Next year (not this year) may be last season if US goes into Hyperinflation...
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Hyperinflation...
The Canadian celebs (and production crew) probably will not lose that much
of their net worth ... but the Americans may be nearly broke if they
exclusively invest in the US finance system.
Smallville still has 3 more production months this year, so the opportunity
is their for the US cast (permanent and guests) to put their money into
Canada while the USD still has value.
Excerpts from : http://www.shadowstats.com/article/292
The U.S. economy is in an intensifying inflationary recession that
eventually will evolve into a hyperinflationary great depression.
Hyperinflation could be experienced as early as 2010, if not before, and
likely no more than a decade down the road. The U.S. government and Federal
Reserve already have committed the system to this course through the easy
politics of a bottomless pocketbook, the servicing of big-moneyed special
interests, and gross mismanagement.
The U.S. has no way of avoiding a financial Armageddon. Bankrupt sovereign
states most commonly use the currency printing press as a solution to not
having enough money to cover their obligations. The alternative would be for
the U.S. to renege on its existing debt and obligations, a solution for
modern sovereign states rarely seen outside of governments overthrown in
revolution, and a solution with no happier ending than simply printing the
needed money. With the creation of massive amounts of new fiat (not backed
by gold) dollars will come the eventual complete collapse of the value of
the U.S. dollar and related dollar-denominated paper assets.
What lies ahead will be extremely difficult and unhappy times for many.
Ralph T. Foster, in his "Fiat Paper Money" (see recommended further reading
at the end of this issue), closes his book's preface with a particularly
poignant quote from a 1993 interview of Friedrich Kessler, a law professor
at Harvard and University of California
Berkeley, who experienced the Weimar Republic hyperinflation:
"It was horrible. Horrible! Like lightning it struck. No one was prepared.
You cannot imagine the rapidity with which the whole thing happened. The
shelves in the grocery stores were empty. You could buy nothing with your
paper money."
This Special Report updates and expands upon the three-part Hyperinflation
Series that began with the December 2006 SGS Newsletter, exploring: (1) the
causes and background of the evolving hyperinflation and great depression;
(2) why circumstances will differ from the deflationary Great Depression of
the 1930s; (3) implications for politics and the financial markets; (4)
considerations for individuals and businesses.
The broad outlook has not changed during the last year. More generally,
though, developments in the economy and the financial markets have been in
line with projections and have tended to confirm the unfolding disaster.
Specifically, the current inflationary recession has gained much broader
recognition, while the still-unfolding banking solvency crisis has confirmed
the Fed's and the U.S. government's willingness to spend whatever money they
have to create in order to keep the financial system from imploding. While
the dollar has taken a heavy hit - down roughly 20% against key currencies
from last year - selling of the U.S. currency still has been far short of
the outright dollar dumping that eventually will lead to flight to safety
outside of the U.S. dollar. That event is important to the shorter-term
timing of the pending hyperinflation.
Regular readers may recognize text from last year's Series, as well as
material from various SGS newsletters, but such is the nature of revisions
to prior material. Points that may be repeated from earlier newsletters are
done so in sequence to help build the arguments explaining the unfolding
crisis. Great thanks are extended to the numerous subscribers who offered
ideas, questions and materials that have been incorporated in this report.
Defining the Components of a Hyperinflationary Great Depression
Deflation, Inflation and Hyperinflation. Inflation generally is defined in
terms of a rise in general prices due to an increase in the amount of money
in circulation. The inflation/deflation issues defined and discussed here
are as applied to goods and services, not to the pricing of financial
assets.
In terms of hyperinflation, there have been a variety of definitions used
over time. The circumstance envisioned ahead is not one of double- or
triple- digit annual inflation, but more along the lines of seven- to
10-digit inflation seen in other circumstances during the last century.
Under such circumstances, the currency in question becomes worthless, as
seen in Germany (Weimar Republic) in the early 1920s, in Hungary after World
War II and in the dismembered Yugoslavia of the early 1990s.
The historical culprit generally has been the use of fiat currencies -
currencies with no asset backing such as gold - and the resulting massive
printing of currency that the issuing authority needed to support its
system, when it did not have the ability, otherwise, to raise enough money
for its perceived needs, through taxes or other means.
Foster (see recommended further reading at the end of this issue) details
the history of fiat paper currencies from 11th century Szechwan, China, to
date, and their consistent collapses, time-after-time, due to what appears
to be the inevitable, irresistible urge of issuing authorities to print too
much of a good thing. The United States is no exception, already having
obligated itself to liabilities well beyond its ability ever to pay off.
Here are the definitions:
Deflation. A decrease in the prices of goods and services, usually tied to a
contraction of money in circulation.
Inflation. An increase in the prices of goods and services, usually tied to
an increase of money in circulation.
Hyperinflation: Extreme inflation, minimally in excess of four-digit annual
percent change, where the involved currency becomes worthless. A fairly
crude definition of hyperinflation is a circumstance, where, due to
extremely rapid price increases, the largest pre-hyperinflation bank note
($100 bill in the United States) becomes worth more as functional toilet
paper/tissue than as currency.
As discussed in the section Historical U.S. Inflation: Why Hyperinflation
Instead of Deflation, the domestic economy has been through periods of both
major inflation and deflation, usually tied to wars and their aftermaths.
Such, however, preceded the U.S. going off the gold standard in 1933. The
era of the modern fiat dollar generally has been one of persistent and
slowly debilitating inflation.
Recession, Depression and Great Depression. A couple of decades back, I
tried to tie down the definitional differences between a recession,
depression and a great depression with the Bureau of Economic Analysis
(BEA), the National Bureau of Economic Research (NBER) and a number of
private economists. I found that there was no consensus on the matter, so I
set some definitions that the various parties (neither formally nor
officially) thought were within reason.
If you look at the plot of the level of economic activity during a downturn,
you will see something that looks like a bowl, with activity recessing on
the downside and recovering on the upside. The term used to describe this
bowl-shaped circumstance before World War II was "depression," while the
downside portion of the cycle was called "recession." Before World War II,
all downturns simply were referred to as depressions. In the wake of the
Great Depression of the 1930s, however, a euphemism was sought for future
economic contractions so as to avoid evoking memories of that earlier,
financially painful time.
Accordingly, a post-World War II downturn was called "recession."
Officially, the worst post-World War II recession was from November 1973
through March 1975, with a peak-to-trough contraction of 5%. Such followed
the Vietnam War, Nixon's floating of the U.S. dollar and the Oil Embargo.
The double-dip recession in the early-1980s may have seen a combined
contraction of roughly 6%. I contend that the current double-dip recession
that began in late-2000 already is rivaling the 1980s double-dip as to
depth. (See the Reporting/Market Focus of the October 2006 SGS for further
detail.) Please note that the definition for "great depression" below has
been revised to a contraction in excess of 25% (from 20% stated in the March
16, 2008 newsletter), in order to be consistent with the usage in last year's
Series.
Here are the definitions:
Recession:Two or more consecutive quarters of contracting real
(inflation-adjusted) GDP, where the downturn is not triggered by an
exogenous factor such as a truckers' strike. The NBER, which is the official
arbiter of when the United States economy is in recession, attempts to
refine its timing calls, on a monthly basis, through the use of economic
series such as payroll employment and industrial production, and it no
longer relies on the two quarters of contracting GDP rule.
Depression:A recession, where the peak-to-trough contraction in real growth
exceeds 10%.
Great Depression:A depression, where the peak-to-trough contraction in real
growth exceeds 25%.
On the basis of the preceding, there has been the one Great Depression, in
the 1930s. Most of the economic contractions before that would be classified
as depressions. All business downturns since World War II - as officially
reported - have been recessions. Using the somewhat broader "great
depression" definition of a contraction in excess of 20% (instead of 25%),
the depression of 1837 to 1843 would be considered "great," as technically
would be the war-time production shut-down in 1945.
The current economic contraction is about halfway towards being classified
as a "depression," based on my definitions and GDP accounting. As the Great
War became World War I with the advent of World War II, so too may the Great
Depression become Great Depression I, as the current crisis reaches its
full, terrible potential. As with the two world wars, what may become known
as Great Depression II had its roots in Great Depression I.
Current Environment
Before examining how the current circumstance can evolve from an
inflationary recession to a hyperinflationary depression and then great
depression, it is worth defining the nature of the current economic and
inflation conditions in the United States, and likely near-term
developments.
Based on the regular material discussed in the SGS Newsletter, the U.S.
economy is in an inflationary recession as will be reported in official
statistics. Real (inflation-adjusted) fourth-quarter 2007 GDP, in July's
benchmark revision, and/or first-quarter 2008 GDP should be in contraction,
with most underlying economic series showing distressed levels of activity
consistent with a recession. Annual CPI inflation is at 4.0% and headed
higher. Oil prices remain over $100 per barrel, weakness in the dollar is
just beginning to impact the CPI, and the inflationary effects of soaring
broad money growth should start to surface around mid-year. Official CPI
could be running in double-digits by year-end 2008.
Net of gimmicked methodologies that have reduced CPI inflation reporting and
inflated GDP reporting, the U.S. economy has been in a recession since
late-2006, entering the second down-leg of a multiple-dip economic
contraction, where the first downleg was the recession of 2001 that really
began back in late-1999. Annual CPI inflation currently is running around
11.6%, again, facing further upside pressures.
The current outlook does not exclude further bounces and dips in economic
activity. As was seen during the Great Depression, in severe contractions
the economy can hit bottom and then bounce briefly until it falls again,
finding a new bottom. As discussed in the Depression/Great Depression
section, the current economic downturn reflects a structural shift, which
increasingly has constrained consumer activity during the last several
decades, and which cannot be turned quickly. The current downturn, by my
numbers, already is halfway to qualifying as a depression. The evolving
depression quickly will move to great depression status, when the
hyperinflation hits, as such will be extremely disruptive to the conduct of
normal commerce.
The efforts by the federal government and the Federal Reserve to prevent a
systemic collapse as a result of the banking solvency crisis has started to
spike broad money growth, as measured by the SGS-Ongoing M3 measure, which
currently shows a record annual growth rate of 17.3%. While the Fed has not
been formally creating new money - yet - by adding to reserves, it has had
the effect of creating new money by re-liquefying otherwise illiquid banks,
by lending liquid assets versus illiquid assets. As a result, a number of
banks have been able to resume more normal functioning, lending money and
creating new money supply. As the systemic bailout proceeds, formal money
creation will follow and already may be starting to show up in official
accounting.
In response to the rapidly deteriorating fundamentals underlying the value
of the U.S. dollar, selling of the greenback has been intense, but
contained, with brief periods of stability as seen at the moment. In the
near future, dollar selling should build towards an extreme, with heavy
foreign investment in the dollar fleeing the U.S. currency for safety
elsewhere. With the domestic financial markets and U.S. Treasuries so
heavily dependent on foreign capital for liquidity, the Federal Reserve -
now touted as the formal financial market stabilizer - will be forced
increasingly to monetize federal debt. That process will build over time,
given the federal government's effective bankruptcy, as discussed in the
section U.S. Government Cannot Cover Existing Obligations. Therein lies the
ultimate basis for the pending hyperinflation.
Again, the current circumstance will evolve into a hyperinflationary
depression, then great depression. Although such is not likely much before
2010, or after 2018, that financial end game for the current markets will
tend to come sooner rather than later and will break with surprising speed
when it hits. As discussed later, this likely will not be a deflationary
environment as seen during the Great Depression.
What lies ahead for the current year will be severe enough and financially
painful enough to affect the outcome of the 2008 presidential election.
Historically, the concerns of the electorate have been dominated by
pocketbook issues. Prior to gimmicked methodologies making the reporting of
disposable personal income largely meaningless, that measure was an
excellent predictor of presidential elections.
In every presidential race since 1908, in which consistent, real
(inflation-adjusted) annual disposable income growth was above 3.3%, the
incumbent party holding the White House won every time. When income growth
was below 3.3%, the incumbent party lost every time. Again, with
redefinitions to the national income accounts in the last two decades, a
consistent measure of disposable income as reported by the government has
disappeared. Yet, even with official reporting, the current annual growth in
real disposable income is at 2.2%, well below the traditional 3.3% limit.
Accordingly, odds are quite high that the numbers for 2008 will favor an
incumbent party loss, i.e. a victory for the Democrats. Where I always
endeavor to keep my political persuasions separate from my analyses, for
purposes of full disclosure, my background is as a conservative Republican
with a libertarian bent.
What follows or coincides politically with a hyperinflationary depression
offers a wide variety of possibilities, but the political status quo likely
would not continue. Times would be financially painful enough to encourage
the development of a third party that could move the Republicans or
Democrats to third-party status in the 2010 mid-term or 2012 presidential
elections.
[...]
As to the fate of the developing U.S. great depression, it will encompass
the fire of a hyperinflation, instead of the ice of deflation seen in the
major U.S. depressions prior to World War II. What promises hyperinflation
this time is the lack monetary discipline formerly imposed on the system by
the gold standard, and a Federal Reserve dedicated to preventing a collapse
in the money supply and the implosion of the still, extremely over-leveraged
domestic financial system.
The accompanying two graphs measure the level of consumer prices since 1665
in the American Colonies and later the United States. The first graph shows
what appears to be a fairly stable level of prices up to the founding of the
Federal Reserve in 1913 (began activity in 1914) and Franklin Roosevelt's
abandoning of the gold standard in 1933. Then, inflation takes off in a
manner not seen in the prior 250 years, and at an exponential rate when
viewed using the SGS-Alternate Measure of Consumer Prices in the last
several decades. The price levels shown prior to 1913 were constructed by
Robert Sahr of Oregon State University. Price levels since 1913 either are
Bureau of Labor Statistics (BLS) or SGS based, as indicated.
The magnitude of the increase in price levels in the last 50 years or so,
however, visually masks in the first graph the inflation volatility of the
earlier years. That volatility becomes evident in the second graph, with
inflation history shown only through 1960.
What is shown in the second graph is that up through the Great Depression,
regular periods of inflation - usually seen around wars - have been offset
by periods of deflation. Particular inflation spikes can be seen at the time
of the American Revolution, the War of 1812, the Civil War, World War I and
World War II.
[...]
The inflation peaks and the ensuing post-war depressions and deflationary
periods tied to the War of 1812, the Civil War and World War I show close to
60-year cycles, which is part of the reason some economists and analysts
have been expecting a deflationary depression in the current period. There
is some reason behind 30- and 60-year financial and business cycles, as the
average difference in generations in the U.S. is 30 years, going back to the
1600s. Accordingly, it seems to take two generations to forget and repeat
the mistakes of one's grandparents.
Similar reasoning accounts for other cycles that tend to run in multiples of
30 years.
Aside from minor average annual price level declines in 1944 and 1955, the
United States has not seen a deflationary period in consumer prices since
before World War II. The reason for this is the same as to why there has not
been a formal depression since before World War II: the abandonment of the
gold standard and recognition by the Federal Reserve of the impact of
monetary policy - free of gold-standard system restraints - on the economy.
The gold standard was a system that automatically imposed and maintained
monetary discipline. Excesses in one period would be followed by a flight of
gold from the system and a resulting contraction in the money supply,
economic activity and prices.
Faced with the Great Depression, and unable to stimulate the economy,
partially due to the monetary discipline imposed by the gold standard,
Franklin Roosevelt used those issues as an excuse to abandon gold and to
adopt close to a fully fiat currency under the auspices of what I call the
debt standard, where the government effectively could print and spend
whatever money it wanted to.
[...]
Attempting to counter concerns of another Great Depression-style deflation,
Bernanke explained in his remarks: "I am confident that the Fed would take
whatever means necessary to prevent significant deflation in the United
States ." As a quick point of clarification, Mr. Bernanke's actions to
address the current banking system's solvency issues are still in the
preventative phase. The money supply is not in collapse, and the Fed has not
started dropping cash from helicopters, yet, but the choppers are in the air
and remain at the ready.
As expounded upon by Mr. Bernanke, "Indeed, under a fiat (that is, paper)
money system, a government (in practice, the central bank in cooperation
with other agencies) should always be able to generate increased nominal
spending and inflation, even when the short-term nominal interest rate is at
zero."
"Like gold, U.S. dollars have value only to the extent that they are
strictly limited in supply. But the U.S. government has a technology, called
a printing press (or, today, its electronic equivalent), that allows it to
produce as many U.S. dollars as it wishes at essentially no cost. By
increasing the number of U.S. dollars in circulation, or even by credibly
threatening to do so, the U.S. government can also reduce the value of a
dollar in terms of goods and services, which is equivalent to raising the
prices in dollars of those goods and services.
We conclude that, under a paper-money system, a determined government can
always generate higher spending and hence positive inflation." The full text
of then-Fed Governor Bernanke's remarks can be found at:
http://federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm.
Where Franklin Roosevelt abandoned the gold standard and its financial
discipline for the debt standard, eleven successive administrations have
pushed the debt standard to the limits of its viability, as seen now in the
ongoing threat of possible systemic collapse. The effect of these policies
has been a slow-motion destruction of the U.S. dollar's purchasing power, as
seen in the accompanying table, since the gold standard was abandoned in
1933.
[...]
U.S. Government Cannot Cover Existing Obligations
The U.S. Treasury publishes annual financial statements of the United States
Government, prepared using generally accepted accounting principles (GAAP),
audited by the General Accountability Office (GAO) and signed off on by
Treasury Secretary Paulson.
The statements show that the federal government's annual fiscal deficit, far
from being officially in the low hundreds of billions of dollar - although
2008 numbers rapidly are moving towards the $500 billion mark - is careening
wildly out of control, averaging $4.6 trillion dollars per year for the six
years through 2007. The difference is in accounting for the net present
value, and year-to-year changes in same, for unfunded Social Security and
Medicare liabilities.
The government's finances not only are out of control, but the actual
deficit is not containable. Put into perspective, if the government were to
raise taxes so as to seize 100% of all wages, salaries and corporate
profits, it still would be showing an annual deficit using GAAP accounting
on a consistent basis. In like manner, given current revenues, if it stopped
spending every penny (including defense and homeland security) other than
for Social Security and Medicare obligations, the government still would be
showing an annual deficit.
The results summarized in the following table show the various
deficit/debt/obligation measures. The official GAAP-based deficit, including
the annual change in the net present value of unfunded liabilities for
Social Security and Medicare is estimated at more than $4.0 trillion in 2007
versus $4.6 trillion in 2006. The 2007 estimate is based on a consistent
year-to-year accounting basis.
Further, contrary to the suggestion of Treasury Secretary Paulson - aside
from a weakening economic outlook discussed in the next section - if the
annual deficit is beyond containment through standard fiscal actions, then
the United States has no way to grow out of this shortfall.
[...]
The GAAP-accounting is what a U.S. corporation would have to show. The
Administration's rationale as to why Social Security and Medicare should
remain off balance sheet runs along the lines that the government always has
the option of changing the Social Security and Medicare programs. That said,
there clearly is no one in political Washington willing to go public with
the concept of eliminating or substantially cutting those programs. Such
includes the prospective presidential candidates.
Consider that given the current financial condition of the government,
various politicians are pushing ever further for expensive cradle-to-grave
programs for the electorate, ranging from national health insurance to
bailouts of mortgaged homeowners at risk of foreclosure. With no full
funding available for any new programs, the government again is showing its
willingness to spend whatever money it has to create. The intent going
forward is inflation - hyperinflation. This circumstance has evolved with
the full knowledge of political Washington and the Federal Reserve.
[...]
Depression/Great Depression
The U.S. economy is in a deepening structural change that has resulted from
U.S. trade policies that have driven the U.S. manufacturing base offshore.
As a result, a large number of related, high paying jobs have been lost to
U.S. workers.
As shown in the accompanying graphs, as the U.S. trade deficit has risen to
the highest level for any country in history, U.S. average weekly earnings,
adjusted for inflation, have fallen. Even using official CPI for deflation,
current real earnings are below their peak back in the 1970s. Adjusted for
the SGS-Alternate CPI measure, real earnings have been falling since the
early 1980s. Also shown are real median incomes for U.S. males versus
females, showing declines in recent years, per official government data.
The effect of this structural change has been that most consumers have been
unable to sustain adequate income growth beyond the rate of inflation,
unable to maintain their standard of living. The only way that personal
consumption - the dominant component of GDP - can grow in such a
circumstance is for the consumer to take on new debt or to liquidate
savings. Both those factors are short-lived and have reached untenable
extremes. Debt expansion and savings liquidation both were encouraged by the
investment bubbles created by Alan Greenspan; he knew that economic growth
could not be had otherwise. Part of what is happening today is payback for
those policies.
This circumstance places both the federal government and the Federal Reserve
in untenable positions, where they cannot easily or rapidly address the
underlying problems, even if standard economic stimuli were available. From
the standpoint of the federal government, traditional fiscal stimulus in the
form of tax cuts or increased federal spending have reached their practical
limits, with the actual annual budget deficit running out of control at
$4.0-plus trillion per year.
From the Fed's standpoint, it can neither stimulate the economy nor contain
inflation. Lowering rates has done little to stimulate the
structurally-impaired economy, and raising rates may become necessary in
defense of the dollar. Similarly, raising rates will do little to contain a
non-demand driven inflation, such as seen in the current circumstance that
is so heavily affected by high oil prices.
By the time hyperinflation kicks in, the economy already should be in
depression, and the hyperinflation quickly should pull the economy into a
great depression. Uncontained inflation is likely to bring normal commercial
activity to a halt. Such is consistent with the final graph in this group,
which shows household income dispersion at historic highs.
The greater the variance in income, the more negative are the longer term
economic implications. A person earning $100,000,000 per year is not going
to buy that many more automobiles that someone earning $100,000 per year.
The stronger the middle class is, generally the stronger the economy will
be. Extremes in income variance usually are followed by financial panics and
economic depressions. U.S. Income variance today is higher than it was
coming into 1929, and it is nearly double that of any other "advanced"
economy.
[...]
Hyperinflationary Great Depression
In the United States, the printing presses have not been revved up heavily,
yet, but the commitments are in place, as seen in the annual GAAP-based
deficit running on average more $4.0 trillion per year. That amount is far
beyond the ability of the government to tax or the political willingness of
the government to cut entitlement spending. While the inevitable
inflationary collapse, based solely on these funding needs, could be pushed
well into the next decade, actions already taken likely have set the stage
for a much earlier crisis.
The current systemic bailout being worked at all costs by the Federal
Reserve and the U.S. government, as well as earlier efforts by the Fed to
buy time, have made the circumstance worse. Pushing recent Treasury funding
needs on foreign investors - stuck with excess dollars from the
ever-expanding U.S. trade deficit - has created a huge dollar overhang in
the markets that already has started to crumble. The more the crisis has
been pushed into the future, the greater the potential for pending calamity
has become.
Milton Friedman and Anna Jacobson Schwartz noted in their classic A Monetary
History of the United States that the early stages of the Weimar Republic
hyperinflation were accompanied by a huge influx of foreign capital, much as
had happened during the U.S. Civil War. The speculative influx of capital
into the U.S. at the time of the Civil War inflation helped to stabilize the
system, as the recent foreign capital influx to the United States has helped
stabilize the equity and credit markets of recent years. Following the Civil
War, however, the underlying economy had significant untapped potential and
was able to generate strong, real economic activity that covered the
spending excesses of the war.
Post-World War I Germany was a different matter, where the country was
financially and economically depleted as a penalty for losing the war. Here,
after initial benefit, the influx of foreign capital helped to destabilize
the system. "As the mark depreciated, foreigners at first were persuaded
that it would subsequently appreciate and so bought a large volume of mark
assets ." Such boosted the foreign exchange value of the German mark and the
value of German assets. "As the German inflation went on, expectations were
reversed, the inflow of capital was replaced by an outflow, and the mark
depreciated more rapidly . (Friedman p. 76)."
The Weimar circumstance is closer to the current U.S. circumstance,
although, in certain aspects, the current situation is worse. Unlike the
untapped economic potential of the United States 140 years ago, today's U.S.
economy is languishing in the structural problems of the loss of its
manufacturing base and a shift of domestic wealth offshore.
In the early 1920s, foreign investors were not propping up the world's
reserve currency in an effort to prevent a global financial collapse,
knowing in advance that they were doomed to take a large hit on their
investments in Germany. In today's environment, both central bank and major
private investors know that the dollar is going to be a losing proposition.
They either expect and/or hope that they can get out of the dollar in time
to lock in their profits, or, primarily in the case of the central banks,
that they can forestall the ultimate global economic crisis.
It is this environment that leaves the U.S. dollar open to potentially such
a rapid and massive decline, and dumping of U.S. Treasuries, that the
Federal Reserve would be forced to monetize significant sums of Treasury
debt, triggering the early phases of a monetary inflation. In this
environment annual multi-trillion dollar deficits rapidly would feed into a
vicious, self-feeding cycle of currency debasement and hyperinflation.
Lack of Physical Cash. The United States in a hyperinflation would
experience the quick disappearance of cash as we know it. Shy of the rapid
introduction of a new currency and/or the highly problematic adaptation of
the current electronic commerce system to new pricing realities, a barter
system is the most likely circumstance to evolve for regular commerce. Such
would make much of the current electronic commerce system useless and add to
what would become an ongoing economic implosion.
Some years back, I happened to be in San Francisco, having dinner with a
former regional Federal Reserve Bank president and the chief economist for a
large Midwestern bank. Market rumors that day had been that there was a run
on a major bank in the City by the Bay. So I queried the regional Fed
president as to what would be happening if the rumors were true.
He had had some personal experience with a run on banks in his region and
explained how the Fed had a special team designed to handle such a crisis.
The biggest problem he had had was getting adequate cash to the troubled
banks to cover depositors, having to fly cash in by helicopters to meet the
local cash flow needs.
The troubled bank in San Francisco, however, was much larger than the
example cited, and the former Fed bank president speculated that there was
not enough cash in the vaults of the regional Federal Reserve Bank, let
alone the entire Federal Reserve System, to cover a true run on deposits at
the major bank.
Therein lies an early problem for a system headed into hyperinflation:
adequate currency. Where the Fed may hold roughly $210 billion in currency
(sharply increased in the last year) outside of $50 billion in commercial
bank vault cash, the bulk of roughly $780 billion in currency outside the
banks is not in the United States. Back in 2000, the Fed estimated that 50%
to 70% of U.S. dollar cash was outside the system. That number probably is
higher today, with perhaps as little as $200 billion in physical cash in
circulation in the United States, or roughly 1.5% of M3.
The rest of the dollars are used elsewhere in the world as a store of
wealth, or as an alternate currency free of the woes of unstable domestic
financial conditions. In Zimbabwe, for example, where something akin to
hyperinflation is underway, U.S. dollars are used to maintain some semblance
of economic activity, where wages and salaries seriously lag inflation, and
goods often are available only on the black market.
Given the extremely rapid debasement of the larger denomination notes, with
limited physical cash in the system, existing currency would disappear
quickly as a hyperinflation broke.
For the system to continuing functioning in anything close to a normal
manner, the government would have to produce rapidly an extraordinary amount
of new cash, and electronic commerce would have to be able to adjust to
rapidly changing prices.
In terms of cash, new bills of much higher denominations would be needed,
but production lead time is a problem. Conspiracy theories of recent years
have suggested the U.S. Government already has printed a new currency of
red-colored bills, intended for some dual internal and external U.S. dollar
system. If such indeed were the case, then there might be a store of "new
dollars" that could be released at a 1-to-1,000,000 ratio, or whatever ratio
was needed to make the new currency meaningful, but such would not resolve
any long-term problems, unless it were part of an overall restructuring of
the domestic and global financial and currency systems.
From a practical standpoint, however, currency would disappear, at least for
a period of time in the early period of a hyperinflation. Where the vast
bulk of today's money is not physical, but electronic, however, chances of
the system adapting here are virtually nil. Think of the time, work and
effort that went into preparing computer systems for Y2K, or even problems
with the recent early shift to daylight savings time. Systems would have to
be adjusted for variable, rather than fixed pricing, credit card lines would
need to be expanded daily, the number of digits used in tallying
dollar-denominated transactions would need to be expanded sharply.
While I have been advised that a number of businesses have accounting
software that can handle any number of digits, I also noted on a recent
cross-country trip that a large number of gas stations have older pumps that
cannot register more than two digits' worth of dollars in their totals or
more than $9.99 per gallon of gas.
From a practical standpoint, the electronic quasi-cashless society of today
also would shut down early in a hyperinflation. Unfortunately, this
circumstance rapidly would exacerbate an ongoing economic collapse.
Barter System. With standard currency and electronic payment systems
non-functional, commerce quickly would devolve into black markets for goods
and services and a barter system.
Unlike Zimbabwe, the United States does not have widely available, for
circulation, a back-up reserve currency for use in place of a
highly-inflated domestic currency. The alternative here is in the
traditional monetary precious metals. Gold and silver both are likely to
retain real value and would be exchangeable for goods and services. Silver
would help provide smaller change for less costly transactions.
Other items that would be highly barterable would include bottles of a good
scotch or wine, or canned goods, for example. Similar items that have a long
shelf life can be stocked in advance of the problem, and otherwise would be
consumable if the terrible inflation never came. Separately, individuals,
such as doctors and carpenters, who provide broadly useable services, would
have a service to barter.
A note of caution was raised once by one of my old economics professors, who
had spent part of his childhood living in a barter economy. He told a story
of how his father had traded a shirt for a can of sardines. The father
decided to open the can and eat the sardines, but he found the sardines had
gone bad. Nonetheless, the canned sardines had taken on a monetary value.
Reserves of the Necessities of Life. Howard J. Ruff, who has been writing
about these problems and issues since Nixon closed the Gold window, rightly
argues that it will take some time for a barter system to be established,
and suggests that individuals should build up a six-month store of goods to
cover themselves and their families in the difficult times. Mr. Ruff covers
this and many other excellent fundamentals in his new book How to Prosper
During the Coming Bad Years in the 21st Century (see recommended further
reading at the end of this report).
Financial Hedges. During these times, safety and liquidity remain key
concerns for investments, as investors look to preserve their assets and
wealth through what are going to be close to the most difficult of times.
In such a circumstance, gold and silver would be primary hedging tools that
would retain real value and also be portable in the event of possible civil
turmoil. Also, at some point, the failure of the world's primary reserve
currency will lead to the structuring of a new global currency system. I
would not be surprised to find gold as part of the new system, structured in
there in an effort to sell the system to the public.
Real estate also would provide a basic hedge, but it lacks the portability
and liquidity of gold. Having some funds invested offshore - outside of the
U.S. dollar - would be a plus in circumstances where the government might
impose currency or capital controls.
While equities do provide something of an inflation hedge - revenues and
profits get expressed in current dollars - they also reflect underlying
economic and political fundamentals. I still look for U.S. stocks to take an
ultimate 90% hit, peak-to-trough, net of inflation, during this period.
Where all stocks are tied to a certain extent to the broad market - to the
way investors are valuing equities - such a large hit on the broad market
will tend to have a dampening effect on nearly all equity prices,
irrespective of the quality of a given company or a given industry.
Other Issues.
A hyperinflationary depression would be extremely disruptive to the lives,
businesses and economic welfare of most individuals. Such severe economic
pain could lead to extreme political change and/or civil unrest. What has
been discussed here still has not been a comprehensive overview of all
possible issues, but rather at least has raised some questions and touched
upon some likely consequences. No one can figure out better than you the
peculiarities of this circumstance and how you and/or your business might be
affected. Using common sense is about the best advice I can give.
Rod Speed
> Next year (not this year) may be last season if US goes into Hyperinflation...
Not a chance.
> The Canadian celebs (and production crew) probably will not lose that much of their net worth ... but the Americans
> may be nearly broke if they exclusively invest in the US finance system.
Not a chance.
> Smallville still has 3 more production months this year, so the
> opportunity is their for the US cast (permanent and guests) to put their money into Canada while the USD still has
> value.
> Excerpts from : http://www.shadowstats.com/article/292
> The U.S. economy is in an intensifying inflationary recession
Wrong. We havent even seen a single quarter of negative growth yet.
> that eventually will evolve into a hyperinflationary great depression.
We didnt even see hyperinflation during the last great depression.
> Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road.
Pure fantasy.
> The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of
> a bottomless pocketbook, the servicing of big-moneyed special interests, and gross mismanagement.
Pure fantasy.
> The U.S. has no way of avoiding a financial Armageddon.
Have fun explaining how come the US did that fine the last time.
> Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to
> cover their obligations.
The US wasnt even stupid enough to do that the last time.
> The alternative would be for the U.S. to renege on its existing debt and obligations,
The US wasnt even stupid enough to do that the last time.
> a solution for modern sovereign states rarely seen
> outside of governments overthrown in revolution,
So the US wont be stupid enough to do that this time.
> and a solution with no happier ending than simply printing the needed money.
The US wont do either. It will just deal with the toxic debt and carry on regardless.
> With the creation of massive amounts of new fiat (not backed by gold) dollars
Taint gunna happen.
> will come the eventual complete collapse of the value of the U.S. dollar and related dollar-denominated paper assets.
How odd that that didnt happen last time.
<reams of even sillier shit flushed where it belongs>