flows into debt instruments (60% or $4 trillion) and to a lesser extent equities and other assets. This gleeful repatriation of dollars is historically unprecedented and has been done for a reason. Like those of "Giant" domestic wealth builders whose dollars are now sitting in debt instruments, these instruments will be converted - in the fullness of time - into currency to purchase hard assets ("old economy" companies with captive customers, positive operating cash flow, little debt and little remaining CAPEX, or trophy real estate or certain other proven factors of production) once the deflationary spiral has exhausted itself and driven the price of all these factors into the ground.
ORO stated that the banks want the gold mines and telecoms on the cheap. The above is the process for setting up the BUYS of the CENTURY. Perhaps a real time illustration would serve us well at this point.
================= Your presentation shows a lack of understanding about how exchange rate risk works during unsettled times. Failing nation states that have opted for a fully """""fiat currency"""""" (the US dollar) do not simply stand by and allow ownership of everything in the country to be transferred to foreigners. Or even local creditors for that matter.
Truly, the vast bulk of overall debt assets standing against US credit extending institutions dwarfs our ability to service with real goods. Even at vastly diminished prices. These debt structures are held for further fiat accumulation only. Truly a Western Thought concerning wealth. Once an economy begins to get into trouble, everyone flees these very instruments you stand by in your analysis. Truly, people understand political risk as it pertains to the fleecing of constituencies. It doesn't happen in powerful states and investors know it. ==============more
A Denver ========"Traveler's example"==== company at 40 cents.
In the late 80's and early 90's, some banks liquidated land at an average 24% of the then CURRENT appraised "Fair Market" value, incoming producing properties at 50% of replacement cost or about 60% of then CURRENT appraised value and residential homes at 81% of the then CURRENT appraised value. Less than a decade later, most properties had handsomely appreciated from the FED induced credit expansion. Boom then bust then boom is the age-old cycle of wealth transfer TO the plutocracy.
========= These cycles end when the currency timeline ends! ==========more
Next, ... ... ... ... ... .
Does the US Government want hyperinflation? A close call depending upon timing and how events unravel. It could silently default on its outstanding debt and contingent liabilities (such as EXIM and SBA loan guarantees, FDIC insurance, etc.) by passing out wheelbarrows of FRN ala Weimar Germany. On the other hand, so many middle class welfare programs (the Big 5 are about 48% of total outlays) are indexed to inflation. They could never be met from the current tax code which has indexed rate brackets -- Thank you Ronald Reagan!
===========This is exactly what many people see and are preparing for! ==========more
Many models have =======more of Traveler's examples of possibilities===== apostles of Jenny, Jerry and Ophra.
Physical Gold Advocates fear not. Gold historically has done ITS BEST during a deflation! Yes deflation. When all other assets were spiraling down in value because defaults soared and collateral sales pressured the prices of all hard assets, gold alone increased its value. It has no liabilities (no one to default) and is portable to destinations without domestic deflation. See Professor Roy Jastram's The Golden Constant (Wiley & Sons, 1978) for a 416 year history of gold under four major deflationary periods of the past. If you are a bit lazy or pressed for time, simply recall that gold in the 1930's went from $20 to $35 during that deflationary depression. One caveat: All four were under some form of the gold standard.
=============== OK, now you say: """"One caveat: All four were under some form of the gold standard.""""
Boy Traveler, that's some caveat! (smile)
Four hundred and sixteen years of history examples can be toppled by one little caveat. Truly, that little point is exactly "the point" for today's time!
Our modern dollar world has created a fiat debt structure money system of biblical proportions. Nothing like it has ever been produced in the annals of time. We got to this point because our money was gold in the beginning. Then we allowed our confidence in gold as wealth to grow into the abilities of mankind to continue such a money system without gold. The result is a massive debt against every thing except gold! Every asset that exists in the USA is fully covered by such debt several times over. Either directly or indirectly through various official government debts.
There is simply no historic example in the history of mankind that shows where everyone surrendered their assets to satisfy such debt. Yet, this is the process you Traveler, fully well expect from a deflation. A deflation, by the way, that no gold standard today says must happen?
Truly, had the dollar advocates allowed it to be devalued against gold long ago we would all know where we stand. Free trading Physical gold would have slowly risen in dollar prices in an ongoing process that would have taken gold prices into the heavens. But, it didn't happen and an imploding debt structure (caused by pushing on a string of consumer credit demand) will be "QUICKLY" countered with debt instrument purchases from the official level. The old 1980 monetary control act is already in place and allows our fed to buy everything down to your shoe laces in order to stop any debt defaults. ===========================more
Is not deflation the very outcome that the Austrian economist Mises predicts following periods of rampant credit excesses? Furthermore, if one has escaped indentured servitude (being a debtor)through hyperinflation, how likely is one to "re-up" by borrowing at floating rates of "35%, 40% or whatever". What could one invest in and reasonably hope to make a positive spread (return on investment) if this is your cost of capital?
============Well Traveler, if you go to just about any third world country today, there are many extreme examples of what "re-uping" is all about.
Further, deflations following the credit excesses Mises talked about only happen when people believe the currency system will last and opt to stay with it.--- OR -- They escape the bad credit risk inherent in remaining in such a deflating system by jumping to another system of younger stature. Still, it leaves the choice of hyperinflation as the only route after a fiat expansion.
When such processes unfold today, people look for security in a fiat. One that will back itself with gold valuations conducted in an ongoing nature. Something the US fought so very hard to avoid all these years! ===========more
With respect to Trail Guide's "living in many, many lands and have witnessed and used such inflating systems," I would point out these key differences in economic profiles.
Unless he was economically alert during the last time a reserve currency "fell from grace" (the pound sterling following WWI), then the experience of Mexico, Argentina, Russia and other commodity based economies are not on point.
==============Well, the pound opted to have the dollar back its "transitioned" currency so the effects are not the same. Further, their debt structure had not come anywhere close to what we currently have. So they muddled through. The same could be said for the dollar if it took the Euro as its reserve backer. However, comparing the debt levels of Britain then and the dollar now is like comparing a baseball to the universe! ===============more
Furthermore, hyperinflation is difficult to introduce when a country's government, businesses and citizens are already overly leveraged and are having trouble meeting debt service obligations ($2 trillion annually as recently posted by ORO). Total debt in America is often quoted in multiples of record high GDP. It is one thing for the FED to pump money vigorously into the economy. It is another matter altogether for the banks to find credit worthy or semi-credit worthy users of this fresh tidal wave of liquidity. By some estimates, corporate America has already leveraged up from a conservative ratio of 25% debt to 75% equity to a precarious 75% debt to 25% equity ratio. That is almost a 10 fold (1,000%) increase in debt!
============= Traveler, every time you bring another log to our "Gold Trail" fire, I pour gasoline on it and burn it before it becomes of use. But keep trying, sooner or later I'll run out of fuel. (smile)
Again, hyperinflation in our economy will (as I demonstrated in the beginning) begin with our government buying the debt from creditors and changing the terms of its payment for over leveraged citizens and businesses. Further, a rising price structure of an extreme nature, such as this, quickly raises all wages and income levels. Allowing everyone to service easily what seemed like a mountain of debt before. No different than looking back to when minimum wage was $1.00 and now is $5.00+/-. Only happening on a super accelerated scale. =======================more
In summary, he who has the gold makes the rules. The creditor class -- both the domestic plutocracy and their foreign cousins, has the gold -- both literally and in the form of debt claims. They would rather convert their paper claims into foreclosed hard assets following a deflation and at worst loose a billion or two from poor collateral valuations while reaping trillions in new purchasing power. That beats passively losing 20% - 40% - 60% of the value of the entire debt portfolio from hyperinflation.
=============== Exactly who in the voting public do you think is going to sit still for this paper conversion? You,,,, me,,,, that man behind the tree? Ha! Ha! """NoONE""" leaves their debt claims laying around in a country where their citizens are being economically tortured by huge, all consuming debt claims! At least not without massive risk returns. That's why rates soar so high. You either run for it or take a big chance in staying,,,, most run if a stable medium exists. Providing that medium in either Euros or a Free Trading gold market is where the ECB / BIS can play the good guys ============more
Furthermore, if the word came out that hyperinflation was the policy of the USA, who would lend their funds for the prospect of receiving less purchasing power later? I for one would rather take my chips overseas to an economy that is stable and offered good returns for definable risks. Domestic usury laws can only be raised so high and bankruptcy laws tightened so tight before the great unwashed revolt.
===============My feelings exactly!===============more
The major risk to the scheme of the plutocracy is a revolt of the masses -- whether politically through election of populists who pass legislation such as foreclosure moratoriums or violently though protests, strikes, lynchings, pogroms and the like. Thus inflation followed by hyperinflation will be instituted by the FED at the instruction of its masters once the fear of loosing it all exceeds the greed of gaining another prized asset on the cheap.
Lastly, consider this. Current wealth of creditors only increases during deflation as each dollar now held becomes more dear.
=============That used to be true before the volumes of debt securities began to dwarf the universe. Today, most asset holders are true to nature players of the trading mentality. If inflation becomes the risk, they will exit the door in an attempt to out-trade you and me (and that man behind the tree (smile))! Most of them will simply run up the inflation ladder seeking the next higher return. In the process marking the market down in existing holdings until the government must also buy those items at par. ===============more
Inflation is a wild card for everyone. For example, my one ounce Maple may be worth $20,000 or $30,000 once deflation is turned into hyperinflation (and former creditors have switched to being net debtors). But what is that $30,000 worth in today's purchasing power - $3,000 for a 10 to 1 return or $300 for a big waste of time and energy?
This is one of the major flaws in Western Hard Money thinking. We tend to view the dollar price of gold in a static purchasing power light just because it's bookkeeping-priced through paper accounting deals.
Lost in our perception of all this is the fact that current bullion prices must rise into the thousands just to reflect the US credit inflation that existed 20+ years ago! Much less reflect its value relationship to the current trillions of debt.
Our modern dollar paper gold derivatives have masked the true gold values all this time. Start with a base of gold holding its international wealth value at $3,000 to $10,000. Then extrapolate that to handle any future money printing to buy our already hyper inflated debt! Now you have an idea why PGSs (Physical Gold Advocates) are so quiet as they buy bullion today.
The current marketplace has so understated its true dollar value, physical gold must rise far beyond any price inflation that's in our future. Only Western commodity traders using a thought process that says; """the dollar market price of anything is correct because the dollar price says so"""" think gold today is a "one - on - one to price inflation" proposition. Nothing could distort the picture more. ==============more
Truly, what waits for us economically just over the horizon will be calamitous and stunning for all but a few.
===="""We watch this new gold market together, yes?"""=====
Black Gold, Yellow Gold - the only wealth worth physically owning.
=======Absolutely, Sir Traveler, Absolutely!!!!=============