Sunday, February 6, 2011

Ballsy or Crazy? Where Are We On Inflation and Hyperinflation

For better or worse, in the financial blogosphere, I’m Hyperinflation Boy.

You decide.
I haven’t actually written that much on the subject: Only five posts from a total of 82 over the last year. I posted the most recent one back in late October—over three months ago—where I made a series of concrete predictions about inflation and hyperinflation of the U.S. dollar.

The predictions were either really ballsy or really stupid—even I can’t quite decide. But be that as it may, it’s only fair and right to revisit the subject, recapitulate my arguments, and then check to see if I was on the money, or full of shit.

To begin: Last August 23, I posted an article called How Hyperinflation Will Happen. I guess the piece must’ve struck a nerve, because between my site and a couple of other places where it was reprinted, it got over half a million page views.

My basic thesis was simple: If there is another financial crisis, I argued that capital would not flee to Treasury bonds—instead, it would flow to commodities. And this spike in commodity prices would lead to dollar hyperinflation.

This argument seemed not just counter-intuitive—it appeared to fly directly in the face of empirical evidence: In the Panic of ‘08, Treasuries shot the moon, as people exited equities and every other risk asset—including commodities and precious metals—and ran for the safety of Treasuries. As an added bonus, the U.S. dollar shot up, bouyed by this rush to a safe haven.

Therefore, in another market crisis, it would seem reasonable to expect a similar outcome: Capital flows exiting whatever asset class was considered risky—as well as a few that were clearly not risky—and going to the safety of Treasury bonds and the U.S. dollar. 

However, my point was that—between the deteriorating U.S. fiscal situation, as well as the Federal Reserve’s fast-and-loose money policies—Treasury bonds were the likely source of the next global financial crisis. 

In other words, I argued that U.S. Treasury bonds have become a risk asset class. This was the key proposition of my argument, and I defended it both in the original piece, and in a subsequent piece called A Termite-Riddled House: Treasury Bonds

I pointed out that, since the fall of ‘08, the Federal government’s balance sheet has deteriorated significantly (a fancy way of saying “They’re more in the hole than in ‘08”). The U.S. Federal government’s outstanding debt is currently 100% of GDP, and fiscal deficits are projected to be 10% or more every year for FY 2011, 2012, 2013 and 2014. State and local governments are at the point of collective bankruptcy, and will likely need to be bailed out by the Federal government—putting more strain on the Federal finances. 

The U.S. Federal government is drowning in debts that cannot be paid. And since Treasuries are essentially unsecured debt, I argued that there would eventually be a panic in Treasury bonds—much like last May’s Flash Crash, but without the happy ending—which would lead to commodities spiking.

This surge in commodity prices would reach the consumer, and become a self-reinforcing spiral. Since the Federal Reserve cannot raise interest rates aggressively because of the weakness of the Federal government’s balance sheet, this price spiral would feed on itself, and lead to hyperinflation of the dollar.

I wrote a few other pieces around that time—What Hyperinflation Will Look Like (Aug. 26), the aformentioned A Termite-Riddled House: Treasury Bonds (Aug. 31), and Was Stagflation In ‘79 Really Hyperinflation? (Sept. 16)—which buttressed and amplified the basic argument.

Then a couple of months later, on October 28, I wrote a follow-up piece, called Signs Hyperinflation Is Arriving.

In this follow-up post, there were two noteworthy points: One, I backtracked a bit on the issue of a Treasury bond panic. And two, I made some hard-and-fast predictions as to the timing of hyperinflation of the dollar. 

At the time (late October) yields on the 10-year Treasury were at around 2.50%, spreads with the 2-year were about 200 basis points—yet commodities of all classes (precious metals, industrial, agricultural, oil) were all steadily rising. This was just before the announcement of Quantitative Easing-2, but the Treasury bond market had already priced in QE-2, because of all the signals put out by the Fed in the weeks prior to the November 3 announcement. 

Therefore, I began to wonder if whether the Federal Reserve could successfully backstop Treasury bonds, while the commodity markets continued rising unabated. After all, I had originally argued that, if there was a panic in Treasuries, this would necessarily force a rise in commodities. But if commodities were rising regardless of the Treasury bond market, then hyperinflation could be arrived at in spite of Treasury bond yields. 

In other words, I began to think that a panic and crisis in U.S. Treasury bonds was not a sine qua non condition for dollar hyperinflation.

So I hedged on the issue of a Treasury bond panic. In the Oct. 28 piece, I wrote:
However, I am no longer certain if there will ever be such a panic in Treasuries. Backstop Benny has been so adroit at propping up Treasuries and keeping their yields low, the Stealth Monetization has been so effective, the TBTF banks’ arbitrage trade between the Fed’s liquidity windows and Treasury bond yields has been so lucrative, and the bond market itself is so aware that Bernanke will do anything to protect and backstop Treasuries, that I no longer think that there will necessarily be such a panic. 
That was the major shift from my original August pieces.

The other major point of the October 28 post was that I became increasingly confident in calling for precise inflation targets, which would signal imminent hyperinflation. I wrote:
Therefore, I am confident in predicting the following sequence of events: 
• By March of 2011, once higher commodity prices reach the marketplace, monthly CPI will be at an annualized rate of not less than 5%. 
• By July of 2011, annualized CPI will be no less than 8% annualized. 
• By October of 2011, annualized CPI will have crossed 10%. 
• By March of 2012, annualized CPI will cross the hyperinflationary tipping point of 15%. 
After that, CPI will rapidly increase, much like it did in 1980. 
Fucking ballsy! or, Fucking crazy!—You decide. 

How do these predictions stack up so far? 

Well, rest assured, I’m not going to turn to John Williams’ Shadow Stats: According to his very well-researched data, 5% inflation has already been breached—and rising nicely.

But in my October 28 piece, I didn’t claim that inflation would be at 5% by the end of March according to John’s Shadow Stats data—rather, I claimed that the official inflation number, non-seasonally adjusted, would be at 5%.

Right now, we’re on track for that official 5% inflation rate by the end of March. There are a lot of signs that do not depend on subjective forecasts, which point to rising dollar inflation:

Most apropos, according to the Bureau of Labor Statistics’ January 14 bulletin, CPI-U inflation, non-seasonally adjusted, for the period January 2010 through December 2010 was 1.5%. The pace of inflation was rising in December: 0.4% higher than November’s annualized rate (Dec. ‘09 to Nov. ‘10) of 1.1%, which had been flat since June.

This BLS data is as of December 31, 2010—January data comes out February 17. Expectations among economists is that it will be higher. 

Insofar as the Treasury bond market is concerned, as of this past Friday, February 4, the yield spread between 2-year and 30-year Treasury bonds—the traditional gauge of investor inflation sentiment—is at 397 basis points: Closing in on record levels, investor sentiment clearly on the side of further inflation.

The rise in yields is despite that fact that, as I wrote here, the Fed is purchasing 60% of the U.S. Federal government’s FY 2011 deficit. Depending how you count QE-lite, the Fed is creating $600 billion or $767 billion out of thin air, and using it to buy Treasuries. So the obvious question you have to ask is, What would Treasury yields—and the 2-year/30-year spread—be like without the Fed’s massive purchases? A lot uglier than they are now. 

Insofar as signs of inflation elsewhere in the rest of the world, they’re feeling the pain presently—it’s the reason Egyptians rioted: Food prices are rising throughout the world, especially China and Indonesia. The poor devote a higher percentage of their earning for food, so it makes sense to see food prices affect poorer countries first, before hitting the U.S. and Europe. 

(An aside about rising food prices: Several people, including Paul Krugman, have claimed that these spikes in agro prices are a result of curtailed supply, due to natural events (wildfires in Russia, flooding in Australia, drought in Argentina). However, a 5% decline in food production does not produce a 15% rise in price all on its own. By definition, it is impossible to separate the various causes for the rise in prices in agricultural products, but historical data on grain production and prices leads even a casual observer to conclude that decline in production is not the sole factor that determines agricultural commodity prices: There have been several other years where grain production has fallen—and fallen a lot worse than this past year—yet prices have not spiked to the levels that they are spiking to now. (Krugman—once again—also creates a specious and highly misleading inference, by writing: “The USDA has estimates of price elasticities. For the United States, they put the price elasticity of demand for breads and cereals at 0.04 — that is, it would take a 25 percent rise in price to induce a 1 percent fall in consumption.” This leads an unsophisticated reader to infer—erroneously—that a 1% fall in production could mean a 25% rise in price, yet allows Krugman to claim that he never said such a falsehood. Another example of his throwing a rock and hiding his hand—someone really should go over his serious work and logic-check it.))

Apart from a., the official CPI-U numbers for December, and consensus expectations of their continuing to rise, b., the Treasury bond market’s signal of inflation expectations, and c., food price inflation in the rest of the world, there is the indisputable fact that commodity prices (precious and industrial metals, oil, agro) have all steadily risen in price since December 2010; only gold has been a bit topsy-turvy. 

So as of today, there are clear, unmistakable macro-signs that inflation is rising, across the board. 

My March 2011 prediction of 5% annualized inflation is still two months away—but it looks as though it’ll be met. This upcoming April 15 we’ll know for sure.

If we do, then I think the July prediction is an easy money bet—the real issue will be September-October of this year: That’ll be decision-time for the Federal Reserve. They’ll have to decide whether to raise rates to stem rising inflation, or whether they’ll stand pat.

I think they will raise rates—but I think they will be timid, and raise them to match the annualized inflation rate, as opposed to doing a Volcker and shoving the rate a good 300 to 500 basis points above the pace of inflation.

But that’s for September-October. For now, this is where we are. 

I don’t know if I’m being ballsy or crazy to have predicted specific inflation targets: All I can say is, it’s exciting. 
This coming Thursday, February 10, at 9pm EST, I’ll be having a live debate with Nicole “Stoneleigh” Foss, of The Automatic Earth, on precisely this subject: Deflation vs. Hyperinflation. 
We will be taking audience questions. You can register here.
Hope you will join us!
GL

48 comments:

  1. Great stuff GL. That treasury yield curve never lies (unless it's being manipulated). Remember the inverted yield curve that hung over the housing bubble? Bond investors know their business.

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  2. You'll be called crazy by a lot of people but not me. I've seen the inflation you talk about already starting to take hold where I live. A dozen eggs 3 weeks ago was 99 cents but now a dozen eggs are almost 3 dollars. Thank you for coming out and saying the truth about the inflation that's here and the coming hyperinflation.

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  3. Small correction - you cited the 2-20 spread; it is the 2 year/10 year spread...

    We will be there soon!
    Good luck in the debate.

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  4. CORRECTED—thanks for the catch, Polumetis.

    GL

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  5. I believe that your original prediction that a collapse of Treasuries will lead to hyperinflation is correct.
    As interest rates rise, in response to price inflation, pensioners will see their Treasuries mutual funds lose money.
    It's bad that they are getting, practically, no return in those funds from the low interest.
    But to loose money!
    They are going to panic and sell those mutual funds.
    Then the "death spiral" begins.

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  6. I think banksters will continue to milk current monetary system untill currency collapse and then go hide in there bunkers/vaults. After 50% plus population has succumb to starvation/violent chaos and started PM based system they will resurface with there vast PM hoarde and take up where they left off. Over simplified but you get the idea.

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  7. I participate in a national effort to track inflation where it counts - at the grocery store and the gas pump. Those of us who buy food to feed our families and put gas in the car know the real rate of inflation.

    So far our efforts have revealed an annualized rate of inflation of 12.4 % for the 8 weeks ended January 5, 2011.

    Buckle your chin strap. We are in for a bumpy ride.

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  8. K Smith, why don't you post a link to your data.

    GL

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  9. "I think they will raise rates -- but I think they will be timid..." - GL

    That is how inflation really got going in the '70s. CPI would come in at 6%, fed funds rate went to, say, 4 1/2%. Next report saw inflation at 8% so short rates went to 6%.

    Interest rates followed inflation because people were content with the promise of action without the performance.

    I do expect something similar this time too so we can go on with rising inflation and rising commodity prices for a long time.

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  10. Pertaining to your Chinese inflation: The bus fare from Qingdao to Rizhao has increased by 6% since 21 Jan 11, from 78 to 84 dingdong. Not sure about food prices, as we would shop after hot pot and somewhere north of 4 500mL Tsingtaos. The price increase may be attributed to the Chinese New Year, but I doubt it with government price controls.

    Looks like you're fucking ballsy and spot on.

    Batten down the hatches...

    C deK

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  11. GL

    Jim Rickards has been on the fence for a while now, but recently said it looks as if inflation is going to win.

    http://bit.ly/hmsoeZ

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  12. Oops. Last link was incorrect, here is the correct one.


    http://bit.ly/dYUI9x

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  13. US = bankrupt - Most US sheep have no idea what is coming....

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  14. Hyperinflation is a feedback loop. Money printing, loss of confidence, falling bond sales, higher interest rates, increased velocity of money, higher prices, all feed on each other. So arguing if the feedback loop starts with "falling bond sales" or a "loss of confidence" is like arguing which comes first, the chicken or the egg.

    Hussman calculates how higher interest rates lead to higher money velocity, and so higher prices if the quantity of money is the same. So he says the Fed must withdraw money when interest rates go up. Mish notes that the Fed would lose big time if they sold bonds after interest rates go up, so they must hold to maturity. If you put these two together, neither of which is a hyperinflationist, you can show we are headed toward hyperinflation.

    http://howfiatdies.blogspot.com/2011/01/hussman-mish-hyperinflation.html

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  15. GL,
    The inflation tracking I am involved with is a voluntary grass roots effort. I am reluctant to even share the name of the group here because trolls may attempt to infiltrate the group and corrupt the data.

    You have written of such trolls here. We all know the Fed is paying PR people big money in an attempt to convince us what we see all around us is not really happening.

    Our group consists of several hundred people all over the country who conduct weekly price surveys. We gather retail pricing on regular gasoline, and a list of common household grocery and personal needs products you would find in a typical family grocery cart as part of weekly grocery shopping. There is no Kobe beef, organic coffee, or convenience foods. The data collection, compilation, and analysis are all conducted on a completely voluntary basis. The data and analysis are not publicly available.

    Because of the nature of our data collection process it is not possible to put in place the controls necessary to protect against those who may join the group in the future who may have nefarious intent. We do have some controls that assist in identifying interlopers but we do not want to roll out the red carpet.

    I do not mean to create the impression that we are some mystery organization. We are not. But we have worked really hard to establish our inflation tracking effort and I do not want to jeopardize the integrity of the process or future data.

    I will continue to share the results here when it is appropriate to the topic at hand. Or I can email it to you when it is available. I'll include more detail with future results.

    You and others will have to draw your own conclusions about my integrity and the accuracy of what I share.

    KS

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  16. I agree with your blog GL, but would add that food inflation is being impacted by corn conversion to fuel, something that is totally foolish. Also, alcohol blended fuel contains roughly 95% of the energy contained in a gallon of gasoline. On an energy equivilent basis it should be about $0.15 a gallon cheaper than regular gasoline.

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  17. Paul Krugman is not an economist, but a very irritating propagandist for his fellow, the irritating inflationist Bernanke.

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  18. Is 15% annualized CPI hyperinflation? I don't think so...

    http://en.wikipedia.org/wiki/Hyperinflation

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  19. I regularly drink orange juice. I buy their Stater Bros brand at the Stater Bros supermarket. A 64 oz carton cost $1.79 two years ago then it slowly going up to $1.99 then $2.19 to $2.39 and now $2.49. I stop drinking orange juice 4 months ago because it is too expensive. I couldn't afford brand name orange juice like Dole, Minute Maid, Florida's Natural, Simply Orange Juice, Tropicana, Mott, etc. because their prices are above $3.00.

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  20. From Kansas to K Smith, why not email the link info for that grassroots organization. If you ask him to guard it, I trust that he will.

    Great Article GL!

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  21. "Since the Federal Reserve cannot raise interest rates aggressively because of the weakness of the Federal government’s balance sheet, this price spiral would feed on itself, and lead to hyperinflation of the dollar."

    The Federal Reserve's primary dealers, the International Too Big to Fail's of CLUB FED, have over 250 TRILLION in notional interest rate based derivatives.

    They have raped entire sovereigns, like Greece on "designed-to-implode" 5-year rate swaps, just like the dozens of other bankrupt sovereigns, States, Counties, Municipalities and utilities - any public works where the productive powers of labor can be exploited -- all are being bankrupted through these interest rate swap debt protection schemes.

    Ya think there just MIGHT be a little bit more leverage here, at 250 trillion, which the FED's mandate to manage USD interest rates is beholden to moreso than the UST's weak balance sheet?

    This is a global CON job, with hyperinflation as the end game to usher in global economic governance.
    http://letthemfail.us/archives/7339

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  22. Fountain City expatFebruary 7, 2011 at 5:02 PM

    Food prices rise during periods of inflation therefore food company stocks such as ADM should rise as well, right? But what happens when the overall stock market is declining during a time of rising food prices? Can the food company stocks still be expected to rise?

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  23. Hi GL

    As always , a well thought out piece of work.

    I want to ask - considering the inflationary environment we can all see or the hyperinflation that may occur, the FED would have to raise interest rates to try to curb this as is my understanding, but if they did this wouldn't it make private debt such as credit cards etc unserviceable for the common man ? If it does will this cause even more inflation in some way ? Thanks

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  24. Since it's prediction time, here's one from me:

    The Fed will NOT raise the rates in September.

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  25. I switched cell phone providers from Verizon with 450 minutes @ 39.99/mo to t-mobile with 500 minutes for $29.99. 11% more minutes for 25% less cost. Auto insurance has been flat to down for 3 years now. Health insurance went way up so I dropped my coverage. Rent is the same. gas and food up, but one good year harvest and grain prices will collapse again. Looking for another 40% drop in housing before I buy. If 10 year yields rise to 5% or 6% that should be good for a 40% drop in housing prices. Buy a modest house and pay cash for it, grow your own vegetables. Rage against the machine.

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  26. You may be crazy to give CPI signposts, or not.

    If CPI is ~1.5% with real price increases around 6-8%, then it is likely prices will be increasing at ~23% before they allow a 5% CPI. Did you underestimate the dishonesty of the system, or is this what you are expecting? My guess is stat manipulation will get worse as inflation accelerates, with 100% annual price increases yielding a CPI in the 10-20% range.

    Secondly, while it looks like we might get hyperinflation, I'm wondering how the banksters win in that case? Do they sell all the debt they can't "forceclose" on to the Fed and have the Fed offload it on taxpayers? Do they then take the cash and buy up all the commodities, switch to a PM system and make us pay them in gold?

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  27. Until recently, the 99(.9) cent store sold a 16 oz. bottle of 70% rubbing alcohol for $1 (I’ll round up from .999 for convenience). NOW they sell a 12 oz. bottle of 50% alcohol for $1.

    You used to get 11.2 oz. (70% of 16) of actual rubbing alcohol for $1 – now you get 6 oz., a decrease in volume of 46%!

    Put another way, you now pay 16.7 cents per ounce of actual rubbing alcohol when you used to just pay 8.9 cents per ounce. The price increase per ounce is 87.6%.

    Think about that – 87.6% inflation in stupid rubbing alcohol prices at the local dollar store!

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  28. One thing nobody wants to ask is where is this all going to end. Large financial, social and political developments require centuries to unfold. In history class we are taught that history is linear, that particular events occur only once never to occur again. This is totally untrue. Everything in the Universe is cyclical. What we are experiencing now has happened twice in history, around 1200 B.C. and again around 400 A.D. The signal events in both cases included huge increases in immigration, governmental decentralization down to the level of city state/citadel/castle, destruction of the economy though monetary devaluation and inflation, eventual impoverishment of the middle class, destruction of technology (Did you know there were computers and coin-operated vending machines 2,000 years ago? See Scientific American for December 2009, I believe, the so-called Antikithira computer, named after the island near which it was discovered nearly a century ago.) as well as eventual depopulation due to poverty, famine and plague (still to come as a result of the general impoverishment and loss of science and technology.
    This can be mostly avoided if we go after the banksters and politicians who are destroying the economy. Some of the banksters could be prosecuted for insider trading and fraud, crimes far greater than those of Bernie Madoff, Michael Milken or even Martha Stewart, all of whom were imprisoned for far less. The problem is they own the political system. We must take it away from them and reinstitute a truly democratic government before it is too late.
    We are now about a century into a middle age period, and there is a lot more room to go down from here if we do not act soon.

    I have been studying history for fifty years and have earned three grad degrees in history and research. I have an extensive library relating to the two previous middle age periods.

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  29. Wil correctly observed
    "This is a global CON job, with hyperinflation as the end game to usher in global economic governance."

    I couldn't agree more.

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  30. Besides the "official" government stats & Williams' Shadow Stats, the Massachusetts Institute of Technology (MIT) has a price-tracking project too - the Billion Prices Project. (http://bpp.mit.edu)
    "BPP Database Key Facts:
    -Statistics updated every day
    -5 million individual items
    -70 countries
    -Started in October of 2007
    -Supermarkets, electronics, apparel, furniture, real estate, and more"

    5 millions item prices tracked daily should provide a statistically valid view of what's really going on. 70 countries. Rhetorically, is "one country's stats in a vacuum" a valid perspective these days?

    The graph at http://bpp.mit.edu/daily-price-indexes/?country=USA shows their price index for the US diverging from the govt CPI figures since beginning of Jan 2010.

    At a cursory glance, we might be seeing the "knee of the curve" being traced out by the MIT index right now.

    I'm inclined to agree with you that hyperinflation is coming to the US, but it'll be small comfort to be proven correct on this one.

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  31. Interesting as always. I took special note of your comment: "In other words, I argued that U.S. Treasury bonds have become a risk asset class." Recently I had a similar epiphany regarding which asset classes are most risky. If one has a 10 year horizon, are bonds less risky than equities? What is the risk in holding dollars? Like yourself, I may be crazy too, but here's my home brew list of asset classes in order of increasing risk: PRECIOUS METALS, HARD ASSETS,REITS,YIELD GENERATORS, PROFESSIONAL ALLOCATORS, EQUITIES, BONDS, DOLLARS.

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  32. To Anonymous at 3:57 AM regarding Orange Juice - do you think that perhaps the price of your Orange Juice went up because of the damaged harvest in the winter of 2010 (http://www2.tbo.com/content/2010/feb/09/january-freezes-will-reduce-floridas-orange-harves/)
    I'm not trying to parrot Krugman's "Climate change is causing inflation in food prices" argument but this example seems to be tailor made: a 40% increase in your price matched with "A USDA inspection in late January showed about 40 percent of the oranges being harvested now showed at least some damage from the freezes." And a projected 20% decrease in production. Maybe it's the FED but, again, with Occam's Razor - it seems that weather is the simpler explanation.

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  33. The large cities have NO GNP. They produce NO meat, NO potatoes, NO fish, NO eggs, NO NOTHIN. People that live there will be corraled into FEMA camps, where they will be fed and they will be SAFE, but relieved of their money and forced to work. Farmers have always had a GNP because THEY ARE THE GNP. They will be forced at gunpoint to give the food they produce to the Gov, which will inturn distribute that food to the FEMA camps. That is IF THINGS GET BETTER. Because things are currently worse than that. There are currently a MILLION americans without a home and very little food to eat, that would give anything JUST TO HAVE A JOB.

    Bear with me here...

    Evil does NOT come from above.
    Evil does NOT come from below.
    Evil come at us HORIZONTALLY, like the wind.
    Evil does not come from ROCKS.
    Evil does not come from TREES.
    EVIL COMES FROM BAD PEOPLE.
    Farmers are NOT bad people.
    Fisherman are NOT bad people.
    BANKERS ARE BAD PEOPLE.
    Bankers have enslaved us.
    The time has come to corral all the Bankers and those allied with them into their concrete bunkers, and seal the lid behind them.

    Then the rest of us will be able to HAVE OUR LIVES BACK, and we will be able to love and care for one another once again, and the Earth will be beautiful.

    It IS that simple!

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  34. No dicussion of hyperinflation from foreign dollars repatriating to the US to try to get a return while they can in a panic? If all major currencies "ran home" we'd be screwed, no? I am amazed this isn't in your debate!

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  35. Ballsy I'll give you. But if you are right, gasoline will hit $4.00/gal by next year and a loaf of bread will be even more, and Americans will squeal like stuck pigs, yet we'll manage. But in other nations, this will produce revolution and famine. Egypt and Tunisia will be the first of many if you are right.

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  36. Kansas,
    You suggested I send Mr. Lira a link to the site for our grassroots effort to track inflation. You said "(i)f you ask him to guard it, I trust that he will."

    I find it interesting that because you place your trust in someone you think others will, too.

    Mr. Lira hasn't written anything that would indicate to me he is untrustworthy. However, trust must be earned.

    My trust is earned by observing how someone lives life, how he or she treats his or her family members and friends, how he or she treats those in positions of service, how he or she behaves over time in a variety of situations, especially situations that challenge a person's honesty and integrity. The reason we are in the situation we face today is because we have placed our trust in those whom our culture tells us are experts. Honestly and integrity are not part of the equation.

    I believe Mr. Lira has an excellent grasp of the facts. He is very skilled at using insight and experience to draw conclusions, and he is extremely adept at using the written word to communicate complicated concepts and ideas.

    These things do not make him trustworthy.

    KS

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  37. GL,

    I think your timing is off. I don't think the official YoY CPI will even reach 4% by the end of 2011. 2012 is the time frame at which I am most concerned.

    Because the Dodd/Frank financial reform law requires that bonds be traded transparently, they will be on an exchange (just like stocks) by 2012. Once the computers are programmed, the probability for a flash crash in bonds will be with us.

    My prediction? In one hour, the dollar will die.

    -Dave in MO

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  38. GL

    I just listened to your discussion on hyperinflation and agree with many of your points. I do disagree with you regarding preparedness minded individuals on which I am one. You stated your disdain for "suvivalists" for several reasons. I am on the other hand a self reliant prepper who takes responsibility for my own actions. I store food and prepare for unexpected things because I know that the government won't take care of me. It is my responsibility to take care of myself and my family. I would like to hear your thoughts on this type of preparedness minded individual. Think Jack Spirko at the survival podcast as the approach I am describing. Are you anti-preparedness as well or do we have a misunderstanding of your position in this area. Please advise.

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  39. I hate to, but have to agree with Rick when he so succinctly states:

    I think banksters will continue to milk current monetary system untill currency collapse and then go hide in there bunkers/vaults. After 50% plus population has succumb to starvation/violent chaos and started PM based system they will resurface with there vast PM hoarde and take up where they left off. Over simplified but you get the idea.

    This is a possibility, if, the majority of the people remain ignorant that "bankers are the problem" and are responsible for all those deaths that will happen from starvation and war. They make Hitler look feeble by comparison. Current circumstance presents an opportunity to direct attention to these sociopaths and remove them from the gene pool

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  40. the people of Egypt have it right..throw the bums out NOW not next election cycle...we should give them all visas and let them siege DC for it IS the fed that causes their problems..

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  41. I might offer a "tie breaker" on the inflation-deflation debate. I've been studying this stuff for as long as I can remember. Call it a side effect of being born on the 4th of July.

    The only way to return to gold-as-money is by way of what I'll simply call "the stick" ... pain ! Having been in marketing all my life, pain is the more powerful motivator in contrast to pleasure and therefore it can be considered a "necessary evil" written into "the script".

    Here are a couple of facts to consider on the gold-as-money axiom.

    Since an economy is a real-time event, its currency should reflect those fundamentals. Gold systems of the past did not support this feature as gold had a fixed value to currency as recently as Bretton Woods. This, of course, created a lack of liquidity, but not because of the gold, because of the fixed peg ! There are two ways to meet monetary demand for gold. On the basis of a fixed value, deliver more gold from the ground ...or .... allow gold to float and then split the enhanced value. The former issue took place in 1971 and the latter in the mid 1990's when gold title, as measured by weight, could be digitized as a currency and distributed by way of the information highway. I'm speaking of gold backed digital currency which is a marriage of debt-free store of value and instant global liquidity. It doesn't get any better, does it ?

    Here's a nice little fact to digest. Without the development of the pure fiat USD with its floating qualities, real-time gold payment processors that support the above mentioned bullion based payments would have never been developed. The dollar's "ultimate destination", for its application, appears to be as a real-time measure within a commodity based payment system. The dollar's role as a currency was part of this process and could be considered to be a "necessary evil" in the evolutionary process. If you think gold payments cut out the banking industry altogether, think again. The dollar is an element within the programmed algorithms for all gold based payment processors. The dollar's role as a measure (not a currency) is inseparable to the need to convert fiat based pricing (of goods and services) to weighted gold payments. The dollar can be considered to be intellectual property, can it not ?

    The design is already a "fait accompli". That challenge has been overcome. The real challenge is the marketing and scale-up, something the US government cannot touch or be involved in for fear of the safety and stability of the legacy system (the USD). Rate of change is critical and therefore the market (bottom-up) is assigned with this task. The elite's role is simply to "carry the stick". The stick is inflation. It's time to break from the Newtonian limitations of boom-bust.

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  42. We do not shop at the local grocery store, as prices are way high, we've been shopping at Trader Joe's instead. As for gas, we just stay at home a lot.

    As to whether the transition to a one world government will be smooth or rocky I don't know. I do know this is just a change from one stage to the next in the Age of Imperialism. The end of it is what to dread: absolute imperialism.

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  43. Rising interest rates will lead to a sell off in gold/silver as treasuries begin to pay competitive rates once again. gold/silver investors losses highly deflationary. Those holding treasuries and muni's will suffer loss of capital as rates rise, highly deflationary. S&P500 will lose value as rates rise, also highly deflationary. Rising rates will crash housing prices which are way too high anyways, more highly deflationary. Rising rates govt will have to cut back on their profligate spending, less spending more deflation.

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  44. Many of the posters here may not understand the definition of hyperinflation.

    Whether the US economic environment is inflationary or deflationary, investors still want to hold dollars; investors just want the relative value of their dollar-based investments to go up.

    In hyperinflation there will revulsion toward securities tied to the US dollar. Investors will dump them; rapidly; at any price.

    Please remember the definition:

    "Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency." -Gonzalo Lira 8/23/2010

    It is my belief that the dollar will die in one hour.

    -Dave in MO

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  45. Hey GL,

    Kudos to you sir for a wonderful piece.
    I have been following the saga unfolding now in the US and the rest of the world for almost 3 years now, slowly putting the pieces together.
    For the record I am with you and support the prognosis.
    The amazing part of your argument though(or the part that is lacking) is that there is little reference to the USD....read loss of value. If one were to measure the loss ...one could conceivably start when the price of GOLD was at its lowest point at the beginning of this millennia.Yes gold has risen every year for that last decade....and what has the USD done on the same timeline....depreciated. The gold price is really a measure of the loss of value of USD.
    If the USD has fallen, then can't we safely assume that prices of ag. products, commodities and PM's would increase. If I glance across the spectrum of these items, most are quoted in USD. Price movements in the same are to a large extent a reflection of value of the USD.
    You have failed to specify what has contributed to the surge in prices of 15% (other than a fall of 5% in production). The lower USD value surely has some larger ownership of this.
    Sure inflation (on a much higher level) is coming. Blind freddy can see that. What you have ommitted to point out is the failing of the USD causing a currency crises, thereby tipping the US into HYPERINFLATION. If the USD fails( and there is a high chance of that occurring)then a complete withdrawal from the USD is taken as a done deal.
    Would you consider for one minute that the US Government is exporting inflation / inflating away its debt obligations. IN turn this is setting up a helluva bull in commodities and the undesirable inflation effect domestically.
    Absolutely correct on the interest rate movements. Undesirable YES, R/E destructive possibly YES (in USD terms),Bond price destruction absolutely YES...
    If true, the timeframe you give for inflation to get to the HYPER mark is probably spot on perhaps sooner. Remember the lag factor in economic data. Historical information is exactly that. As pointed out the ST vs LT Treasuries give us a clear picture where we are headed. On this point = game over when 30YR Tr hit 5 %. The US is bankrupt. This IMHO is the SHTF precursor.

    Crises ..WHAT CRISES.?.OOOOHHHHH THAT ONE !!!!!

    Liquid Motion

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  46. curious to know what you think about how the rise in food prices will affect the companies overall: I have chickens, goats, garden, lots and lots of dried food food storage...still, I watch what is happening and am wondering. Milk, butter, eggs and wow..bread...have all shot up over the last 10 days. Bread was 1.25 and is now 3.53...It was a shock, so we are back to grinding wheat and making bread at home. As people stop buying the products they no longer absolutely need, it is going to cause a further destabilization of the economy as large companies and big agri-business go under, albiet, slowly. Thoughts on the overall effect on our country and hyperinflation issues? It's a trickle effect, and once the big companies start to feel the pain, what happens next? Personally, am going to continue teaching budgeting, cooking and gardening classes!

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  47. What you have written there seems to apply for China, at this very moment. CPI around 5% with rumors that the basket was changed to make it look nicer. They are also guilty of running the money presses hot. No wonder they go into metals like there's no tomorrow.

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  48. You have no credibility..you do not believe Osama Bin Laden is dead, although Al-Qaeda admits it. What the hell is wrong with you..trying to win on sensationalism...You are the one not to be believed!!

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