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Inflation, Hyperinflation or Deflation?

By Rick Ackerman Posted on July 26, 2013, 12:01 am EDT Last Updated September 9, 2014, 7:36 am EDT

Rick’s Picks inaugurates a new format today that will give forum participants a larger role in shaping the discussion.  Instead of the usual essay, I will be posing a question that concerns a key issue of the day. Today’s relates to a theme that has been sounded here many times over the years:

Which do you foresee:  inflation, hyperinflation or deflation?

To get the discussion rolling, here’s a post of mine at Mises.org in response to a thoughtful essay by Ed Bugos. In the essay, Bugos, a mining analyst and senior analyst at The Dollar Vigilante, asserts that although CPI has been tame, inflation is very much with us and will soon take off in a big way. My comments were as follows:

“Mr. Bugos and other inflationists (although not the hyperinflationists, who may yet have their day) envision inflation returning more or less gradually.  But suppose a global flash crash were to occur, triggered by some black-swan event? In such circumstances, the financial system would implode overnight, banks would be shuttered indefinitely, credit cards would cease to ‘work’, and the economy would revert to barter/cash. Such an outcome would be catastrophically deflationary.

“Try to imagine an inflationary ‘remedy’ and you see that there are none — certainly not the one used by the German government in 1921-23, since that required tight collusion between the government and a largely unionized labor force.

“Nor can it be argued that a flash crash and financial-system implosion are impossible.  Indeed, this outcome seems entirely likely, if not to say inevitable, since the global financial system is hard-wired to a $650 trillion derivatives edifice that has been built on ethereal collateral.”

Your further comments are welcome.

  • wesmouch August 15, 2013, 11:21 pm

    David Ranson of Wainwright Economics has determined that a 15% gold position immunizes a portfolio from hyperinflation. Then we also have to think about confisctaion, counetrparty risk, etc. The Permanent Portfolio of Browne would have done well during the 1966-1980 mess, the Great Depression and has done all right since 2000. The key is not to bet too heavily on one outcome. The future to me looks bright. Any surviving capital will likely participate in the greatest buying opportunity of several generations

  • wesmouch August 15, 2013, 11:17 pm

    I have no idea which will occur. Therefore I design my portfolio to deal with both. Remember that in addition to gold, small cap value stocks do well with inflation.

  • eddy August 7, 2013, 8:03 pm

    rick always falls back to every debt must be paid either by the lender or the borrower and so calls for deflation. how is that possible when the lender lent money he did not have and the insurer covered default with almost zero backing ? so they cannot pay . can they throw all the borrowers into the street and repossess ? I guess they can but governments like the easy way out . to me the only easy way out seems big inflation or a much higher gold price to cover the debt money or both .

    &&&&&&

    You need to think on this just a little but harder, Eddy, since there is no counterargument to the assertion that either the borrower or the lender, or some combination of the two, must pay. There is simply no walking away from our collective debts. RA

  • Jeff July 31, 2013, 10:52 pm

    Hyperinflation can arise a from a multitude of scenarios, but ultimately in every case it comes to an “accidental” and out of control positive feedback loop resulting from government directed central bank printing to fund giant spending gaps. Basically, the less people want the bonds, the more printing will be needed and the less people will want bonds.

  • wayne siggard July 31, 2013, 3:53 am

    Inflation comes when there is more money chasing the same amount of goods. There is inflation, but only in the stock market. I didn’t get a couple billion dollars to inflate the stock market and bond market for the purpose of Obamaite spin, did you? Housing is also starting to inflate into a bubble again with flippers, ZIRP, and big blocks of houses sold to Wall Street, leaving out the little guy.
    20% of the entire Phoenix housing is owned by investors (AZcentral.com/business/realestatearticles). Did we really forget that soon? What happens when the hedge funds all reach their 5-year sell mark at the same time?
    According to Zerohedge the big investors are unloading their stocks; retail investors are buying; margin is at its highest level since Lehman.
    Japan’s industrial production fell most since 2011, yet the jobless rate was 3.9%, the lowest since 2008. This will not stand. Workers will have to be laid off (Marketwatch). European jobless rate is at a record high (Bloomberg). American youth unemployment is at a dangerous level. The level of employment is at its lowest level ever because phony disability claimants and people who have just quit looking for work. What is the real unemployment rate? Bad.
    China is now starting a massive QE program. They are going to invest massive amounts of money into railroads which cannot even cover their operating costs, let alone the interest on bonds which were issued to build them.
    Bottom line? The Fed has been trying for 5 years to inflate the economy with ZIRP and stimulus. Its effect is limited to malinvestments, the stock market (is anything really produced by the increase in stock prices without an underlying increase in productions and earnings?), and repeating the same policies that created the housing bubble. Citizens are losing income and net worth at an incredible rate while taxes are rising. When workers have no money to spend, how can there be any real inflation?
    The stock market will plummet, and either retail investors will see their savings disappear, or Wall Street will take a huge loss, or the government will bail out the banks and socialize the speculative losses. This can lead to only one result- deflation. Real demand keeps decreasing. When debt service interest rates increase, trillions of dollars previously available for other purposes will disappear.
    Barter will surely return. Have a house paid for with your own water and electrical supply and a garden. It doesn’t matter what type of monetary system prevails; a house, some stocks, gold and silver, and other real estate (unleveraged) will have a useful value if other assets are denominated in a similarly valued currency.

  • rickj July 30, 2013, 3:21 am

    About today’s statistical gdp numbers, complete with the latest aberration, the inclusion of R&D………..
    So, given that the Chinese, or American off-shore owned entities making things in China, will copy any invention with impunity and Americans will buy the stuff, in part with transfer payments of freshly minted debt money which someone purports to believe will be repaid at some future date…how is it that we should include this in gdp. (I realize it would only have to be some other story if we refuse to swallow this one)

  • Gary July 29, 2013, 6:19 am

    “The Jerry Lance” commentary is Superb,

  • Buster July 29, 2013, 3:54 am

    Whether by inflation, deflation or both in combination, it matters not.

    I lament that each & every day, all over this tortured globe ‘they’re’ mopping up, whilst the Sheeple bicker between themselves over irrelevancies. Make no mistake, somewhere our neighbours are being thrown out on the streets to cover the imaginary debts of a debt based monetary system that are impossible to pay, whether it be in the next town, state or country. That is the guarantee of this ‘unfit for purpose’ Banksters dream come true, world system of private debt. Somebody has to pay the Piper, & now he demands more debt to be paid than can be borrowed into existence quick enough by the Sheeple, even if they were allowed access to it, which they are not. The ZIRP QE goes straight to the members of the club, unfortunately, so that doesn’t count toward lessening the burden, but instead is most, & very ‘inconveniently’ channelled into making the cost of necessities still higher just when the shortage of money should be driving them down.
    The rest of the Sheeple not yet caught in the trap only care to grab a share of the spoils if they can, or just stave off their own bleeding a little longer.
    I’m sure it’s all just a really inconvenient chance that we are all so screwed,…..since wiser heads inform me that there’s really no conspiracy in what’s progressing….

    THE BANKERS MANIFESTO

    Congressman Charles A. Lindbergh, Sr. revealed the Bankers Manifesto of 1892 to the U.S. Congress somewhere between 1907 and 1917. The source was an article written by Louis Even and published in United States Bankers Magazine 1892.

    “We (the bankers) must proceed with caution and guard every move made, for the lower order of people are already showing signs of restless commotion. Prudence will therefore show a policy of apparently yielding to the popular will until our plans are so far consummated that we can declare our designs without fear of any organized resistance.

    Organizations in the United States should be carefully watched by our trusted men, and we must take immediate steps to control these organizations in our interest or disrupt them.

    At the coming Omaha convention to be held July 4, 1892, our men must attend and direct its movement or else there will be set on foot such antagonism to our designs as may require force to overcome.

    This at the present time would be premature. We are not yet ready for such a crisis. Capital must protect itself in every possible manner through combination (conspiracy) and legislation.

    The courts must be called to our aid, debts must be collected, bonds and mortgages foreclosed as rapidly as possible.

    When, through the process of law, the common people have lost their homes, they will be more tractable and easily governed through the influence of the strong arm of the government applied to a central power of imperial wealth under the control of the leading financiers.

    People without homes will not quarrel with their leaders. History repeats itself in regular cycles. This truth is well known among our principal men who are engaged in forming an imperialism of the world. While they are doing this, the people must be kept in a state of political antagonism.

    The question of tariff reform must be urged through the organization known as the Democratic Party, and the question of protection with the reciprocity must be forced to view through the Republican Party.

    By thus dividing voters, we can get them to expend their energies in fighting over questions of no importance to us, except as teachers to the common herd. Thus, by discrete actions, we can secure all that has been so generously planned and successfully accomplished.”

  • Luke July 29, 2013, 2:32 am

    And I would differ with Egregious’s comment that ulimately it’s all about the debt, which he sees as the largest set of parentheses around the GFC (great financial crisis). That is the more obvious conclusion but not IMO the correct one. The subtler and larger conclusion is that it’s all about affordable energy per unit of economic output. That is what rules GDP, not finance and debt levels. Just ask the Japaneses since Fukushima.

    &&&&&

    A point that Kunstler has made at Clusterf**k — that the U.S. and global economies were not built to function with crude at $90+ per barrel. RA

    • Buster July 29, 2013, 12:55 pm

      It’s all about debt, debt & more debt!
      Everything else is just the dog wagged by the tail of this atrocity.
      Debt is the root of the whole damned rotten tree, & the Sheeple the mere decaying fruit of society it produces, fed it’s poison while starved of the healthy sustenance of honest weights & measures that instil responsible decisions.

      The only thing at this point that is possibly more fundamental than this fact is the question of ‘sovereignty’.

  • Luke July 29, 2013, 2:23 am

    Funny and smart comments from Troll, Jill and Rich about Zerohedge. And yet, it’s a pithy comment fromr. Ackerman as well:

    We are living out Vern Myers’ dictum: that ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender. We see now how both are joined at the hip, although neither economists nor policymakers care to acknowledge just how this is so. Whether acknowledged or not, the price we are all paying is a precipitous decline in the standard of living. America’s middle class can no longer afford things that single-worker households could easily afford in the 1950s. Even less are we able to save.

  • Rich July 28, 2013, 11:21 pm

    MA: “The dollar is setting up to be the only viable currency.”:

    http://armstrongeconomics.com/armstrong_economics_blog/

    The Point & Figure IT target for USD is 103…

  • egregious July 28, 2013, 10:02 am

    For the goldbugs among us, you might want to couple this ZeroHedge article with Xie’s observations regarding the migration of the gold price discovery mechanism eastwards to the physical market. http://www.zerohedge.com/news/2013-07-27/gold-and-endgame-inflationary-deflation

    • Troll July 29, 2013, 12:15 am

      Zerohedge is never wrong . . . unfortunately, they are rarely right. Anyone who has invested their money based on what these guys have to say has lost themselves a ton of money since ZH’s inception, and that is a fact.

    • Jill July 29, 2013, 12:16 am

      Well, they are an ATM machine if you fade them though, LOL.

    • Jill July 29, 2013, 12:18 am

      People call what ZH does “bear porn”– i.e. fantasy pictures of scenarios that the viewer can never get to happen in reality, regardless of how much they may want it to.

    • Troll July 29, 2013, 12:35 am

      Jill, I could not have said it better, myself. Never have I read so many well-written individuals whose greatest success is steering their followers in the wrong direction.

      &&&&&

      Zerohedge is the most important, useful and interesting source of financial information on the planet right now. Go ahead and rely on agitprop from The New York Times, The Washington Post and Wall Street Journal if you’d like. RA

    • Troll July 29, 2013, 4:32 am

      We shouldn’t “rely” on anyone to tell us what to do . . . if your readers want to follow a group that is consistently wrong, so be it.

    • Troll July 29, 2013, 4:51 am

      A qualification to my previous comment: As traders (and many who frequent this site are) ZH has offered us no better information (when it comes to making money) than mainstream media. In fact, I would say, ZH has failed miserably. But they’re an exceptional read while they totally suck at what they do (which I thought was to offer their readers above-average investment advice).

    • Troll July 29, 2013, 5:02 am

      How many of ZH’s followers bought into this in October of 2011

      http://www.zerohedge.com/news/gold-top-2000-central-bank-buying-bloomberg-chart-day

      With that, I end my case. But be assured, there are so many ridiculous ZH calls over the years, one could write a book.

  • egregious July 28, 2013, 6:38 am

    After reading the other comments in this thread and drilling down a bit into my own contribution, I feel the need to expand upon my gloomy forecast. First, my call for imminency is relative; I am not suggesting that a deflationary crisis looms on the morrow, but I feel it is closer and the GFS [Global Financial System] is more precariously vulnerable than at any time in my adult life. I believe the deflationary catalyst will occur in the credit derivatives arena (the largest derivatives exposures with the greatest leverage and duration risk reside there; altho FX derivatives may notionally exceed credit derivatives occasionally, they are significantly shorter duration) and is most likely to occur as a consequence of a counterparty failure/default emanating from the Eurozone, most likely from the French banks SocGen or BNP Paribas. That’s something of an insider’s call. The BIS and global central banks’ self-serving claims of reduced risk in the credit derivatives markets through ‘netting out’ works only until a single counterparty with leveraged exposure (beyond the capabilities of even the Squids Draghis ‘whatever it takes’) defaults and all the fancifully ‘netted out’ claims suddenly become all too real and unfulfillable, leading to a daisy chain of catastrophic failures and bankruptcies. I believe ‘bail ins’ are the global banking communities preparation for this likely event (as they are exhausting government and taxpayer willingness to socialise private losses, so let’s move on to the depositors). The development of the ‘bail in’ regime and its ongoing adoption worldwide is what has led me to the conclusion of ‘imminency’.

    Further to these observations, I think that US dollar’s reserve currency status, the price of gold, Peak Oil (really Peak Cheap Oil), global warming (publically funded alarmist nonsense utterly without scientific foundation) and many other issues with which we concern (and entertain) ourselves daily are trifling. Debt is the issue, credit markets rule, and they will be our undoing. Debt is the overarching macro, and we ignore it at our peril, and deflation will be its handmaiden.
    Finally, and somewhat appropriately to the above, I recommend the following analysis from Andy Xie (formerly Cato to Morgan Stanleys Clousseau-Stephen Roach, now outshining the master in all respects) of Rosetta Stone Advisers http://english.caixin.com/2013-07-23/100559749.html?p2. He publishes at Caixin online twice a month, is always worth the read, and the link above may provide some thoughts for another forum topic. And Rick, thanks for providing this much-appreciated vehicle for lively discourse.

  • Cam Fitzgerald July 26, 2013, 11:33 pm

    A combination of three developing and related events will now conspire together to form the construct of the deflationary conclusion to many decades of so-called growth. Time has run out. We cannot inflate away these troubles anymore.

    1) Municipalities will continue to fail (and are failing) under unsustainable debt burdens and will be unable to meet past pension obligations in a host of major and minor US cities. No need to even mention the added issue of an inevitable muni collapse on continued bad news nor the higher rates that will be demanded in the future but I said it anyway.

    2) The federal government is so deeply indebted that it is easy to conclude they will also be unable to meet past promises made to ordinary citizens where pensions are concerned nor to past Federal employees without substantially altering the terms of retiree disbursements. The alternative is much higher levels of taxation of course. That will be a vote getter (!). Expect lower payouts in the future, higher ages of retirement and the elimination of pensions altogether for select income groups.

    3) The vast majority of private pension funds now under active management are tied up in a combination of bonds (municipals, treasuries, junk etc) or a vastly overvalued stock market at a time when both interest rates threaten to bring a withering loss to fixed income and the equity markets are looking unstable and precarious. An equities rout will waste what remains of funding that retirees have banked upon to sustain them in old age at exactly the moment they need it. It might not seem such a foreign idea that in the event of a private pension collapse where the government becomes saddled with the burden of closing the income gap lost to unstable markets that holders will have no option but to turn over their surviving assets in exchange for secure Federal benefits.

    In a secular period of low or even negative growth these three scenarios all lead to a single conclusion. Pensions are at risk across the board and the millions of baby Boomers set to retire during this time will face an economic extinction threat unless they liquidate other assets.

    It should therefore be clear that falling wealth, savings in decline as a result of municipal, state and Federal rebalancing and damages wrought by an inevitable stock bust will bring about a second reckoning in real estate and related assets.

    There is no question whatsoever about the deflationary impacts this would have on the consumer economy as panic stricken retirees buckle under and hoard cash for the future in a vain effort to preserve what might remain of their financial core. That does not bode well for those holding out for a burst of inflation pressures as past consumption will be consumed before new consumption will begin in that environment.

    They say there is a price to be paid for living beyond ones means. For the Boomers who enjoyed the best of the bubbles in one of the longest stretches of continuous growth in modern times and still did not save for the hard times this will be instructive.

    Between demographic forces of an aging population, high public and private debt levels that will resolve slowly (if crisis can be averted), weak employment numbers for youth and a global economy that looks flat to dismal for many years to come there cannot be anything other than a deflationary reckoning of a tall order.

    The bull market in commodities is over and gold is almost certainly finished as an inflation hedge in most of the developed world. Even a dramatic currency revaluation would leave some public debts unrepayable and balance sheets impaired for many years while bringing a substantial cost to living standards for the typical citizen. Those standards are already declining. How much worse when the real squeeze arrives?

  • mario cavolo July 26, 2013, 5:02 pm

    Hi All,

    A great thread to read and learn.

    We surely won’t know if the central banks of the world are successful in their united plan to thwart disaster until after the fact. And that’s an ugly thought because as we all know “after the fact” of a sudden black swan event as Rick often points out will be disastrous. Furthermore, as the world’s economies today are now more linked and integrated than ever, it will be widespread. We all received a taste of that in ’08.

    Yet, until and when another such black swan financial event happens, the world is plodding along with deflationary recession is some regions and inflationary growth in others in a constant tug of war.

    There is plenty of cash floating around. In the case of western regions for example, top 2/3 of population, 200,000, million Americans seem to be doing quite well financially, while the bottom 100 million are in the worst hell of their lives that will only continue to get worse, for many contributing reasons. In addition, according to Bloomberg, the cadre of rich folks have stashed $20 TRILLION offshore. The biggest problem with that being that it is just sitting there idle, sucked out of the economy which desperately needs it to stay afloat and grow.

    In the case of China/Asia, the top 1/2 of the population are incredibly cash rich beyond what most anyone realizes. China/Asia has been a “cash” economy for the past twenty or so years and they like it that way, wouldn’t you? And so as a result we find that America’s cash shadow economy hovers around 2 trillion, 15% of total official GDP, while China’s cash shadow economy hovers around 6 trillion, to as much as 10 ten trillion, which equals 50% to 100% of the total official GDP. Problem is that all the idiot analysts from economists to investment advisors don’t take this into account in their analysis. It would imply that things aren’t as bad as they seem, in that for example, retail sales are holding up well in the U.S. and domestic spending in China is strong and rising at 12% per year (contrary to any idiot who suggests otherwise), both of which would not be the case if things were “that bad”.

    It all means what have been experiencing as JJ notes, continued insidious inflation, which most certainly has been occurring across the cost of many key products and services in the economy. (With the exception of retail/supermarket/sundries in America which are still relatively dirt cheap, a point most Americans don’t realize)

    The overlords will manipulate every scheme they can to keep interest rates low, I’ve said that for years, they absolutely have no choice to avert disaster with edifice of debt we now all face. They have plenty of tricks and illusions in their bag that may continue to keep the ship afloat for decades. That is, until the day after whenever that day may come.

    Cheers, Mario

  • egregious July 26, 2013, 11:37 am

    After 30 years spent in the interbank derivatives markets I cannot envision a scenario whereby the current toxic combination of severely impaired credit markets, deteriorating national fiscal balances and increasingly restrictive regulatory regimes in the developed world and key emerging market economies can result in any outcome other than a severe global deflationary episode. I know of know financial reflationary mechanism that can forestall or mitigate that dreadful end. National economies in resource and import independent countries may, through subsequent isolationist and domestically reflationary policies, be able to induce inflation and perhaps experience hyperinflationary outcomes; globally, no outcome other than severe deflation and its attendant social upheaval, trade dislocation and potential military conflict can be expected. I live in Singapore, and you would be hard pressed to find a more successful yet critically import dependent nation. I recently bought a farm in Uruguay to provide safe haven for my family in sad anticipation of the inevitable, and now seemingly imminent, deflationary crisis.

    • mario July 27, 2013, 6:56 am

      A mouthful of wisdom from you egregious, I’ve been based in Shanghai for ten plus years and we know Singapore is a reliable economic bellwether in many ways….Cheers, Mario

  • Rich July 24, 2013, 10:13 pm

    FWIW sold to close QQQ Aug puts for modest +12% profit in two days and bot to open SPY Aug calls 4 ticks above the lows of the day

    • Rich July 28, 2013, 11:07 pm

      Fri 26 July 2013 rolled SPY Aug calls into relatively stronger QQQ Aug calls just for chuckles…

  • stitch July 24, 2013, 3:42 am

    I have a hard time imagining that a piece of paper called the dollar will maintain any value in the case of a breakdown in the financial system such as Rick projects, as I think that would be quickly followed by a societal collapse. However, I’ve seen enough human behavioral quirks to say that I could not rule it out– look at the Swiss dinar in Iraq that was fiat but not backed by the Hussein regime and yet traded at a premium due to scarcity.
    However, if a competing currency such as a gold backed yuan arose, then the value of the U S dollar would be called into question and a hyperinflation could ensue as people started to run from the buck and all of the currency held abroad rushed home and drove up the value of all assets in dollar terms. So, why not a Gresham’s law scenario where good money drove out bad and the dollar lost it’s reserve status. Overnight, exchange controls would be implemented, but the dollar would collapse in value in terms of tangible goods and the debt would be paid off with real assets or defaulted upon.
    I get the deflation argument re debt and the scarcity of currency; however, the dollar is only worth what people believe and if their beliefs are shaken, then something that was highly valued could lose value over night. Look at the internet bubble, the tulip bubble etc. When the herd moves no one will see it coming and I doubt it is predictable, but in the context of history, the only thing the dollar has going for it is recency bias.
    I guess my point is that there are 3 billion other actors in China and India that just may see things somewhat differently.
    I don’t pretend to know how the inflation/deflation debt will turn out, but I do know that the markets are part logic and part mysticsm. I think our fiat system is ridiculous, but that is reality today. As for tomorrow???

    • Cam Fitzgerald July 27, 2013, 12:08 am

      Stitch, a gold backed Yuan would theoretically take years or even decades to come into being if it happened at all. A genuine financial crisis could erupt and ruin your life in days or weeks. Reflect on the GFC for reference. Where was the savior then except a greater infusion of dollars which are immediate versus the entrance of a “hard” currency which we have still not seen to this very day?

  • Andrew Gutterman July 24, 2013, 2:39 am

    As Rick says, cash is KING. If his scenario plays out then gold and silver will be technically worthless at the grocery store because nobody will know what to do with them, but they will respect cash.

    A friend of mine posted a video of a coin shop employee selling silver dollars for 99 cents. Setting aside the general mistrust of buying anything from a stranger in the street the real lesson was that nobody understood the value of a silver dollar to begin with. One European tourist bought one for a souvenir, but not because he knew the value.

    If we have a bust where credit evaporates those with cash will get by while the rest of the world starves, until someone can get the system going again.

    Gold and silver only have value if the people you are doing a transaction with recognize that value. My experience is that very few do.

    Andy

    • Cam Fitzgerald July 27, 2013, 12:02 am

      Good points Andrew. And on that note I will offer support to Ricks assertion that a shoebox of dollars will have far more value in the coming decline than any commodity based asset like gold which is sure to lose its luster once the next financial crisis strikes. The gold bugs have been unable to convince the general public of the grand value of precious metals even after 12 long years of spectacular returns. How much more will they accomplish in weeks and days following a real banking crisis?

  • Carls July 23, 2013, 11:26 pm

    I also read Vern Myers books a while ago and the old curmudgeon (he came up the hard way) is probably right about deflation being our end game . We could have more defaults with other cities going the way of Detroit. Vern was pro-coal. Obama is the anti-coal man. An interesting contrast between the effete Obama, effete Bernanke and crusty old Vern.

    The FReserve was much more reserved back in Vern’s day. He would be rendered speechless by the Fed’s rate of money creation (out of nothing) these days.
    http://www.motherearthnews.com/nature-and-environment/economic-outlook-zmaz80mazraw.aspx#axzz2ZuFgRyzZ

  • tortuga July 23, 2013, 5:36 pm

    Why has nobody mentioned all the flood of us dollars (cash) coming back home from all the nation’s in this world that over the past few years have entered into multilateral agreements to trade in euros or their own currencies or even gold, such as China, Russia, Iran, basil, India, the EU, Africa, etc… what will be the consequence for the US long term as more and more nations continue to dump the US dollar as a trade currency and therefore a reserve one? also who can explain why the Chinese have turned 180 degrees over the past 24 months and become the largest (government) buyers of gold in the world?

    • Cam Fitzgerald July 26, 2013, 11:56 pm

      You mean the same Chinese government that has been hell-bent on blowing the biggest credit bubble in world history and now leads the commodity producing nations to the brink of ruin because it was all an unsustainable exercise from the beginning? And pray tell how gold will help when it is more highly correlated to crude oil than to dollars? Crude incidentally as a metric for global growth is destined to fall for years if China lands hard. Do you really think that bodes well for precious metals?

    • mario July 27, 2013, 6:52 am

      These are great points tortuga and cam… let me add that China is basically colonizing Africa and Brazil as the Dutch, French, Portuguese and British colonized other countries in the prior countries, and fortunately they are not doing it by barbaric slaughter. Meanwhile China’s auto market continues relentless expansion, selling 16 million passenger cars in 2012 and still strongly rising. That will keep pressure on crude prices while their commitment to alt energy will do the opposite, so we’ll see how it washes in the end.

      Cheers, Mario

    • Cam Fitzgerald July 27, 2013, 12:14 pm

      China is certainly colonizing Tibet, Mario. Military domination has led to economic and political domination over time.

      With the advent of the new railway, many thousands of Chinese have moved have moved there safely under the power of state to take up lands, to farm, invest, trade and exploit the resource base.

      This is largely against the will of the Tibetans themselves who see it as an unwelcome invasion. China’s foray into Africa on the other hand is quite different. There is no overt military force being used to coerce local populations.

      On the contrary, the Chinese have been coming in and setting up industrial zones or building business to support their growth and manufacturing objectives while gaining better geographic access to essential resources.

      The rule of law is still in place though and the relationships are for the most part cooperative as they support African ambitions of industrialization and jobs creation and Chinese desires to expand into fresh markets while acquiring direct access to resources. Charity never enters the equation.

      The relationship is cemented by significant gifts from the Peoples republic in the form of roads, bridges, dams, railways and other infrastructure. This has bought preferential access to timber, ores and quality farmlands.

      Colonization itself refers more broadly to how lands and resources were taken through less cooperative means and usually backed by the superior power of the invasive state seeking those properties. In general this involves migrations of people intending on permanent settlements with or without the cooperation of local governments.

      The Chinese in Africa are there on business. There is no sense of permanence about their participation in the economies but rather relationships based on mutual needs are being established. State directed initiatives have been succeeding in their goals. A report not long ago suggested that Chinese firms were signing off on contracts with African governments and business at a ratio of twenty to one versus their Western counterparts.

      We cannot call that colonization though.

    • mario July 27, 2013, 4:13 pm

      Thanks for adding more salient points. You sound quite up on the subject. One of the negatives in the case of Africa is that they have created alot of dispute in their insistence importing local Chinese workers as a condition of their deals, teeing off the locals who need their employment situation improved…

    • BKL July 28, 2013, 8:11 am

      There is much to admire about the way that the Chinese are exploiting Africa.
      They refrain from trotting out obscure references to human rights whenever it suits their interests.
      The Chinese workers that they provide work for about one tenth of what an American “contractor” would.
      They are developing a good reputation in the third world.

    • Cam Fitzgerald July 28, 2013, 9:46 pm

      Not so. They are loathed here, BKL.

  • Andrew Gutterman July 23, 2013, 2:20 pm

    Let’s try and look at the inflation/deflation debate in a different way. Let’s say that inflation is a rise in your standard of living and deflation is a fall. Standard of living being loosely defined as what you can afford to purchase on current income, without going into debt.

    When I was 18 and had my first real job at a textile plant in Yardley, PA in 1969 a visit to the doctor was easily affordable. An overnight at the local hospital was under $100. I could pay for that stay with a week’s worth of work. (I made 16 hours a week in overtime)

    Today, if I’m just starting out at a similar low level job the average cost of a hospital stay is now about $1700. A little over three weeks of income. (This excludes any procedures, any one of which could put me into bankruptcy.)

    So who has experienced inflation and who has experienced deflation?

    Andy

    • Rick Ackerman July 23, 2013, 8:16 pm

      Anticipating the argument that it is inflation, not deflation, that has made the good life less affordable, I’ll once again suggest defining and qualifying deflation by its chief symptom — i.e., an increase in the real burden of debt. Clearly, that burden has sapped our ability to afford much of anything, even necessities.

    • bc July 23, 2013, 9:37 pm

      Taken to extremes deflation is store shelves groaning with goods but no one has any money. Hyperinflation is shelves are empty but everyone has cash. The choice is a policy decision that reflects the power structure of the society. If the debt deflation policy route is chosen it will result in bank failures, bank holidays, bank runs, and bank robbers everywhere. This was the route chosen in the Great Depression. Today I see none of the above happening now or likely to happen. Hence I conclude the power rests with the banks who will run us to ruin by hyperinflation.

      &&&&&

      As I mentioned elsewhere in this discussion, ‘The Great Reckoning’ spells out in great detail why deflation would leave the financial infrastructure intact while hyperinflation would wreck it for a generation. Concerning ‘the shelves,’ they’ll be empty in either case since our just-in-time supply chain is far too fragile to survive a financial cataclysm. RA

  • BKL July 23, 2013, 12:15 pm

    Terrific ideas and insights all around.

    Just consider all the educational resources which brought us to this place. Now think of the many millions of young people all around the world, and the debts they have racked up, trying to improve their prospects. You can see how powerful wage deflation will ultimately become. Probably fits in with Martin Armstrong’s nightmare deflationary scenario.

    There is strong circumstantial evidence that energy is behind a lot of our past, current, and future woes. West Texas is about 108 today.

    When I first learned about Peak Oil years ago, my first thought was that metals would become worthless in a de-industialized world. However, they have risen spectacularly as people seek to develop alternate energy systems.

    When industry finally gives up on energy alternatives, gold will be the metal that matters. Copper is a metal which has been been worked by hand for millenia. Copper and other base metals will be valued relative to gold.

    Interesting isn’t it, how gold has lately gone out of the discussion? Maybe it’s time for the moonshot.

    • mario July 26, 2013, 7:27 pm

      Hi ALL, Industry and govt in rising China/Asia is full speed ahead with their commitments to alternative energy. China building 40 or so nuke plants, massive windfarms., lots of solar, many public vehicles including Volkswagen’ s taxi fleets running on LOG….keeping in mind that there are probably twenty times more taxis in Asia than the west. Will be interesting to see how it all pans out 10-20 years from now.

      Cheers, Mario

    • Cam Fitzgerald July 26, 2013, 11:37 pm

      Rising China? Are we reading the same news Mario?

    • mario July 27, 2013, 6:42 am

      True enough Cam…China is surely part of any current slowdown in the numbers. Big picture wise, they are still one of the few with overall expansion and growth. Domestic consumption is far stronger than is being reported and pondered.

      …enjoying 3 weeks here in Scottsdale ScottsdaleAZ for summer holiday!..Cheers, Mario

  • Jerry Lance July 23, 2013, 6:07 am

    Understand that the dollar is the defacto “Reserve currency – Petrodollar” that the world uses to transact business. As that dollar becomes more encumbered with “leverage” its ability to be a store of value has less conviction and faith. The “only” value that a fiat paper currency can retain “is” that conviction and faith.

    So, let’s look at the reason all faith will be lost in that currency at some point in the future. Since the creation of the FED in 1913 the currency (Dollar) value has been controlled through inflation/deflation. In 1944 the U.S. Dollar through the Bretton Woods agreement was granted “exclusive reserve currency status”.(that status meant that any country wanting to buy oil, food or commodities would have to buy dollars “first” and then they could go into the world market to make their purchase “on” the world market (with those reserve currency notes) also it meant that “If” any country lost faith or trust (through debasement or any other reason) in that currency they could go to “any” central bank in the world and trade that paper currency for physical Gold of equal value.
    (Good as Gold) In 1971 Nixon suspended Bretton Woods and took us off the Gold Standard telling other nations that they could not “now” exchange the dollar for Gold as previously promised.

    Here is the key to its downfall:

    The U.S. dollar (debt) from 1971 through around 1995 was able to be removed from a balance sheet with little implication through accounting techniques claiming (debt) as a loss and could be written off through tax levy accounting and that was the end of it.

    Here (around 1995) comes Blythe Masters from JP morgan and she creates what is called a “Credit Default Swap” This is essentially an insurance policy on a default to pay back a debt or loan. So, let’s say for shins and giggles Greece is lent 1 trillion dollars by another country. They promise to pay that money back at a set interest rate over time. The CDS (Credit Default Swap) enables financial institutions to purchase a put (Default insurance or a bet against the underlying asset (loaned debt or CDO – Collateralized Debt Obligations) never being paid back. This would be OK if only “ONE PUT” was taken out against the chance of that debt not being paid back. The problem “of the whole planet situation right now” is that this debt can be leveraged by 100 “PUTS” or in layman’s terms (for each dollar that was lent to Greece there are $100 betting against “each” one of the dollars lent, that it will default and not be paid back) So, now you have 100 Trillion dollars leveraged against the default of a 1 Trillion dollar loan. So, now Greece cannot pay back the loan (CDO-debt) triggering the CDS from the default on the CDO and now everyone that bought a “PUT” wants’ to get paid on their bet. The next problem is that those financial institutions that sold those “PUTS” are only required to have a 6% reserve (less than that) (Money held in escrow to pay claims) So, in reality those institutions only have .06 cents per dollar to pay those claims and not the “whole” dollar “required or needed” to pay those claims.

    This is why all of these bailouts are created so “NO ONE” is allowed to fail “Triggering” these Credit Default Swaps. The original debt is maintained through interest payments from “newly created” debt (bailouts) because the money to pay those claims does not even exist………Yet.
    So, you say why can’t they just unwind them.
    Answer, is that you can’t because everyone that purchased these “PUTS” on “CDO’s” wants’ to get paid because they are classified as an asset on “their” balance sheets.

    When the discussion turns to CDS/CDO’s at parties, I ask if anyone can explain them so that we can have an educated discussion. No one can, so I give this analogy and everyone sees a little better what the problem is. I know it’s not a perfect description but conveys the basis.
    So, GK wants to buy a house, so GK goes to Joe banker and says hey Joe can you lend me a 100K to buy this house. Joe says sure GK here is your 100K you can pay me back over time with interest.
    Then Joe gets back from the closing and says to himself, Hey “what if GK doesn’t pay me back, I will be out a 100K. So, Joe calls Allstate and talks to Al the broker and says, “Hey Al I want to buy a 100K insurance policy incase GK doesn’t pay me back. Al says sure Joe here is your 100K default insurance policy (CDS). Then after Al gets off the phone with Joe, Al says to himself “wait a minute” “what if Joe doesn’t pay me back” and Al quickly calls jerry at AIG and says hey jerry I need an insurance policy for 100K incase Joe doesn’t pay me back. Jerry says sure Al here is you CDS for 100K incase Joe the banker doesn’t pay you. Then Jerry gets off the phone with Al and says “wait a minute” “What if Al doesn’t pay me back and then he quickly calls Zurich and talks to Chad and says “hey Chad” “I need to purchase a 100K policy against Al not paying incase GK defaults on his mortgage. Chad says here you go Jerry a 100K CDS for you and the Chad says to himself………………………………………………………you see were this is going.
    So, let’s say this goes 20 CDS contracts deep. So what we have is 2,000,000 dollars worth of credit default swaps written on a (CDO) 100K depreciating asset that is now only worth 60K. Now the leverage went from 20 to 33 because of the deflation in the housing prices. (That’s why there is no mark-to-market)
    Now GK’s employer just called and is laying GK off “permanently”.
    The problem is now that the financial institutions that wrote all these CDS’s (a ton of American banks) were only required to have a 6% reserve (even less) on this 100K worth of exposure (each). So, you see the money does not even exist-yet (our anti deflationary kryptonite backstop and tribute to JS for the saying “QE to infinity”) to pay these claims and all these entities must be bailed out to stop the contagion before wiping out everybody.

    I used a house as an example and it actually is a physical asset. Most of the CDO’s are written against debt (paper, but classified as an asset on balance sheets with “no” underlying physical nothing) Here is where the problems lay. It’s the reserve of 6% that is the problem. Let’s take our old friend JPM that has a leveraged balance sheet of 44 to 1. If they are in the wrong chain position on the CDS loop and let’s say that they have to pay out 5x of that leverage but only receive 2x of the leverage back. ???????????????????

    Where does the money come from to pay that net 3x’s exposure? (it does not exist…yet, remember the 44 to 1 leverage) hence the bailouts to keep this thing from going full balls out.

    There it is, and it’s called “Contagion”

    So the/any deflation will trip the balance sheets into default causing the printing of currencies to try and save the system.
    This can be proven by the labeling of the 70% haircut on Greece’s debt not being classified as a default, hence delaying the massive printing of money to honor them.

    Deflation would only occur if there was a free and open market reflecting price discovery. The law of supply and demand would deflate prices depending on reserves, production, storage costs/duration or demand. The price discovery mechanism of the markets all around the world has been removed and since the price of everything is being controlled there will be no deflation in anything. There will be temporary moves up and down in price, but this would reflect chart painting for chartists and the media pundits for debating those charts. The nature of the dollar says it has to inflate to survive, through the fractional lending banking scheme to expand credit to pay the maintenance on the money that was created before it. Deflation is de-leveraging and inflation is multiples of leverage. The only way to maintain that created leverage (generational wealth) and keep it from default, is to leverage that generational wealth again and again and again.
    Fiat money has a limit to the leverage it can sustain by it’s continued expansion. When everyone is running around trying to beat his neighbor buying anything that will store his generational wealth in, while casting that fiat currency aside, this is the point inflation turns to hyperinflation or a loss of confidence in that currency (hyperinflation isn’t the over printing, but the faith and confidence in the governments that control it’s rate of inflation). Has happened every time, to every currency, ever created, since the beginning of man.
    In an hyperinflationary transition everyone with some wealth and a hoard of supplies that have an expiry date will try to find a medium of exchange before the guy next to him as the price and scarcity of that element increases; to [b]store their generational[/b] wealth in. Something that is non-corruptible, can’t be printed, is timeless, doesn’t rot, has no expiry date, doesn’t rust, decay, spoil, degrade, is hard to contaminate, is portable, is accepted all over the world through all language barriers.

    There is only one element that meets this criteria.

    Hyper-Inflation is the way it will go down !

    • Rick Ackerman July 23, 2013, 8:03 pm

      Thank you, Jerry, for your lucid description of how global leveraging works. I agree with nearly everything you’ve said, although I think you’ve left some wiggle room for a deflationary outcome. Mainly, it has to do with how quickly the endgame unfolds. If the financial system were to collapse in mere hours, which is what I expect, there would be insufficient time for the banksters and politicians to effect hyperinflationary countermeasures.

      Under the circumstances, we would all be plunged directly into an economic world of bankruptcy and barter — about as deflationary an outcome as one could imagine. And it is why I keep telling my subscribers, particularly bullion hoarders, to keep a shoebox filled with cash in a safe place. Regardless of whether cash has no intrinsic value The Morning After, it is all but certain to retain its utility value for transactions. There would be precious little of it around with the banks closed indefinitely, lending an aura of high value to the fiat currency that we hard-money snobs now disdain.

    • mario July 26, 2013, 7:19 pm

      Concur with Rick, a priceless post Jerry, thanks! Mario

    • RickJ July 29, 2013, 2:14 am

      I suspect that derivatives are the key to the end game/collapse. I find it unsettling that they are to be placed ahead of even deposits in the event of a declared bank insolvency. This tells me that all our money or shares stored in banks and brokerages is as good as gone.
      I suspect that the astronomical notional values of derivative contracts comes about as a ponzi scheme reaction to the large potential losses that Gerry discusses. One can see, that since there are no limits on the issuance of derivatives, then one way out of a loss is to issue a very large fresh set of bets extending well out into the future.
      Derivatives are also the equivalent of a special set of magic cards issued by the banks, delivering the capability to force any price up or down for at least long enough to make a tidy profit.
      Ironically, without derivatives, I suspect we would already be in a full blown crisis. Everything will of course blow up at some point and we will be left with what we can touch and defend.

  • Hugo July 23, 2013, 12:44 am

    Hi Rick,

    Thanx for your reply. I am not sure what to make out of it though.

    ”Read Fergusson’s ‘When Money Dies’ and it will greatly improve your understanding of hyperinflation and what is possible for ‘all countries that control their currency’, Hugo. ”

    All I stated that there is the political will to replace defaulting debt with freshly printed cash. After all, defaulting debt is how fiat dies (smile). How long already is the globe on this directory?

    And while you’re at it, you could benefit from ‘The Great Reckoning’ (Davidson & Rees-Mogg), since it spells out why your comment on hyperinflation’s keeping the powerstructure intact has it exactly wrong.

    Then my initial question remains. Why do all currencies hyperinflate instead of hyperdeflate? If hyperdeflate was the way forward to keep the powerstructure in tact that would have happend at least a noticeable few times I say. Do you have examples of (big) currencies that died because of deflating untill their whole banking sector went bust?

    • Rick Ackerman July 23, 2013, 7:23 pm

      We’re in uncharted waters because the whole world is on a dollar standard. No global reserve currency has ever been hyperinflated, nor do the logistical and statutory mechanisms exist, as they did in Weimar Germany, to effect a hyperinflation. Where the hyperinflationists are at their most persuasive is when they argue that hyperinflation will require no “mechanism,” only the epiphany of the dollar’s intrinsic worthlessness.

      Davidson & Rees Moog described in detail how a hyperinflation would destroy savers as a class as well as the institutional conduits of saving — i.e., the banking system, securities markets and fixed-income assets. Deflation, on the other hand, would cast us all into poverty but at least have the ‘virtue’ of leaving our financial institutions, and perhaps our system of government, intact.

      Fergusson’s book, by the way, is the only description of the Weimar hyperinflation I’m aware of that explains exactly how all of that printing press money came to circulate. Read it and you will see why a Weimar-style hyperinflation could never occur in the U.S. — at least, not as a result of political decisions and processes that would necessarily lag the speed at which catastrophe is likely to unfold.

  • Bluefire July 22, 2013, 11:08 pm

    I really have to wonder about you deflationists… Do you really see deflation in your living expenses? Sure, investment asset classes going down, but general deflation? I really have to wonder what alternate universe you live in that is so disconnected from everyday life.

    As for the future … When has any political power with fiat money opted for deflation rather than inflation when it really comes to a head?

    &&&&&

    Stop wondering, Bluefire. You seem unaware of a point that has been made here perhaps 150 times over the years — i.e., that inflation in the prices we pay for groceries, fuel, college tuition, health care and such are as nothing in comparison to the deflationary overhang of a quadrillion dollar derivatives bubble. Want to try and refute that? No one else has. RA

    • Jason S July 25, 2013, 7:28 pm

      Also, Bluefire, the increase in the cost of goods we buy without corresponding wage inflation (other than at the upper echelon of employment) translates into a loss of standard of living; highly deflationary.

  • kicker July 22, 2013, 9:05 pm

    In the 1970’s the US saw rampant inflation due to guns-and-butter policies of Johnson (Great Society) and Nixon (Vietnam) along with a Federal Reserve Chairman bent on keeping short term rates below the rate of inflation and a rapidly rising standard of living in Asia gobbling up commodities (Japan).

    In last decade the US saw moderate to negative inflation due to the guns-and-butter policies of Bush (Afghanistan and Iraq, Medicare Part D) and Obama (SSDI and Food Stamps) and a Federal Reserve chairman bent on keeping short term rates below the rate of inflation and a rapidly rising standard of living in Asia gobbling up commodities (China).

    While most pundits seem focused on monetary or fiscal policy as the major driver of inflation my guess is that the major driver is demographics. In the 1970’s the Baby Boomers generation was in their early 20’s. Their productivity was low while their demand for goods and services were high. The boomers are now in the 50’s and their productivity is high while their demand for goods and services is declining.

    At some point the demographic tailwind will become a demographic headwind with the Baby Boomers entering retirement and Echo Boomers starting family formation. My feeling is that we are already seeing this demographic tailwind in the 50 year asset classes such as S&P 500 with P/E ratios implying a yield of 8%. At some point I expect that tailwind will hit 30 year assets classes such as the long bond, high dividend stocks and fixed rate mortgages who’s duration will start to increase as rates jump.

    Even the eternally young Boomers will have to accept that at 60 buying a 30 year duration asset that will mature when their 90 is a leap of faith (to put it mildly).

    The wild card for the inflation/deflation debate will be the fiscal position of the US as rates start to rise due to the demographic tailwind. For all the bluster about mandates of price stability the Federal Reserve will always ensure there is a market for the Treasury to sell into at rates that it can afford.

    Cash will become a hot-potato once it’s obvious that negative real interest rates are a one-way bet. Turnover in the economy of things will slow as producers find it makes more sense to sit on finished goods rather than sell them into the market.

    This scenario seems to be at the door in Japan given the politics that swirl whenever 10 year yields rise above 2%.

    • gary leibowitz July 23, 2013, 5:27 am

      Demographics being front and center, wouldn’t that mean the “Entitled” would be in the driving seat. If that’s the case than all is lost. Can you imagine the clueless generation that was/is pampered by the flower generation determining the state of economic affairs?

      Rick, I changed my mind. We are all doomed to hell and the train is taking off as we speak.

  • Hugo July 22, 2013, 8:51 pm

    nice discussion though this one confuses me Rick;

    ”we are in uncharted waters as the central banks struggle in vain to delay the deflationary collapse of a quadrillion-dollar credit edifice.”

    So far the central banks don’t seem to have any problem replacing defauling with freshly printed currency. Inflation is even picking up! I have no doubt in mind that even when trillions are in danger to default they will be paid with fresh printed currency to avoid default.

    After all, all countries that control their own currency always opted for even hyperinflation over deflationary collapse. After all, that keeps the powerstructure more intact compaired to a deflationary collapse.

    &&&&&

    Read Fergusson’s ‘When Money Dies’ and it will greatly improve your understanding of hyperinflation and what is possible for ‘all countries that control their currency’, Hugo. And while you’re at it, you could benefit from ‘The Great Reckoning’ (Davidson & Rees-Mogg), since it spells out why your comment on hyperinflation’s keeping the powerstructure intact has it exactly wrong.     RA

  • gary leibowitz July 22, 2013, 8:19 pm

    I certainly am in the majority on this issue. Seems the mortgage debacle accelerated the timetable for a conclusive ending to this buildup in credit. In fact the current nature of deflation is proving its point rather clearly these last 5 years. Most economists at the time were worried the Fed’s unprecedented intervention would cause massive inflation to spiral out of control. What it has show was that the debt imbalance is too great to be offset by the free money filtering into the system. In hindsight it makes for a great surge in corporate profits. This low cost environment allows for some dramatic gross profit margins.

    The most likely stumble should come from an economy that starts back to normalcy. That would be the end of this sweet spot. The world markets can’t absorb real interest rate increases. I suspect we start out with ever improved economic data and a steady rise in rates until creditors cry foul. I will leave the details, like bond yields hitting critical mass, to the likes of Rick. For now though, a 10 year note of 2.5 percent is in the safe zone.

    In the end though a vicious cycle of deflation is needed to unwind this debt debacle, and start anew.

  • Robert July 22, 2013, 5:08 pm

    Hyper inflation requires a rogue government acting against its citizens’ best interests (I know, I know… Don’t ALL governments qualify against these criteria?)

    Regardless- it is better to understand how money actually works than it is to concentrate on stock versus flow analysis.

    Rick Ackerman’s “deflation” thesis actually portends the destruction of the market/purchasing value of credit and derivative “assets” concurrent to a rise in the value of physical purchasing agents- this is a premise I agree with completely- I see no faults in the reasoning or logic.

    However, I simply refuse to call such a concept “deflation” due to my adherance to the Austrian definition of deflation as a decrease in the money supply within an economy.

    I believe that the supply of government money in the years ahead will only go one way: UP.

    But will it lead to a hyper inflation (defined by Mises as a total loss of faith in the monetary value of a currency instrument)? I personally agree with Martin Armstrong (as posted by Hueofman above): Hyper-inflations never occur in militarily significant countries/economies.

    There are SO many competing currencies in place today, that as Rick Ackerman’s slow credit destruction/unwind scenario unwinds, Currency exchange volatility will steadily rise as people hop-skip-jump from currency to currency, looking for any measure of short term stability they can find. The end-effect of these gyrations will mirror the CONCEPT of hyperinflation – but the destruction will not be as rapid as historical episodes of hyperinflation have played out.

    In other words, I think we are in for a long, global inflationary grind (the term “inflation” adhering to the increasing money supply definition); but this long grind will have the same end-effect as a rapid, hyperinflationary collapse: the value of credit will collapse, and the real value of real assets will re-assert themselves within the psyche of humanity.

    So, buckle up and settle in for the first “hyper-slow hyperinflation” in history….

    • Rick Ackerman July 22, 2013, 7:22 pm

      For what it’s worth, the late Kurt Richebächer (1918-2007), an Austrian School economist of the first rank, got tied up in knots trying to square the circle of credit inflation and the incipiently deflationary environment that obtained after the dot-com crash. I interviewed him for my SF Examiner column and read The Richebächer Letter religiously for a decade, but he was never able to come to terms. It turns out that even for the classically trained economist, we are in uncharted waters as the central banks struggle, presumably in vain, to delay the deflationary collapse of a quadrillion-dollar credit edifice.

    • Rich July 28, 2013, 10:50 pm

      Monetary Velocity (GDP/Money Supply) fell since RR was Prez.

      Fed can inflate their balance sheet and monetary base reserves at member banks all they want to try to patch up their off-balance sheet derivative black holes with Fed cash flow, but if the banks don’t lend except to AAA institutions, there is no broad monetary inflation, only higher and higher institutionally-driven prices for food, fuel, healthcare and RE vulture funds:

      http://research.stlouisfed.org/fred2/series/MZMV?cid=32242

  • Andrew Gutterman July 22, 2013, 1:52 pm

    If anyone wants an update on what happens when debt gets out of hand, here is an excellent article about it, going back 6000 years.

    Been there, done that:

    http://www.washingtonsblog.com/2011/07/we-have-forgotten-what-the-ancient-sumerians-and-babylonians-the-early-jews-and-christians-the-founding-fathers-and-even-napoleon-bonaparte-knew-about-money.html

    Deflation.

    Andy

  • eva July 22, 2013, 10:23 am

    Please tell us what the real collapse would do. Thank you! I am tired of the mainstream contrarian – guys who are no different from mainstream yet trying to appear contrarian to appeal contrarian audience.

  • Steve Jobs July 22, 2013, 10:01 am

    I have been telling you guys. See my name? If you dont know me please google up. I have been telling you nor deflation neither hyper or any kind of inflationary course is not the path. Follow the trend. Normal course of business is the trend for another decade maybe longer. We have been brainwashed with all these gloom and doom for many many years. Please dont listen. Dollar $ is still the strongest currency of the world. Even as strong as gold maybe stronger in some cases. So much demand for greenback history has not even witnessed since the currency was introduced to the global trade. We will witness dollar index trade well above 150s sooner rather than later. Crisis crashes collapses deflation hyperinflation??? Pehhh. You know what real collapse is? You wanna know?

    &&&&&

    I’m not so sure Steve Jobs would be pleased with the way you’ve butchered the English language in his name. Nor does your claptrap serve whatever argument you are attempting to make. RA

    • George July 22, 2013, 10:11 am

      Thank you Steve for awakening many of us to the truth. I hope you continue you with your great remarks whenever you can and please continue to do so.

    • Steve Jobs July 23, 2013, 8:39 am

      Rick. The point is not the English language. The point is strictly academic. I do not see any deflation nor hyperinflation on our way. It just does not happen. Does it? You tell me please. SJ

  • buck novak July 22, 2013, 7:54 am

    I am definitely in the deflationary camp. The Federal Reserve and all central banks do not print money. They don’t have enough paper. They create instruments of credit and debt. It is call a bond. All money is credit and debt. I also see the Dollar that so many see as being worthless or lowering in value in the future actually rising in value. If a government destroys its own money, then the government destroys itself. In the deflationary Depression of the 30s the dollar rose in value. The government’s very own money got stronger. People are unlikely to overthrow a government with a strong currency or a currency rising in value. It will be in demand. It is when governments have weak or simply make their currency worthless is when governments are overthrown. Nobody wants it so nobody will want the government. FASTEST WAY TO DESTABILIZE A SOCIETY, DEBASE THE CURRENCY. LENIN. On a final note whether it is deflation or hyper-inflation this will pass in a period of time of a decade or more or less until all the excess debt is liquidated.

  • John Jay July 22, 2013, 6:06 am

    To see the future, look at the past.
    We have experienced 50 years of inflation since LBJ took over from JFK back in 1963.
    I see nothing to slow, stop, or reverse that trend.
    If you read between the lines Ben has already said he will never raise interest rates.
    Never.
    And if, by some strange set of circumstances, market forces cause the interest rates to rise on US Treasury paper, Ben has a huge ace in the hole to play.
    When the Fed rolls over maturing debt in a rising rate environment, the Treasury simply makes the new debt tax free from Federal income tax.
    That will throw the huge muni market under the bus, but hey, the muni market has already thrown itself in front of that bus anyway.
    Look at Detroit, etc.

    That’s my view.
    The Federal Government will pull out all the stops to keep the interest they pay on debt miniscule.
    And they will continue to ignore 50 years of inflation with gimmicks like “Chained CPI”, and “Hedonistic Quality Adjustment”.
    And yes, Ben knows the truth about everything we complain about, but he can never, ever, admit to it.
    The only question is, how long can they fake it before the USA goes “Fall of Rome”.

  • Rich July 22, 2013, 5:53 am

    Two bright ideas Rick, the new format and the GOOG option strategy.

    Some great responses above, so will only choose all three, deflation, inflation and hyperinflation, in which markets at what times i attempt to follow with Big4, Fed Fred, Point and Figure, Option Sentiment, Bullish Percentage Charts and Hidden Pivots.

    Until monetary velocity, the ratio of GDP to money stock picks up from all-time lows, we are deflating by debt default, despite a record monetary base of $3.288703 Trillion going straight into bank reserves, mortgages, treasuries, stocks and institutional RE vulture funds:

    http://research.stlouisfed.org/fred2/series/MZMV?cid=32242

    Right now long SPY calls, T notes, RPMGF, TLM and XOM, subject to some change tomorrow.

    Best all, r…

  • JF July 22, 2013, 2:47 am

    I doubt the question can really be answered because it can’t even be adequately formulated. Too many variables are interconnected in the realm of physics, finance, psychology, demographics and such. Ed’s description of what constitutes money is fine as it goes, but all the rest continue to lubricate the status-quo, until they don’t. It looks like anarchy at the macro level to me, with the all-seeing eye of the BIS blind as a bat, as anyone reading their white papers can attest. I think Joseph Tainter might weigh-in with a productivity deus-ex-machina, but a black-swan related to physical-plane complexity is more likely, as we lose the expertise of those already thrown overboard. Anyone else out there watching the settlement-warfare going on in large construction projects, executed by incompetent people and managed by bean counters? Does it really matter what the financial side of civilization-decay is called? It’s a bust-out any way one looks at it, imho. Whether we drown in a sea of paper, or die of thirst in a dollar-Mohave, it’s pretty much the same result for most people on Earth. The modern reification of socialist ideas is at the root of this great tragedy. Anyway, having visited Detroit recently, I’m banking on deflation as the way this plays out, and then a much lower energy-throughput per capita future.

    • Rick Ackerman July 22, 2013, 6:58 pm

      Detroit’s endgame is becoming more interesting each day, especially since Chapter 9 has set up a clash between the irresistible force (i.e., promised pension benefits as a matter of well-settled law) and the immovable object (“Sorry, folks, but the money just ain’t there”).

      My guess is that when Detroit’s bankruptcy problems play out in an even bigger way in Illinois, California and New York (which so far has been saved by decent cash flow), it will bring civil war and blood in the streets.

      So far, The Feral Guvvamint hasn’t even hinted of a pension bailout, since it would open Pandora’s box for all of the other bankruptcies that lie down the road. You can imagine how the civil war could take a turn for the worse if it pitted bailed-out public workers against royally screwed private-sector employees and taxpayers.

    • Rich July 28, 2013, 10:41 pm

      Moody’s just downgraded Chicago debt three notches.
      Seems if they made the legally required contribution to pensions, they would be out of cash.
      Chicago has $29 B in debt they cannot service.
      Will the Godfather’s sex club buddy start bailing out a domino chain of BQ cities?

  • VegasBob July 22, 2013, 2:23 am

    I think that if one looks at history, one sees that hyperinflation only occurs as a result of excessive printed currency in circulation (e.g., wheelbarrows full of cash or hundred trillion dollar notes) – not excessive creation of electronic or credit-based currency. In an economy such as the US economy where most transactions are credit-based, even a hint of hyperinflation would cause the credit markets to quickly shut down, and the economy would collapse rather quickly. After all, most Americans live paycheck-to-paycheck, and are one missed paycheck away from a bankruptcy filing. Without continuing access to credit, the masses would face immediate economic devastation.

    It is true that we had massive inflation in the late 70s and early 80s in the US, but I think that was due in large part to the transition from a gold/silver-based monetary system to a credit-based monetary system.

    If we fast forward to today, excessive creation of electronic or credit-based currency, such as Bernanke’s idiotic money-printing, does cause some measure of inflation. As noted before, the average American is teetering on the edge of bankruptcy, so most of the inflation we see is in assets such as stocks, commodities and housing. While it is true that the average American is hard hit by inflation in food and energy prices, that inflation doesn’t count in official government statistics, and even if it did, Bernanke would not care. His mission, first and foremost, is to protect the banks.

    As to interest rates, insolvent debtors (which includes nearly all governments, most individuals and many corporations) cannot afford to pay real interest on their borrowings without being forced into bankruptcy. So I think there are some unseen constraints that will operate to prevent a rise in real interest rates any time soon.

    As such, I foresee negligible inflation for the future. This will embolden Bernanke and others of his ilk to continue to print money to their heart’s content, and they will get away with it until they do not.

    When they cannot get away with it any longer, we are going to experience one hell of a deflationary economic depression. Most “assets” in this economy are someone else’s debts. We will find that there is far more bad debt floating around our financial system than we think, and it will all have to be written off as uncollectible.

    • Andrew Gutterman July 22, 2013, 1:49 pm

      “It is true that we had massive inflation in the late 70s and early 80s in the US, but I think that was due in large part to the transition from a gold/silver-based monetary system to a credit-based monetary system.”

      We had inflation in the 70’s because millions of baby boomers were entering the economy, getting jobs, spending money but not producing much for their labor. Cost-push inflation ensued.

      It had nothing to do with what everyone thinks it does. That’s just the story our owners pass out to convince us we in control of the situation if only we did…..

      I’m expecting deflation myself once we wake up to the fact that debts won’t get repaid. That and the fact that the labor force has stopped growing, and will soon be in decline. Forced retirement of the boomers, whether they like it or not.

      Andy

    • Bam_Man July 22, 2013, 8:16 pm

      I agree Bob.
      Barring a black swan event, The Fed’s continuing battle with the deflation monster will provide us with a few more years of “stagflation”. Eventually the deflation monster wins. And in that scenario, as Martin Armstrong says, you will wish for hyperinflation.

  • bc July 22, 2013, 12:54 am

    The massive destruction of dollars is happening right now. The Fed and other central banks are printing like maniacs to countervail against this. They are barely breaking even against this credit contraction disappearance of credit money even though the central bank printing rate grows exponentially. This is why there is little inflation despite massive printing by the Fed. I predict continued exponential increases in printing by the central banks offsetting continued money disappearance by credit contraction in the private sector. The end game will come when the swollen central bank balance sheets are liquidated sending huge realized losses to the treasuries world wide. This will trigger automatic deficits of epic proportions the funding of which will flow to the private sector as real aggregate demand rather than the mere pumping up of asset prices we have seen the Fed create. The detonation sequence will be :
    Rates rise.
    Fed takes massive losses.
    Losses transmit to treasury automatically.
    Treasury issues debt to save govt from insolvency.
    Rates rise.
    Lather, rinse, and repeat. Voila, hyperinflation. And a blood bath in bonds followed by stocks.

  • John July 22, 2013, 12:42 am

    I’m expecting deflation. It has taken me several years and lots of reading to get my head around this topic, but I think I finally got it. It seems to me that those who predict massive inflation or hyperinflation don’t appreciate the difference between money and credit. There is very little cash out there. Most of the “money” in our system is little more than hot air. Some day, it will, disappear into the same thin air it came from. Rick, you once mentioned C.V. Myers’ book, “The Coming Deflation.” Several years later, in the mid 80s, he wrote another book called “World Rollover,” in which he suggested that some day, although it’s a bit counter-intuitive, the big winner will be physical federal reserve notes, of which there are very few compared to the avalanche of credit in the system.

    And, I don’t think 2008 was “it.” It was a good preview though.

    • Rick Ackerman July 22, 2013, 6:30 pm

      We are living out Vern Myers’ dictum: that ultimately, every penny of every debt must be paid — if not by the borrower, then by the lender. We see now how both are joined at the hip, although neither economists nor policymakers care to acknowledge just how this is so. Whether acknowledged or not, the price we are all paying is a precipitous decline in the standard of living. America’s middle class can no longer afford things that single-worker households could easily afford in the 1950s. Even less are we able to save.

    • Rich July 28, 2013, 10:35 pm

      Five-year growth in Real Personal Income

      http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/07/20130727_income.jpg

  • PhotoRadarScam July 22, 2013, 12:29 am

    It would help to have a time frame. Inflation will continue for the next few years until a point where the fed loses control and hyperinflation ensues. The only way deflation can take hold is if there is a massive destruction of dollars, and I don’t really see that happening.

    • Hueofman July 22, 2013, 5:56 am

      “Well naturally I get critical responses that the way everything has to collapse is only through HYPERINFLATION. I would love to see just one empire that has ever collapsed in such a manner – not Babylon, Athens, Hellenistic Greece, Rome, Venice, Holy Roman Empire or even Britain. I fail to grasp this insistence upon something that historically has NEVER happened in 6000 years of recorded history. Hyperinflation takes place in PERIPHERAL economies. When the CORE economy collapses, as we are experiencing currently, governments always become draconian. When I say they are after the underground economy that is by no means localized. This is a global trend. France and Italy are the tips of the iceberg. Greece is going after people that left their homeland. They presume all will be OK if they can just get their hands on more money. As this takes place, corruption soars and the rule of law collapses. We are likely to see Europe adopt US law and begin to enslave their citizens demanding taxation worldwide based solely upon your citizenship at birth.”
      -Martin A. Armstrong

    • Rick Ackerman July 22, 2013, 6:22 pm

      Perhaps, Photo, you’ll address the point I made about the banks not opening for business one day, telling us why you don’t ‘really see that happening’.

    • PhotoRadarScam July 24, 2013, 9:02 am

      Rick, I guess I don’t see why you equate banks not opening with deflation. I can definitely see banks not opening. What I don’t see is a massive destruction of US dollars which can pretty much only happen due to debt forgiveness by the fed, or failure to pay back loans from banks or institutions to the fed followed by insolvency of those banks or institutions. They will keep printing and printing and bailing out until they can’t no more.

      &&&&&

      You don’t have to ‘equate’ anything, PRS — just imagine how you will pay for things the day the banks have failed to open. Meanwhile, have any of those ‘keep-printing-and-printing’ dollars found their way into your wallet? RA

    • Hueofman July 24, 2013, 7:31 pm

      Hyperinflation is a social phenomenon separate from normal inflation, a total lose of confidence in a countries symbolic currency to complete worthlessness. Massive money printing is the governments response to keep funding itself against a hypervelocity depreciation of money. This will not be the US dollars fate. Historically all the countries who have hyperinflated their currencies did so in relative isolation, they were not the core economy, they did not have a world currency, they did not have a bond market. Everything is global now, there will always be someone on the other side of whatever trade willing to accept US dollars and that sliver of life is what will keep the dollar alive for a very long time.

    • Jason S July 25, 2013, 3:15 am

      Hueofman, many countries that were hit by hyperinflation had bonds issued and were trading in the global bond markets (Argentina, Yugoslovia, Germany and Hungary just to name a few recent examples.) I think the real issue that will play out the way of deflation will be the lack of a lender of last resort. With all developed countries over leveraged and playing the game of beggar thy neighbor at the same time, who will be there to step in and rescue all the major nations? Inflation may start but once it does there will be a quick grab for anything tangible and at that point people will stop spending on unnecessary things and the deflationary death spiral will begin.

    • Rich July 28, 2013, 10:25 pm

      Big4 insiders LT Short the USD 2.6 to 1
      Point & Figure USD target 103
      USD Sentiment oversold:
      http://stockcharts.com/freecharts/gallery.html?s=%24usd


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