Monday, December 22, 2008

Deflation or Hyperinflation?

This post is for those who have been taken in by the deflationists recently, and who have begun to wonder and worry about what they thought they knew.

To think about this debate properly, let's look at what the Fed has in mind. The Fed fears deflation and would like to swing it back, in a linear fashion, to mild, controllable inflation. To do this it is using every trick in the book. One thing is certain, there are no physical limitation to how much the Fed can inflate the money supply. Money creation now comes with no physical costs (like paper, ink, and printing press grease).

Some say that any money created must be borrowed into existence and that this is a limitation. They are partly correct, because this is not a limitation. As the borrower of last resort, the Treasury of the United States has the power to borrow as much money as it wants to use for stimulus. This can take the form of rebate checks to taxpayers or spending on public works projects. In both cases, the money enters the economy efficiently.

So when Ben said in 2002 that "deflation is always reversible under a fiat money system", he was correct. Point in fact, if the US government issued Tbills, and the Fed bought them with printed money, and then the government used that money to refund everyone's income taxes for the last 10 years, it is likely that would be enough to reverse the current deflation. I use this example simply to show that it is within the power of central banks and governments to defeat deflation in a nominal way.

So now let's see what is the case if the Fed and the government do not take such drastic measures. Let's say they would never do something as Zimbabwe-crazy as that and let's say that the deflationary forces are now out of control. Well, the only thing that can mean is that the best investment to hold right now is fiat currency, or more specifically, US dollars. And if we accept that this runaway deflation will last for several years, that means the best thing you can do is hold dollars for all those years. Because as time passes, those dollars will always buy more and more goods, for as long as deflation persists.

So I ask you, does this pass the sniff test?

It is the only logical conclusion if you are going to accept what the deflationist's are telling you.

With US government bonds at a parabolic peak right now, this clearly does not pass the sniff test. If you buy this theory and act on it wholeheartedly, you are asking for big trouble in the coming months, both in the dollar and in the Tbills.

So, making a big jump here, I ask, is there any difference between a currency collapse and hyperinflation?

Let's ask a different question. What if the government decides to devalue the dollar against gold as many have suggested. This would solve a lot of problems for the government (and for us goldbugs, but that's for a different post). But it would create problems for other governments holding dollar reserves, like China. Well, there are a couple of remedies for this. Perhaps the US government would make a secret promise to China. But still, there are other's in the world that would be greatly hurt by a USD devaluation. So what would happen?

Governments don't always make rational moves. Sometimes they panic. So the likely response to a USD devaluation would be simultaneous devaluations across the board. Let's say there's no secret deal with China to replace it's reserves with a new currency at a favored rate. Well China would immediately devalue the Yuan against gold so that it would still be holding the same Yuan value of Tbills as it held before the USD devaluation.

If this happened across the board with all currencies (a fairly likely scenario), then all currencies in the world would drop roughly the same amount. In this case, the USDX value of the dollar could remain the same, say 81 like it is today, since that is simply a measurement against other fiat currencies. But the reality is that the dollar, and all other fiat money, would buy a whole lot less. You see, they can't devalue gold, they can only up-value gold. In order to devalue gold, they must do it surreptitiously through the COMEX or else outlaw it all together (which is not going to happen, but that's for another post).

This would literally be like overnight hyperinflation. If you bought your house for $300K in 2007, and this damn deflation has taken it's value down to $200K, and then the fiat moneys of the world devalue by 90% against gold, the very next day your house would be worth $2million.

From there, things would start to diverge. That first day, gold would be $9,000/ounce, and your house would be worth $2million. But because we are in a "deflationary environment", your house would likely continue dropping in price, maybe to $1.8million within the next year. And because gold is actually a hedge against failed confidence in fiat money, gold could rise from $9,000/ounce to $90,000/ounce in that same year.

Trust me, this would be a rough year. And there would be nothing linear or predictable in the TA (technical analysis) that would be tracking price movements.

You see, hyperinflation does not require a linear progression from deflation, to less deflation, to slight inflation, to inflation, to high inflation, to hyperinflation. Nope. As a monetary phenomenon, our money supply was already hyperinflated in the 90's. Counting dollars in the world is like counting stars in the sky. (The main difference being new stars are born at a much slower rate.) None of this recent housing bubble or derivatives monster bubble was even needed to create a currency crisis. In fact, these recent bubbles created their own additional credit inflation and also provided a place to put it, a place that has now collapsed to almost nothing. It sure feels like deflation right now. But that's just because of the collapse of the bubble. The money supply was already hyperinflated before this bubble. Even Another said so in 1997.

So why no price hyperinflation yet? That's because the rest of the world has been soaking up our hyperinflated currency through the trade deficit. No other currency in the world has had this privilege. That's why so many other currencies, when hyperinflated, were soon followed by price hyperinflation.

There is nothing playful and hippie-like about hyperinflation. I have seen it suggested that inflationary times are characterized by hippies and growth and good times, like the late 60's and early 70's. And that deflationary times are characterized by loss of control, social upheaval, war, and death, like the 30's. So the argument follows that we are obviously headed for the latter and not the former, therefore deflation. But I ask you, which is a better description of Zimbabwe? Obviously Zimbabwe compares more to our deflation of the 30's than to the inflation of the 70's, even though it is experiencing hyperinflation.

I think the point is that hyperinflation is a close cousin to deflation, and only a distant relative of inflation. So don't let the name fool you. Hyperinflation is most definitely not a hippie paradise.

I apologize if this post seems jumpy. It's just that there are so many different angles from which to view this debate. And there are so many people writing on both sides of the debate. I have given this much thought from all the angles I have come across, and I always come to the same conclusion.

Let's take a look at what I call the Prophet angle. Where I think Peter Schiff got it wrong is that he thought the foreigners would abandon the USD Titanic either as it was approaching the iceberg, or soon after it hit the iceberg. But they didn't. They seem to be going down with the USD Titanic. However, they do have their own lifeboats. And at the last minute, before we disappear under the water, they will abandon us. Trust me. Peter was actually correct, only his timing was off, and to great cost to his clients at Europac. But his macro view of the way the world economy works is pretty spot-on.

Eric Janszen of iTulip correctly predicted this deflation years ago during the bubble inflation. He called his theory Ka-Poom. The Ka part is this deflationary cycle we are in, which he calls disinflation. The Poom is the massive inflation that will follow. So far he has been pretty correct.

Nouriel Roubini has been very correct about the collapse. And now he sees deflation. He and Mish both see this as continuing for a long time. But what I think they miss is the massive herd of black swans lurking in the bushes. The black swans are an analogy similar to the pins in Eric Janszen's book America's Bubble Economy. It says that the bubble (currently the TBill bubble) is floating through a maze of many many pins. And it only take one pin to pop the bubble. The odds are much higher for a pin prick than for the bubble to make it out of the house-of-pins in one piece.

Another related problem with Mish's and Roubini's view is that it relies too heavily on a linear analysis of the economy. I touched on this earlier. But I call this the TA angle. Part of the reason most mainstream economists did not see the collapse coming like Roubini did is that they relied too heavily on TA, which prescribes slow, linear movements. Roubini saw big troubles lurking, black swans, and rightly predicted a low probability (rare) yet high impact paradigm shift. But now it seems he is suffering the same blindness to black swans that inhibited the mainstreamers from 2006 to September 2008. He now thinks things will continue in a linear progression.

A good comparison for this TA angle is the POG (price of gold). There are some, like Jim Sinclair, Axstone and Stefanmo on GIM that track the POG using TA methodology. If you followed Stefanmo's thread, It's all in the dollar and his methodology, you'd have a hard time reconciling that POG with ANOTHER or FOA who spoke of a $30K POG back in the late 90's. This difference, a linear progression versus a gapping up due to a rare but high impact event, is analogous to the reason Mish and Roubini see deflation and I see hyperinflation in our future. Don't get me wrong, I too see their current deflation. But I also see a 95% probability that it will change to very high inflation, or hyperinflation, or a collapse of the dollar (mere semantic differences), within the next two years at the VERY LATEST.

There is also the Necessities vs. Luxuries angle. This is the way I see it most likely playing out. All "luxuries" are currently deflating. And in real terms (gold terms) this will continue for years. But when you look at necessities, the things we need to survive like food, we haven't seen much deflation at all. In fact, many prices have been going up (except gas) during this current "deflation". Mikal on USAGOLD listed out some of his bills which have INflated in the last two months:
Dentist bill
Grocery Bill
Heatlamp bulb
Car parts- do it yourself
Auto parts and service- garage
Car insurance
Precious Metals
UPS, Fedex and US postal shipping
Computer parts and repair

All you have to do is look at Zimbabwe. Necessities like clean water are as valuable as gold right now. Yet luxuries that we enjoy in the west have almost no market there. So even though their prices are now quoted in the quadrillions, their real values (in gold terms) are still dropping.

Hyperinflation need only hit the necessities. That is why it is so bad. The way I see this going down is that we'll see inflation start creeping into necessities in the next few months followed by shortages in those same necessities, and then a currency collapse which we could call "hyperinflation", because that's what it is. If we have hyperinflation is that not also a collapse of the currency? Yes. And the opposite is true as well.

The last angle I will discuss in this post is what I call the Manipulation angle. Remember that we had high "price inflation" in commodities including oil for the first half of this year. Note that I said "price inflation". This is a distinction from the Austrian "monetary inflation", which was already hyperinflated in the 90's (and which we are piling cash on top of now). Anyway, we had oil going up to $140/bbl in July. That ended July 15th, right after INDYMAC collapsed.

Many notable writers including Don Coxe and Jim Puplava have speculated that Paulson (and the PPT) engineered the commodity collapse simultaneously with the rally in financials and the ban on short sellers (in financials only) starting on July 16th. This commodity collapse, currently called deflation, continued through November. Now if I were to believe that Paulson started this "deflationary" collapse in commodities, must I now believe it is real? Should I believe it will continue once he is out of office? I don't know. But I think I know.

One thing I am fairly certain of is that gold is going up, way up, and relatively soon. Another thing that I'm sure of is that the dollar is not a safe investment. Even now. It can lose massive (like 90%) value overnight if the wrong thing happens. Don't get me wrong. I do have some dollars. But gold is no longer my hedge. Gold is now my wealth reserve, and the few dollars "under my mattress" are now my hedge. Since I don't know the timing of the future events I see coming, I still need to be prepared to pay my bills and to lose some value on those dollars if things happen as soon as I think they could.

One other thing I'm 95% certain of is that we will see what I am calling "hyperinflation" within the next 24 months. And I say 75% by next fall. 50% chance of it by summer. And 25% by spring. There are just too many black swans/pins in the room.

Once again, apologies for the jumpy post. But I have been reading too many things about "the big D" lately that I wanted to write a post. Don't get me wrong, the big D....epression is coming. And the big D.... flationary head-fake is happening right now. But take solace in the people that tell you gold will do well in both deflationary and hyperinflationary environments and don't worry about your gold. But as for the rest of your preparations, just be aware of the black swans.

The following article will show you the state of the money supply and the panic. Note that statistics can be interpreted in many ways, but this article highlights some of the most applicable statistics and graphs to what we are facing. It is by Rich Dad advisor, Michael Maloney.

The Greatest Wealth Transfer in the
History of Mankind Starts Now!

by Michael Maloney
December 19, 2008

Right now, the Treasury, the Federal Reserve, and the banking system seem to be gearing up for an event the likes of which has never been seen. I believe the crisis that will unfold over the next few years will add up to the biggest economic event in history. The scale of what is happening will dwarf all other economic events combined. The Tulip mania of 1637, John Law's "Mississippi Scheme" of 1720, and the dot-com / tech bubble of 1999 will pale by comparison. Even the hyperinflation in Weimar Germany in 1923 and the Great Depression will seem like a walk in the park compared to what is coming.

But wealth is never destroyed - It is merely transferred. Neither you, nor I, have the power to stop what is coming. But we do have the choice to either freeze in panic and be crushed under the wheels of the economic freight train that is bearing down upon us, or catch the ride of our lives on the road to immense wealth.

While speaking at a recent wealth conference in Florida, I showed the audience some charts to try to impress upon them the enormity of what is going on right now! The chart I call my Panic Meter is made up of LIBOR rates (the rate which banks lend to each other) divided by the 3-Month Treasury Bond yields. By dividing LIBOR rates by bond yields you get a measurement of just how panicked the banks and large investors really are. This chart is saying that something is really, really wrong.

Panic Meter (2006 - November, 2008) (Click charts to enlarge)

I then showed a chart of the monetary base (all paper dollars and coinage in existence). It took 200-years for the monetary base to go from $0 to $800 billion, but in just the past 3-months it has grown from around $800 billion to $1.5 trillion, and by the time you read this it will probably be surpassing $1.6 trillion. That's double the number of paper dollars in existence since last summer!

Base Money (1919 - November, 2008)

But here are a few charts that I didn't show at the conference...

The next chart is "Cash in Circulation". So far only a small amount of all that extra currency shown in the above chart has leaked out of the banking system and into circulation. But you can bet your assets... IT WILL. When it does, it means that prices must rise to soak up all that extra currency, like a sponge soaking up water. This is bad news for someone holding dollars, but cause for celebration for a precious metals investor.

Currency in Circulation (1919-November, 2008)

Here is a chart of how many dollars the banks have borrowed from the Federal Reserve through the end of last year (2007). Please note the spike that indicates the banks had to borrow $8 billion from the Federal Reserve during the Savings and Loan Crisis of the late 1980s.

Bank Borrowings from Federal Reserve (1919-2007)

Here is the same chart, but I've now taken it out through November of 2008. You can't even see the $8 billion S&L Crisis peak anymore! In fact, the banks are approaching $800 billion in borrowings. This means that the banks perceive this crisis as being 100 times larger than the S&L crisis.

Bank Borrowings from Federal Reserve (1919-Nov., 2008)

This next chart is Reserve Bank Credit. It is the total amount the Federal Reserve has loaned out of its bottomless checkbook. This chart includes all the rest of the bailouts (at least through November 2008). This chart also rises to roughly $800 billion by the end of 2007, but by November 2008, it has risen to $2.2 trillion. As Brent Harmes would say "It's climbing skyward like a homesick angel."

Reserve Bank Credit

Last, we have a chart of "Excess Bank Reserves". These are reserves in excess of the amount that the Federal Reserve requires the banks to have. It looks almost identical to the chart of Bank Borrowings, except for two small features; there is a tiny blip in 2001 and a small bump around 1941. Could it be that the banks perceive this crisis to be 50 times larger than 911 or even World War II?

Excess Bank Reserves (1930-November, 2008)

With the exception of the Panic Meter, all graphs in this article are taken directly from the Federal Reserve's website. Personally, I'm pretty sure that in a few years a chart of the price of gold will look similar to these charts, and a chart of the U.S. dollar will look like one of these charts flipped upside-down.

If you don't believe me, just take a look at this!

Bloomberg, Dec. 15 - Dollar Staggers as U.S. Unleashes Cash Flood:
"U.S. policy makers are flooding the world with an extra $8.5 trillion through 23 different plans designed to bail out the financial system and pump up the economy. The decline (of the dollar) shows that the increased supply of money may be overwhelming investors...."

In my book, "Rich Dad's Advisor's Guide to Investing in Gold & Silver," I show how virtually every time governments, and/or the banking system, abuse a currency enough to push it to a tipping point (such as in these charts), the free market and the will of the public revalue gold and silver to account for the excess currency that was created since the last time they were revalued. But this time, for history to repeat, and for gold to do what it did in 1980, 1934, and hundreds of times throughout the world going all the way back to Athens in 407 BC, it will require a gold price of over $10,000 per ounce... And that's if they turn off the printing presses today!

I believe this is the greatest opportunity ever offered to anyone in the history of mankind! Gold below $1,000 and silver in the $10 range is a gift from God. You can ignore this gift at your own risk, or graciously accept it and be on the road to great abundance. I don't know about you... but I'm buying lots of gold and silver.

Things I believe every investor should do:

Step 1: Get educated. Don't take my, or anyone else's, word on this. Read books and newsletters on the subject and decide for yourself.

Step 2: Buy physical gold and silver and take possession of it (or have it stored at a third party depository).

Step 3: Avoid "Fools gold" such as:
ETF's, pool accounts, futures contracts, leveraged accounts etc. Many of these are just "paper contracts" with little or no gold or silver behind them.
Collector coins with excessive premiums above the worth of their metal content. These are a better deal for the dealer than for you.

Step 4: Relax knowing you have protected your wealth and positioned yourself to profit greatly from what history tells us is inevitable.

By Michael Maloney

Michael Maloney is a precious metals expert, monetary historian, author of "Rich Dad's Advisor's Guide to Investing in Gold & Silver, and the founder of is an online precious metals dealer that specializes in delivering gold and silver to your door or securely storing it for you in a Brink's precious metals storage account.

To read the book that predicted the current financial crisis and what will happen next, check out Michael's book "
Rich Dad's Advisor's Guide to Investing in Gold and Silver". (Amazon $11.55)


Anonymous said...

Your thoughts about the various 'flations mirror my own (see my own post It’s Time To Man The Lifeboats).

One thing you didn't really make clear is where you think hyperinflation comes from. I believe hyperinflation is distinct from "ordinary" inflation in that the latter has a monetary cause, while the former has a psychological cause. When peoples' confidence in the currency collapses, hyperinflation ensues.


FOFOA said...

Dave, you have written an excellent post. I recommend that everyone read the whole thing. You are very thorough and I totally agree. I think you and I have many thoughts in common. However, I do have aspirin in the house for those headaches that come from liberal amounts of alcohol!

You are correct. As I cobbled this post together, I skipped several angles on the causes or tipping points of hyperinflation. Hyperinflation is both a monetary AND a psychological event. And the psychological component becomes the trigger. Shortages which will come from the deflationary period will trip this psychological event. If you combine shortages with a flood of liquid stimulus money you get a very quick transition to price inflation.

And there are other psychological land mines developing as well. As more and more people become aware of the language of hyperinflation and the possibility it could happen here, the probability of a psychological shift grows exponentially. We saw a hint of this last spring with the run on rice. Jim Sinclair posted this plausible scenario a few weeks ago:

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 at the link above)

There is another excellent post about The Psychological Trigger of Hyperinflation which you might find interesting. Here's a snippet:

You see, hyperinflation is not only a monetary event, but it is far more of a psychological event. During boom periods of economic fiat expansion, there a demand for money, the problem comes when a deflationary period enters the economic fiat landscape. At that point, as we have seen, the central bankers push the “presses” into overdrive, full steam ahead to avoid facing the consequences of correction associated with a fiat bust. It is during this period that the danger of hyperinflation evolves because the supply of money is rapidly increasing but the demand for that money is decreasing. Eventually, everyone begins to understand that no amount of fiat money can replace the loss of value associated with the money. At that point everyone suddenly gets a mind, they suddenly come to a realization about just how much of a fraud they have been victimized by over the years and they are no longer willing to play the game.

This great psychological event, as I said, always happens suddenly, so fast in fact that the government must respond by revaluing each monetary unit, seeking to exchange old fiat money with lower denominations with new fiat money complete with ever-increasing numbers of zeros on its face. The system, along with the central bank and government, is effectively destroyed. It is all crippled, stripped of its power to enforce not only legal tender laws, but all laws. The government is effectively neutralized by a hyperinflationary event and the fiat monetary system is dealt a final death blow from which it simply cannot recover because it cannot regain the confidence of either the people or the market.

A deflationary depression can be devastating to a country with massive layoffs, bankruptcies, defaults and business closures, but the money is never destroyed through deflation, that is not the case with hyperinflation. Deflationary will prolong the fiat monetary system, almost cleaning the system of excesses but hyperinflation will absolutely destroy everything that is even remotely associated with the currency. A deflationary depression will simply allow the Federal Reserve to continue its fiat shenanigans; hyperinflation will destroy the Federal Reserve, the fractional reserve banking system and the political machine that supports its criminal activity.

We have already been told, time and again, that the Federal Reserve will not allow a long deep deflationary event to occur; the other side of that coin is that their options will include, as we are now seeing, a drastic inflationary push of fiat economic instruments. Remember, our Dollar has already been debased by 97% or more, it will not take much to tip the scale of inflation where the people’s psychology is triggered and they cease any demand for the massive amounts of fiat money coming into the system.


Anonymous said...

Brilliant insight, dear FOFOA !!!

The "hidden hand" has internationalized (!) the organized World-Crisis for the $-system/regime to remain in control of the major leverage-handells.

Is it the Kissinger NWO who says what one's wealth is or isn't !?

The deeper (broader) the organized deflations are being installed,...the more hyperinflations are needed. And in the whole process, the $-regime wants to remain in the epicenter of the coming global re-organization of the IMFSystem.

A complete artificial globalizing world with one unilateralist $-dominator.

The main problem for the $-regime remains WHO will benefit from the massive global devaluations against gold.
That's why the ECB's freegold wealth concept and the goldreserve-redistributions of the past decade are a stumbling bloc for the $-regime.

Anonymous said...


Thanks for that link on the psychological trigger of hyperinflation. That's how I feel as well. What I meant above was that hyperinflation is primarily a psychological phenomenon. Obviously, the monetary policies before and after its onset play a role too. Ordinary inflation, however, is primarily a monetary event, although it could be argued that psychology is involved there too, the psychology of denial. People refuse to get upset that their money is being slowly, quietly debased. It's like a small tax that they sometimes notice, but tolerate.

I wonder what would happen if, when hyperinflation begins to take off, instead of pumping up the money supply to keep up, the central bank did nothing. Clearly, central bank money creation fuels hyperinflation once it begins, so it would seem that a cessation of money creation would quell hyperinflation. There might be some initial chaos after hyperinflation is so abruptly extinguished, such as shortages of things, but it seems that once people recognized that the money was no longer being debased stability might return.


Ender said...

“If you bought your house for $300K in 2007, and this damn deflation has taken it's value down to $200K, and then the fiat moneys of the world devalue by 90% against gold, the very next day your house would be worth …”

Assuming each nugget trades for 1k, your house that commanded 300 nuggets in 2007 but ‘deflated’ to 200 by today would, tomorrow, after devaluing against gold, only command 20.

You see, the price of houses is a function of the cost of currency + gross income – it is not related to gold. The time proven rule is that someone can afford a house priced at 3 times their gross yearly income. Thus, someone making 100k currency each year should be able to afford the loan needed to buy his house today and pay it off over time. With this in mind, if you’re making 100k (yearly) today and the currency/gold relationship changes by 90% overnight, the 10 percent that a saver puts away every year in the form of 10 nuggets suddenly becomes 1 nugget.

If these observations hold, the revaluing of gold upwards devalues human labor.

“So why no price hyperinflation yet? That's because the rest of the world has been soaking up our hyperinflated currency through the trade deficit.”

I don’t quite see it this way. Yet, I still may not fully understand what you’re trying to say here. It is my view that the banks can borrow and loan trillions of dollars amongst themselves, but as long as those dollars are absorbed by ‘paper plays’ they will exist and die in a realm of the financial system that is independent of the real economy.

My observations lead me to believe that the fed will loan dollars to institutions only if those dollars will NOT make it into the real functioning economy. In other words, the dollars will exist to cover paper loses. They will exist long enough to maintain the status quo. It’s only when dollars make it into the hands of individuals that those dollars will chase goods and services. Thus, the fed loans trillions – and we don’t see price inflation.

Bankers around the world are wise enough to know that there is a significant difference between a dollar that chases a paper play verses a dollar that chases real goods and services.

Ultimately, IMHO, this game will continue as long as people, real people, value paper plays above real assets. Governments and bankers will always try to convince real people that paper plays are the place to be. They have a vested interest in doing so. Yet, the reality of the situation is that if people were to wise up and start holding gold, the tide would turn giving the future productivity of people back to the people rather then to the bankers of the world. At that point, the balance of power is in the hands of the freemen (people) of the world.

Likewise, no banker or government in the world will freely revalue gold higher. Gold stands in opposition to their power. Gold will be revalued as people turn to gold. This action will show it’s value. Until people turn to gold, the paper dragon will continue to roar.

FOFOA said...

Thank you for your comment.

Ender: My observations lead me to believe that the fed will loan dollars to institutions only if those dollars will NOT make it into the real functioning economy. In other words, the dollars will exist to cover paper loses.

Here is my thinking on the flow of credit money and real money which chases goods and services. Think about the housing bubble. Someone buys a brand new house in late 2006 for $1million. This price has been inflated, and the house should probably only be worth $500K. But the bank makes the loan for $800K, and a check (including the down payment) is delivered to the builder. That builder now has $1million. True, the builder has earned a lot of that through human productivity, but then there is the bubble portion, let's say $500K. That is now real money and that builder is going to buy himself a new Hummer for $100K. And now the Hummer salesman is going to buy his girlfriend a $30K engagement ring. And the pawn shop owner that sold the ring is going to remodel a bathroom, and so on. That credit money the bank created with a click of the mouse is now out in the economy bidding up prices.

Now think about China's surplus. China produces a net amount more than us. So once all the trade is cleared, Chinese exporters have more US Dollars and we have more plastic Christmas Trees. Those Chinese Christmas Tree exporters then go to their local banks and exchange the dollars for local currency. Then the banks sell the dollars to the Chinese central bank which uses them to buy Treasuries. So the excess reserves that the Chinese hold in USTreasury bonds are actually the result of their trade surplus. It truly is the soaking up of our hyperinflated currency.

Now let's go back to the house from above. Let's say the house value deflates to $500K and the buyer defaults on the mortgage. The bank has just lost $500K. But the original money it created from thin air has already entered the economy. The only difference now is that the inflated assets have lost value. Real money wasn't lost. Imaginary money was lost. The bank is still on the hook for that imaginary money it created.

Let's say someone get's bailed out here. Now the bank is made whole, and it can zero out that imaginary $800K which was created from thin air. So what is the difference here from if the home owner paid off the loan early? Once that loan is written off, the original imaginary money disappears. But the check that the home builder cashed still made it into the economy.

I may be starting to confuse myself here a little, but my point is that when imaginary money is used to pay a debt, it enters the economy. That $800K was created from thin air, yet the home builder could cash the whole $1million and put it in a metal brief case if he wanted. And the deflating of the home asset does nothing to take that million out of circulation.

Banks that are getting imaginary money right now to cover debts are using that money to pay the debts. And the creditors can likewise cash the check. It is true that this is a big check kiting scheme, and someone will ultimately lose. But when I see imaginary wealth, (inflated valuations) being bailed out with money that becomes real spendable cash, it sure seems inflationary to me. I can see that an argument could be made that the circular motion of this money, out from the Fed and ultimately back to the Fed would keep it from entering the economy. But I don't think that will happen in reality. Either banks will die before that money is paid back to the Fed or the flow will just continue on until the currency collapses. Either way it has entered the economy.

Please help me if I am wrong here.

As for your statement, "Assuming each nugget trades for 1k, your house that commanded 300 nuggets in 2007 but ‘deflated’ to 200 by today would, tomorrow, after devaluing against gold, only command 20."

I must give this some thought. It is interesting that the price of $1.8million FRN's equates to 20 nuggets at a $90K valuation. I must wrap my head around the order of magnitude I am missing. Can you help me with this?


FOFOA said...


Regarding this: "Assuming each nugget trades for 1k, your house that commanded 300 nuggets in 2007 but ‘deflated’ to 200 by today would, tomorrow, after devaluing against gold, only command 20."

Are you saying that if the dollar was devalued against gold that the house value would remain at $200K in new, lower FRN's?

I can see how the value of existing mortgages would follow the dollar down. And also paper assets denominated in dollars. In other words, creditors get screwed. But a house is a real thing. It is, in essence, a commodity. I should retain it's previous valuation against real money, no? Or at least move to somewhere in the middle, like other commodities would.

The very purpose of the devaluation is to screw the creditors and help the debtors.

Gold is merely the benchmark, a representative of real things versus paper things.

Help me here.


FOFOA said...

How Deflation Creates Hyperinflation
By Eric deCarbonnel

FOFOA said...

Great article by James Grant in the Wall St. Journal

Some excerpts:

Since Labor Day, the Fed's assets have zoomed to $2.31 trillion from $905.7 billion. And what is the significance of this stunning rate of asset growth? Simply this: The Fed pays for its assets with freshly made dollars. It conjures them into existence on a computer; "printing" is a figure of speech.


"Creditors of central banks...are at no risk of a loss because the central bank can always create additional currency to meet any obligation denominated in that currency," he soothingly reminded his listeners.

Yes, today's policy makers allow, there are risks to "creating" a trillion or so of new currency every few months, but that is tomorrow's worry. On today's agenda is a deflationary abyss. Frostbite victims tend not to dwell on the summertime perils of heatstroke.


The credit troubles took the Fed unawares. So, likely, will the outbreak of the next inflation. Already the stars are aligned for a doozy.

Ender said...

Maybe it would be easier to think of this way. Today, if your house is worth 200k dollars it might also be worth 20k lbs coffee. If tomorrow you wake up to find that coffee is 10 times more expensive, your house would only be worth 2k lbs coffee, yet still worth 200k dollars. Your house has nothing to do with the price of coffee.

In this case, coffee is just as real as gold and just as disconnected from the price of the house.

Also note in this situation, FRNs have been devalued against coffee. Before and after the ‘revaluation’ of coffee, we still have the same old dollars.

FOFOA said...

But if coffee becomes 10 times more expensive, then surely other real things do as well. Like 25lb. bags of rice. Did coffee get more expensive because of the devaluation (against coffee)? Or did the dollar get cheaper?

Surely a house has more intrinsic value than paper with special printing on it. It then follows that it's worth is attached to something other than what mere paper says.

Now there is a separate issue. Totally separate. If coffee has been undervalued for many years because the Coffee Cartel has been manipulating the price down, well then what does that do? Does an intentional devaluation of fiat currency against a suppressed commodity exclude all other commodities?

Can you truly devalue a currency against only one thing? Or are you really devaluing it against all things?

Ender said...

General price inflation and dollar devaluation are two sides of the same coin. Likewise, if the general price of things declines, the dollar gains value.

So to fit with your article, if we have general inflation or deflation the dollar will gain or lose value. This happens in a general sense against all things. If it turns out that we have a government that willingly prints 90% more currency (dollars) and puts it into circulation, we should see a huge drop in value in the dollar. (90%? Maybe, who knows it may have more strength then that.) Now, if the humans handling the currency (which is not new because it’s been around for many, many years) continue to use it like they have, most everything will go up in price a relative amount. Gold would be no exception to this. Neither would houses.

So now, looking specifically at how I interpreted your house statement “This would literally be like overnight hyperinflation. If you bought your house for $300K in 2007, and this damn deflation has taken its value down to $200K, and then the fiat moneys of the world devalue by 90% against gold, the very next day your house would be worth $2million.” Here, I’m getting a little confused. Hyperinflation means an extremely rapid increase in the amount of currency that is reflected in a painfully sharp rise in the rate of price inflation on ALL things. Thus, if we enter a hyperinflationary period, sure, the house would rapidly increase in price. (It’s value would still remain relatively constant.)

But, when you say “devalue by 90% against gold” you are not talking about inflation in the general sense. You’ve singled out a specific item. If you’d said “devalue by 90% against other fiat currencies” then it would be equal to saying ‘in the general sense’.

Singling out gold as a measurement against the dollar means you’re talking about revaluation of gold. Not inflation of deflation. So, again, if your house is worth 300k yesterday and today it’s worth 200k (because general deflation of house prices is in action) and tomorrow you wake up to find gold is revalued 10 times, your house will still be worth 200k and gold will be 10 times more expensive to purchase.

Sure, in a hyperinflationary environment the ‘price of gold’ will skyrocket, yet, so will everything else.

The one thing that’s different is that in a hyperinflationary environment people’s perceptions with regards to what is TRULY valuable shift from promises to pay to payment in full.

This brings us back to Freegold. This concept is 100% built upon the perceptions of man. If man values gold over paper we will have freegold today. If man values paper over gold, we will have more of what we currently have. No government will willingly give mankind Freegold. Yet, some banking systems are designed to function in both environments.

Anyway, enjoy your writings. Thanks for taking the time…

FOFOA said...


Likewise, I enjoy reading your thoughts. You make me think in new directions.

Part of my thesis in the post above is that much of the confusion on this topic is semantic in nature. After thinking about your last comment, I think we need to differentiate between hyperinflation and Freegold. I think they are two separate things, and I think we will probably get both.

As for hyperinflation, I define it as the value of paper dollars falling rapidly or gapping down, one way or another, against all things. I think this can come in any number of ways, one way being the intentional devaluation of the dollar by the government/Fed. This would be done to facilitate a transfer of wealth from creditors to debtors. And only the most elite of the creditors would be protected by secret deals.

This transfer of wealth/debt-forgiveness can only work if the devaluation is against all things. That they would devalue against gold makes no difference in my mind. It is a proxy for all real things since it is no longer tied to money, but instead floats in price. This devaluation does not require additional printing in my mind. It could be done on a bid for gold basis, and the rest would flow from that. I think there are other ways it could be done as well.

This is different from Freegold. As you say, Freegold must flow from the will of man, not from government decree. But I think if the dollar were devalued, it would certainly jumpstart Freegold.

If just Freegold came tomorrow, yes, your house would still be worth $200K FRN's, but you could now buy it for say 4 nuggets. In Hyperinflation, your house would be worth $2million. But with hyperinflation AND Freegold, you could still by that house for 4 nuggets. (And because we have "deflation", your house would soon be worth only 3 nuggets, then 2 nuggets).

My point in the post is that devaluation and/or currency collapse are essentially the same thing as hyperinflation. This is not your father's inflation we are talking about. It is not a linear progression.



FOFOA said...

New Jim Willie:

"The year 2009 by yearend should be marred by very big inflation outbursts in price structures, enough to silence the wrong-footed deflation theory guys.
To begin with, the US so-called ‘Deflation Experience’ is not deflation at all. Sure, many investments are losing value fast. Sure, much credit is being burned, with heavy write-downs. But new money is coming into the system from the corrupt bond swaps, historically unprecedented rescues, bailouts, and nationalizations..."

FOFOA said...

Bob Moriarty: "guaranteed hyperinflation"

...we are about 14 feet from going over the edge of Niagara Falls. We haven’t gone over the edge yet; we haven't gone to a total collapse... that’s about two to three months off.
What we have done is guaranteed hyperinflation in the United States. We have guaranteed the destruction of the United States. We will have riots starting in the first quarter of next year; we will default by the summer of 2009.
The United States government will not exist in its current form a year from now.
Hyperinflation is starting to kick in now. I think you're going to see it turn shortly. The government has been flooding the system with money and in short order it’s going to try to find a safe haven. Here’s what to look for. If you take a look at a chart right now, the 10-year, 30-year bonds have gone curve linear. They're going straight up to the moon. Any time a market does that, it’s about to crash. When the bond market crashes, it’s going to be 15 on the Richter scale. It’s going to be enormous. It’s far more dangerous than the stock market crashing. When the bond market crashes, the hyperinflation starts.

Anonymous said...

ANOTHER Date: Sat Feb 14 1998 21:32

"In the past, nations and states have lost all as " the world changed" and these entities lost the ability to trade, at a profit. It is as history, and happened many times. Today, it is not the same. The "wealth of nations" are held as "thoughts of value" not real value! And even these thoughts are "in debt" as they are owed to other nations. As it has always been, time moves the minds of people to change, and with this, the thoughts of value also change. In this day, as not in the past, the loss of paper value as a concept will destroy the very foundation of wealth that this economic system is built on. This drama has started and is well underway!

There are nations that will try to "resource a new currency" as the old financial system implodes. Oil or gold or both may be used. If it is done at the correct time, much will be gained by all! Fail this Attempt, and gold will never trade on an open exchange again, in our lifetime! We will see this end in our time".

Reading the reply's here seems we are approaching day by day...


FOFOA said...


It sure does feel like we are approaching big change. It has felt like that for more than a year now. Yet as I look back, I can certainly distinguish between the signs I saw then and the signs I see now. And right now it seems so much closer. Even by a dispassionate analysis.

So, do things always move at a snails pace? Or do the biggest changes come as fast as lightning, unexpected from miles away, out of a clear blue sky?

I keep thinking back to my post of October 31, A Season of Change. Then I felt like the leading edge of a hurricane had just passed, and we currently sat lulled in the eye. I think we are still in that eye, but not for much longer.


FOFOA said...

The Prudent Squirrel sent out this video for those who need a break from the scary world of economics. Warning: It's not for the faint of heart.

Anonymous said...


Nice comparing economics with that scary trail.
How fortunate are we, with the trailguide from ANOTHER & FOA on the economic trail.... ;-)

I agree with you on the evolution of the drama, seems to take more time. I personaly think it is will end like a fractal where Mandelbroth was talking aboud a "sudden stop" like playing flipper and pushed the machine to hard result "TILT" or Game over.

Just another interesting sign around the corner:


FOFOA said...

Hi Shanti,

Yeah, I just read Denninger's piece a little while ago. I think his take is that this velocity problem will assure deflation and depression. But it is clear that Bernanke will do the wrong thing. And I still say we have bigger problems than deflation coming.

As for the evolution of the drama, another way to think about it is a "phase transition". As in, when ice turns to water and then water turns to steam. While raising the temperature things seem to be moving in a steady, linear way. Then out of the blue the medium you are working with completely changes form. This is preprogrammed in nature and we know it's coming in the case of water.

But Bernanke and friends are in new territory right now. Nature may have some "phase transitions" in store for them. (FreeGold?)

Source of this analogy


FOFOA said...

"As broad money growth accelerates, inflation will increase. When heavy dollar selling… leads to dumping of dollar-based assets held by foreign investors, the Fed will… have to monetize accelerating Treasury debt….I am moving ahead in time the possible onset of hyperinflation into 2009."
- John Williams

Anonymous said...

Happy & Healthy New Year FOFOA !

Bringing on the Denninger epilog was just meant as another sign, not that i'am hanging on the deflation ideas who are dwarfing on the net, far from that.

Phase transition sounds revolutionair in economics, a kind of out of the box thinking.
I need more time to think on that of a sollution.

For now my thoughts are that many economic fundamentals today are based on linear thinking and are prologued to gain some extra time. While the base of thinking should be cyclistic, the approache of Kondratieff comes close here as to my humble opinion. Just like the symbol of Ying Yang but rather out of balance just like this;


FOFOA said...

Wikipedia article on that scary hiking trail

FOFOA said...

New Jim Willie on inflation vs. deflation.

[Rick] Ackerman states steadily in his work that the money supply is flat to down. Ackerman also points out that money velocity has slowed considerably. He relies upon these two pillars to make his argument for deflation as the prevailing phenomenon, pointing to prices fallen in a broad sense. Pardon my very succinct summary. It is not for me to cite his work in full. My motive is to cite a position that is gaining popularity, wrong-footed in my view. In his private work, he takes exception to being called a ‘Wrong-Footed Deflationist' in response to my recent article in late December. He claims our differences are semantics, to which another disagreement comes.

Three big phenomena on my radar must be identified in order to present the titanic struggle accurately. The second cited item exposes the primary flaw in the deflationist argument concerning the monetary aggregate. The third item exposes a paradoxical flaw since it centers upon gold itself. My role is not to take umbrage, but rather to engage the debate. Mike Shedlock also has too narrow a view of events, and regards deflation as having taken victory laps. He too makes improper interpretations, since too focused on the tangible real economy, without valid incorporation of unorthodox financial data. The analysis of monetary matters, such as inflation versus deflation, must take into account the ‘Double Booking Economics' very carefully. See the Shadow Banking System, and bring them into the analysis. CONCEPTS LIKE MONEY VELOCITY MUST ADAPT OR BECOME IRRELEVANT. Many monetary tectonic shifts have occurred, which must alter the analysis.

First is the reduction of money flow within the private sector, as a result of sharp reduction in credit creation in packaged loans. This applies to the sector outside Wall Street and the satellite markets upon which they exert their criminal fraudulent influence. No dispute here, since evidence abounds on reduced bank credit to both households and businesses. The loss of home equity, like $6 trillion in two years, has led to a truly mind boggling reduction of collateral to extract spendable money. The loss of stock valuation has also removed a key source from which to extract cash. The entire Cash Mgmt Bill activity has worked to neutralize the flood of US Fed Lending Facility activity for the benefit of New York firms. The public seems totally unaware of the huge drainage.

Second is the staggering explosive growth in the credit derivative market since the mid-1990 decade. In just the last few years, the growth of credit derivatives, traded over the counter, has been enormous. This is widely recognized. The annual growth levels lie in the 40% to 60% annual range. How can the deflationists ignore this? THIS IS MONEY IN FLOW, NOT COUNTED BY DEFLATIONISTS IN MONEY SUPPLY DATA. It is an important blind spot of theirs! Do they not call it money when gigantic swaths in the billions are traded, and enter the bank systems via the back door, recorded off balance sheet (read: double booking), but used in the flow of operations? Dr Banker claims the entire US banking system has depended vitally upon such flow of funds in order to conduct a decade of bank operations! Furthermore, the credit derivatives contracts represent a perverse cancer of money itself. Cancer must be accounted for. Does a sick man weigh less officially, after discounting the cancer tissue? No!

Third is the continuing powerful upward thrust in the open interest and trading activity of gold & silver futures contracts. During the summer and autumn of 2008, the gold & silver phony paper prices declined by 25% and 50% respectively. Price movements were dominated by heavy futures contract activity by the elite Wall Street firms. See JPMorgan, which registered a 50% rise in their short positions. THIS IS MONEY FLOW, NOT COUNTED BY DEFLATIONISTS IN MONEY SUPPLY DATA. It is an important blind spot of theirs! Do they not call gold money? What irony! They argue the merits of a gold-based system. They decry the corrupt monetary base in a debt foundation. Yet they fail to recognize gold trading hands in mammoth transactions, not acknowledged as money flow. In fact, the trading of gold is 10 times in turnover per ounce of gold (see LBMA data), generating fees, and forcing tax payments. Its commerce is undeniable. Movement of metal to and from vaults is evidence of money flow.


The picture presented in the gold chart does not confirm the deflation thesis. If deflation were a powerful new force, then the resistance at 700 to 730 would not have held ground. In fact, the gold price has fluctuated around the mid-level profit taking zone between 790 and 830, set in late 2007. The deflationists observe a broad liquidation of hedge funds, of speculative positions, in an environment of tighter credit and profound bank system distress, and conclude a deflation event, in total confusion. They must explain why the gold price has not returned to the 2004 price, like crude oil has! We are seeing mammoth monetary inflation amidst mammoth assaults in commodity prices, enforced by mammoth assaults on private accounts (hedge funds), during a period of mammoth credit restriction. THAT AINT DEFLATION. Notice how the gold price has risen precisely when industry collapse has hit the newswires in the last few weeks. See the retail and car industries. If deflation were in the driver's seat, gold would be closer to 700 than 900, and technicals would be showing bearish signals, not bullish.

Meanwhile, the buck is stuck in the middle of nowhere. The US Economy stinks on ice, having entered a zone better described as disintegration, with numerous sectors hoping to avert actual collapse. The banking system stinks on ice, unsure of its solvency, hoping it can resort to sanctioned fraudulent accounting in order to continue zombie lending operations. The newest bubble on the endless highway of US bubbles is the US Treasury Bond itself. It is inconceivable that foreigners will be willing to pay top prices for bonds yielding nearly 0% anchored to a US Dollar grossly overvalued.

The US Dollar will offer very little to prevent the gold price from moving higher, step by step, as the switch is turned on by the Elite in Power. The clutch is soon to be released. Traction from the monetary inflation engine will result in long ugly black rubber tire patches. Gold will respond to the switch turned on. Then the deflationists will be silent, and their wrong-footed analysis will be forgotten.

Anonymous said...

If you believe what you're saying why are you selling gold?

FOFOA said...

I don't understand your question. I am not selling my personal gold and I am not selling anyone elses either. I have no ads on my blog. I only offer my observations and thoughts as a free service to anyone who wants to read them.

Jeff said...

FOFOA, do you still stand by your hyperinflation timeline? 24 months would be the end of 2010.

FOFOA said...

Hello Jeff,

In my opinion you ask the wrong question. Are you one of those that think ANOTHER and FOA "got it wrong"? To view the world properly is to view it probabilistically. A probabilistic prediction can be 100% correct and appear not to come true. And a probabilistic prediction is only applicable at the time it is made. As more time passes probabilities are always adjusted because unknowns become knowns.

I believe ANOTHER and FOA were 100% correct. It is still playing out so there are still a few unknowns.

In answer to your question, it is still possible that 2008 prediction will prove to be prophetic. Hyperinflation does not require a long run-up. It occurs fast when it happens. Within a couple weeks it can become full-blown. Also, it is most unexpected right before it happens. See the "head fakes" at the end of Shake the Disease. Would I state today that there is a 95% probability of hyperinflation in the next five months? Is this your question? No offense, but it is a dumb question.


DP said...

So, here we are: beyond the end of 2010, and the 24 months "prediction".

I wasn't around for this post and its comments, let alone the one forecasting 24 months a couple of years ago. But I am here to see that since this post some more unknowns have become a little more known, some announcements have now been pre-announced by TPTB, and I still have every confidence things are going to unfold very much along the lines advertised here. Albeit perhaps not on the timeline posited earlier. For my part, I think it is impossible for anyone to accurately forecast when any of this stuff is going to happen, and it's unrealistic for anyone to expect that. It's going to be put off as long as it can be, and that's the top and tail of it. I can see signs suggesting to me the middle of 2011, or in 2012, 2016, and "a long way off yet, perhaps longer than I can survive through".

Not being able to say when it is going to happen doesn't make me think the trail is a crock of shit. It does, however, make me think I should be prepared as best I can on my meagre resources and my limited ability to persuade those close to me, as quickly as possible. Get there early and make sure we've got a seat.

Once again I say thanks for what you're doing here, FOFOA. I can't realistically help you financially myself, since my circumstances don't seem to be so very dissimilar to yours at the moment. I try to give something back via the comments - I just hope that they're not counterproductive in this respect and I would be better to shut the F up! :-D One can but try though.


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