Tuesday, April 5, 2011

Talk About A Big Gap In Logic!—Slicing Up Rick Ackerman

So Rick Ackerman posted a piece that I spotted on Zero Hedge—which surprised the hell out of me. Either Tyler and his gang of merry pranksters are losing their nerve about the downward trajectory they think the U.S. economy and monetary policy is headed in—or they ran the piece for shits and giggles.

“Nothing personal, buddy, you’re just dinner.”
Ackerman’s piece said, in effect, that dollar hyperinflation was impossible. His post was titled “Big Gap in Logic Weakens Hyperinflation Argument”.

I’ve got a rep for being a hyperinflationist—which isn’t exactly true: I’m a dollar hyperinflationist, but a euro deflationist. A friend called me an economic agnostic, which is pretty accurate (and kinda cool, actually): I look at the data, look at the political realities influencing macro-economics, look at the arguments, then make up my mind, regardless of what the various sects of the religion known as Economics deem orthodox.

I suppose my heterodoxy comes from my education: I was trained in philosophy, with emphasis in epistemology (theories of knowledge), Hegel’s political philosophy, and formal logic. That background makes you not want to join a crowd—any crowd. And it makes you willing to question even your most prized assumptions.

So when Ackerman said he had proof positive that hyperinflation in America was impossible—that he had, as he claimed, found a “big gap in logic”—I was like, “Cool: Show me.”

So Ackerman . . . well, he tries. In his piece, he writes:
Hyperinflation occurs when people, fearing their money is about to become worthless, panic out of currency and into physical goods. This is highly unlikely to happen in the U.S. for several reasons, to wit: 1) Whereas Germany’s hyperinflation took several years to ramp up, today’s financial markets are primed for a catastrophic collapse that could conceivably run its course in a week, if not mere hours; 2) under the circumstances, there would be no shifting of financial assets into hard goods simply because any financial assets one holds at the time of the collapse would become worthless before one could sell them; and, 3) at that point, there would be insufficient currency available to drive a hyperinflation, since mattress money is likely to be scarce and because branch banks keep only about $25,000-$50,000 in cash on hand. All of which implies we will go straight to deflation without the emancipating, hyperinflationary interlude that some mortgage debtors might be hoping for. 
Then Ackerman adds:
My argument is simple, and I will not yield ground to any hyperinflationist who fails to explain, if the system collapses, where the money will come from to bid tangible assets skyward. 
For situations like this, never use a hatchet to chop somebody down—always use a long, fine, sharp knife. After all, you don’t gut a fish with a hatchet—you have to slice it up thin as a ribbon. And for that, you need a long, fine, sharp knife . . .

To begin: Ackerman’s argument in the above paragraph looks like a valid argument—only it’s just not sound.

Sorry to get all philosophy geek-speak—let me quickly explain: The classic deductive argument “All men are mortal, Socrates was a man, therefore Socrates was mortal” is both a valid argument (in that the premises follow one another to the conclusion) and a sound argument (in that each of the premises is true, and therefore the conclusion is true).

But the argument “All toilets are television sets, all television sets make you stupid, therefore using the toilet makes you stupid” is an example of a valid argument that is unsound: The two premises lead to the conclusion, even though all the statements are false. (FYI: An unsound argument can arrive at a true conclusion. For instance, “All parrots are a type of beaver, all beavers have wings, therefore all parrots have wings.” Such an argument—though it arrives at a true conclusion—is an unsound argument, and therefore fails.)

Ackerman’s “argument” is completely unsound: Once you begin to unpack it, it’s really quite obvious.

His very first sentence which he uses to set up his argument—“Hyperinflation occurs when people, fearing their money is about to become worthless, panic out of currency and into physical goods.”—is actually more or less correct—but only insofar as the end stages of hyperinflation are concerned. And this fleeing from the currency is not the cause of hyperinflation—it’s merely an effect, when the population as a whole has realized that the jig is up, with regards the curreny. 

The cause of hyperinflation is always the same: Spiralling prices that cannot be reigned in with traditional monetary policies of interest rate hikes. But Ackerman doesn’t see this: In his piece, it’s clear he doesn’t realize hyperinflation is an effect of rising prices. Eventually people realize the money itself is to blame—but only eventually, at the end. That’s why Ackerman’s first sentence sort-of makes sense, but not really.

But although Ackerman is partly right in the first sentence, his second sentence? That it’s “highly unlikely that this will happen in the United States”?

Brother, a panic in the dollar that leads people to exit it for commodities has happened already—and not that long ago: In 1979-’80, when inflation crossed the double digits but before Volcker slammed the brakes via interest rate hikes, people were beginning to get out of the dollar and into anything else, especially commodities, especially gold and silver.

But be that as it may, Ackerman goes on with his “argument” and puts up his first premise: “1) Whereas Germany’s hyperinflation took several years to ramp up, today’s financial markets are primed for a catastrophic collapse that could conceivably run its course in a week, if not mere hours.”

The reference to Germany is of course the Weimar Republic. Ackerman has a handy list included with his piece, showing the price of gold in German marks from January 1919 to November 1923. Let me reproduce his list: 


Right away, his own chart betrays him: The charts that he cites says that gold went from 170 marks per ounce in January 1919 to 499 marks in September 1919—that’s a trebling of its price, a 200% rise in nine months. Repeat after me: Triple in price in nine months. Then by January 1920—a mere three months later—the price of gold had trebled yet again. Weimar was able to hold off more hyper-i during 1920—call it a pause in the moonshot—but by 1921 it was off to the ionosphere: Gone, baby, gone.

“Several years”? By Ackerman’s own data, Weimar Germany’s slide into hyperinflation started the second the Great War ended.

(By the way, deflationistas always point solely to Weimar Germany, as if it were the only country to have ever experienced hyperinflation. Or rather, as if the Weimar experience is the only way by which hyperinflation can happen. Very irritating. That’s like saying that there is exactly one and only one route from Los Angeles to New York, a route that necessarily passes through Miami—patently untrue. But I digress.)

In Ackerman’s first “premise”, the Weimar reference is actually a subordinate clause to the whopper he springs on us, the poor reader: “[T]oday’s financial markets are primed for a catastrophic collapse that could conceivably run its course in a week, if not mere hours.”

Who says this? How is this very wild conjecture—nay, this very wild guess—suddenly a statement of fact? Last I checked, in the Global Financial Crisis of 2008—the last real market panic—the fall took about six to eight weeks: And that was a full-on, the-world-is-ending—save-yourselves-now! panic with a capital-P—a panic to put hair on your chest, especially as that particular panic was outfitted with all the latest technological trimmings of high-speed trading and various computer accesories. And it still took about six weeks, from peak to trough (depending, of course, on where you set the interim peak).

Ackerman boldly—and without a shred of proof or even a modicum of evidence—claims that the “financial markets are primed for a catastrophic collapse!” Okay, there was no exclamation mark in his original piece—but there might as well been one. Such an inflamatory premise begs at least some proof—some reasonable argumentation.

Alas, there is none. And since Ackerman’s entire argument rests on this particular . . . creative outburst if you will, then the rest of his argument pretty much goes out the window right here and now.

Even if we grant that Ackerman is somehow right about this baseless, brazen claim, we have to ask the obvious: How is a market crash relevant to hyperinflation? What—if stocks fall you can’t have hyperinflation, or vice-versa? Because that is simply, empirically not true: I can point to three separate cases of hyperinflation—Chile in ’73, Brazil in the ’90’s, Argentina in 2001—where the stock markets all collapsed, even as hyperinflation was rampant. Ditto with real estate—here I explained how housing prices can collapse even in the midst of high- or hyperinflation.

That pretty much gives lie to Ackerman’s seemingly formidable paper-tiger premise one.

So let’s go on to his second premise—to quote: “2) under the circumstances, there would be no shifting of financial assets into hard goods simply because any financial assets one holds at the time of the collapse would become worthless before one could sell them.”

Ackerman is supposed to be a trader—or at least someone who teaches people how to trade. (Those who can’t do . . .) Anyway, as any trader knows, no asset—be it stocks or bonds—suddenly has a valuation of zero. It might well trade all the way down to zero—but it takes time, because even if an asset is suddenly discounted by, say, 20%—rather, especially when an asset is suddenly discounted by a big double-digit chunk—there are always buyers who think that this drastic fall is a momentary panic, and that the asset will rebound.

Great traders have met their ruin, chasing a market to the bottom.

By the way, practical experience shows that what Ackerman is positing simply isn’t true: Even when a specific stock collapses—say because a teetering company didn’t get FDA approval for some crucial drug, or because a seemingly solid company was discovered grossly cooking its books—there are always traders willing to take on the asset, even as it slides all the way to zero. And that slide is never instantaneous—it always takes time.

So premise 2? Fuhgedaboudit!

Finally, Ackerman hits us with this whopper: “3) at that point, there would be insufficient currency available to drive a hyperinflation, since mattress money is likely to be scarce and because branch banks keep only about $25,000-$50,000 in cash on hand.”

My knife-hand is dithering: Where to begin to slice! Where to begin to slice! 

First off, to dispute an obvious error of fact: As anyone with even a passing knowledge about commercial banking knows, most branches carry $200K to $1 million in cash—and that’s the small branches. For crying out loud, the lobby ATM carries a hundred G’s, easy.

Second, the amount of currency in circulation is not the issue, in a hyperinflationary crisis: It’s how hot that cash becomes to its holders.

Thirdly—and most importantly—hyperinflation is a pricing issue: Prices are rising in hyperinflation (obviously), so buyers have to find the cash to buy what they need. If food for your family goes up from $1,000 a month to $5,000 a month, by golly you’ll find the money somewhere—and if you have to sell your $20,000 Harley Davidson for a paltry $2,000 in order to get cash to buy groceries? Well, you’ll do it, of course: You can’t eat a Harley, but you sure can starve to death.

Ackerman’s premise 3? Unsound.

So to recapitulate: Ackerman’s argument is: 1) There’s going to be a sudden collapse of all financial markets, all of them happening simultaneously and instantaneously. 2) The collapse will be so sudden and complete that no one will have time to exit financial assets and find safe haven in commodities or other hard assets. 3) There simply won’t be enough money to make hyperinflation possible, because banks don’t have that much cash.

Strictly speaking, of course, this isn’t an argument: This is just a series of premises without a conclusion. The conclusion Ackerman does posit in his post, as I quote above—“[W]e will go straight to deflation without the emancipating, hyperinflationary interlude that some mortgage debtors might be hoping for”—does not at all follow from these three premises: First of all, these three premises don’t argue for deflation—they just argue against hyperinflation. So the first part of his conclusion is invalid from the premises he presents.

And even if we allow for the weaker, implicit conclusion that Ackerman is positing—“There will never be hyperinflation in America”—it’s not at all clear that that follows from these three premises he presents.

Besides, these three premises are all incorrect, as I think I’ve shown.

Notice, by the way, that Ackerman doesn’t present an argument for deflation: He just claims at the last minute, “No hyperinflation—therefore deflation!” But that’s no argument—that’s simply a false dichotomy that is demonstrably untrue. After all, you can have an economy where there is neither deflation nor hyperinflation—obviously. But Ackerman seems to think that “proving” hyperinflation can’t happen is the very same thing as proving deflation will happen—which is of course nonsense.

I had the privilege and pleasure of arguing with Nicole “Stoneleigh” Foss about deflation. I didn’t agree with her, but at least she had an argument for her position. But Ackerman has none—and really doesn’t have an argument against hyperinflation either, as I think I’ve shown.

Ah, but Ackerman does throw down a gauntlet at the end of his piece. He wrote, as I quoted above: “My argument is simple, and I will not yield ground to any hyperinflationist who fails to explain, if the system collapses, where the money will come from to bid tangible assets skyward.”

Apart from the obvious fact that he presented no sound argument against hyperinflation—or even a valid argument—the answer to his “challenge” is simple: The money will come from the Federal Reserve by way of the Federal government.

In fact, the money is coming right now from the Federal Reserve to the wider economy, by way of the Federal government’s spending.

As I have shown elsewhere—and this isn’t controversial or anything anyone seriously debates—the Fed is monetizing roughly 50% of the Federal government’s FY 2011 deficit by way of QE-lite and QE-2. That’s roughly $100 billion a month that the Fed provides, $75 billion of which it is printing out of thin air.

The Federal government needs this money printing—as I’ve said repeatedly, Washington is a junkie, and the Fed is its friendly neighborhood dealer. Washington can’t afford to go off the horse—the Federal government would go broke if it did. Broke as in bankrupt—broke as in full government shut-down. Broke as in no more money to pay for entitlements, the military, or regular government services.

Broke as in broke.

Think it through: If the Fed suddenly cut off it’s $100 billion monthly purchases of Treasuries, where would the Federal government get its funding? From China? They’re selling Treasuries and getting into commodities. From Japan? They’ve got Fukushima to deal with. From Europe? They’ve got Portugal on deck, Spain and Italy warming up.

There’s no one to buy the massive amounts of Treasuries the Federal government needs to sell in order to fund its deficit. The Federal Reserve is the Treasury Department’s buyer of last resort. Scratch that—buyer of only resort.

That’s why QE-2 will never end, come June when it’s supposed to end—it’ll just keep on going: The Bernank and the Fools at the Fed will just keep on printing money, month after month, propping up a literally bankrupt government, because they have no other choice.

This bankrupt government, of course, will spend this money—it’ll get this paper from the Fed, and then go pump it out into the wider economy: And this is how the Federal government will be helping to raise prices across the whole economy. That $800 billion that the Fed is printing out of thin air, and then ramming up the economy? That $800 billion of new money—which is close to 6% of total GDP? That is what is bidding up stuff.

That is where the money is coming from right now. And that is how prices will rise—are rising right now.

And that is how I answer Ackerman’s “argument”, and his challenge: That is how we will get hyperinflation.

If you’re interested, you can check out my recorded presentation, “Hyperinflation in America”, where I discuss the specifics of how I think the dollar will crash. 

My!, but that was a delightful meal! Been a while since I had fish.
  

53 comments:

  1. My compliments to the chef.

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  2. Just saw this thread on one of the sites I check out on a daily basis, and it looks like a lively debate is breaking out about your response to Ackerman. Kudos to you for your clear, concise dissection of these issues, Mr. Lira.

    http://goldismoney2.com/showthread.php?15945-Big-Gap-in-Logic-Weakens-Hyperinflation-Argument

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  3. Who will be the buyers of gov't debt?

    The banks. They will have the trillion dollars to buy the bonds as a result of the gov't deficit spending of a trillion dollars.

    Money is being printed, it's just that the real printing is coming from the deficits, not qe.

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  4. GL,

    Can you explain why the $200+ trillion in derivatives debt won't create an overwhelming DEMAND for dollars, causing massive and irreversible deflation a la the Great Depression? I just don't understand how all of these things interplay

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  5. Gonzalo,
    Would you at least consider that there may be a rationale reason why the executives (Bernanke, et al) of the privately owned Federal Reserve bank are not fools?
    Is it not possible that they are taking a well calculated risk that the US government will not default and that US taxpayors will end up owing massive amounts of debt and interest to the owners of the Federal Reserve?

    Perhaps their risk is mitigated because they name the tune to which Congress dances.

    Please think write about this. If I am completely wrong I would be happy to hear why from you.

    a concerned Canadian

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  6. Dear GL:
    Please, why are you a Euro Deflationist?
    I think that the EU has the same, if not worse, debt problem than the US.
    Their debt is un-payable, they are printing Euros "out of thin air" just like the US is doing.
    Therefore the result should be the same as in the US: hyperinflation.

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  7. Kudos to you Gonzalo for taking the time to "unpack" the ZH post. I wasn't nearly as mature in my response to it on ZH. I think one of the fundamental disconnects that drives the deflation/inflation arguments, is a simple lack of experience on the part of most. The US/EU are just beginning to "feel" the consequence of higher prices which is in effect the only thing that matters. If something costs more on a relative basis, our perception of that delta seems to be primarily a consequence of the time frame in which the price change occurs. Stretch it out over years and I barely notice. Clip me for more next quarter and - bamn! - it's above average inflation.

    My first job was in Mexico City just before the peso devaluation in 12/1994. Until that point, devaluation was just an idea. Once an airplane ticket went up 30% or more in price, it became very personal and highlighted my diminished earnings capacity. "Measured" inflation didn't even show up for several quarters - but we knew what it was going to feel like and that it was set to increase.

    The US is in effect importing inflation and regardless of what the Fed does, we are getting higher cost inputs. The Fed's activities have done nothing else other than to forestall the economic recovery and ergo sum, the realization of the effects of inflation.

    Finally, I think the greatest argument against the deflationists is their complete silence on the ^DXY. They argue by default that the USD will become a safe haven asset, but that flies in the face of reality: which is the only way out for the US economy is to reset the value of the USD. How we get there is up for debate to be sure, but the trajectory is very clear. Unless we grow exports, reduce imports, we will not grow the employment base. The long, cold, slow grind downwards continues.....

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  8. The argument structure is called a sylogism

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  9. @Ebag: I don't want to speak for GL but I think the basic line is that countries that are dying because they can't devalue their currency to improve exports and GDP will leave the Euro (think PIIGS) leaving Germany and handful to the north in the Euro. Demand for the Euro will plummet as the EU breaks up.

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  10. GL
    Another answer for the "where will the money come from?" argument is given by none other than your Professor Paul Krugman. Yesterday he wrote about the transmission mechanisms of QE and noted that Q4 growth was spurred by net exports AND consumption. The thing about the consumption...
    "For what it’s worth, casual observation suggests that a lot of the growth in consumer spending has been at the high end, which suggests in turn that a higher stock market might be driving it. ...in a highly indebted society, you might hesitate at policies that would increase private debt further, but if stocks are driving the story, the consumers now spending more aren’t the same people who are in debt trouble"
    So, where will the money come from? From the rich who will have the cash to spend even if prices inflate 15%-20% annually. In your example, if the food budget goes from $1,000 to $5,000 month it's not a crisis if you have an excess of $10k-$100k per month in income.

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  11. Dear Doug:
    I think that the rise in consumption in the US is coming from "buying ahead of price inflation".
    In Cuba, circa 1960, there was an enormous rise in consumer spending.
    It was people spending all they had before the Cuban peso became worthless.

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  12. Dear GL,

    Beautiful Slice and Dice. Rick deserved it. ;).

    My conjecture (so I do not have to prove it ;)) is as follows:

    We will have violent deflations and inflations that will finish in a collapse caused by hiperinflation.

    The function of money supply is an exponential function in which FED has a crude control over its base (can print money) but has very limited control over its exponent (velocity of money, how long is the chain of credit=credit multiplier). Now, each QE adds to base money. FED could increase interest rate (lowering the exponent) but doing it now will make USA go broke faster.

    In 2008, everybody living in Banker Wonderland had a reality check that the system is unstable and needs fixing. However, banks have been completely nuts and used OTC derivatives and other questionable money substitutes as a base of their lending capital. They have also lent often without any collateral making immense credit/money expansion. Many were using insurances to hedge the risk so that they can lend more. This is why AIG was in immediate danger after Lehman collapse.

    Since even before 2008, FED is trying to figure out how to manage the base and the exponent so that there are no violent moves in money supply. They are not capable of that therefore they stopped publishing M3 to hide their failure. This is why they have asked big banks to help them decide how much money should be printed to avoid violent moves in money supply. Unfortunately for them, the exponent is also influenced by people confidence which decreases with time (gold/silver price raising despite rigged markets). If FED is temporarily successful to stave off disaster then banksters will get drank again and go on a wild party from which FED will not be able to help them out without destroying the current monetary system.

    Everybody with a brain and wealth to worry about should immediately withdraw from this type of monetary system. If you try to chase profits then sooner or later you will make a wrong bet and loose your shirt (e.g. hiperinflation - bonds/cash, deflation - debt).

    Will dollar experience massive deflation or die in hiperinflation?

    The monetary system will die in a manner that benefits banksters. If the banksters manage to get enough assets as collateral for debts then we will have deflation. If they are not happy with the amount of debts (assets being offered to them as collateral or safe sovereign debt that they can use to suck interest forever) then they will start buying everything they can giving loans to their buddies thus making sure that the public gets killed by hiperinflation after they sold their assets to banksters buddies for "great" price.

    Continuation below.

    Radek S.

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  13. The final part that I had to split due to restriction. ;).

    What can you do? Avoid debt (bad in case of deflation), avoid cash ( bad in case of hiperinflation), run for hills buy tangible assets, especially assets that can act as a replacement for money that may be destroyed due to hiperinflation.

    Trust nobody as most people have normalcy bias and can not see danger. Put your eggs in many different baskets (country wise, access wise, asset wise).

    I can not tell from the actions of the banksters for certain which route is more profitable for them.

    My guess is that they prefer hiperinflation because they can kill dollar, try to establish world fiat currency, fleece the cash (is-trash) savers again. Massive deflation at the end is less likely as people are too spoiled and are not likely to accept paying interest on sovereign debt (high taxes) for long time. However, we may have massive deflation in the middle so that banksters can position themselves properly and kill people who have debt. I find teaching of Robert Kiyousaki about good/bad debt extremely dangerous as in massive deflation all debts become bad unless you have access to FED that is printing money for you to buy everybody else going bankrupt.

    I feel sorry for most people. They are being lied to, conditioned to speculate in financial markets, fleeced from the fruits of their hard work. The founders and current benefactors of FED are the most evil people on the planet Earth.

    Great article GL. I hope you like my answer and contribution to this debate.

    best regards,
    Radek S.

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  14. Another excellent post. I found it strange that in Mr. Ackerman's post he linked to an essay ("Extend and Pretend," @ Minyanville.com) that read like a modern history report on the Great Devaluation. The essay refutes the base of his post, and together with your post, it completely debunks it. He must have been inhaling too much smoke from the recent wild fire near his neighborhood.

    Also, what are the chances that the Fed is rooting for collapse of the EU? To me, that would mean people diving out of the Euro and into: USD for the idiots, and the RMB for the not-so-idiots.

    C deK

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  15. Dear GL,

    Weird, firefox ate my first post, so I have to repost my first part.

    Beautiful Slice and Dice. Rick deserved it. ;).

    My conjecture (so I do not have to prove it ;)) is as follows:

    We will have violent deflations and inflations that will finish in a collapse caused by hiperinflation.

    The function of money supply is an exponential function in which FED has a crude control over its base (can print money) but has very limited control
    over its exponent (velocity of money, how long is the chain of credit=credit multiplier). Now, each QE adds to base money. FED could increase intere
    st rate (lowering the exponent) but doing it now will make USA go broke faster.

    In 2008, everybody living in Banker Wonderland had a reality check that the system is unstable and needs fixing. However, banks have been completely
    nuts and used OTC derivatives and other questionable money substitutes as a base of their lending capital. They have also lent often without any coll
    ateral making immense credit/money expansion. Many were using insurances to hedge the risk so that they can lend more. This is why AIG was in immedia
    te danger after Lehman collapse.

    Since even before 2008, FED is trying to figure out how to manage the base and the exponent so that there are no violent moves in money supply. They
    are not capable of that therefore they stopped publishing M3 to hide their failure. This is why they have asked big banks to help them decide how muc
    h money should be printed to avoid violent moves in money supply. Unfortunately for them, the exponent is also influenced by people confidence which
    decreases with time (gold/silver price raising despite rigged markets). If FED is temporarily successful to stave off disaster then banksters will ge
    t drank again and go on a wild party from which FED will not be able to help them out without destroying the current monetary system.

    Everybody with a brain and wealth to worry about should immediately withdraw from this type of monetary system. If you try to chase profits then soon
    er or later you will make a wrong bet and loose your shirt (e.g. hiperinflation - bonds/cash, deflation - debt).

    Will dollar experience massive deflation or die in hiperinflation?

    The monetary system will die in a manner that benefits banksters. If the banksters manage to get enough assets as collateral for debts then we will h
    ave deflation. If they are not happy with the amount of debts (assets being offered to them as collateral or safe sovereign debt that they can use to
    suck interest forever) then they will start buying everything they can giving loans to their buddies thus making sure that the public gets killed by
    hiperinflation after they sold their assets to banksters buddies for "great" price.

    Continuation above (as this post is repost due to the first part being lost).

    best,
    Radek S.

    ReplyDelete
  16. I would prefer that we had a deflation, because this would be less damaging to the American, and the world, economy.

    An Austrian Economist would tell you that a deflation wrings out the bad economic decisions caused by increasing in the money supply. A Neo-Keynesian would tell you that animal spirits are responsible for price increases and that the money supply has nothing to do with it. Sadly, the Neo-Keynesians are in control of America’s central bank --the Federal Reserve.

    The people in charge of the dollar’s fate are inflationists. It is in the Neo-Keynesian’s self interest to avoid a deflation, because this ruins how they make their money through Fractional Reserve Banking. Fractional Reserve Banking is fraud where money is created out of thin air by a printing press or electronic means.

    If you want to learn about hyper inflation, you must ask, “How do they end?” They end when the money supply stops being increased. This can happen in a variety of ways. In the Weimar Republic, a new central bank and currency (the Rentenmark) was proclaimed. A government could run out of ink and paper. Or the government could accept that another currency was being circulated in its place and adopt it. It takes direct governmental interference to produce a hyperinflation.

    A depression, like a hangover, is a necessary result of excess. Alcohol is a poison which damages the body. Excess Fiat Money is a toxin which misleads people into bad economic decisions. Both must be washed out. The body can recover from a small amount of poison. The effects of the poison, especially a narcotic, can have desirable effects. The problem with increasing the dosage is that undesirable effects occur.

    Hyperinflation is the most common effect of printing excessive fiat money. The question is not whether this will occur, but "Do the people in charge of a Fiat Currency have reasons and motives to prevent a deflation?” If so, a hyperinflation will eventually occur because, if you will do anything to avoid pain, this leads to an overdose.

    ReplyDelete
  17. Arthor Bearing said..
    "Can you explain why the $200+ trillion in derivatives debt won't create an overwhelming DEMAND for dollars, causing massive and irreversible deflation a la the Great Depression? I just don't understand how all of these things interplay "
    -----
    I think I can answer this. Debt denominated in USD (massive/gargantuan as it is, both private and public) has a limit. The USD will be printed in an amount that has no upper limit.

    ReplyDelete
  18. Gonzalo,

    I find your rebuttal compelling, but you really tore into Ackerman the way you did with Mish. Is there some backstory with Ackerman having gone on the offensive to raise your ire? His "Big Gap In Logic" language certainly doesn't merit this escalation. Unless there's some other reason or exchange that justifies the...vehemence...of your piece, I think you might want to edit this post to show the same respect as you showed for Ms. Stoneleigh. Intelligent, respectful debate is much more compelling than intelligent debate interlaced with borderline personal attacks.

    - Nobody

    ReplyDelete
  19. I wonder why GL thinks the US could ever get to a hyperinflationary state, though I agree the conditions to create one are present. I say that because of some recent observations of mine during the course of visiting supermarkets.

    Two days ago I visited a chain supermarket in a low income area. This is right after social security, disability and Food Stamp benefits are topped off at the beginning of the month. The store ailes were threadbare, almost Soviet like, only a couple of frozen pizzas remained. I believe the total number of people on these 3 benefit programs total over 100 million. Then there are those who live paycheck to paycheck or rely on payday loans to make it to the next paycheck. Toss in those who no longer have credit cards and we may have half the population who, right now, are unable to keep food in the house till the next 'payday'.

    A Walmart I occasionally went to no longer had the self checkout aisles it had had just a few weeks earlier. I asked an employee why and was told 'too much theft'! So if hyperinflation requires a ramping up period of gradually accelarating price increases, I fear the US will never get there. If people cannot now keep food in their house for a month what is going to happen as prices start rising 10 or 15%/month and wages and government benefits do not keep pace ( as they won't). Theft! And how will chain stores respond? By closing or not stocking stores in low income areas. In short I think retail commerce will become impossible in the United States in a hyperinflationary environment. We have too many people relying on government largesse and a dangerous underclass willing to resort to violence if that largesse proves inadequate to keep them content.

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  20. @Nobody - to the contrary, what happened with Mish was really just a juvenile (substance induced?) name calling exercise. This is a pretty thorough refutation of Ackerman's points. It's not juvenile to say someone is wrong, real wrong. I don't even see anything ad hominem in GL's post. This is much more benign than saying about Greenspan "The fucker was a Soviet goon" but allows you to draw the conclusion that Ackerman is truly clueless, and worse - wrong.

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  21. @Doug (and GL) - I agree that Ackerman is wrong. I merely suggested that the debate would best be kept at a thorough refutation of Ackerman's arguments. Where Gonzalo started to go astray was "Ackerman goes on with his “argument” and puts up his first premise" - putting argument in quotes was when the gloves started to come off. Ackerman's argument is unsound, but his piece has enough thought behind it to grant him the courtesy of calling an argument an argument without the implied insult. Same thing with putting premise in quotes. These were minor, but were the first red flags. "(Those who can’t do...)" was the first outright attack, and unnecessary. I believe that Gonzalo is right and Ackerman is wrong on the logic, but the personal attack is as wrong morally as Ackerman is wrong factually and logically.

    In the hindsight of having re-read Gonzalo's piece to cite these examples, there wasn't anything else. I think the first red flag (quotes around argument) invoked a knee-jerk "here we go again" (over)reaction on my part, in recollection of the exchange with Mish.

    My apologies to Gonzalo, but I do hope he'll consider three minor edits.

    - Nobody

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  22. Good one, the problem is that there are very few people out there capable of hagelian dialectic and socratic dialogue. Most debates are boiled down to 2 guys throwing their bunk at each other. Here is a post that explains it much better than me:
    http://cluborlov.blogspot.com/2011/03/everyone-poops-debunked.html

    PS: Too bad that there is no blinking dot from Israel on that tracking applet. Maybe one guy is not enough.
    Cheers

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  23. Mr. Ackerman apparently has forgotten the infamous Enron scandal, the price of those shares took quite a long time to be worthless, it didn't happen in a few hours, even though everyone knew the company was finished (I lived in Houston at the time). I believe it gave ample time for all the top executives to sell their shares ...

    Your fan Tita

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  24. It is interesting (to me) that the USA can print so much money and the outcome be an evaporation of money and assets.

    Perhaps the US Treasury should consider "plastic" as the new kind of coinage to use when they make their recommendations about the current changes in metal. I understand that time is coming up soon (offically). Plastic would be much more honest!

    I really like the fish pic. Not as nice as the girl and fish, but Ackermann did not deserve to be cited so thoroughly with such a pretty girl (your girlfriend-really).

    I have enjoyed the other readers comments. BTW, I appreciate you, GL, for examining the ZH article so precisly.

    The sun is currently shinning in Kansas, snow is the forecast, and perhaps a tornado in neighboring Missouri.

    Finally, the quality and topic choices of recent long articles, has helped lighten the withdrawals from not having much Hourly G these days.

    Thanks, from Kansas.

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  25. Excellent job!

    When you say that hyperinflation is caused by prices, I trust that this is true while it is also true that inflation is always and everywhere a monetary event. Price increases are secondary to and caused by an increase in the money supply. Hyperinflation then is a completely different phenomenon where a phase shift has occurred and the rules of inflation no longer apply. is that correct?

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  26. Logic, Mr Lira? You've heard of Occam's Razor, right? Next time please use it on your prose. Unbelievable.

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  27. A masterly riposte and explication Mr Lira.

    Perhaps your arguments would have even greater weight if you were to post some more photographs of your girlfriend.

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  28. The real place the money will come from is paying off all the short term government debt that will come due when people stop rolling over government debt. There is something like $7 trillion due in the next 12 months. If people stop buying, money will be printed for all of these.
    http://pair.offshore.ai/38yearcycle/#hyperinflation

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  29. They say that a Master Chef uses his craft so precisely that all of his produce is utilised in the highest, most efficient manner..nothing is wasted. They also know that a sharp knife is essential because the meat is so delicate and can be bruised easily.
    Some would consider discarding the skin, the head and even the bones....but the master chefs know that this is where all the flavour is.
    I thoroughly enjoyed the exquisite flavours, the combination of textures and the journey that you took me on. I cant wait to sample your next offering. I give you a 10/10.

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  30. Just curious if anyone knows the answer to this. What would happen if the US stopped accepting paper and coins and went to an all electronic medium of exchange? How would that change the game if at all and if not why not? Definitely seeing movement in that direction all over. I have difficulty wrapping my head around all this.

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  31. Just curious if anyone knows the answer to this. What would happen if more national leaders did as Irish Premier Enda Kenny did, telling the IMF and central bankers to go pound sand -

    "Well, that’s it. That’s the end. Henceforth, all banks and all bank assets are to become the property of the Republic of Ireland. Bank premises will be turned into useful resources for the people, such as pubs or pizza parlors. If a bank owes you money...you are out of luck. You should have known better than to put your money in a bank anyway... And don’t come running to me telling me that Ireland’s default will trigger a wave of defaults across Europe...and possibly bring down the euro and the European Union. I don’t want to hear it. It was the European Union that got us into this mess."

    How would that change the game if at all and if not why not? Definitely seeing movement in that direction all over. I have difficulty wrapping my head around all this.

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  32. Hey GL, you said you are a dollar hyperinflationist, but a euro deflationist. Can you point me to some articles of yours or make an article that explains why there will be euro deflation? I haven't had the time to read all of your blog posts and I would like a guide for euro deflation articles. or if any other GL reader can help me with that, it's perfect.

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  33. I will be writing some long posts about euro deflation shortly.

    GL

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  34. "Whether you agree with me or not, thank you for your comment.

    I neither answer nor purge any comment, unless it is blatantly obscene, obvious spam, a commercial solicitation, or an obvious duplicate. I never purge a negative comment (as you can see by some of the discussions), so knock yourself out. But I won’t take you seriously if you post anonymously—after all, I don’t. "

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  35. You say "The cause of hyperinflation is always the same: Spiralling prices that cannot be reigned in with traditional monetary policies of interest rate hikes."

    That's not true. Prices do not rise unless the money supply/money velocity increases. Inflation does not equal price rises. Inflation is more money chasing the same goods/services. Generally wages must rise for inflation to take place in an economy. We have some price rises due to speculation, using borrowed money, like oil and other commodities. Offsetting that is deflation in the most widely held asset, housing. All of the $470bn the FED has created in QE2 so far has gone straight back to the FED as bank deposits ($475bn since QE2 started). Banks are hording cash, cos they know what's coming next - a rapid collapse, once QE2 ends (or perhaps before).

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  36. "Think it through: If the Fed suddenly cut off it's $100 billion monthly purchases of Treasuries, where would the Federal government get its funding?"

    Yeah, Bill Gross and other smart people are also wondering who's going to buy treasuries if the Fed does not.

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  37. Interesting. Here's an observation and a question. First, the accepted notion that all debts are always, without exception, payed back either by the lender or the debtor assumes that something of value was lent. The problem is that with our current monetary system, money is created from nothing by bankers. Thus nothing of value is ever lent. The 'money' never existed before the loan and when the loan is retired the 'money' goes back to 'nothinglessness' When you stiff the banker for any loan, he doesn't get hurt, he only misses out on some 'interest'. Second, its quite obvious that the Fed is printing or digitally creating 'money' at an alarming pace but this money is not reaching the wage slave - there is no mechanism for Fed created 'money' of any ammount to reach Joe Lunchbucket and Mom and Pop.

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  38. Dear James:
    The Fed lends counterfeit dollars (nothing of value) to the Treasury by, buying Treasuries.
    That bond, note or bill (loan) that the Fed "bought" is added to the Federal debt, presently at over $14 Trillion.
    The taxpayer pays interest on that loan, until or if, it is paid back.
    Meanwhile the Federal Government is free to use the proceeds of the loan to buy materials, labor or to have it stolen by the politicians.
    That's money velocity, in my dictionary, enabled by counterfeited dollars.
    The Government, eventually, has a choice 1) It pays the loan back from tax receipts, 2) it defaults on the loan or 3) the Federal Reserve monetizes the corresponding debt through inflation.
    So, who paid for this debt?
    If 1), the taxpayer.
    If 2) or 3):
    People with annuities, insurance policies, bonds and cash savings get robbed.
    Also Lunchbucket and mom who won't be able to afford food and rent because of price inflation.

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  39. Beautifully dissected, GL.

    I'd suggest the eye-opening real level of inflation would become readily, immediately, apparent if treasuries were sold at auction WITHOUT any fed bids to drive yields down to artificially low levels.

    Just how high would yields actually have to be to sell the kind of debt the govt needs to sell to anyone other than the Fed? After all, anyone else lending money to a broke spendthrift is going to demand a pretty big potential return to balance the risk.

    (Personally, it would take a lot more than the current 3.5% 10yr treasury yield to tempt me to lend my money to someone who's bankrupt but for the final paperwork being processed.)

    PIMCO & the Chinese may have arrived at the same conclusion by different paths, but they too aren't prepared to assume the risk associated with lending to the US govt... at least not at the rates that Fed intervention is forcing.

    I guess therein is the basis of the "QE Forever" argument, if we accept that interest rates must indeed remain low in order for the govt's illusion of solvency to continue.

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  40. Diving into the epistemological wellspring of the fiat money system, we find that the present money system on this watery planet is based on the imperial US dollar, and that the US Central Bank, the FED, is the issuer of fiat dollars.

    The financial irrigation system that has been set up to control the flow of these dollars has been changing due to over indebtedness induced droughts and catastrophic credit erosion. This situation is due to the fiat fiduciary crisis, induced from the issuing of loose credit to cover for an overflow of too much unserviceable debt, hence the source and flow of money has changed.

    The recycling of currencies enjoying a trade surplus into the US currency with it's chronic trade deficits to fund budget deficits is over.
    Now the FED is pouring forth zero interest rate credit to feed the fiat system and has abandoned all currency recycling to create the appearance of financial responsibility.

    From the FED the flow of credit first runs into the Primary Dealer's dam, which then flows into a corrupt financial distribution system. The once flowing canals, where the little people lined up fishing using their poles with long credit lines baited with optimism have all dried up.

    No longer credit worthy the TBTF banks have withdrawn the flow of money from those fishing along the canal hoping for normalcy to return. Instead, TBTF bankers have redirected the money flow to foreign markets and commodities.

    This money flow that starts with the FED has now begun to flow back to those fishing for normalcy. There is the confusing realization that the new flows of money is creating some assets like housing, luxury items to deflate, while necessities to inflate.

    As this new financial system based on fraud navigates through new river courses and flowing creeks of credit, this shifting process will lead to many ponds that will eventually dry up, while others will inflate and overflow.

    Due to the criminal fraud and intransperancies of this system sometimes the flow of money will be subversively subterranean and emerge in unlikely places abruptly, and then disappear.

    Predicting a Tsunami of hyperinflation, as eventually possible as it is, is a prediction reserved for the hyperventilating ideological absolutists and doomsayers. I do believe.

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  41. cut dice slice chop chop...set it and forget it...

    inflation or deflation the FED is the enemy and that is who BOTH of you should be trashing...

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  42. You don't even need more supply of money to cause hyper inflation in the U.S. The fact that we are discussing hyperinflation says we have printed too much already. The U.S. is the world's reserve currency, which puts us in a unique position. 70% of U.S. dollars are outside of the U.S. All we need is for foreigners to lose faith in the currency and start cashing in their dollars for commodities or other foreign currencies. That would cause a cascade of selling around the globe. the dollar would crash and voila, hyperinflation.

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  43. BTW: Don't wear out any mirrors as you smugly pen any more ruinous essays...

    Sorry, couldn't help it as I read Mr. Ackerman's rebuttal. Apparently he has not studied the hyper-inflationary trends prior to Weimer, Zimbabwe, and other places in the 20th century. To wit: the government creating a HUGE demand in printing press ink (digitally or otherwise)as they print more and more money to pay of the mounting debts. Nice to see how Mr. Ackerman blames the debtors, and not the government-prodded lending institutions. Not to mention the fact he likes to read books and claim their knowledge as writ.

    C deK

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  44. Gonzalo Lira 1
    Ackerman 0

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  45. Have I got this correct? Hyperinflation comes about when a currency (US dollar) loses the confidence of the markets, and as well there is a loss of confidence in that country's central bank (Fed) and in the government (US/Congress) to rein in deficit spending above certain limits, and the currency caves in. It also involves flight from that currency to a perceived safe haven (Precious metals, Swiss franc, foodstuffs, other hard assets, even the stock market). It would seem to me that this is happening already - booming stock markets, raging commodity prices, deteriorating confidence in the Fed/US government/Congress, US dollar down.

    Having said that, an end to QE2 may rebound on China, in that if the US slows down, as well it may, without the gargantuan stimulation, so will China, as exports to the US falter.

    A rising US dollar could also occur which would be associated with the slow down. As well, with the yuan tied to the US dollar, a rising dollar means a rising yuan, reducing exports from the Red Dragon, and placing more pressure on the Chinese populace.

    Strange how all this volatility in many asset classes is happening at the same time the Chinese are discussing their new leadership selections which will be announced in March 2012. Since the US needs a scapegoat, any market deterioration could be conveniently blamed on the CHinese; additionally hot money could flee China and lead to a financial crisis there.

    Just speculating on possible scenarios of course.

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  46. I'm rather glad I now have chickens and a coop...

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  47. Although it should be obvious to Rick Ackerman that in an economy that has increased its monetary base as much as the US has there should be no lack of dollars to bit up hard asset prices, it is simply not necessary to have all these dollars for it to happen. He clearly does not understand how hyperinflation works.

    He seems to be assuming that if tomatoes reach $100 a pound, and if the local grocery store currently sells 1000 pounds of tomatoes a day that the local economy needs to have $100,000 available daily to buy tomatoes. Not true.

    When the man with the tomatoes tells you "I don't want your dollars. Give me gold, euros, shoelaces, tires, anything but dollars" then you have the key ingredient to hyperinflation without a transaction. He will inevitably add "but you must buy in dollars, they're $100 a pound".

    At this point people, the moment they get their paycheck will buy anything to get rid of their dollars within hours. Who said they need to have printed notes? We don't need banknotes to buy anything. What has he been smoking? People will buy anything and everything in sight. They will hoard. Things that keep will go up in price fastest. Flour will be bid up faster than cheese which will be bid up faster than tomatoes. This leads not only to an oversupply of available cash (ie cash that is being actively spent) but a penury of certain things mostly foodstuffs with a long shelf life. So it is not just that I want to unload my entire paycheck the moment I get paid, but I am now competing with 100 other people for the last kilo of flour on the shelf.

    Hyperinflation happens when there is no confidence in money. The exponential increase in the money supply does not precede this phenomenon but follows it. We are already having a massive increase in the money supply anyway. We don't need any more increase as a prerequisite to hyperinflation.

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  48. SPECTRE of DeflationApril 7, 2011 at 3:52 PM

    "First off, to dispute an obvious error of fact: As anyone with even a passing knowledge about commercial banking knows, most branches carry $200K to $1 million in cash—and that’s the small branches. For crying out loud, the lobby ATM carries a hundred G’s, easy."

    Where exactly does your information come from on this statement? Banks hold much less cash on hand than you claim with your thesis. WAY LESS! Big difference between M2 and currency in circulation, and look no further than The M1 Money Multiplier from the St. Louis FED which shows NO VELOCITY OF MONEY OF ANY KIND. We just hit a new low for this measurement going all the way back to 2008. You can create liquidity, but you can't push it where you want it to go because you are herding cats.

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  49. Velese, there are simple reasons for why Europe and the US will have different outcomes: competition, self interests and a different history.

    The FED and Germany both fear a prior financial debacle, but they are not the same one. The FED fears the deflation of ’29, but Ben Bernanke drew the wrong lesson from the Great Depression. He thinks that the government did not intervene enough. He thinks we are in a liquidity crisis, rather than a crisis of faith. Hence, Bernanke will do anything to avoid a deflation and that guarantees a hyperinflation.

    Germany went through a hyperinflation in 1923 that they will not want to repeat.

    The FED and Germany have a different self interest. The FED is trying to hold together it’s banking cartel, expecting one time more through the credit cycle. It keeps hoping that the economy will recover to pull its chestnuts out of the fire.

    Only Germany has a functional economy in Europe. The European Union is a failure and its people are waiting for this fact to come home. The other PIGS members, Portugal, Ireland, Greece and Spain, have the excellent example of Iceland to consider. Iceland was a worse basket case than Ireland, but it repudiated its debts and gave its bondholders a haircut. The voters keep refusing to bail out the big wigs. Hence, Iceland is coming out of its economic doldrums far faster than anyone else.

    If Ireland follows Iceland’s lead, then all hell will break lose. France and Germany are the biggest holders of the PIIGS debt. If the PIIGS default, then all the big creditors and central bankers will take a hit. But the threat of the PIIGS doing this could cause Germany to bow out of funding any more bailouts. Then, every European economy would be in a deflation because the EURO would become worthless. It is in the self interest of the EU members to fragment the EU back into member states of the European commonwealth.

    Ultimately, it comes down to competition and control. The FED has no monetary competition in the US; it thinks that it can do anything it want. This leads to hubris. The FED is operating on failed Keynesian Economics and will be blindsided in a crisis when nothing they do works. All the dollars and T-bills in foreign lands will flood into America, pushing up the rice of goods.

    Europe has a different completive environment. The EU bureaucracy tried to cobble together vastly different economies and cultures; it failed. Serious errors in the formation of the EU are being felt. The EU’s member states can deny the truth only so long. Soon, there will be a falling out among thieves and the EU members will stab each other in the back.

    In doing so, the EU’s bureaucracy will lose control. The EURO will become worthless paper as the EU fragments into sovereign states. Every EU State will issue its own currency and have its own currency issues. There will be no central authority to increase the supply of EUROs, hence, no hyperinflation.

    Painful dislocations and distortion in the economy caused by the expanding EURO must be washed out, border issues and acrimony will hinder the flow of goods. This adjustment will cause a bad economy in every member country which will be interpreted as a deflation.

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If you have a question or a private comment, do feel free to e-mail me at my address expat229@gmail.com.

GL