It will get mass inflation at some point: anywhere from 15% per annum to 30%. But it is not going to get 50% or 100% or more.

Why not?

1. The temporary nature of the payoff

2. The fear of getting blamed

3. The boom-bust cycle

4. The employees’ vested pension fund

1. THE TEMPORARY PAYOFF

Hyperinflation lasts only a few years. People in the hard-money camp ought to know this, but they tend to forget.

Those economic forecasters who keep telling us the dollar will fall to zero forget the obvious: big banks are creditors. Bankers lose when a currency falls to zero. Never forget this. If you believe, as I do, that the Federal Reserve is the enforcement arm of the largest commercial banks, then stop worrying about hyperinflation. But don’t stop worrying about Congress.

Ever since All the President’s Men — the movie, not the book — we have been told to follow the money. So, let us follow the money.

The four big U.S. banks — maybe three, with Bank of America on the skids — make their money by lending money. As with all fractional reserve banks, they borrow short (low rates) and lend long (higher rates).

Under hyperinflation, long-term interest rates skyrocket. This forces down the discounted present market value of bonds and mortgages. Nobody wants to lend long. Who gets killed? Banks and insurance companies that have lent long.

What saves them from bankruptcy is fake accounting. They are allowed to keep their bonds on the books at face value. But, sooner or later, bankers get paid off in fiat money. Their portfolios are locked into bad investments. They can’t sell them without reporting losses. So, they hang on. Month by month, the value of these assets falls.

Hyperinflation is bad for the super-rich. Why? Because they own their assets outright. The super-rich own land and homes. These go up in nominal value, but rich people don’t pay off their debts by selling a gold coin or two. They have no debts to pay off. They are the creditors. They own bonds and fixed-income investments.

When we read of the great hyperinflations, we find that urban people got ruined. Farmers did very well. They paid off their mortgages by selling a few dozen eggs. Wealth moved from cities to rural areas.

Bankers were in big trouble. Farmers were in hog heaven.

Has it ever occurred to you that there have been no hyperinflation periods in Great Britain? The Brits have gone through wars of their own making. Their elite ran an empire from 1700 until 1946. Yet for all the crises, they never had price inflation above 30%. You know why? Because the Bank of England would not allow it. The BoE was privately owned from its creation in 1694 until the government nationalized it 1946. Even after 1946, the bank would not allow hyperinflation.

The Bank of England inflated often. This created the boom-bust cycle on numerous occasions, but never got seriously blamed for any of the busts. This is because not enough people understood the Austrian theory of the business cycle, which was discovered in 1912 by Ludwig von Mises. Even today, hardly anyone knows about it, and of those economists who do, almost none believes it.

Which are the famous hyperinflations? In Western Europe, Germany, Austria, and Hungary after World War I. They had lost the war. There was Hungary in 1946 — the worst inflation ever. It was a Communist nation.

There was China in 1947-48. The nationalist government fell; Mao took over. No more hyperinflation.

There are Latin American examples over and over. These are not major industrial economies. If we count Brazil as industrial, it had a long, severe hyperinflation, 1981-95: That was the longest hyperinflation on record.

I know of only one major hyperinflation in the industrial West: the State of Israel, 1980-86. I went there in 1985 to study it. Life went on. Tourism brought in Western currencies. So did agricultural exports. The experience did not last long. This was the longest hyperinflation in modern times. Wikipedia describes it.

“Inflation accelerated in the 1970s, rising steadily from 13% in 1971 to 111% in 1979. From 133% in 1980, it leaped to 191% in 1983 and then to 445% in 1984, threatening to become a four-digit figure within a year or two. In 1985 Israel froze most prices by law and enacted other measures as part of an economic stabilization plan. That same year, inflation more than halved, to 185%. Within a few months, the authorities began to lift the price freeze on some items; in other cases it took almost a year. By 1986, inflation was down to 19%.”

This is the central fact: hyperinflations do not last long. The currency is ruined fast. Then there is a currency reform. The central bank starts over: boom-bust, boom-bust.

If you time things perfectly, and sell assets to pay off debt, you win. But hardly anyone does. They buy inflation hedges, thinking it will go on for years and years. It ends a lot sooner than the late-comers think.

Then there is a recession. The inflation hedges fall in price. In that period, cash is king. If you have money to lend, you are in fat city. You buy up assets at a discount. In short, you get out in time.

There are few winners in hyperinflation, and they do not win for long. Then the recession hits, and things go back to normal.

2. THE FEAR OF GETTING BLAMED

Ben Bernanke is under fire as no FED chairman ever has been. The critics are in the millions. This is historically unprecedented. There is a cause: Ron Paul. Ron Paul has focused millions of voters’ attention on the FED and Bernanke. Bernanke cannot escape scrutiny any longer.

If there is hyperinflation, millions of voters will know who did it: Bald Ben the Beard and his crew of yes-men on the Board of Governors. Investors know more about the FED today than they did in 2007. This knowledge will increase.

Then there is the Internet. The mainstream media cannot control the flow of information any longer. Word gets out, and you may have noticed, not much of it is favorable to the FED.

The FED is desperate to avoid an annual audit by the Government Accountability Office. This is good. It means that people other than Ron Paul are calling for such an audit.

Rick Perry used the word “treasonous.” Michelle Bachmann has called for a FED audit. Ron Paul is still running. The FED is today the target of Republican Presidential candidates’ sound bites. This has never happened before. This is terrific. They are trying to steal Ron Paul’s favorite issue. I say more power to them. Come one, come all! Pile on!

Milton Friedman made this line famous: “Inflation is always and everywhere a monetary phenomenon.” He was correct. This insight has been resisted by Keynesian economists from day one, but the Keynesians find that the phrase has gotten into the thinking of millions of voters. Keynesians today are calling for larger deficits and Federal Reserve accommodation, but that is because consumer prices are rising very slowly. If prices were rising at 20% per annum, the Keynesians would find it difficult to conceal the source of the problem: the Federal Open Market Committee. The FOMC could not hide.

This is the central political fact facing the FED today: “It can run, but it can’t hide.”

Bureaucrats want to avoid blame. This is their #1 concern. Second is to increase the number of subordinates, in quest of a promotion. Third is to increase the bureaucracy’s funding. But the #1 concern is to avoid blame.

Bernanke will not be able to avoid blame for hyperinflation. He will therefore not adopt policies that produce it.

The FED could be nationalized. Congress could take over. Then all bets are off. But if we are talking about the existing Federal Reserve, with government-appointed academic economists visibly in charge and the privately owned and operated FOMC making the decisions — which will favor large banks — there will be no hyperinflation.

3. THE BOOM-BUST CYCLE

In Western industrial nations, including Japan, the central banks have always ceased inflating whenever consumer prices climbed close to 20% per annum. It has only happened once in U.S. peacetime history: 1977-80. Consumer prices rose in 1979 and 1980 by about 11% per annum. Jimmy Carter took the heat. He pressured the utterly incompetent G. William Miller to quit after only 18 months in office, and Paul Volcker replaced him in late 1979.

Volcker slowed the rate of monetary base growth. T-bill rates soared to 22%. The result was a recession. Carter lost the 1980 election as a result. Then Reagan took a hit: the 1981-82 recession. But prices started slowing, and interest rates began an 18-year decline.

Volcker wound up as a hero. He is still around. He is still beyond reproach. I can think of no person in power in the Carter-Reagan era who has a more distinguished reputation. Yet he oversaw two recessions.

He talked tough. He smoked cigars. Congress did not lay a finger on him.

This lesson is not lost on Bernanke. Bernanke does not talk tough. He does not smoke. But he knows this much: G. William Miller oversaw mass inflation, and never recovered. He is forgotten. He is forgotten because he left the office and made a hasty retreat to become Treasury Secretary — a no-power office. Then he disappeared. Had he held on, he would have become the fall guy: a pariah.

Here is the lesson learned by every Western, industrial central banker: the post-inflation bust will reduce price inflation. The bust can be justified as the necessary requirement to save the economy, save the currency, and save the social order.

Then the dog-and-pony show starts over.

Remember this: the FED will save the largest banks, That is its #1 unofficial task. Central banks all save the largest banks. The rest of the market can drop by 50% or more. The largest banks then re-finance on the new terms, meaning post-mass inflation terms.

As long as the largest banks are saved, the FED can put on the brakes and let the economy move into a recession.

This is the story of all central banks in large Western industrial nations ever since 1900, with only the exceptions of defeated Germany and Austria-Hungary.

The reason why Americans should not take seriously the scenarios of Germany-Austria in 1921-24 is because we are not defeated. There is no way, short of some sort of biological warfare-induced plague, that we will suffer what Germany suffered in 1921-24. In any case, during a plague, there would not be hyperinflation. There would be martial law, price controls, and rationing.

The Patriot Act offers this single advantage: it will make hyperinflation unnecessary.

Boom-bust, boom-bust, boom-bust: this is the pattern. Do not plan your future as if it will be broken.

What follows every hyperinflation? A recession. But, during hyperinflation, bankers are impoverished. So, if the result is the same at the end of the hyperinflation — a bust — why not call it to a halt early, in the mass inflation stage?

It worked for Volcker. It worked for every western, industrial banker in the 20th century except in Germany after the war.

4. THE EMPLOYEES’ VESTED PENSION FUND

The Federal Reserve System offers its employees a retirement plan. It is not as good as Congress’s, but it is better than yours. It is detailed in a 79-page document.

I regard this plan as the best payoff money in America. It is the equivalent of the Mob’s protection money. If you pay it, you receive protection… from the Mob.

We pay this money by letting the FED keep some of the money from interest payments on bonds that the FED bought with digital money created out of nothing. It can cover its operating expenses. Part of these expenses is the pension system.

This pension fund money is our protection money. The FED is not going to create hyperinflation, which would wipe out the value of its pension fund.

How big is this fund? Large and growing fast.

Contributions to the System Plan are actuarially determined and funded by participating employers. In 2010, the System made $580 million in contributions to the System Plan; the contributions may be adjusted upon completion of the 2011 actuarial valuation.

What is the fund invested in? I have provided an extract from the so-called independent audit for 2009. It was 53% in U.S. stocks, 13% in foreign stocks, and 34% in bonds — not non-marketable Social Security Treasury bonds.

Hyperinflation will play havoc with 34% of this portfolio: bonds. Stocks will not keep pace with consumer prices: 53% at risk. Only the foreign equities portion of the portfolio would not be devastated. Maybe.

This is why I do not think we are facing hyperinflation… at least not until Congress nationalizes the FED.

CONCLUSION

Whenever you hear that hyperinflation is inevitable, keep your hand upon your wallet and your back against the wall.

Hyperinflation is a policy option. It has been adopted only once by a Western, industrial nation’s central bank in peacetime since 1946: Israel’s. That is a small nation. Its leaders have not made that policy error since 1985.

If we get hyperinflation, it will not last long: a few years at the most. It will be a great disruption in the lives of most Americans, but if the government does not impose price controls, there will not be devastation. There will be losses. People will have to scramble. They will adjust. They will get poorer. They will consume capital. But they will survive.

If the government imposes price controls, as it probably will, there will be serious shortages for several years. There will be a large increase in the number of bankruptcies. Unemployment will rise. Families will be squeezed badly. But it will not last. The voters will not tolerate it. Without a war, voters will demand a reform. There are too many economists, even Keynesians, who know that price ceilings create shortages.

Hyperinflation is what Ludwig von Mises called the crack-up boom. It cannot last long because the currency system is rapidly destroyed. It no longer serves as a tool of economic calculation. People switch to gold coins, silver coins, and barter. Output falls. Capital is consumed rapidly. But then it must end. When the government cannot buy votes with worthless money, it stops inflating.

Ron Paul has performed a great public service in alerting the voters to the danger of the Federal Reserve System. He has exposed the source of mass inflation and hyperinflation. He has exposed the source of the boom-bust cycle.

The FED cannot escape. Its policies must lead to booms and busts. This is inherent in all central banking. The FED will choose a repetition of the boom-bust cycle rather than impose hyperinflation, for which it can no longer escape blame. Too many people have heard Ron Paul’s warning.

Regards,

Gary North

Gary North is the author of Mises on Money.

Mass Inflation, Yes; Hyperinflation, No was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The general public today knows little about the FED. Prior to Ron Paul’s Presidential run in 2007-8, far fewer people understood it.

I have been asked: “How could we get rid of the Federal Reserve? What will replace it?” The answer: either the free market or Congress.

People who think of themselves as free market people often are not. The tax-funded public schools and the state-regulated and accredited university faculties have taught that the modern system of intrusive civil government is necessary for an orderly society. People cannot imagine a market-based society.

There is an old saying, “You can’t beat something with nothing.” But the free market social order is not nothing. It is expanding around the world, which is why the world is getting richer.

At the Federal level, a free market social order in banking existed prior to 1914. That was back when the dollar was worth over 20 times what it is worth today. (On this point, see the inflation calculator of the Bureau of Labor Statistics.)

We can go back to that system. We will go back to it. The question is: When? The other question is: At what price?

Ending the Fed By Law

Ron Paul could introduce a bill to end the Federal Reserve System. He could call it: “The Monetary Liberty Act.” It would get known as the “End the Fed Act.” Here is what the text might say:

The Federal Reserve Act of 1913 is hereby repealed. So are all subsequent acts based on the Federal Reserve Act of 1913.

All authority of the Federal Reserve System to act in the name of the United States government is hereby revoked.

The assets of the Board of Governors of the Federal Reserve System, which are already the property of the United States Government, are hereby transferred to the Department of the Treasury. This includes all of the assets listed on the balance sheet of the Federal Reserve System.

The twelve (12) privately owned Federal Reserve Banks will return all assets held in trust for the United States government within thirty (30) calendar days of the signing of this bill into law.

The gold reserves of the United States government that are held in storage by the Federal Reserve Bank of New York will be transferred to the Government’s depository at Ft. Knox, Kentucky, within one calendar year after this bill becomes law. The Government Accountability Office will conduct an inventory of the gold held in storage by the Federal Reserve Bank of New York before and after this transfer.

The Board of Governors will vacate the premises of the Federal Reserve building within thirty (30) calendar days of the signing of this bill into law.

Any pension fund assets of the employees of the various Federal Reserve Banks will remain under the control of those banks. All pension obligations under the authority of the Board of Governors of the Federal Reserve System are hereby transferred to the Department of the Treasury, to be administered under the retirement program of the Department of the Treasury.

This is simple.  The Board of Governors of the Federal Reserve System is a government agency. Its authority would be transferred to the U.S. Treasury.

The dozen Federal Reserve Banks are privately owned. All authority of these 12 banks that derives from their connection to the Board of Governors will cease. If they can make a profit, fine. If not, equally fine. The free market will determine which will survive and which will not.

Is this radical? Not at all. There are two historical precedents: the refusal of Congress to renew the charter of the Bank of the United States in 1811, and the refusal of Congress to renew the charter of the Second Bank of the United States in 1836. Both of them went bust.

The standard response is that there must be independence between the Federal Reserve System and the U.S. government. Let us apply this to other agencies:

• The Department of Defense
• The Department of the Treasury
• The Department of State
• The Department of Education

I could go on, one by one, to list all of the thousands of agencies that are funded by Federal taxes and which operate by means of the authority of the U.S. government. Only one government agency is defended by publicists, both on and off the payroll of the Federal Reserve System, as deserving to be independent of the government that has transferred authority to it: the Board of Governors of the Federal Reserve System.

The phrase, “the independence of the Federal Reserve System,” is a code phrase for “the independence of the four largest U.S. banks from the threat of losses.” A growing number of voters has figured this out since the fall of 2008. This is why the Federal Reserve System is facing public criticism for the first time since 1914. This criticism will grow.

All of this may seem Utopian. Ron Paul could not get Congress to audit the FED, which by law possesses this authority. The Congress has been in the hip pocket of the FED for almost a century. The Congress lets the FED run the nation’s economy.

But as criticism spreads, there will be more voters who figure out what the FED is and has always been: a government-created cartel of the banks. It operates for the benefit of the largest banks.

Will Ron Paul get such a law passed by Congress and signed into law? No. Does this mean that the FED is forever untouchable? No.

We need the following:

1. A wave of price inflation caused by the FED
2. A subsequent recession caused by the FED
3. A depression caused by the FED
4. A wave of outage in response to the FED
5. An endless series of criticisms of the FED

This will result, ultimately, in the abolition of the FED. Whatever replaces it will decide the economic fate of Americans: Congress (hyperinflation) or the free market (economic stability).

But could the free market replace the FED without a catastrophe following? Yes. We are already seeing this in another sector of the economy.

“You’ve Got Almost No Mail!”

From the days of America’s most famous postmaster, Benjamin Franklin, two decades before the American Revolution, residents of North America have thought that the country could not do without a government-funded postal system. In the past 15 years, this faith has quietly died. The United States Postal Service now delivers mostly subsidized opportunity mail. (I hate the work “junk mail,” for I built my business on opportunity mail. But I have not used it for 15 years.) With email, UPS, FedEx, and text messaging, the first class letter is an anachronism. Historians will not be able to trace much after 1998 based on copies of letters.

With no fanfare, the postal system has become optional. The public does not go to the local Post Office often. If it were not for Netflix, a lot of people would not check their mailboxes daily.

All of this has happened without any new legislation. The once unbreakable monopoly of the Post Office is a rusted-out shell, staffed by union-protected workers who probably know their jobs are peripheral. Its volume declined by over 12% in 2010. This is expected to continue. That would cut volume by 50% by 2017. About 40,000 employees were fired in 2010. Saturday delivery will be dropped soon. There is another rate hike scheduled. Yet the outfit will lose $10 billion this year.

All this has happened without any enabling legislation. It has happened quietly. Market competition has reduced the USPS to an anachronism. It is a leftover shell of a bygone era.

In an essay about his youth, sociologist Robert Nisbet remarked that in the year he was born, 1913, the only contact that most Americans had with the Federal government was the Post Office. Later that year, the Federal Reserve Act was passed in a late session, just before Christmas break. Also in that year, the income tax came into effect. The expansion of the Federal government has been relentless ever since.

Nevertheless, the Post Office is slowly dying. No one planned this. The free market has replaced it, despite its official monopoly.

This offers hope. It means that free market solutions can come into existence before a government entity is shut down by law. The Post Office officially is a monopoly, yet its monopoly status has been eroded over the last four decades. It has been almost entirely replaced over the last two decades.

I think of a TV commercial that did not directly attack the Post Office. It was targeted at UPS. But UPS responded much faster than the Post Office could.

While critics of the postal monopoly had for decades tried to get Congress to revoke the Post Office’s monopoly, all attempts failed. They were associated with the fringe. Yet, year by year, the Post Office fell behind. It is irrelevant in American life today.

This was not planned by any political group. It was the result of new technologies. People made decisions, day by day, to bypass the Post Office.

An End Run Around the Fed

I do not expect Congress to revoke the Federal Reserve Act of 1913 in this decade. The powers that be who run this country do so by means of the Federal Reserve System more than by any other semi-private institution. It is at the center of control, because the monetary system is at the center of the economy.

But the central bank faces a problem. To maintain the boom, the FED must inflate. To cease inflating would allow the credit bubble to implode on a scale far more devastating than what happened in 2008. The FED has placed us all on the back of the tiger.

Yet if it does not reverse its policy, it must produce hyperinflation at some point. That will destroy the FED’s ability to guide the economy. Hyperinflation will lead to alternative currencies. Digital technology is now international. If buying and selling digital U.S. dollars is no longer profitable, because long-term contracts are not possible under hyperinflation, then the citizens of the United States will do what citizens of Zimbabwe did. They will use other currencies.

If the FED produces a Third World economy through hyperinflation, then people will do what Third World citizens do: find reliable currencies elsewhere. This can be done on-line nearly for free. The Internet has reduced the transaction costs of using rival currencies.

The FED economists know this. They know that transaction costs for using other currencies are low. If the FED’s policies undermine long-term contracts, the citizens are not helpless. They can switch.

It will not take legislation to end the FED. All it will take is the FED. If the FED continues to inflate, it will destroy its base: the monetary system based on the FED. But if it ceases to inflate, by ceasing to buy Treasury debt, it will create Great Depression 2.

QE2

Bernanke can get away with QE2 today only because commercial banks are not lending. If they start lending, M1 will rise, the M1 money multiplier will rise, and price inflation will return.

He has bought time with QE2, but he has not bought a way out of the credit bubble that Greenspan created and he created.

He can play hide and go seek with Ron Paul, refusing to show up at the hearings of the Monetary Policy Subcommittee. Congress cooperates. But he cannot play hide and go seek with the business cycle. Greenspan did, but he got out in 2006. He passed on the Old Maid to Bernanke.

The Federal Reserve System bases its power on its ability to control the monetary base. It swapped T-bills for toxic assets to save the big banks, but to replenish its supply of swappable liquid assets, it has to inflate, as it is now doing. QE2 is replenishing the supply of Treasury debt to swap with large banks.

The FED did not bail out any small banks in 2008. It never has. Its unofficial mandate is to bail out the largest commercial banks. This it has done.

I think Bernanke sees another banking crisis coming. This is why he has pushed QE2. Only Hoenig has voted against it. Bernanke has his way with the other members of the Board of Governors and the Federal Open Market Committee. He has not said why this massive increase in the monetary base is mandatory for the economy. To talk about this would create doubts. He does not want to rock the boat. So, he gets away with another $600 billion in monetary base creation.

This is working for now. But the results are unavoidable: either price inflation or continued high unemployment and stagnation, because commercial banks thwart the stimulation. He is on the tiger’s back. So are we.

Conclusion

The Post Office looked unbeatable for over 250 years. Technology has made it peripheral. The same will happen to the Federal Reserve System. It looks unbeatable. But the Internet can beat it. There are ways out of the FED’s trap.

A lot of people will pay a heavy price for Bernanke’s policies. That will be the price of persuading those people with the bulk of their assets in digital dollars to sell those assets and replace them with other digits.

This is why I do not think the FED will resort to hyperinflation. The economists know that the FED’s victims can escape. The FED will risk mass inflation, but at some point it must say: “We will buy no more Treasury debt.” That will be the moment of truth. That will be the day it climbs off the back of the tiger.

So will we all.

Regards,
Gary North
Whiskey & Gunpowder

March 9, 2011

How to End the Fed was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

For example, gold is trading at a record high, while silver has reached a 30-year high. Those new high prices are happening for a reason. The precious metals are sensitive to changes in inflation, both actual as well as future expectations.

Rising precious metal prices tell us that there is a lot of inflation in the pipeline, but they are not alone in giving us this message. More generally, look at the trend in commodity prices over the past few months in the following chart of the CRB Continuing Commodity Index, which is based on the price of 19 different commodities.

On June 4th the CRB Index closed at 450.24. Here we are just 3-1/2 months later, and the CRB Index closed Friday at 530.24, up 17.7%. That is a HUGE jump in prices in such a short period of time. To put this price rise into perspective, it is a 61.8% annual rate of “appreciation” — though we should call it by what it really is, namely, “price inflation.”

Commodity prices are not rising because of good economic activity, which remains in the doldrums with high unemployment throughout most of the world. Commodity prices are rising because too much money is being printed. But the Federal Reserve reports that M1, a narrow measure of the total quantity of dollars in circulation, rose only by a 9.1% annualized rate in the three months from May 2010 to August 2010, and M2 rose by even less. So why are commodity prices rising by an even faster rate than money growth? There are two reasons.

1) Because too much money has been printed for years, not just over the past three months, which can be illustrated by comparing M3 to the total US population. In 2000 there were $26,977 in circulation, as measured by M3, for every man, woman and child in the United States. That amount has ballooned to $46,538, a 7.1% annual rate of growth, which is more than 7-times the 0.9% annual rate of population growth during this period.

2) Demand for money is usually ignored, but it is an important part of the equation. Unfortunately, demand cannot be measured, so we again need to rely on observations of market prices to determine the prevailing trend in the demand for dollars at any moment.

So, for example, let’s look at the US Dollar Index, which measures the dollar’s rate of exchange against a basket of currencies. While commodities have been rising since June 4th, the Dollar Index has been falling. It is down 7.9% over this period, a 27.6% annualized rate of decline. Given that people are opting to hold other currencies in preference to the dollar, as evidenced by the dollar’s falling exchange rate, it is clear that the demand for the dollar is falling.

Thus, the dollar is being hit by both rising supply and falling demand. We know from Economics 101 that this condition results in falling prices, which when applied to money means declining purchasing power, or what today is usually called “inflation.” If monetary policy is not corrected and inflation is not reversed, in time hyperinflation will be the inevitable result.

I have been warning about hyperinflation since March 2, 2009 when I wrote that the dollar was on the cusp of hyperinflation. I noted that “the federal government has embarked on a course of runaway spending, and it is runaway government spending that causes runaway inflation”, which if left uncontrolled leads to hyperinflation. The trend has not changed for the better.

From February 28, 2009 to August 31, 2010, runaway federal government spending has resulted in a $2.57 trillion increase in the national debt. But over this period GDP increased by about $0.5 trillion, and the increase in economic activity is even less after adjusting for inflation. So clearly we need to ask ourselves, what have the bailouts and stimulus programs really accomplished?

The answer is very little in terms of economic activity, but there is an ominous consequence from this foolish binge by policymakers of soaring debt and reckless money creation. Given that these dollars are not being used to generate economic activity, they are now sloshing around the globe looking for a safe home. Tangible assets are one of the safest places to be to protect your wealth from a currency whose purchasing power is eroding.

The result is that the commodity markets are on fire. Prices are not rising because of a shortage of commodities, but rather, there is a surfeit of dollars. Too much currency has been created, relative to current economic activity.

Without an abrupt about-face to end the wrongheaded policies being followed by policymakers, there can be only one conclusion. The dollar is headed toward hyperinflation. The new record highs in gold and silver, an across-the-board rise in commodity prices and the renewed downtrend in the dollar’s rate of exchange are the “writing on the wall.”

Regards,
James Turk
GoldMoney.com
for Whiskey & Gunpowder

September 22, 2010

They Are Printing Too Much Money was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

When will the world finally begin to understand that we have reached the point of no return and that “the voyage of their life is bound in shallows and in miseries” (Shakespeare, Julius Caesar)? Sadly, we are probably not very far from that point. It is already starting to happen in many countries.

The latest EU and IMF package of $1 TRILLION (Euro 750 billion) is yet another futile attempt by governments to abolish poverty by printing paper. Let’s be absolutely clear, this money does not exist and the EU governments are hoping by declaring such a large amount that they can con the Wolfpack speculators. At this point the EU has just picked a large round figure out of the air. But when their bluff is called by the Wolfpack and the next attack happens, EU governments will after initial huffing and puffing start printing unlimited amounts of paper.

So the world is now on its road to ruin and there is no action, no leader and no new amount of printed money that can save the world or prevent a hyperinflationary depression.

Never in history has the world been in a situation when virtually all industrialised countries are bankrupt. Therefore there is no precedent for what will happen in the next few years. What we can be quite certain about is that events will happen in a seemingly random pattern and that it will be impossible to forecast where the next crises will start.

But although we will not be able to predict in what order events will take place, we can expect much of what is outlined below to happen.

Wolfpack Attacks

Already back in 2007 we warned about the very high risk of the CDS (credit default swap) market. This is now one of the primary instruments used by the Wolfpack (expression coined by the Swedish Finance Minister Borg). The Wolfpack, speculators with enormous fire power such as hedge funds and investment banks, use the CDS market to attack any weak financial sector, be it a country, a bank or a company. The combination of the leverage of the CDSs and the massive capital available to the Wolfpack makes it possible for them to bring down or badly maul whatever they attack. It was not the Wolfpack that caused the problem in for example Greece but they can bring down a weak victim quickly and profit immensely and immorally from it.

There are so many weak potential victims that the Wolfpack can attack and they will start with the most vulnerable ones like, Portugal, Spain and Ireland etc. But when the time is right they will also attack the US and the UK.

So in the coming year we will see country after country coming under attack from the Wolfback which will lead to acceleration in money printing and higher interest rates.

Iceland – Ireland – Greece – Who Is Next?

The EU support package of $ 1 trillion is supposed to be sufficient to protect the rest of Europe from another Greek tragedy. The dilemma with such a massive EU commitment is that no government expects to have to pay the money out. If they did the voters in the respective EU countries would throw out their government. Why should the German people, who are also having hard times, pay for the Greeks, Portuguese or the Spaniards, especially since these loans will never be paid back?

Greece is bankrupt but is still taking on additional EU loans of € 140 billion. In addition, their austerity measures are supposed to bring the deficit down from 12% of GDP today to 3% in a few years time. But who can be so stupid as to lend to a bankrupt nation which will sink into the Ionian and Aegean Seas in the next few years. With massive cuts in government expenditure, with major falls in output, with unemployment rising fast, with tax revenues collapsing how can Greece possibly be expected to improve the economy and pay a high interest rate on their exploding debt? In addition, as long as they have the Euro they will be totally uncompetitive. So if they couldn’t manage their economy in the so called good times, it is absolutely guaranteed that they have no chance of surviving in bad times. So Greece will default and so will Portugal, Spain, Italy, France, the UK, the US and many more. But before that there will be the most colossal worldwide money printing exercise which would have used up most of the trees in the world but for electronic fiat money.

So, if virtually bankrupt nations don’t cut their deficits, they will definitively go under and if they try to cut, they will also go under due to collapsing output and tax revenues and colossal debts. Thus whatever actions governments take or don’t take, they are damned.

The table below shows debt as a percentage of GDP for various OECD countries. The official debts (in red) are massive and unlikely to ever be repaid in real money. Total debts (grey bars) include unfunded liabilities such as pensions and health care. Spain has the lowest total debt to GDP of 250%. Germany and the UK have around 400%, the US over 500% and Greece over 800% debt to GDP. These figures are absolutely astronomical and prove that most governments in the world will be totally incapable of repaying their debts or funding the pensions or medical care which they have committed to. It doesn’t matter however much governments cut expenditure or raise taxes, all these countries are insolvent and nothing can save them.

The World Must Permanently Readjust

Most governments still believe that deficit spending and money printing is the solution to all their problems. Because the world economy’s expansion in the last 100 years and particularly in the last 40 years has been primarily based on credit and not real growth, governments live under the false impression that money printing will work this time too. But we have reached the point when investors will no longer buy worthless government debt that will never be repaid with real money. We will first go through a period when governments issue and buy their own debt thus monetising the debt or print money. This will be the hyperinflationary phase. Thereafter the world will realise that none of the government debt and very little of the bank debt will ever be repaid. Credit will then implode and so will also the assets financed by credit. Eventually there will be a new monetary and financial system and the world will start afresh. The adjustment period will be very long and will involve economic and human misery, leading to social unrest and major political change. It will be a horrible experience for the world during this extended period of adjustment. But it will be like a forest fire that clears out the deadwood and creates the conditions for strong new growth. Once the new era starts it will therefore be from a very much lower level and individuals will be rewarded for hard work with little or no social security safety net. Credit will only be granted for sound capital investment projects, not for consumption or speculation. Ethical and moral values will return and the golden calf will not be worshipped. But before that, the period of readjustment will be very long and extremely difficult for the whole world.

Regards,
Egon von Greyerz
Gold Switzerland
Whiskey & Gunpowder

May 24, 2010

Hyperinflation Guaranteed was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Virtually no one was calling for this kind of rally a year ago. But it happened. So investors are either seeing the “green shoots” supposedly sprouting from the moribund economy or believe that they’re about to break ground any day now. That sentiment is continually reinforced by government officials and media talking heads who almost universally proclaim that “the worst is past,” “we’re back from the brink,” or other words to that effect.

It’s often said that stock market action is a leading indicator, reflecting what investors think the economy will be like six or nine months down the road.

Are they right? Will good times soon be here again? Or is this just a big dead-cat bounce?

Jobs: Now here, we’ve clearly turned the corner. Everyone says so. For evidence, all we need do is look at the declining rate of job loss in the country. Uh-huh.

Perhaps it’s rude of us to point this out, but a declining rate of job loss is still a job loss. It is not the same as job creation.

The hard reality behind February’s “encouraging” numbers is that 14.9 million people remained out of work. 8.4 million jobs now have been lost since the start of the recession. In addition, there is a net need for 100,000 new jobs a month, just to keep up with first-time entrants to the workforce.

Even if the economy were suddenly to start churning out new jobs at the robust rate of a half-million a month — and the chances of that range from zero to none — it would still take nearly two years to return just to pre-recession employment levels.

(Near-term employment figures may blip up, as the government hires one and a half million people — who knew we needed so many? — to help take the census. That could lead to a classic false dawn.)

Anyone looking to the housing market to lead the recovery, as it often does, had better find a magnifying glass. January marked the third consecutive monthly drop in new home sales, and it was a whopping 11.2% tumble. Mortgage applications fell to the lowest level in 13 years. There was even a decline of 6.1% from January of 2009, itself a very dark month. Congress’s extension of home buyers’ tax credits is proving to be of increasingly little consequence.

New home sales are very important, since they cause a cascade effect down through the entire supply chain, from architects to building contractors, to sawmills, to sheetrock manufacturers, to carpenters, plumbers, and electricians. But sales of existing homes are also relevant, and there, too, the figures are grim. After piggybacking on federal subsidies through the fall, sales absorbed the worst pummeling on record in December, down 16.2%. January was a little better, only off 7.2%.

One number that is unfortunately growing is this: distressed sales, such as foreclosures, accounted for 38% of sales in January, up from about 32% in December. People are losing their homes at an increasing rate, with few buyers stepping up to the plate.

But hey, maybe there is a huge pent-up housing demand out there. We doubt it, but if there is, it doesn’t matter. Because lenders are ignoring it. In 2009, U.S. banks posted their sharpest decline in lending since 1942. One reason is that many are too cash-strapped themselves to deal with borrowers. According to the FDIC, at year’s end its “problem” list of U.S. banks at risk of failing hit a 16-year high at 702 (or nearly one in eleven), rocketing up from 552 at the end of September and 416 at the end of June. And little wonder. More than 5% of all outstanding loans are now at least three months past due, the highest level recorded in the 26 years the data have been collected.

Then there are those that can’t lend because they’re no longer with us. 140 banks went belly-up in 2009, and 2010’s total will be worse than that if January’s 15 failures prove representative. The FDIC is bankrupt after reporting a $20.9 billion loss in the fourth quarter of 2009 in its Deposit Insurance Fund.

However, never let it be said that the government won’t try to squeeze some lemonade out of its bag of lemons. To wit, the FDIC’s own financial woes haven’t prevented it from opening a huge new satellite office in the Chicago area. The facility will be dedicated to managing receiverships and liquidating assets from failed Midwest banks, and will occupy seven floors of an 11-story building. The office space being leased is well over 100,000 square feet and will employ approximately 500 temporary employees and contractors.

Does the FDIC know something we don’t? We can’t say for sure, but the fact is that the agency has already opened similar offices in Irvine, California, and Jacksonville, Florida.  Each time, the number of bank failures in those states spiked dramatically after the FDIC set up shop.

Elsewhere, consumer confidence is flagging and, since the economy is 75% consumer-driven, that doesn’t bode well. The Conference Board’s index took a swan dive in February, to its lowest point since last April. The index plunged to 46 from January’s reading of 56.5, stifling the previous three months’ uptrend. As a measure of how bleak the public mood is, the economy is considered stable only when the consumer confidence reading exceeds 90. We’re barely halfway there.

And finally, we don’t want to lose sight of the 800-pound gorilla in the room, the federal debt. How bad is it? Well, the Bank for International Settlements recently released a very frightening figure. In order just to stabilize debt at pre-crisis levels, the BIS says the U.S. government must run a budget surplus of 4.3% of GDP. Every year. For ten years.

For an in-depth look, try Harvard economist Kenneth Rogoff’s new book, This Time is Different: Eight Centuries of Financial Folly (co-authored with Carmen Reinhart of the University of Maryland), the first comprehensive survey of past financial crises around the world.

Dr. Rogoff, who may be the country’s leading expert on the historical record, concludes that a banking crisis often leads a country into default, because government’s response is usually to try to prop up the financial system with yet more debt.

If that sounds familiar and disconcerting, it should. Even more so because Rogoff has identified a clear tipping point, beyond which there is little hope of recovery. When a government’s debt grows to equal annual GDP, the game is essentially over.

Where we are now: We have $12.5 trillion in gross debt, growing at $2 trillion per year, on a GDP of $14.3 trillion. Next year, it will be $12.5T + $2T = $14.5 trillion on a projected $14.5T of GDP. Or 100%. A level we cannot survive for long.

That means it’s likely, in the not-too-distant-future, that the government will be confronted with a very stark choice between defaulting on the debt or trying to inflate its way out. The former would kill off economic growth and likely launch a worldwide depression of epic proportions.

Disastrous as that would be, if the alternative is chosen and Washington’s printing presses beget hyperinflation, that would probably be worse. In a serious deflation, those who have saved for a rainy day can make it through okay. In hyperinflation, which unconstrained further spending could easily bring on, everyone loses.

The truly prudent prepare, as best they can, for either eventuality.

Regards,
Doug Hornig, Casey Research
for Whiskey & Gunpowder

March 17, 2010

The Big Dead Cat Bounce was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Twenty-five years ago the Russians found themselves in a hole.

They had an official price for petrol (gasoline) of 1 ruble. But the cost of providing it, for example by buying it on world markets, was 8 rubles. Insofar as the state could supply any petrol to anyone at all, it was definitely going to be at a big loss. Yet they obstinately refused to accept that their price was wrong.

How we laughed at this dogmatic denial of the discipline of the market! We put it down to some sort of political imperative, but in fact it was much simpler than that.

Rather than lose money at a world-record rate, the Russian state responded by distributing official petrol in limited quantities, and only to favored clients, which in their society meant party members. The members used to fill up their Zil limousines with this cheap petrol, and effect a supply chain to retail via the simple device of draining their tanks into the jerry cans of local teenaged entrepreneurs – at 6 rubles per liter. That left the last 2 rubles to the entrepreneur, who sold it on the side of the street at 8, with hardly a murmur from official sources.

Party members were getting rich, after all, and the taxpayer was footing the bill.

Now substitute USA for Russia, and credit for petrol, and you have the essence of what is going on today. Can you get a mortgage in America or the UK at 2%, even if you pay a 50% deposit on your house? Certainly not. In America, only government mortgage agencies (Fannie and Freddie) and megabanks which are too big to fail have access to the 0.25% credit provided by the Fed. And once again, those megabanks are making very large sums, much of which gets distributed via bonus pools to those with an unremarkable talent for re-selling this cheap credit at market rates of 5.0% or more.

Political leaders regularly rail against greedy bankers, but the problem – all that cheap money – has for the last five years come directly from the false market in credit extended by ultra-low rate policies sourced in the Treasuries of the West.

Who’s at fault is academic. The issue now is that this artificially low interest rate environment can set off a hyperinflation chain reaction, just as it did in Russia once market forces prevailed. Not much is different from previous hyperinflation episodes, save that the melting of a glacially frozen stockpile of $50 trillion in government bonds performs the role traditionally played by the printing press.

In the end, those who have saved for their futures could form our own Babushka generation of pensioners. Paid out monthly, and in full, their pension will buy them a sandwich or two. The nominal value of sovereign debt will not decline, but the value of it will inflate away, taking with it the value of all those bonds.

We could end up needing to remove a couple of zeros from banknotes, because otherwise the coinage will be melted back into nickel and copper ingots as soon as it is issued, and then sold to the Chinese…

Regards,
Paul Tustain
BullionVault

October 12, 2009

Hyperinflation and Our Bankrupt Babushka Future was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Here’s a thought—that tiny handful of investors and analysts warning how Fed policy risks hyper-inflation are in fact doing the central bank’s work.

The Fed wants you to believe hyperinflation is looming. Or at least, it should want that, if doubling its balance-sheet – purchasing and lending against investment junk – is going to work the wonders that modern central-bank theory says it can. And the Fed certainly wants you to believe it will stop at nothing to avoid deflation (“whatever means necessary” as the chairman put it back in 2002).

So anyone touting the hyperinflation risk in public is playing the shill, a decoy – seemingly unconnected – proclaiming the miracle powers of Dr.Ben Bernanke’s snake oil to CNBC anchors at every chance.

In fact, they’re doing the Fed’s work better than the Federal Reserve itself. Really.

“The major danger with a zero lower bound for the interest rate,” said Swedish policy-wonk Lars Svensson (also a Princeton colleague of the Fed chief and his credit-bubble associate Paul Krugman) in a speech earlier this year, “is that inflation expectations will be too low and even negative, and that the real interest rate will thus become too high.”

With it so far? Slashing interest rates to the very minimum of 0% suggests inflation has vanished, at least in the central bank’s eyes. But that, in turn, reduces the rate of inflation expected by consumers, investors and business. Central banks are credible forecasters, you see. At least in central-bank eyes. So in Svensson’s philosophy, the zero-rate solution to falling inflation proves self-fulfilling as people hoard cash and sit tight in bonds.

“It is thus necessary to…to counteract expectations of falling inflation, and preferably to create expectations of higher inflation,” Svensson went on. But “as Paul Krugman put it” says the Riksbank’s deputy governor, “How will the central bank ‘credibly promise to be irresponsible’…?

Heaven knows the Fed’s trying. (So’s Krugman, to no one’s surprise.) But while it’s embraced credible recklessness, the Fed’s stop short of French kissing it.

Why so coy…?

“We have a very serious recession, we have a 9.4% unemployment rate,” said San Fran Fed governor Janet Yellen in a speech in California on Tuesday. “If we were not at zero, we would be lowering the funds rate…We should want to do more.”

Just how much further would the Fed go – all the way to hyperinflation perhaps? Racing to first base, “The vigorous policy actions of the Fed and other central banks, combined with sizable fiscal stimulus here and abroad, have sent a clear message that deflation won’t be tolerated,” Yellen said.

“Based on measures of inflation expectations,” she went on, an apparently reading straight from Svensson, “the public appears confident that the Fed will adopt policies that will maintain a low, positive rate of inflation. Evidently, the credibility that the Fed and other central banks have built over the past few decades in bringing inflation down has spilled over into a belief that we won’t allow inflation to get too low either.”

Steady on, cheeky! Second base next, and “A glance at history shows that many countries with massive structural deficits and without an independent central bank turned to the printing press to pay off their debts,” Yellen continued.

Straight to third then, and “That’s a recipe for high inflation and, in some cases, hyperinflation.”

Gulp, almost home! But then, somewhere between third and fourth base, the Fed’s gone shy and rebuttoned its blouse. Because “I don’t believe the United States faces that threat,” Yellen said, showing the come-on to be just one big tease.

“Looking back in history, runaway fiscal deficits have often been accompanied by high inflation,” she explained in Tuesday’s speech in the bankrupt state of California. “But, since World War II, such a relationship has only held in developing countries. In countries with advanced financial systems and histories of low inflation, no such connection is found.”

Oh man, what a let down! Who’s gonna put out hyperinflation if not the Fed…?

“In order to make up for the collapse of credit, we are effectively creating money,” said George Soros, the legendary if only occasionally accurate hedge funder, at a Washington forum in March. “If and when credit is restarted, you would then have an incredibly swollen monetary base, which, if it were leveraged, you would have an explosion of inflation.”

The trouble comes, as Lars Svensson guessed back in January, with that “if and when”. Because it opens the door to the idea that a central bank might opt instead to withdraw all this new money after the deflation panic has ended. And that in itself is enough to make creating it useless. Pointing to Japan’s five-year experiment with ‘Quantitative Easing’ between March 2001 and March 2006, said Svensson, boosting the monetary base by some 70% failed to “noticeably affect expectations of inflation and the future price level.

“For example, the Yen did not depreciate as it should otherwise have done. Firms and households clearly believed that the expansion of the monetary base was temporary and not permanent, which subsequently proved to be true. The monetary base fell back to normal levels when the interest rate was later raised to above zero.”

Sure, the Bank of Japan’s trillions did triple Japanese Gold Prices. But even with gold refusing to drop back against the Dollar right now, eagle-eyed readers will note that, quite apart from the urgent debate in Europe, the US authorities are at pains to deny they need an ‘exit plan’ any time soon. White House advisor Christina Romer made that much plain in last week’s Economist magazine, blaming the double-dip depression of 1937 on “an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy.” Yellen said it again Tuesday.

So Team Bernanke have got the right idea – at least on Planet Svensson – if not the right level of irresponsibility just yet. Slip a little vodka into their juice though, and they might start talking up inflation like Alan Greenspan, Bernanke’s predecessor and the Maestro himself, writing last week in the Financial Times. He tried to spook everyone out of cash and into the stores by warning of a decade of inflation ahead!

“A pending avalanche of government debt is about to be unloaded on world financial markets,” Sir Alan of Greenspan warned sagely, almost visibly winking from behind those enormous spectacles. “The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt.”

Or given enough sauce to get really loose, the Fed might even get crazy like Asia-based doomster Dr.Marc Faber. (He’s been known to enjoy the odd cocktail or two.) Stop warning on hyperinflation. Just come out and say it instead.

“I am 100% sure that the US will go into hyperinflation,” as Faber told Bloomberg in late May, and again on June 29th. “The US central bank has structured and introduced policies without considering exponential credit growth and its consequences,” added the Gloom, Boom & Doom author in an interview with the Korea Times on Wednesday.

See what I mean about being a shill? It’s like he’s on the payroll…

“The United States will not raise interest rates for many years to come because it needs to pay off its huge debts,” he went on, recommending inflation-friendly assets such as equities and Gold Bullion. “In turn, too much money in the economy will raise costs of everything, including healthcare and education, giving rise to hyperinflation.”

There, now that’s the way to do it! Greenspan and Faber on song, while the Bernanke Fed tip-toes around stating its aim:

Spark inflation and leave it to burn. Because putting it out worsened both the Great Depression and Japan’s “lost decade” – the one that started two decades ago and hasn’t yet ended. Everyone who’s anyone in monetary theory knows that.

And if they claim otherwise, maybe they’re the ones kidding.

Regards,
Adrian Ash
BullionVault

July 6, 2009

Faber and Greenspan: Shills for Fed Snake Oil was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

One big difference, as I have written before, is that during the Hoover-FDR  first great depression, there was absolutely no inflation.  None.  Why?  Because the dollar was backed by gold!  It was illegal to print trillions of paper dollars during the first great depression. That’s why FDR tried to get everyone to turn in their gold.  He could then spend more gold-backed dollars.  Also, there were no credit cards, no interstate roads, and virtually no air travel.  Stocks were being sold with little or no down payment, just as homes were being sold for the same requirements during the second great depression.  During the first great depression, there was no trillion dollar credit card debts.  During the first great depression, stocks plunged as they have done now, but perhaps a little bit further.  Then, there was no PPT or plunge protection team to keep the stock market artificially high; and you can bet your bottom dollar that the PPT has been busy of late.

Speaking of stocks, can anyone give me a reason why they have gone up a thousand points, other than the PPT?  650,000 or more each week are getting laid off, businesses by the thousands go bankrupt or close each week, prompting even more layoffs, and the chain reaction continues.  One of my clients says that stocks are going up because during a hyper inflation, everything goes up, and that is a good point, but there are no profits anywhere, so I think that argument my not be totally true.  I honestly do believe that gold and the Dow will cross eventually, with the Dow on its way down and gold on its way up.  Gold and silver will NEVER go to zero like paper assets (sic) can and have done and will continue to do.  With hyper inflation, gold and silver will be made to go up even further than other prices, I believe, because more and more people are seeing the beauty of tangible beautiful, historic money, in the form of gold and silver, and there is only so much of it out there.  As it becomes more and more difficult to get, due to increased demand, prices of metals will have to go sky high in dollars.

We drove over 3200  miles last week, mostly in Texas, and going to and from there.  The Blue Bonnets are out and beautiful, but even in Texas, the economy isn’t good at all.  While Texas houses haven’t plunged like Las Vegas, California, and Florida, it’s because they never got that high in the first place.  Still, layoffs are plentiful, and tourism, motels, and other non-essentials are hurting…even in Texas.  Closed auto dealerships are plentiful, and in one wonderful German restaurant, which used to have people waiting around the block on a Friday evening, we were seated instantly.  The second great depression is going to leave an unemployment rate of close to 20% before it’s over and all the spending and bailouts are merely postponing the inevitable, and making it worse with hyper-inflation.  The term “trillion” was unheard of a couple of years ago, as far as deficits are concerned, and now that term is thrown around like penny candy at a fair 50 years ago.

Silver is down a buck an ounce from a week ago and gold a hundred bucks.  Great buying opportunity, because they won’t stay there.  Silver is an unbelievable bargain.  In 1980, when gold was $850, silver was $50, or a 16 to one ratio.  If the ratio was 16 to 1 now, as it was then, and has been throughout history, silver would be $55 an ounce, not $12.25.   It will happen. because history cannot be denied.  It you’ve got the place to put it, get silver!

Hoover and FDR was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Do you have a slight idea of how many millions of retirement accounts, pension funds, and charities have been destroyed because of the Barney Franks of D.C.?  I find it incomprehensible to witness that a stock market can go up 497 points, three days after another 20 banks went under, and every conceivable thing which can go wrong has gone wrong. I am astonished at the credulity and unabashed total economic illiteracy of the American and even the world’s public.  We’re headed for hyperinflation, with prices of everything going through the roof, and America is buying stocks rather than gold and silver?  Unbelievable.  Millions of offices, stores, and shops are empty throughout America, thanks to bankruptcies.  Millions of homes are empty, being foreclosed, in some cases brutally vandalized, and people buy stocks, rather than gold and silver?

Remember Stott’s Law?  “The more of anything there is, the less they will be worth.”  This is true with houses, cars, dollars, stocks, government and bureaucracy.  Millions of new shares of stock are issued each week, and government is growing like a weed.  There’s very little gold and silver on earth, so the law will never apply to them.  They’ll never go to zero.

State governments are broke, county, city, and town governments are suffering from a lack of sales and property taxes, which pay for public trash removal, snow plowing, police and fire departments; and people are buying stocks?  America’s travails have ventured around the world.  Not that the Brits don’t have a housing bubble, and the French too, or other nations also, but we seemed to have triggered it.  There are trillions of derivatives still out there.  It isn’t all over at all.  This is just the beginning, my friend.

The D.C. Gang supports the automakers, while the auto dealerships by the dozens go broke.  Who will sell the cars if the dealers are gone? Used car lots are chock full, and no one is buying them.  Massive business failures are around the corner, and people are buying stocks?  If there ever was a bear market bounce, this is it.  If there ever was a rally with no logical reason to support it, this is it. Many many shopping centers and malls are on the skids, their mortgages are in default, and not being helped by vacant stores.  I do know that thousands of ex- Circuit City and other big box stores are not free and clear, and the owners of them are in deep trouble with no rent coming in.

Locally, there are two sand and gravel companies.  One of them is shut down totally, and the other is hanging on by a thread. Locally, there are lots and lots of vacant stores, and this isn’t a manufacturing town.  My town is a farm town, has 17,000 people in it, and there are lots of vacant stores which weren’t vacant a year ago.  All localities are in trouble.  Silverton,Colorado, with 450 people in it, depends on tourism since the mines were shut down by the EPA and MSHA.  They’re dreading this summer’s business, and people are buying stocks?

We’re headed directly into socialism with a capital “S” and that results in communism in far too many cases.  When Hitler and Castro came to power, they were regaled as saviors and heroes.  The Ruskies still idolize Stalin, who murdered 30 million.  In South and central America, the socialists are gaining ground, and with voter approval.  When you get in bed with government, usually by the volunteerism of the vote, you are going to get raped.  America has gotten into bed with, as Rush calls him TOTUS (Teleprompter of the US), and we are getting screwed with our own smiling faces. Would I opt to leave America?  Hell no, because as far as the Latin nations are concerned, one of their most common shouts have always been “Revolution!”  Governments come and go down south, I am afraid.  Who would have ever thought that Iceland could go bankrupt because of AAA rated securities?

Want to short the dollar?  Buy gold and silver which are the enemies of paper scrip.  Want to be safe?  Get out of the big cities.  It is so sad.  Grievously sad about what’s happening to America and hundreds of millions of its citizens.  We’re being over run with illegals from Mexico who won’t learn English, and think we’re supposed to support them.  We’ve elected a bozo who has about as much true love for America as does any pip squeak, lusting for power, politico.  Our currency is headed south with all deliberate speed, helped along by Democrats and a few Republicans.  Our guns are threatened, and with every day that dawns, a new little bureaucracy is formed.  A popular talk show host’s wife read the 600-page Stimulus Bill and was appalled at its contents.  According to her, the bill is full of giveaways with a separate little bureaucracy to oversee each handout.

The plain fact of the matter is that with a $3.6 TRILLION deficit, and long term obligated to pay debts of $75 TRILLION, the debt cannot be paid, any more than could the German debt be paid after WW I, other than with printing press money.  Will dollars be used as insulation or as a method to start fires eventually?  How can it be avoided?  If anyone has even a smidgen of a way this can be avoided, please let me know.  Is there any other way to protect ones self from hyperinflation, other than to get out of the currency that is being hyperinflated, and into something tangible?  The king dollar has no clothes, people are beginning to see the truth of it, and the laughter has begun in the form of escaping from them.

Regards,
Don Stott

March 26, 2009

Absurdities of Socialism and Hyperinflation was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

During a credit deflation, things get cheaper. Without lines of credit, people can’t bid things up and prices fall to their “cash on hand” level. Given a long enough time, things settle out and prices relative to wages actually become attractive. But it’s a long and bumpy ride from here to there. The trick is to maintain roughly the same level of income as others take wage cuts or lose their jobs entirely. Add this to the general lack of credit and you find that the cost of living drops dramatically. You might have felt poor a couple of years ago when you earned $50,000 per year, but if you can hold onto that income, why, in the next couple of years you could feel positively wealthy!

The holding on part is where it gets a little tricky.

It’s tricky because when credit evaporates, less goods and services can be bought. A lot of jobs providing those goods and services become unnecessary. Layoffs become all the rage. You wind up with a lot of formerly employed people with no jobs and no money and no attractive prospects. Doesn’t seem fair, but that’s what happens when hopes and livelihoods get propped up on the shifting sand of credit expansion.

When credit vanishes, actual cash becomes king. Promises to pay take a back seat to actual ability to pay. Exactly what are we calling “cash”, though? God and the free markets like gold and silver because they’re relatively rare, easily divisible, and it’s very difficult to control their supply, and hence they’re innately honest. Governments prefer colorful bits of paper that they issue precisely because they can print up as many as they need.

While credit isn’t wealth, neither is money. Money is just a commodity we use to represent and exchange wealth. It’s rather vital to have a measuring tool that resists stretching and deformation or else you get into all sorts of trouble. Gold and silver tend to resist stretching; paper money begs for it.

During the last really big credit bust in this country cash was very strictly tied to gold and silver. The exchange rates were fixed; you got one ounce of gold for a twenty-dollar bill (plus 67 pennies). Fifty-four cents got you an ounce of silver. So when the credit bubble popped and prices slumped, they did so in terms of a dollar that was a reliable proxy for gold and silver. How things have changed!

First FDR devalued the dollar and a little later Nixon killed it. The currency we have today is a hoax wrapped in a lie. It isn’t tied to anything. The old dollar was a certificate that could be exchanged for a very specific amount of gold. The one we’ve had since 1971 is a promise from the U.S. government…and little paper promises from governments have a dismal history.

You might have noticed that during our recent gargantuan credit bust people again ran to the dollar. They expressed a very strong preference for greenbacks over…well, just about everything else in the wide world. But running to the dollar for shelter these days is like seeking protection from the man who is shooting at you…or running from the doorway of a burning building to the second floor.

During the last depression, the dollar’s tie to gold limited the ability of our communist dictator to goose the money supply. Roosevelt had to coerce the citizenry to give him their gold under pain of imprisonment so he could allow for some easing of the dollar’s value. This time around, FDR II can just have central banks conjure up as much cash as deemed necessary out of nothingness because the dollar isn’t tied to gold anymore.

Inflation is a slow burn on its default setting, which governments enjoy so much. It’s why they insist on monopolizing currency in the first place. But let inflation go on long enough and the currency becomes worthless. Sometimes events conspire to accelerate the race to worthlessness. Wars, laughably unpayable national debt, financial panics…that sort of thing.

The government would prefer an endless boom, even though such a thing—like individual biological immortality or perpetual motion — just isn’t possible. The central bank gets things started by expanding credit. Good times ensue. Everyone is employed and everyone lives beyond their means and bids up the prices of assets with money they don’t really have. This can’t go on forever (and never does!), but governments hate to see the ravages of the inevitable contraction after their artificially-induced boom. States love for their citizens to be blissfully distracted with fantasy, especially the really unsustainable sort.

So what is a government to do when it wants people to spend and they just refuse? When the rubes refuse to play ball and insist on hanging on to their savings, all you have to do is make saving less attractive than spending. Increase the money supply…make the money people hold less valuable…encourage them to get rid of it. Set the currency ablaze and ferret the consumers out.

Around these parts, we subscribe to the view that savings are essential for capital investment, but politicians side with Keynes on this and believe savings are for suckers; debt is where it’s at. And if private debt has brought the population to its knees, then the obvious answer is a dollop of public debt to kill their currency and finish them off!

It’s not just the amount of dollars that the central bank produces, however; it’s the amount that actually gets circulated and the speed at which it moves through the economy. When the general populace senses that the dollars they’re holding are losing value (because the central bank is accelerating the increase in supply), they try very hard to get rid of them as quickly as possible. They trade them for things that will hold their value.

The real trouble with hyperinflation isn’t that it devalues the currency, however; it’s that it devalues souls. It leads people astray. It removes the moral stops. It changes all sense of proportion. Like a sadistic, juvenile prankster, government spikes the punch with a little quantitative easing and before you know it all bets are off. People drunkenly succumb to the baser instincts they normally keep in check. The thin layer of restraint provided by the neo-cortex is broken and all sorts of reptilian longings are indulged…and consequences be damned.

Trying to invest and plan for the future under a fiat currency regime is like trying to be witty and convincing while drunk. Inevitably the wrong things are said and done because perception and judgment are hopelessly warped.

During a hyperinflation, the majority of the population who counted on the scrip they were forced to deal with and save can only feel angry desperation as all their savings turn to ashes practically overnight. The reward for personal thrift coupled with trust in the largest institution around—the state—is loss and future uncertainty. Under such conditions, societies tend to come apart fairly rapidly. Crime rises as savings and incomes disappear. Ethnic tensions may mount. There is a bull market in internal strife and personal misery.

People generally rather consume than produce or delay gratification. This is why the masses can be lied to with paper. But the universe is a weighing machine, not a voting booth. Wishes don’t trump reality. And disaster must befall those who expect something for nothing. We here in the Whiskey Room like to point the finger at governments, but we also have to acknowledge that thing in human nature that allows governments to exist in the first place and to flourish.

For the past decade in the U.S. easy credit — pretend money — led people to put their houses up as collateral on debts that could only be paid back if real estate prices kept getting propped up by more easy credit. Then they used this debt to finance vacations and trips to big retails chains to buy things that would not be used to produce or store wealth. And this was just an expansion of credit!

When the actual money supply expands in order to ease debt repayments…well, all sorts of screwy things happen. That’s what generally spurs the vulgar expansion of the money supply: the political desire to ease massive debt repayment, both public and private…that and war. When you see a nation living beyond its means, watch out; its currency will be thrown under the bus when the bill comes due.

Destroying the currency, however, means that the debts really weren’t repaid…because they were paid back with dollars that aren’t worth the value of those that were initially borrowed. It’s a big swindle and everyone involved knows it. But it goes on anyway with all the nasty consequences you’d expect from such massive debauchery, delusion and theft.

The list of countries that have suffered the ravages of paper money hyperinflation is pretty darned long…and ironically it starts with the very first country to give paper money a try, long, long ago. China’s Yuan Dynasty’s little experiment with paper money ended badly. In fact, it helped end the Yuan Dynasty.

For the first time in history, currencies everywhere are merely paper…including the world’s reserve currency. The potential…the inevitability…of a worldwide bonfire of these little paper vanities staggers the imagination. The conflagration will be mesmerizing in its size and intensity. You may even find yourself enjoying the view…if you make it a point to be standing far enough away not to be consumed.

Regards,
Gary Gibson
Managing Editor, Whiskey & Gunpowder

February 17, 2009

The Joys of Hyperinflation was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.