Thursday, August 26, 2010

Hyperinflation, Part II: What It Will Look Like

I usually don’t do follow-up pieces to any of my posts. But my recent longish piece, describing how hyperinflation might happen in the United States, clearly struck a nerve. 

It was a long, boring, snowy piece of macro-economic policy speculation, discussing Treasury yields, Federal Reserve Board monetary reaction, and the difference between inflation and hyperinflation—but considering the traffic it generated, I might as well been discussing relative breast size in the porn industry. With pictures. 

Essentially, I argued that Treasury bonds are the New and Improved Toxic Assets. I argued that, if there was a run on Treasuries, the Federal Reserve—in its anti-deflationary zeal, and its efforts to prop up bond market prices—would over-react, and set off a run on commodities. This, I argued, would trigger hyperinflation. 
 
The disproportionate attention my post garnered is indicative of people’s current fears. As I’ve said before, people aren’t blind or stupid, even if they often act that way. People are worried—they’re worried about the current state of affairs: Massive quantitative easing, toxic assets replaced by the full faith and credit of the U.S. government in the shape of Treasuries, fiscal debt which cannot possibly be repaid, a second leg down in the Global Depression that seems endless and only getting worse—people are scared. Many readers gave me quite a bit of useful feedback, critiques, suggestions and comments on the piece—clearly, what I was discussing touched on a deeply felt concern. 

However, there were two issues that many readers had a hard time wrapping their minds around, with regards to a hyperinflationary event: 
 
The first was, Where does all the money come from, for hyperinflation to happen? The question wasn’t put as baldly as that—it was wrapped up in sophisticated discussions about M1, M2 and M3 money supply, as well as clever talk about the velocity of money—the acceleration of money—the anti-lock brakes on money. There were even equations thrown around, for good measure. 

But stripped of all the high-falutin’ language, the question was, “Where’s all the dough gonna come from?” After all, as we know from our history books, hyperinflation involves people hoisting bundles and bundles of high-denomination bills which aren’t worth a damn, and tossing them into the chimney—’cause the bundles of cash are cheaper than firewood. If the dollar were to crash, where would all these bundles of $100 bills come from?
 
The second question was, Why will commodities rise, while equities, real estate and other assets fall? In other words, if there is an old fashioned run on a currency—in this case, the dollar, the world’s reserve currency—why would people get out of the dollar into commodities only, rather than into equities and real estate and other assets? 
  
In this post, I’m going to address both of these issues.


Apart from what happened with the Weimar Republic in the 1920’s, advanced Western economies have no experience with hyperinflation. (I actually think that the high inflation that struck the dollar in the 1970’s, and which was successfully choked off by Paul Volcker, was in fact an incipient bout of commodity-driven hyperinflation—but that’s for some other time.) Though there were plenty of hyperinflationary events in the XIX century and before, after the Weimar experience, the advanced economies learned their lesson—and learned it so well, in fact, that it’s been forgotten. 

However, my personal history gives me a slight edge in this discussion: During the period 1970–’73, Chile experienced hyperinflation, brought about by the failed and corrupt policies of Salvador Allende and his Popular Unity Government. Though I was too young to experience it first hand, my family and some of my older friends have vivid memories of the Allende period—vivid memories that are actually closer to nightmares. 

The causes of Chile’s hyperinflation forty years ago were vastly different from what I believe will cause American hyperinflation now. But a slight detour through this history is useful to our current predicament. 
 
To begin: In 1970, Salvador Allende was elected president by roughly a third of the population. The other two-thirds voted for the centrist Christian Democrat candidate, or for the center-right candidate in roughly equal measure. Allende’s election was a fluke. 

He wasn’t a centrist, no matter what the current hagiography might claim: Allende was a hard-core Socialist, who headed a Hard Left coalition called the Unidad Popular—the Popular Unity (UP, pronounced “oo-peh”). This coalition—Socialists, Communists, and assorted Left parties—took over the administration of the country, and quickly implemented several “reforms”, which were designed to “put Chile on the road to Socialism”. 
 
Land was expropriated—often by force—and given to the workers. Companies and mines were also nationalized, and also given to the workers. Of course, the farms, companies and mines which were stripped from their owners weren’t inefficient or ineptly run—on the contrary, Allende and his Unidad Popular thugs stole farms, companies and mines from precisely the “blood-thirsty Capitalists” who best treated their workers, and who were the most fair towards them. 
  
Allende’s government also put UP-loyalists in management positions in those nationalized enterprises—a first step towards implementing a Leninist regime, whereby the UP would have “political control” over the means of production and distribution. From speeches and his actions, it’s clear that Allende wanted to implement a Maoist-Leninist regime, with himself as Supreme Leader. 
 
One of the key policy initiative Allende carried out was wage and price controls. In order to appease and co-opt the workers, Allende’s regime simultaneously froze prices of basic goods and services, and augmented wages by decree. 
 
At first, this measure worked like a charm: Workers had more money, but goods and services still had the same old low prices. So workers were happy with Allende: They went on a shopping spree—and rapidly emptied stores and warehouses of consumer goods and basic products. Allende and the UP Government then claimed it was right-wing, anti-Revolutionary “acaparadores”—hoarders—who were keeping consumer goods from the workers. Right. 
  
Meanwhile, private companies—forced to raise worker wages while maintaining their same price structures—quickly went bankrupt: So then, of course, they were taken over by the Allende government, “in the name of the people”. Key industries were put on the State dole, as it were, and made to continue their operations at a loss, so as to satisfy internal demand. If there was a cash shortfall, the Allende government would simply print more escudos and give them to the now State-controlled companies, which would then pay the workers. 

This is how hyperinflation started in Chile. Workers had plenty of cash in hand—but it was useless, because there were no goods to buy. 
 
So Allende’s government quickly instituted the Juntas de Abastecimiento y Control de Precios (“Unions of Supply and Price Controls”, known as JAP). These were locally formed boards, composed of loyal Party members, who decided who in a given neighborhood received consumer products, and who did not. Naturally, other UP-loyalists had preference—these Allende backers received ration cards, with which to buy consumer goods and basic staples. 
 
Of course, those people perceived as “unfriendly” to Allende and the UP Government either received insufficient rations for their families, or no rations at all, if they were vocally opposed to the Allende regime and its policies. 
 
Very quickly, a black market in goods and staples arose. At first, these black markets accepted escudos. But with each passing month, more and more escudos were printed into circulation by the Allende government, until by late ’72, black marketeers were no longer accepting escudos. Their mantra became, “Sólo dólares”: Only dollars. 
  
Hyperinflation had arrived in Chile. 
  
(Most Chileans, myself included, find ourselves both amused and irritated, whenever Americans self-righteously claim that Nixon ruined Chile’s economy, and thereby derailed Allende’s “Socialist dream”. Yes, according to Kissinger’s memoirs, Nixon did in fact tell the CIA that he wanted Chile’s economy to “scream”—but Allende did such a bang-up job of fucking up Chile’s economy all on his own that, by the time Richard Helms got around to implementing his pissant little plots against the Chilean economy, there was not much left to ruin.)
 
One of the effects of Chile’s hyperinflation was the collapse in asset prices. 
 
This would seem counterintuitive. After all, if the prices of consumer goods and basic staples are rising in a hyperinflationary environment, then asset prices should rise as well—right? Equities should rise in price—since more money is chasing after the same number of stock. Real estate prices should rise also—and for the same reason. Right?
 
Actually, wrong—and for a simple reason: Once basic necessities are unmet, and remain unmet for a sustained period of time, any asset will be willingly and instantly sacrificed, in order to meet that basic need. 
  
To put it in simple terms: If you were dying of thirst in the middle of the desert, would you give up your family heirloom diamonds, in exchange for a gallon of water? The answer is obvious—yes. You would sacrifice anything and everyting—instantly—in order to meet your basic needs, or those of your family. 

So as the situation in Chile deteriorated in ’72 and into ’73, the stock market collapsed, the housing market collapsed—everything collapsed, as people either cashed out of their assets in order to buy basic goods and staples on the black market, or cashed out so as to leave the country altogether. No asset class was safe, from this sell-off—it was across-the-board, and total. 

Now let’s return to the possibility of hyperinflation in the United States:

If there were a sudden collapse in the Treasury bond market, I argued that sellers would take their cash and put them into commodities. My reasoning was, they would seek a sure store of value. If Treasury bonds ceased to be that store of value, then people would invest in the next best thing, which would be commodities, especially precious and industrial metals, as well as oil—in other words, non-perishable commodities. 

Some people argued this point with me. They argued many different approaches to the problem, but essentially, it all boiled down to the argument that commodities and precious metals have no intrinsic value. 

Actually, I think they’re right. In a strict sense, only oxygen, food and water have intrinsic value to human beings—everything else is superfluous. Therefore the value of everything else is arbitrary. 
  
Yet both gold and silver have, historically, been considered valuable. Setting aside a theoretical or mathematical construct that would justify the value of gold and silver, look at it from a practical standpoint: If I went to a farmer with five ounces of silver, would he give me a sack of grain? Probably. If I offered him an ounce of gold for two or three pigs, would he give them to me? Again, probably. 
  
Where there is a human society, there is a need to exchange. Where there is a need to exchange, a medium of exchange will soon appear. Gold and silver (and copper and brass and other metals) have served that purpose for literally millennia, but then they were replaced by paper. 
  
Right now, there are two forms of paper currency: Actual dollars, and Treasury bonds. One is a medium of exchange, the other a store of value. 

If Treasuries—the store of value—were to collapse in price, and the Fed—as I predict—tried everything in its power to at least initially prop up their prices, would those sellers who managed to get out of Treasuries in time then turn around and invest in even dodgier bits of paper, like stocks? Or REIT’s? Or even precious metal ETF’s?

No they would not: They would get out of Treasuries—supposedly the “safest” investment there is—and get into something even safersomething even more tangible: Actual commodities. Not ETF’s, not even futures (or anything else that entails counterparty risk)—sellers of Treasuries would get into actual, hard commodities. Because if suddenly even the safest of all investment vehicles is now unsafe, do you really want to get behind the wheel of an even more unsafe vehicle, like stocks or corporate bonds or ETF’s? I mean, c’mon: If Treasuries crash, what else might crash?

That’s why people in a Treasury panic would buy commodities. This ballooning of non-perishable commodities would be as a means to store value. Because that’s what people do in a panic—they batten down the hatches, and go into what’s safest. When the stock markets tanked in the Fall of ’08, where did all that sellers’ cash go? To Treasuries—because it was then considered the safest store of value. Commodities suffered in comparison—gold took a bit of a hit, as did the other precious metals—but Treasuries ballooned as the equities markets tanked. 
  
But if Treasuries—the ultimate store of value—now tanked? If the last sure-thing in paper-based stores of value took a hit, where would people go to both store value, and have ready access to that value? 

Commodities. And this rush to commodities, I argued, would trigger hyperinflation. 

Now, I said I would answer two questions—one was why commodities would outpace all other asset classes in a Treasury panic and subsequent hyperinflation. The other question was, “Where’s all the dough to feed my fireplace gonna come from, in a hyperinflationary event?”

The first wave of dollars in a hyperinflationary event will come from people’s savings accounts. 

If Treasuries tank, and the markets all barrel into commodities, then prices will rise for regular consumers—this should not be a controversial inference. What would consumers do, with suddenly much higher gas prices, and soon much higher food prices? Simple: They’ll bust open their piggy banks, whatsoever those piggy banks might happen to be: 401(k)s, whatever equities they might have, etc. 

But if the higher consumer prices continue—or become worse—what will happen to the 320 million American consumers? They’ll start buying more gas now, rather than wait around for tomorrow—and the market will react to this. How? Two way: Prices of commodities will rise even further—and asset prices will fall even lower. 

Again, the man in the desert, the diamonds, and the water: If American consumers are getting hit at the gas station and the supermarket, they’ll start selling everything so as to buy gas, heating oil (most especially) and foodstuffs. The Treasury panic will thus be transfered to the average consumer—from Wall Street to Main Street by way of $15 a gallon gas prices, and $10 a gallon heating oil prices. 

All other consumer prices would soon follow the leads of gas, heating oil and food. 

In the above bit of Chilean history, I described how the Allende government printed up escudos to make up for the shortfall in nationalized businesses that was produced by their policy of hiking wages, while at the same time fixing prices. 

This is a completely different way to hyperinflation than the way I envision it for the American economy—but once the American economy gets there, the effects of hyperinflation will be exactly the same: People will try to get out of assets in order to get hold of commodities. To get all eccy about it, money velocity would approach infinity, as money supply remains (at first) fixed, yet in the panic over commodities, aggregate demand as measured by aggregate transactions goes vertical. 

Would there be Federal government intervention of some sort? Most definitely—people would be screaming for it. Would food rationing be implemented? Probably, and probably by way of the current Food Stamps program. Troops on the streets, protecting gas stations and supermarkets? Curfews to prevent looting? Palliative dollar printing? Yes, yes, and very likely yes. 

That last bit—palliative dollar-printing: That’s the key. When palliative dollar-printing happens, it will be the final stages of hyperinflation—it’s when sensible people ought to realize that the crisis is almost over, and that a new normal will soon appear. But this stage will be fucking awful

Palliative dollar printing will take place when the Federal government simply runs out of options. Smart economists will get on CNBC and argue that, “The velocity of money is destroying the economy—we must expand the currency base!” It’ll sound logical, but palliative money-printing will be a policy option born out of panic. The final policy option. It won’t be done for evil conspiratorial reasons—always remember Aphorism #6 (“Never ascribe to malice what can be explained by incompetence.”). It’ll be carried out because of fear and panic. 

A whole boatload of fools in Washington, on seeing this terrible commodity-driven crisis unfold, with consumer prices shooting the moon, will scream for dollars to be printed—and their rationale will be perfectly reasonable, I can practically hear it now: “We've got to get cash into the hands of the average American citizen, so he or she can buy food and heating oil for their families! We can’t let Americans starve and freeze to death!”

Palliative money-printing will take place—hence the average American family will likely be using bundles of $100 bills to fire up the chimney that hyperinflationary winter.

Hoo-Ah

Now, this fairly Apocalyptic scenario is simultaneously horrifying, and exciting as all get out. Hell, why do you think disaster movies are so popular? Shit blowing up is way cool! That's why Roland Emmerich gets paid the big bucks, God bless ‘im. 

But for sensible people, Apocalypse is a distraction—it’s not the main event. For sensible people who want to be prepared, Apocalypse represents opportunities. 
 
A true story: In ’73, at the height of the Allende-created hyperinflation, an uncle of mine, who was then a college student, was offered an apartment in exchange for his car. That’s right—an apartment. He owned a crappy little Fiat 147—a POS if ever there was such a thing—but cars in Chile in the middle of that hyperinflation were so scarce, and considered so valuable, that he was offered an apartment in exchange. To this day, my uncle still tells the story—with deep regret, because he didn’t follow through on the offer: “That Fiat was in the junkyard by ’78, but that apartment still stands! And today it’s worth nearly a half a million dollars!” Actually, I think it’s worth a bit more than that. 

Another true story: A banker friend of mine manages the assets of a fabulously wealthy 70-something gentleman, whom I'll call Alfredo. In 1973, Don Alfredo was a youngish man, just starting out, with a degree in engineering but no money—until he inherited US$3,000 from a deceased aunt. Alfredo realized that the $3,000 were in a sense worthless: He couldn’t buy anything with them, and it wasn’t enough for him to leave the country and start over someplace else. After all, even then, $3,000 was not that much money. 

So he took those $3,000, went down to the stock exchange, and spent all of it on Chilean blue-chip companies: Mining companies, chemical companies, paper companies, and so on. The stock were selling for nothing—less than penny stock—because of the disastrous policies of the Allende government. His stock broker at the time told him not to buy stocks, as Allende’s government, it was thought, would soon nationalize these companies as well. 
  
Alfredo ignored his broker, and went ahead with the stock purchases: He spent all of his $3,000 on buckets of near-worthless equities. 
  
On September 11, 1973, the commanders in chief of the four branches of the Chilean military staged a coup d’état. Within a year, Alfredo’s stock had rebounded about ten-fold. Since then, they’ve multiplied several thousand-fold—yes: Several thousand-fold. Don Alfredo has lived off of that $3,000 investment ever since—it’s what made him a multi-millionare today. 
  
He realized, of course, that either those blue-chip companies would be nationalized by Allende—in which case he would lose all his $3,000 inheritance, which really wouldn’t change his fortunes very much—or somehow a new normal would arrive in Chile. Since the $3,000 couldn’t buy him anything, he took a gamble—and won. 
  
What do these two true stories tell us? Simple: Buy when there’s blood on the streets
  
That’s Baron de Rothschild’s famous line—but it hides a key insight, one which should be highlighted perhaps even more forcefully than the line itself: 
  
Even in the midst of Apocalypse, things will get better. 
  
That’s something people don’t quite seem to understand. In fact, it’s why teenagers tragically kill themselves over some girl or boy: They don’t realize that, no matter how bad things are now, they will get better later. To repeat: 

Even in the midst of Apocalypse, things will get better. 
  
I’m not repeating this insight as an empty comfort to my readers—I’m saying it as a trading strategy. When things are at their crazy worst, when everyone believes the Apocalypse is well nigh here, that’s when thing are about to turn for the better. This applies to every situation—including and most especially in a hyperinflationary situation. 

Why? Simple: Because hyperinflation—by definition—cannot last. Because people need a stable medium of exchange. So if the currency goes up in flames in a hyperinflationary fire, of course there will be a period of terrifying instability—but it will pass. Either the currency will be repaired somehow (as Volcker repaired the dollar back in 1980–’82). Or the currency will be completely and irrevocably trashed—and then be replaced by something else. Because—to insist—people need a stable medium of exchange

If Treasuries tank and commodities shoot up so high that they essentially break the dollar, civilization will not come crashing down into anarchy. At worst, there’ll be a three-four years of hell—economic hell. Financial hell. But then things will settle down into a new normal. 

This new normal might well have unsavory characteristics. I tend to be a pessimist, and just glancing through history, I can see that just about every period of hyperinflation has been stabilized by some subsequent form of autocratic or totalitarian government. The United States currently has all the legal decisions and practical devices to quickly transition into an authoritarian or totalitarian regime, should a crisis befall the nation: The so-called PATRIOT Acts, the Department of Homeland Security Agency, the practical suspension of habeas corpus, etc., etc. 

But as I said in my previous post, and reiterate here: Speculations about the new normal are pointless at this time. The future will happen soon enough. 

What I do know is, One, a hyperinflationary event will happen, following the crash in Treasuries. Two, commodities will be the go-to medium for value storage. Three, all asset classes will collapse in short order. And Four—and most importantly—civil society will not collapse along with the dollar. Civil society will stumble about like a drunken sailor, but eventually right itself and carry on with a new normal. 

During that stumble, opportunities will present themselves. I hope I have explained why. 

100 comments:

  1. civil society will not collapse along with the dollar I disagree with this statement. Look at Argentina, anarchy in the streets. Russia in the late 90's, demonstrations by the hundreds of thousands. New problem we have today is the inability to feed the population due to weather changes, water problems, wheat, fish and ocean die off, WILL collapse societies. If you look at the bigger picture it's actually quite scary. (It's only 5 degrees Celsius in Ecuador right now. Very bizarre.)

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  2. Interesting. I quitee agree that we are going to experience a period of austerity, the likes of which no one in this country alive today has ever witnessed.

    Those who have not already stocked up on 18 months worth of food should begin doing so while there is still food on teh shelves. A few weapons to protect that stash is good ancillary advice.

    When the SHTF, our stores will empty in short order. With the "just-in-time" delivery model broken, we will se chaos in extremely short order.

    I believe it is far better to be prepared for a disaster that never happens, than to be standing shirtless in the road after a hurricane blasts the clothes from your body and wrecks your possessions.

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  3. I like to print out Gonzalo's articles, but ...
    1.) he doesn't provide a print button (or I haven't found it),
    2.) I don't want his yellow background on my printed version.
    I've found a way to get rid of the yellow with Windows 2007. In case some of his other fans would like to get rid of the yellow too, this is my procedure:
    Select all the document. Under View, select Web layout. Right click on the document and select Modify. In the Modify window, click on the Format button and then select Borders. There you can change the background colour.

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  4. 'civil society will not collapse along with the dollar'

    I generally agree. Western civilization has enough natural and existing resources to start a new currency without burning entire cities to the ground. A nuclear war or a civil war can do that, but not completely destroying the currency. People will create new mediums of exchange and stores of value, on the spot if need be. And global warming? Please don't fall for that.

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  5. 4:29 its NOT global warming its GLOBAL COOLING. Society WILL collapse since many today cannot grow their own food. The GOVERNMENT will not provide it for you, unless of course you enjoy the GENETICALLY MODIFIED FOOD they feed us.

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  6. 'its NOT global warming its GLOBAL COOLING.'

    Oh, I get it. You're a faux troll. Or else you have a very thick tin foil hat. BTW, I've reported you to the men with black helicopters. You will be in a re-edutainment camp shortly. It won't hurt. Honest.

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  7. Silver Bully, you just haven't woke up yet, but you will, with those big staring blank eyes blinking in the headlights. DO SOME RESEARCH, HILLBILLY. On global cooling and genetically modified foods, Food inc. Don't make yourself look so stupid here, its embarrassing.

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  8. The cold this December and January has been noteworthy and newsworthy. We just posted that December 2009 was the Second Snowiest on Record in the Northern Hemisphere. Beijing was hit by its heaviest snowfall in 60 years, and Korea had the largest snowfall ever recorded since record keeping began in 1937. Plus all of Britain was recently covered by snow.

    The cold is setting records too.

    Oranges are freezing and millions of tropical fish are dying in Florida, there are Record low temperatures in Cuba and thousands of new low temperature records being set in the USA as well as Europe.
    Google: Global Cooling

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  9. This is certainly one possible scenario, but not likely. One thing we have to consider is who runs the country. At this time, the banking cartel runs the country, if not most countries. For hyperinflation to occur and the government to start handing out money directly to citizens, they would need to dismantle the banking cartel and the Fed. Hyperinflation would be suicide to the banks and this is not how the current system is set up.

    Congress would need to pass a law and the President would need to sing off. There would be legal challenges and the banks would begin to fund other politicians (likely, the out of power party). This does not even mention the obstacles on the international scene.

    Under the current structure of our society, hyperinflation it is not likely to occur. Much change – politically and to the existing power base - would have to happen first, much like what had happened in your example of Chile.

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  10. Hi Gonzalo!

    I was in Switzerland in Sep. 1973, and I heard a lot of mention of "Allende" on the TV, but could not understand what was going on (I don't speak German)

    Later that same day, as I checked into a hotel in Andermatt, it turned out the porter was Spanish. I asked him what was going on in Chile.

    He told me, "Allende is dead. Shot."

    I turned to my wife and said, "This is the time to go to Chile with a suitcase full of dollars. Things are dirt cheap there now, and they won't be thinking of Socialism for twenty years, at least."

    I didn't follow through on the investment idea - but it was very sound and would have made a bundle. As for Socialism - some Chileans are
    clamoring for it again. Some people never learn.

    Great article, Gonzalo!

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  11. Wow! I remember living in Ecuador and Columbia in the late 70's when Pinochet was in power. I recall meeting many Chileans who had fled during that time. Ecuador also had a military government at that time that turned the reins of power back to a civilian government while I was there. My recollection was that they restored order without being tyrannical (in Ecuador).

    I find it ironic that many other South American countries have failed to learn the lessons that Chile suffered. Some have experienced hyperinflation. (I remember the Ecuadoran sucre at 25/Dollar. It later devalued to 30,000/Dollar. Then, Ecuador simply adopted the Dollar.) Now, there are socialist governments flooding the continent, with similarly disastrous results, including high inflation (Chavez' Venezuela has 20+% inflation and shortages off all kinds, another consistent and distasteful by-product of socialism).

    Unfortunately, we in the United States have also failed to learn the lessons of painful history, and seem doomed to repeat them! I couldn't help but note the striking similarities between what occurred in Chile and what is happening now in the United States. A word to the wise is sufficient!

    Thanks for a very insightful series of discussions about hyperinflation. Best wishes, Gonzalo!

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  12. Bravo and Hooah!

    "Be greedy when others are fearful" -some old guy

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  13. "If Treasury bonds ceased to be that store of value, then people would invest in the next best thing, which would be commodities"

    "No they would not: They would get out of Treasuries—supposedly the “safest” investment there is: Actual commodities. Not ETF’s, not even futures"

    Once again, the reason I can't get with this mentality is because the only way a fund can buy hundreds of millions of dollars worth of commodities is with futures. But you said people will shun futures. So which is it? It can't be both. Derivatives are so entrenched in the system that the idea that no one will buy or use them is naive.

    If anything is likely to happen with commodities, it will be a brief super spike, similar to $850 gold, or $150 crude: they spiked then crashed soon afterward.

    I can see the argument for significant inflation, or stagflation, but the case for hyperinflation seems more like an urban myth.

    I'm still waiting for the bond vigilantes to come out as the 10-yr yield keeps cratering.

    Don't get me wrong, I'm bullish on metals, but there's a difference between caution and sensationalism.

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  14. Great pair of articles, love your work.

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  15. Thank you - you have put this all out in a fashion that allows for complete understanding of these complex financial mechanics. Your references are well done and compelling.

    I believe you are absolute correct on all accounts, although I myself believe that the violence in America will be great and widespread - And, perpetrated by the Government. They have come to despise us, the sheeple, and have been waiting anxiously to dominate and enslave us.

    Americans love cliches yet pay no heed to them - history is about to repeat itself be it Depression, World War, or Natural Catastrophe(s). God help us all.

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  16. "Relative breast size in the porn industry" made me spew coffee on my keyboard as I fell off my chair from laughter!

    Layman checking in here as I continue to read your blog/posts of valuable information with satire to boot. I'm curious, do you use an open-hand or a back hand when you deliver the smack down?

    Cheers mate.

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  17. Awesome piece of art. Thank you so much for sharing it with us. Your experience is more precious than Gold itself.

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  18. If Treasury bonds ceased to be that store of value, then people would invest in the next best thing, which would be commodities, especially precious and industrial metals, as well as oil—in other words, non-perishable commodities.

    Reminds me of Exter's Pyramid (via FOFOA).
    Demand Collapses Downward:
    Exter's Pyramid

    Raw link if hyperlink doesn't appear:
    http://www.infiniteunknown.net/wp-content/uploads/2009/09/john_exter.png

    Although, Exter put commodities above stocks and bonds. *barf* LOL

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  19. Gonzalo,

    Your words lose credibility when you lower your intellect by using vulgarity in your article.

    ReplyDelete
    Replies
    1. If you value form over content you should reconsider your priorities and focus. Adapt yourself to the world in stead of adapting the world to you (yes you can also read this as: don't be a F...ing socialist).

      Delete
  20. Both posts on hyperinflation were excellent and informative reads. It's also nice to see some subtlety in writing and leaving breadcrumbs on a trail, but not feeling the need to hit the reader upside the head with a 4 x 4 re possible conclusions - e.g. the Allende - Obama similarities.

    If the US does goes the hyperinflationary path, I hope that you are right in terms of the relatively benign extent of the collapse and length. I think there is a better foundation for a rebound than in many other countries, but having read some posts by folks who lived through the Argentinian crisis, there is the risk that things could really come unglued. The aftermath of Katrina isn't exactly a soothing thought when looking to the future.

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  21. This is all great analysis for the USA. What about the other 95% of the worlds population?

    The USD is the reserve for all other currencies, so what happens to them? Do they try to inflate down with america, or leave them to themselves, and continue on with stronger currencies?

    A look at worldwide implications in a broad sense would be a good topic for the Part III.

    Thanks

    ReplyDelete
  22. A couple of questions for your scenario Gonzalo.
    1:In todays enviroment where q/e will be more in the form of digital dollars rather than paper..How would u see that unfolding? Online stores will never bee so busy!..
    2: If the US sees this coming and decides to provoke a war somewhere,The flight to quality would still be into dollars at least for a while.

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  23. I enjoyed reading your articles. Finally, a well-thought, original idea.

    A lot of observers are predicting inflation followed by Hyper-inflation. But your articles are unique because they describe a rational, step-by-step descent from the current recession to a hyper-inflationary depression.

    Thank you.

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  24. Very weak followup to an otherwise interesting thought experiment article.

    $15 gasoline and $10 heating oil would suck, but it would NOT cause that many people to have to choose between food and their houses.

    There is a gigantic difference between Chile in the '70s and the US today: Chile was and still is a relatively poor nation. The US is not.

    Equally so the Weimar Republic was a literally insolvent nation due to WWI war reparations.

    Thus while I do think hyperinflation is a possibility - it won't be due to a flight to commodities.

    If it occurs, it will be because of a general repudiation of dollars. And for that to happen, there are several clear steps that must occur first:

    1) The petrodollar standard must end
    2) The US must achieve a Ponzi level of funding of its debt (getting there)
    3) The US must suffer a series of weak and ineffective leadership in the Presidency and Congress (done)

    Prior to 1), there are further baby steps:

    a) US non-oil trade imbalance will fall as other nations just stop selling stuff to the US in exchange for worthless dollars
    b) US companies start hoarding foreign currency from exports and subsidiaries abroad

    There are a number of other signs, but these are a few examples.

    Secondly it is actually unnecessary for the Fed to print dollars. There are more than enough dollar in foreign circulation that a significant global repudiation of the dollar will unleash a dollar tsunami.

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  25. I would like to invite everybody to watch the 3 part series, The Ascent of Money.

    http://video.pbs.org/program/1155680272/

    In the 1700s, France had a much bigger population than England. Why were the English able to dominate the world and not France?

    One word: hyper-inflation.

    The french economy and banking system was killed by hyper-inflation, and that gave the British the edge to build a larger fleet, finance new companies and expeditions, and dominate the world.

    ReplyDelete
  26. All in all, brilliant articles, both of them. However ...

    As a Christian, I see these events as the perfect scenario to usher in both a new global currency (if the Dollar is't worth salt, the whole world is effected) and a new global government. And I agree with some posters who believe the civil unrest will be far greater than you wrote about.

    About 30% of our (U.S.) population is slothful and inept at doing anything other that receiving money from the gov't. When they realize they are on their own they will take to the streets and take whatever they can. It will not be pretty.

    This is not the civil, Christian society that was pervasive in the 30's.

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  27. @Khan:
    Truer words never been spoken !
    Thumbs Up.

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  28. Fantastic 2 articles on hyperinflation - I'd like to know your opinion on the price of farm ground - seems to me if food prices hyperinflate so might the cost of the land to produce them. Do you agree or not ??

    In the future, your blogspot will be my first place to visit every morning. Your insights and writing style are unique. Please continue to enlighten us.

    ReplyDelete
  29. SPECTRE of DeflationAugust 27, 2010 at 3:27 PM

    I'm glad you mentioned the stock market as a store of value at some point because the only thing outpacing hyperinflation in Zimbabwe is their stock market. Thank you for the personal stories which help to bring the reality of it all home. We live in very interesting times.

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  30. Well done, Sir! This clear, concise, and relevent explanation should be required reading for everyone.

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  31. I fear you might be right, yet I hope that you are wrong....Below is an excerpt from an investment newsletter that may be equally applicable to today's uncomfortable circumstances...

    "Time Magazine summed it up. This quote is long, but please read it closely…

    The US economy remains almost comatose. The slump already ranks as the longest period of sustained weakness since the Depression. The economy is staggering under many "structural" burdens, as opposed to familiar "cyclical" problems. The structural faults represent once-in-a-lifetime dislocations that will take years to work out. Among them: the job drought; the debt hangover; the banking collapse; the real estate depression; the health care cost explosion and the runaway federal deficit.

    Does that sound about right? Did Time Magazine manage to cover all the bases? Or did it leave something out?

    The thing is, this quote is from the September 1992 issue.

    What happened next? The U.S. economy boomed for 16 years, without a single down year, until 2008.

    If you ever wanted proof of the old saying "it's always darkest before the dawn," that quote from Time is it.

    Of course, with 16 straight years of boom, people thought it could never end. Overconfidence and greed set in. Real estate investors, for example, started to believe real estate never went down.

    Now people believe the opposite… that the bad times will never end. And that buying real estate is a terrible idea.

    Meanwhile, the earth under your feet is agnostic. It doesn't care if you're optimistic or pessimistic. It has no opinion.

    People were ridiculously optimistic when they should have been most scared. And right now they are scared. With history as our guide, it's probably a time to be optimistic."

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  32. "Never ascribe to malice what can be explained by incompetence."

    This is why the malicious use incompetence as a cover for their actions.

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  33. Gonzalo,

    I'm not sure if the power structure atop the United States is malicious or just incompetent. Assuming the power elite pulling the levers at the Fed and the big banks is competent and malicious, is the current "crisis" just another stepping stone toward global government, global taxation,and a global currency - the final hurdle to be crossed being the destruction of the US government and the dollar?

    I don't know about the rest of your readers, but I'm feeling less and less a US citizen and more and more a slave to a cartel of global banks and their minions doing their bidding at the highest levels of government.

    Gonzalo, who wins if the dollar bites the dust?

    And if and when the dollar implodes, will it have been the result of a catastrophic miscalculation by the world's financial and political elites, or a controlled demolition that actually consolidates their power?

    ReplyDelete
  34. Stock up, stock up and ... stock up !!! Then move to a low density area, network, barter and be kind. And do it NOW !

    ReplyDelete
  35. When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany

    Pre-order now for $ 1,023,432.00 :)

    http://www.amazon.com/When-Money-Dies-Devaluation-Hyperinflation/dp/1586489941/ref=sr_1_1?s=STORE&ie=UTF8&qid=1282954500&sr=1-1

    ReplyDelete
  36. 1st time visting, I have bookmarked...

    Agree that RE will devalue but in the present housing situation in the US I believe that having a roof over one's head/toilet/washer/dryer/fridge will become paramount more than you know, even as we stuff 5 people in a two bedroom/1bath house to pay the mortgage from those that got forclosed on, lost their job or cannot work a full time job.
    My understanding this is common is other countries and will become common here. I see camper vans in private drives around here that are obviously hooked up...meaning they are out of a place to stay permanately.
    my 2 cents.

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  37. Of all the great wonderments your blog entry causes me to ponder, there is one, above all others, that gnaws at my soul. So, if it's not too much trouble, what, as per your following quote, "a snowy piece of macro-economic policy speculation" does the term snowy refer to? I ask because I can not reconcile a substance that is frosty, white, and delicate with the quality of your post.

    ReplyDelete
  38. I read your posts on zerohedge.
    First one was good, 2nd even better.

    And on that 2nd post (in zerohedge) in the comments section... all these Gun-heads took over the comments with their inane comments and (I felt) denied you the accolades and respect you deserved.

    Anyway... great posts, both the insightful,timely content and the style in which you delivered it.

    Thank you.

    ReplyDelete
  39. Population Control, not Climate Control

    ReplyDelete
  40. I'm reading "Shock Doctrine" by Naomi Klein at the moment (yeah, it's a 2007 book, but the underlying facts are still relevant.) She, of course, paints a different picture of Allende than you do. I'll give you the edge, you being a Chilean and all.

    However, your negative take on Allende's inflation still glosses over the horrors of Pinochet's fascist takeover. You also don't mention the economic chicanery of Milton Friedman and the Chicago School economist gangsters who used your entire country as a lab rat for their neo-liberal theories. Was life for the average Chilean better under Pinochet than it was under the democraticaly elected government? And I'm not even talking about the people who were tortured and murdered. Did Chile lose most of its manufacturing jobs under the new economic regime? When the pensions and medical services were privatized, did that make things better for the people? Aside from those with 3,000 U.S. dollars in their pocket, that is.

    I'm glad you're an optimistic pessimist about how things will go in the long run. If there is a hyperinflation in the U.S., or more likely a loss of faith in the American clownbuck, my fear is that it will lead to a militaristic dictatorship, civil war and lots of bloodshed. That's part of the reason I moved out of the country. I'm still in the deflationary collapse camp, but long before I read your think-pieces, I was adopting some of the financial strategies you recommend.

    One final thing, though: why do you think stocks won't be degraded like dollars? The crooks who run corporations have no honour. Why would they not debauch shares by issuing vast quantities of extra ones, with permission of captive boards of directors? Why would they not make preferred classes of shares with true control, as opposed to common shares issued to common people? America is a kleptocracy now, whether it's Dempublicans or Repocrats in power. The fascist bank/military/political complex is the enemy of the people, so Americans are screwed no matter what.

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  41. I have a friend who travels the world and has recently visited Chile. He says they're actually doing very well right now, maybe even better than the U.S. if you don't pay attention to their GDP. Maybe the following links explain something the New United States can look forward to.

    http://www.happyplanetindex.org/

    http://www.happyplanetindex.org/public-data/files/happy-planet-index-2-0.pdf

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  42. Aphorism #7: never ascribe to incompetence that which enriches and consolidates the power of insiders and string pullers.

    The malicious put the incompetent in charge knowing this will bring about the collapse they need to buy while blood is in the streets. The use of patsies and fall guys is as old as babylon. How many times in history has economic and monetary collapse preceeded consolidation of wealth and power in the hands of the few? How often have the beneficiaries been the dynastic banking families?

    They say theory is proven as fact when prognostications are borne out in reality. Read Carrol Quigley's musings on the BAnk of International Settlements. His writings from the mid nineteen sixties look downright prophetic as do those of Edward Griffin.

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  43. Here're my 2 cents from Russia ^) I think, it won't neccessairly get much better after the event. It's not neccesairly useful to pile up food stocks for 18 months or preparing for an investment amid the crisis, it might even be useless to buy gold. You pay attention to the Latin American experience of hyperinflations. In all of those cases, the governments were replaced with some motre or less western-oriented (or in your case northern-oriented ^) )soon thereafter, that enjoyed the support from the part of the huge developed economies like the USA, which enabled a rather quick and successful recovery and further development in the framework of the capitalist rules of the game.

    Now have a look at Russia after 1917 relovultion. The country was politicaly isolated, nobody helped and nobody imposed the rules of the game from the outside. The governemnt quickly gained control of all of the industries and later of the whole economy, and you couldn't invest anything because there was no such things as shares or bonds anymore. Gold was outlawed and forcefully requisitioned from the individuals, because the government used it to pay for the criticial imports. Those who didn't give up their gold got executed. After the government managed to curb on the black market (by means of terror and repression), there was absolutely no use in owning gold - if you got caught with it, you were dead, so it wasn't easy to buy anything for it. The moredern USA is bot a small economy, and if it collapses, it will wipe off most of the global economy; there will be nobody top help form the outside, so the scenarios that took place in the isolated 1920-1930 USSR are likely to happen. If ypu don't get a decisive blood-thursty strongman rule, you can alternatively end up in a large scale civil unrest, separatism, and the collapse of the central government. In this case, there's a bigger chance that you will be able to pay with the gold, but the fragments of the Union won't ever be capable of creating an industrial economy comparable to what the USA used be in the past, like none of teh former Soviet Republics became anything truely successful. The States will eventually became a part of teh third world, with the center moved ro China or elsewhere. Or in the worst case there will be no center at all, but the whole civilization will stop the economic expansion and turn to a long-lasting depression and deterioration, both industrial and cultural, like it has been happening in the former East Block. You won't get much profit on your investments in such a case.

    I don't think that the USA will eb able to recover from a hyperinflation without either turning into a dictatorship with the poor and opressed population, or splitting into pieces, each of them depressive and rather insignificant. The reason for that is the lack of the solid economic basis in the US, independent of the globalization effects and financial bubbles. The real economy in the US is in a worse shape than it was perhaps at the times of the Great Depression. There is no way this can be fixed without a very substantial decline in the living standards (remember there's nobody to help from abroad). A rapid decline of the living standards will cause social unrest which will either destroy the country, or will be curbed upon by a strongman's regime.

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  44. The stock I invest in is Mossberg and Remington. I also like lead, copper and brass.

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  45. Hi Gonzalo, I think you've got a point. But, i'd say that in a hyperinflationary situation, highly indebted companies and governments will profit as they see their debts whiped out. Inflation causes a wealth transfer, not wealth destruction. The losers will be the savers and pensioners mainly.

    This same occurred during Weimar, when investors failed to realize at first that stocks didn't have to be worthless as bonds were, since stocks held an underlying real value that brought investors back in.

    At the same time, it's hard to believe that US and other governments will not implement transition meassures such as price controls, nationalization, food stamps, and so forth so that worthless money would remain in most of the accounts which would be blocked, such as it happened in Argentina during the corralito. Then the currency will be assigned a new value.

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  46. 'Equally so the Weimar Republic was a literally insolvent nation due to WWI war reparations.' -- Khan

    And the US in 2010 is a literally insolvent nation due to entitlements promises.

    Lawrence Kotlikoff pegs Usgov's negative net worth at minus $202 trillion -- 14 years worth of economic output.

    http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aiFjnanrDWVk

    The rich America / poor LatAm trope is a 20-year-old time warp. Now the developing world is outgrowing the OECD rich countries by 3 to 4% a year. Through the 'magic of compounding,' this changes the relative balance of power and wealth in a hurry.

    -- machinehead

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  47. i'd say that in a hyperinflationary situation, highly indebted companies and governments will profit as they see their debts wiped out. -- Fernando

    If their debt is long-term and fixed rate, yes -- its real value will be inflated away.

    But entities heavily dependent on floating-rate, short-term debt -- a fortiori the US gov't -- will suffer immense pain as short rates soar into double digits. At some point, they will be unable to roll over short-term debt at all. Illiquidity = game over.

    Debt-free companies will see their sales and earnings rise with inflation. But discounted at higher short-term rates, their net present value will be lower. This is another way of saying that price/earnings ratios will fall.

    In the inflationary late Forties and late Seventies, US P/E ratios fell to 6. But in a hyperinflation, P/Es can fall below unity -- projected future earnings are literally not worth a dime, when their purchasing power is unknowable.

    When hyperinflation burns out, as it must, P/E ratios bounce back, and stocks can mount a dramatic recovery.

    -- machinehead

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  48. When debts are wiped out by hyperinflation, doesn't that mean ALL banks will simply fall ... they issued most of the debt.

    If there are no banks left, how will companies finance their operations?

    If companies can not operate financially, how can their stock value go up?

    ---

    I am arguing since almost two years now that the TARP money should have been spent to set up four brand new government investment banks ... with (of course) clean books.

    Many of the big banks might have failed, but the economy would have de-leveraged quickly, globalization would have been dead, and these new banks could have kick-started the U.S. economy by now with products made at home.

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  49. Thank you for getting me to think about this and take it seriously. Some random thoughts:

    After considering "Part I" i'm convinced USA (and perhaps world) hyperinflation is almost certian, barring more catastrophic events. (One disturbing rumour i heard is the TBTF banks are issuing more Treasuries than they report).


    The "Powers that Be" don't want hyperinflation, except as a prelude to a new global currency they control; so some catastrophic events may be planned to delay hyperinflation until they are ready and/or help prepare the sheeple for acceptance of financial dictatorship.
    BTW It is interesting there is recordbreaking flooding in both China and Pakistan just now. (The Chinese need to buy more Treasuries and the Pakistani need to be more supportive of USA puppets in Afghanistan)
    Are some larger (un)natural disasters planned?

    Keeping in mind a quote from the Terminator films: "The future is not set...No fate but what we make"; the future looks like one of dictatorship(s), collapse, or some combination of both. My guess is that "new normals" will fall to cascading chaos. Given that outlook, no investment is "safe", with paper ones less so. A "back to basics" lifestyle seems prudent for those who have the ability and means.

    I agree that it is darkest just before dawn, just thinking that it might be a long time till dawn.

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  50. You expect fund managers and people to take possession of uranium, wheat, corn, barely, hogs and pork bellies? Of course the rally will be in Futures - what else?

    Interesting pieces but they (partly) hinge on an error in your first article where you describe simple inflation as the economy over-heating; as something independent of monetary policy and the velocity of money; as something different in kind from hyperinflation. This is actually a Keynesian premise. Simple inflation is also a monetary issue, as the whole of 19th c. US shows. Hyperinflation is triggered by a currency crisis, true, but the 1970's shows that simple inflation and hyperinflation are not differences of kind but only degrees. The US will have very inflation but will not suffer Chilean-German style hyperinflation because of the Dollars' status as world reserve currency. Yes, that is being phased out and SDRs, etc., are coming in. But as of this writing, the Dollar is too widely diffused to undergo the perils of a smaller economy like Chile.

    Good blog and writing.

    Saludos - Sebastian

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  51. Very interesting article, however only one of the comments alluded to the fact that the US has the largest standing civilian army/militia in the world. Armed to the teeth.

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  52. To Anonymous: however those banks getting hyperinflated dollars from their borrowers would return those same dollars to their lenders. If they're foreign, so much for them. At the Weimar time, the German total debt to GDP which was something like 130%, became just 1/3 of GDP in the space of several months.

    Besides, I fully agree with P. Krugman in that Tbills discount deflationary times ahead, which rules out the hypothesis of a bonds bubble.

    He's been advocating that the US Gvmt. should inundate the market with paper money, so that when inflation starts to rise, it will be time to call those stimuli back, not earlier.

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  53. I'm ahead of you. I've built numerous sheds and am now stocking with copper, steel, corn, oats, hog bellies and an assortment of other commodities. I also have trucked in a large tank holding 55 barrels of oil and will be adding more storage.

    Hoarding physical commodities is a challenge, but I'm up to it. I'll be building more sheds and accumulating more commodities like wheat, natural gas, propane, nickel, and pigs and cows. Of course, I've got plenty of gold and silver.

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  54. Its not really the hyperinflation that takes down asset prices. It's tyranny. That is also what reduces productive output. And when output falls yet money supply stays the same, you have inflation. Even if there is no printing. If output contracts more than 15% per year you have hyperinflation, even with no money printing. Tyranny is a major part of the reason real estate prices are falling in the US. Who would want to own a home or a business when this bloated government is oozing corruption like stinky sticky green slime all over everything? People in this country are so far beyond braindead it amazes me. Their hopey changey crap never gets them anywhere, and now they are too dumbed down to even understand the history that is unfolding here.

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  55. Every American should read the book called;
    The Creature from Jekyll Island.
    By:Edward Griffen

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  56. I have lived thru hyper-inflation. And all that happens after one or two budget cycles is that wages rise and choke off the cycle.
    The petro-dollar debt empire of the Saudi's evaporated. The spiral decribed here locks up and the wealthy are hit hardest. That is why the Fed will sacrifice any body to avoid it.

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  57. I believe this assessment. We had two events; one in the credit crisis (financial market) started after the collapse of Lehman in 2008 and the other was the flash crash (stock market) happened recently. We will have a third event and it is likely to take place in the bond market. It is unlikely we will recover from the bond crisis because this market is 70 times the size of the stock market and 50 time the financial system.

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  58. Another good article. I have become a fan and I send links to others.
    Like many Americans I am confused and worried about where to safely invest. They say Americans are not savers but low interest discourage savers. Bonds seemed the only safe haven. The flash crash reminds us that the stock casino is rigged by the big players.
    The Fed is trying to re-inflate the bubble with a dead pump leaking air. The only way to get a good return for your money is to payoff your mortgage or pay down expensive credit card debt. Powers that be can't see it's a debt crisis - not liquidity. You can't create jobs in an economy where there is a cautious consumer hooked on Walmart/Costco supplied by China. We cut back because: Where is the money for kids college, for our retirement? Will social security be there? Our growing insecurity and frustration with government is building here. It was said you could not lose betting on real estate and so fool me once... but now with Treasuries - fool me twice? Thank you for your articles.
    Kathleen from Virginia

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  59. Great food for thought but just one question. If the Fed saw that people were dumping treasuries due to the fed purchasing treasuries wouldn`t the Fed just decide not to buy treasuries and comunicate this to the market?

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  60. Agreed.

    Only one caveat:

    Things got better for the Russian people too, but it took from 1917 - 1989, and a whole lot of suffering and lives in the process.

    That is what Authoritarian/Totalitarian rule brings, and that is what should be the 1st concern going forward, not economics.

    Economics and finances (personal) won't mean much under Authoritarian/Totalitarian rule.

    There won't be any 'trading' or 'profiting from disaster', because there won't be any of that allowed in the first place.

    And there is the day's lesson on the 'Patriot' act and 'Fatherland' Security...

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  61. Great article Gonzalo. I am in agreement with 99.9% of your prediction, except one. I think there will be significant civil unrest, enough to overwhelm the local police. Look at the civil unrest when police shoot unarmed citizens in Los Angeles, Seattle, Oakland to name a few cities. While researching the video interviews of survivors of the Great Depression on You Tube recently, there was one common thread to their accounts. Virtually all the survivors claimed that no one saw the October 29, 1929 stock market crash or Great Depression coming, no one. It took people completely by surprise. Considering the level of animosity, fear, and uncertainty running through society today, society is a dry tinder box and any spark will ignite it. I hope you're right in your prediction.

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  62. Mr. Lira, Wow, this piece was SO HELPFUL!!! I really appreciate your going into more detail--very, very helpful. I am reminded of Maslow's Hierarchy of Needs which basically says that an individual's physiological needs (food, water, heat, shelter etc.) are
    paramount. Who cares about a fancy apartment if
    having a car could mean being able to escape the
    country with one's loved ones??? It seems that when people's physiological needs are not being met they all turn into CAVE MEN and CAVE WOMEN--I mean who cares about mining stocks when you or your child is starving or freezing--NO ONE!!! Thanks so much, Caroline

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  63. @Khan
    There is a gigantic difference between Chile in the '70s and the US today: Chile was and still is a relatively poor nation. The US is not.

    The US is the largest debtor nation in the world. The wealth you are referring to is backed by debt. People owe more then their assets are worth.

    Equally so the Weimar Republic was a literally insolvent nation due to WWI war reparations.

    SS and Medicare are operating in the red. The US is insolvent due to the goodies the Baby Boomers think they are entitled too to the tune of a 100 trillion dollars.

    Thus while I do think hyperinflation is a possibility - it won't be due to a flight to commodities.

    If it occurs, it will be because of a general repudiation of dollars. And for that to happen, there are several clear steps that must occur first:

    1) The petrodollar standard must end

    Already being considered.

    2) The US must achieve a Ponzi level of funding of its debt (getting there)

    See SS and Medicare. This is no money in the SS Fund just IOUs

    3) The US must suffer a series of weak and ineffective leadership in the Presidency and Congress (done) Concur.

    Prior to 1), there are further baby steps:

    a) US non-oil trade imbalance will fall as other nations just stop selling stuff to the US in exchange for worthless dollars
    b) US companies start hoarding foreign currency from exports and subsidiaries abroad

    There are a number of other signs, but these are a few examples.

    Secondly it is actually unnecessary for the Fed to print dollars. There are more than enough dollar in foreign circulation that a significant global repudiation of the dollar will unleash a dollar tsunami.

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  64. IRWIN SCHIFF'S BOOK IN 1977,-THE BIGGEST CON- SPELLED IT ALL OUT. BUY IT..READ IT AND HELP HIM GET OUT OF JAIL FOR EXPOSING THE CRIMINALS IN THE FEDERAL RESERVE.

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  65. I hate to burst your Bubble but Quantitative Easing is Over Since August 25. Now the Fed is, secretly and unobserved, doing Quantitative Tightening!

    Operation TWIST Again: Quantitative Tightening

    Operation TWIST Again

    Update Your Software!

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  66. We had hyperinflation in Brazil in the 80´s and 90´s. My first salary back in 1985 was more than a million cruzeiros.I was a millionaire, big deal. Everyone else was a millionaire too, because that was the minumum wage, some 100 US dollars worth. Secret of survival: as soon as you get the money, run to the supermaket and spend it all in anything.

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  67. You're quote at the end struck me becasue you mentioned it twice: "Even in the midst of Apocalypse, things will get better"
    That's a lesson straight out of the Quran: chapter 94 verses 5&6: "5. So verily, with every hardship comes ease. 6. Verily, with every hardship comes ease."
    Its repeated twice to drive the point home

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  68. Man, you write some good articles.

    Here is another one that delineates the valuing of money and the retrogression of out of unbacked paper currency.

    http://www.trueliberty.us/Money.html

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  69. Re futures and commodities: yes, consumers of gasoline WILL hoard it; yes, consumers of cotton WILL hoard it; yes, consumers of uraniums WILL hord it; and so on.

    Consumers will quickly bypass the futures markets, since they operate on a fractional reserve system akin to the banks.

    For example, if everyone long gold allowed his futures contract to expire, and demanded physical delivery instead of a receipt, it would be like a run on the bank. There ain't enough cash to go around. Ditto gold.

    That is why ETFs will be close to worthless, and physical gold will be worth a magnitude more -- unless, as our Russian friend suggests -- Western governments become entirely totalitarian.

    FDR confiscated gold, don't forget.

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  70. This is an excellent article (aside from the coarse language) and your point about assets prices and the water in the desert is good. However, when you are talking about the T-Bond market and the U.S. dollar, you are not talking about a small country. You are talking about the lynch-pin of the civilized world. Like Japan today, Chile in the 70s existed within the context of many other stable countries and could pull itself out of trouble with their help. If the U.S. goes down, coming out of it will be much more problematic.

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  71. The only real problem I see here is that you equate "anarchy" with "chaos". Rothbardians would strongly deny that. Governments, and their stooges, of course, encourage such a belief.

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  72. What's wrong with anarchy?

    Anarcho-Capitalism for the win!

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  73. Dear Mr. Lira;

    Many thanks for your extraordinary analysis. I read the first article over twice and wanted to start alerting friends and family. At the conclusion of the companion piece I was a little more grounded but I still told my 14 year old son that I had read something so important we had to read it together tomorrow night ( he was on his way to bed after watching the Arsenal game ).
    I feel grateful for being given an opportunity to read an analysis so prescient. For I do believe that your perimeters are spot on and that the scenario you portray will be enacted. Of course there will be differences. There always are, but great change beckons and only a mindful few will have the mindset in place as an antidote to dealing with it. Your articles therefore paint the pictures for necessary future decisions.
    What I find so fascinating is the foreknowledge that I am about to live through one of the great economic upheavals in history, a shakeout of mammoth proportions that will completely reorder the foundations of society. And reading articles such as yours makes that feasability so much more imminent. It's like knowing that Pompeii is going to erupt while still an inhabitant of the city. Interestingly enough my warnings to family and friends are met with a bland indifference. ( This, of course, is not for the now, but for some far off future. Far, far off.) That it could be impending is not really a possibility.Your articles place these potentialities right in the Living Room where they belong. There is a screaming wakeup call in your logic and for that we all owe you.

    With warm regards, Jim Backlar

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  74. I have a question:

    If the Fed refused to engage in any more QE than they have already announced/committed to, and simply allowed the price of Treasuries to drop, would that be sufficient to "break the chain" and protect us from hyperinflation?

    If they were to communicate (forcefully) to the TBTF banks their intention not to intervene in the Treasury markets (other than rolling over the MBS's into Treasuries, as they already announced they would), would they thus persuade the big banks it would be too dangerous to make any big sudden moves out of Treasuries, and nip this problem in the bud?

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  75. I have a simple and brillian solution!

    Change the crashing currency to another currency that is more stable.

    Done. :)

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  76. 9-27-2010

    report on tv today about how grocery store shelves are bare in Greece today.

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  77. Great article and comments.

    The US dollar can't collapse alone. The world's economy is too tied to it.

    The euro was exactly created to keep the european economies together: they either float all or sink all.

    TPTB still have this option: create a bigger currency coupling $, € and £ (plus yen?) and buy another 10 years before the eventual collapse (peak oil anyone?)

    At least to give the happy fews enough time to save THEIR assets.

    PomPomPom

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  78. This discussion is akin to fleas discussing when the dog is going to get its next flea bath.

    With all things, this too shall pass. Spend some time today with someone you love. That's the greatest investment you could ever make.

    ReplyDelete
  79. It is really funny. Americans think they are "the chosen people of God" All empires, absolutly all have fallen.Unfortunately, the USA, that was a country based in the Gospel of Christ, has corrupted that Gospel, making a business of it, and has become an inmoral and criminal nation, killing inocent children and women, destroying schools, hospitals, roads, etc etc etc. Why do youy think, you people, that you all are so important? The USA is receiving the wage of it's iniquity and corruption.

    ReplyDelete
  80. A thought provoking write up indeed. Well, to be very honest I advocate most of the views expressed, I too share the same concern "the worst is yet to come".

    Too much of fiscal stimulus does no good to the economy, rather it pulls down the sovereign rating as a result of increase in the Deficit to GDP ratio. As a result people, banks, financial institutions and the world economy by and large would lose faith in the US treasury bills and that would be the start for the 2nd round of recession (well, not necessarily depression).

    I just burst into laughter when Obama said that his Government had succeeded in stabilizing the US economy. Nothing is going to change unless and until the people of the US start saving, they can’t go on a borrowing spree as the model in itself is not sustainable. The government must incentivize savings by way of hiking the interest rates, now that calls for a paradigm shift in the way the US economy had been operating for decades. Yes, it would lead to chaos in the short term as the consumption would take a hit, but it will be a blessing in disguise since people will learn to live within their means.

    For decades the people in the US have been net borrowers, and to make debt available to its people the Fed borrows from other countries by way of selling treasury bonds. When it comes to India, China or Japan the government borrows from its people, it is the net savings of the people which funds the deficit of the government.

    Therefore I am sure of the fact that US is in deep trouble and the bubble can burst anytime, this time the reason for the muddle would be treasury bubble as it was the real estate asset bubble in 2008.

    Well, we in India would of course feel the heat but will survive as our economy is driven by domestic demand unlike China. Our well regulated financial institutions and nationalized banks would act as a cushion for us at times of trouble.

    Please let me know your views.

    Regards,
    S. Hari Balaji

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  81. Thanks for you insight into these current economic conditions, and for what I believe is a very accurate view of what is to come. I can't help to think that there will be some electronic form of "cash printing" when hyperinflation hits. The government is already spending big money to print money. I think that when the SHTF, the government will offer some sort of RFID device solution. There are large private corporations already chipping their employees with RFID's for security purposes.

    ReplyDelete
  82. I agree with the writer about the Commodity's prices and the ending story, but not what happens in between.

    Before the ending story is to happened, two or three things must happen first.

    1. The US Military will go to WW3.
    2. US $ will equal China Yen.
    3. Agricultural suppliers of the world can't supply the world population.

    If these three things happen, Gun and ammo will win.

    You better be happy to be in the United States.

    ReplyDelete
  83. Excellent articles.

    An additional factor is that a quickly imploding dollar value on the global currency markets is a way for the US government to confiscate the value held by the Chinese central bank, drug dealers around the world, other central banks and investors outside the US holding treasuries and dollar assets.

    However, I believe that if Treasury bonds collapsed, investors would put at least some of that money in foreign currencies and bonds.

    A run on the dollar and Treasuries would be triggered by an absolute loss of confidence in the US government. I don’t think that an absolute loss in confidence of the US currency would spread to ALL other currencies. The US in unique in the level of corruption, destructive partisanship, blindness to the real problems, and institutional paralysis in Washington.

    For example, the UK with a massive budget deficit now has a new powerful government that is putting dramatic budget cutbacks in place. And they can stay in office for five years before the next election. The Euro area is shaky but the German economy is very strong and the EU is putting pressure on the profligate countries such as Greece, Portugal and Italy.

    In addition to the UK and the Euro, there are other smaller currency areas with stable economies that can absorb the panic flow of funds: Swiss Francs, South Korea, Sweden, Norway, Australia, Turkey, and several large emerging economies. Even if the other central bankers initially try to support the dollar they are more rational than the US power elite. They would quite soon realize that it is a lost cause and allow the dollar value to implode.

    PS. This would also mean an instant collapse of the US military empire. The US army would not be able to pay for expenses outside the US in other currencies for their overseas standing armies. Will they even be able to afford to pay for transportation home for the troops and equipment?

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  84. An additional factor is that a quickly imploding dollar value would probably wipe out credit as a medium of exchange, which is what 98% of the "dollars" are, just vacuous, digitized promises to pay created by banks.

    ReplyDelete
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