The Hyperinflationary Depression

[hilly7]

http://www.marketoracle.co.uk/Article7539.html

Walter “John” Williams thinks out of the box. He makes disquieting reading, but you won't find him in the mainstream.
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Conditions today are hazardous. A major financial crisis precipitated them. Reckless policies caused it. It threatens the solvency of major banks and other financial institutions. It also hurts the greater economy. Solutions - massive liquidity injections, interest rate cuts and reckless deficit spending. Result - financial malpractice for a short-term fix. Consequences - “financial Armageddon” according to Williams.

M3 (the broadest money supply measure) growth is so high that the Fed no longer reports it. Economists like Williams do because it's crucial to know, and the data he reveals are disturbing - record M3 growth at a near 18% annual pace. Hyperinflationary seeds are now sown. Dollar valuation is falling, and at some point may accelerate when investors flee it for safer havens. The Fed again will respond. More debt will be monetized. It will build over time. Things will get worse and then be exacerbated when the government is less able to meet its obligations. “Therein lies the ultimate basis for the pending hyperinflation,” in Williams' judgment.

He believes it will morph into a hyperinflationary depression, then a “great depression.” And when it hits, it will be with “surprising speed.” Already disposable income is falling in a weakened economy in crisis. As things worsen, politicians get blamed, and Williams raises an interesting possibility. If conditions get bad enough, voters may respond with their feet, declare a pox on both major parties, and turn to a third alternative around 2010 or 2012. It happened before in our history. The Republican Party is Exhibit A. It was created in 1854 at a time Democrats and Whigs were the two dominant parties. Exit Whigs, and enter Republicans with Abraham Lincoln its first elected president in 1860.

Williams shows US inflation data going back to 1665. It was fairly stable up to the Fed's 1913 creation. It then began rising and accelerated post-WW II. Government calculations mask it. Alternative ones are more revealing and accurate. Except for minor price declines in 1944 and 1955, the US hasn't had a deflationary period since the 1930s. Abandoning the gold standard is why. It imposed monetary discipline. Roosevelt went off it in 1933. He had to. The banking system collapsed, money supply imploded, and economic stimulus was needed. It released the Fed to create money freely. Therein lies the problem, and it shows up in the numbers.

Current Fed Chairman Bernanke and Alan Greenspan are students of the Great Depression. “Helicopter Ben” especially vowed never again, and his actions prove it to a fault. He knows the risks and stated them in an earlier speech. He said:

“Like gold, US dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology called a printing press (now its electronic equivalent), that allows it to produce as many US dollars as it wishes.” By doing so, it “reduce(s) the value of a dollar in terms of goods and services” which raises their prices…. ”under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

So it has, according to Williams, and it caused a “slow-motion destruction of the US dollar's purchasing power” since 1933. It shows up in GAAP-based 2007 federal deficit figures - $4 trillion for the fiscal year, not the official $163 fiction reported. Williams estimates total outstanding federal obligations at $62.6 trillion. At least one other economist puts it over $80 trillion. There's no way to honor this debt level, so the “government effectively is bankrupt.” At that point, it has three choices - default, declare a moratorium, or repudiate the entire amount.

Sooner or later, markets will react. Holders of US debt already are balking, but so far modestly and quietly. Ahead, that may change if dollar valuations plunge. It will force the Fed's hand. Greater debt monetization will follow. Dollar valuations will sink further, and so forth in a progressive downward cycle to oblivion if Williams is right.

If conditions get severe enough, the Fed can create huge amounts of currency in a few days or weeks - enough to match the dollar's lost purchasing power in the last 75 years. Combine it with fiscal irresponsibility and imagine the consequences.

Official data alone today are reason for concern - soaring food and oil prices, the dollar near historic lows, money growth at an all-time high, and off-the-charts federal deficits and debt. The trend continues, and it shows up in gold prices - topping $1000, then retreating, but nearly certain to soar way above previous highs on its way to numbers not discussed in the mainstream - $2000 an ounce, $3000? Who knows. Williams sees it “setting new historic highs.”

In 1980, its price hit $850 an ounce. In CPI inflation-adjusted terms, around $2300 an ounce would match it today. But if the government hadn't cooked the CPI calculation, the number would be about $6250 an ounce. By that standard, gold today is cheap. It's way below its real 1980 top, and if inflation accelerates as Williams predicts, expect much higher prices as dollars keep deflating.

Under this scenario, the “US government cannot cover (its) existing obligations.” Annual federal deficits are “careening wildly out of control, averaging $4.6 trillion per year for the six years through 2007.” That's with all unfunded liabilities included like Social Security, Medicare, Medicaid, other social services, debt service and more.

Williams says things are so out of control that “if the government (raised taxes) to seize 100% of all wages, salaries and corporate profits, it still would (show) an annual deficit using GAAP accounting” methods. At the same time, “given current revenues, if it stopped (all) spending (including defense and homeland security) other than Social Security and Medicare obligations, the government still would (show) an annual deficit.” The hole is so deep, it's impossible to dig out, according to Williams.

But given political realities, officials spend whatever it takes to get elected and keep their jobs. That's besides foreign wars, limitless corporate subsidies and more. Things, however, won't improve. They'll worsen, and that for Williams spells hyperinflation ahead. It's happening “with the full knowledge of political Washington and the Federal Reserve.” It it weren't for the US's “special position,” our debt would likely be rated “below investment grade instead of triple-A.” Longer term bonds are especially risky. At some point, they'll lose their full value. They also risk default, and that's besides their loss in dollar terms.

It's just a matter of time before foreign investors get worried enough to act - buying fewer Treasuries down to none, then followed by redemptions. The Fed will have to compensate. Print more currency, and the problem deepens. Its value declines and inflation accelerates.

Trade policies worsen things. We're in a global race to the bottom. The once bedrock manufacturing base eroded. It's now 10% of the economy and falling. Services currently account for around 84% of it and rising. Jobs in all categories are being offshored to low-wage countries. Average inflation-adjusted wages keep declining. Real earnings are below their early 1970s peak. Living standards are falling. Consumer debt is rising to make up the shortfall. Savings are liquidated. Before the housing decline, mortgage refinancing helped when valuations rose. It meant taking on more debt. Fed policy encouraged it. Today's dilemma “is payback” for unsustainable bubble-creation policies. Recalling a relevant quote: “Things that can't go on forever won't.”

Bad policy caused enormous structural change, and trade deficits are part of it. They've “risen to the highest level for any country in history.” They're one more problem for a seriously over-extended economy. It places “the federal government and Federal Reserve in untenable positions, where they cannot easily or rapidly address the underlying problems, even if standard economic stimuli were available.”

Given the federal deficit and out-of-control spending, fiscal policy limits have been reached. The Fed's in the same bind. It can neither stimulate the economy or contain inflation. Rate cuts have done little. Saving the dollar may require raising them, but that won't “contain non-demand driven inflation.” It shows up in high food, energy, health care, and companies like Dow Chemical announcing on May 28 that it will raise prices across the board up to 20% to offset increased costs.

More cause for worry, and Williams anticipates depression. Hyperinflation will follow, and it will sink “the economy into a great depression.” It will halt commercial activity. The greater disparity in income, the more negative its consequences. “Extremes in income variance usually are followed by financial panics and economic depressions. US income variance today is higher” than in 1929 and “nearly double that of any other ‘advanced' economy.”

Federal bailouts have worsened things. Dollar creation exploded. Crisis has been pushed into the future. Its enormity will be far greater, and foreign investors will get stuck with a lot of it. When it arrives in strength, capital outflow will follow, and dollar valuation will plunge with it. Williams believes that “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 of (it) in time to lock in their profits (or for central bankers) that they can forestall the ultimate global economic crisis” as long as possible.

Dollars are very vulnerable in this environment. If Treasuries are dumped, the Fed will monetize debt to make up the difference. Inflation will then accelerate, multi-trillion dollar deficits will worsen things, and a “self-feeding cycle of currency debasement and hyperinflation” will follow.

Cash as we know it will disappear. A barter system and black market will replace it or possible introduction of a new currency. Since most money today is electronic, not physical, chances of it adapting “are practically nil.” With hyperinflation, electronic commerce would completely shut down and economic collapse would follow. Gold and silver will be invaluable. Holders could exchange them for goods and services.

Physical goods will also be precious for survival and as a medium of exchange. Anything with a long shelf life may be stocked in advance, and providers of essential services could barter them for goods and other services. Forewarned is forearmed. Safety and liquidity are crucial. Anything retaining value is essential. Real estate, other currencies for example. Foreign equities and debt to a small degree because US financial assets hammering will spill everywhere.

With all that to deal with, consider another dilemma - the likelihood of painful political change, civil unrest, disruptive violence, and utter chaos. If Williams is right and hyperinflation arrives, Katie bar the door on what may follow. Revolutions are possible with three notable last century ones to consider - in Russia, Weimer Germany and Nationalist China. In each case, the old order ended, everything changed, but not for the good. How does Williams advise? Evaluate one's own circumstances, use common sense, and forewarned is forearmed. That will help, but hard times hurt everyone.

Hopefully they won't arrive, at least not full-blown as Williams predicts. But make no mistake. Excess has a price. The more of it the greater. America has an ocean of it. Sooner or later comes payback. “Things that can't go on forever won't.”

My reaction: Like Walter "John" Williams, I believe hyperinflation is imminent for the US. The current deflationary phase is ending. Our enormous trade deficits and reckless money creation guarantee that the next phase will be hyperinflation, and the trigger will be rising gold prices.

US Trade And Current Account Deficits

To put the US's international deficits into context, Here is an extract from an article by Alan Tonelson where he writes that the U.S. Trade Deficit Endangers the American Economy .

Measuring the deficit as a share of the whole economy is critical because it indicates how sustainable America's foreign debts are. Last fall, the Federal Reserve published a study showing that most countries run into major financial trouble when their overall international deficits hit four percent of gross domestic product. In other words, these countries' foreign creditors begin fearing that their debts have become so high that full repayment is no longer possible. And the creditors become much less willing to continue lending. Sometimes they cut off the credit supply altogether, and even start selling the assets they hold in the debtor country, including their stockpiles of its currency. And other creditors tend to follow suit. If you're curious about how this rush for the doors can end, take a look at the economic devastation in Argentina.

After hitting a record 6.6 percent of GDP, U.S. trade and current account deficits now stands around 5 percent of GDP, but it is about to turn significantly higher. US GDP is enormously dependent on consumer spending which is disappear due to collapsing consumer credit. Meanwhile, the US imports aren't likely to drop much as they are goods Americans can least afford to give up: cheap non-durable goods, oil, etc. Finally, exports are likely to fall rapidly because what little manufacturing the US has left is concentrated in durable goods, the sector most sensitive to economic slowdowns (also sector hit hardest during the great depression). So while the US's GDP and exports are going to shrink enormously, our reliance on imports won't shrink much at all. In fact, when the dollar's collapse pushes oil back over a $100 a barrel, the US trade and current account deficits will easily surpass 10%.

The terminal decline in US trade relations is visually depicted in the chart below from nowandfutures.com .

[DJOldskool]

Thanks for the info.

Many people are predicting the collaspe of the dollar and hyperinflation. However, these same people have been claiming the dollar is totally over inflated and would collapse for a long time.

There arguements do make sense, but I long ago found it best not to believe things just because they make sense. I would definately invest with it in mind if I had any capital to invest lol.

Either way it is going to be some ride over the next year or two.

[hilly7]

I went the opposite way on investing, tradeable stuff. Gold isn't good either because buying is easy, selling is where they get you, and it can be called in. I have bought some Silver lately, just in case. Mostly goods to barter with.

Just looking at the numbers lately I think we're headed for one large screw, not just us though, the world. In an email from Buffet's crew, "The Labor Dept. dropped a jobs bombshell this morning. Over 533,000 jobs were shed from the U.S. economy in November".

And in another email, it looks as if DC is going to bail out car makers, or at least 1 of the 3, bet it's GM so they can finish the 300 million dollar (3rd) plant in Russia. Peloski is pushing to give it to them.

On another email I got, a mortgage broker sent me her new rates, 5.5%, 100%, with no PMIs. I got a client that should look at that. I've never seen 100% without PMI. Maybe AIG is saying they can't or won't do subprime anymore.

Even JC Penny's in Jan is closing 123 stores. UPS has told part timers here that after Christmas look for up to 7 drivers to bump back. That could mean 14 jobs. Unless they meant temp drivers.

I think we're in for a Depression, hope I'm wrong.

[DJOldskool]

Im no expert, but I agree, and I think it is not helped by the amount of spending that the govenments are planning on doing. They need to wait a while yet, money needs to be spent at the correct time, once the markets have reached the uninflated level that they should be. This will give a little confidence and stop them from plunging much further before bouncing back. I am definately not sure what that level should be, but Im sure a careful watch to see when some investment begins to trickle in would be a queue to spend lots and kick start a recovery. I think they are just slowing the downturn and getting us more in debt.

As for investments, silver YES, unlikely to drop even if the rush to it doesnt happen. I would also invest in currency ATM. Find economies that are expanding without massive dependance on exports to the west. The £ is already dropping, the $ is being proped up and will have to fall significantly at some point. Ive heard Brazil has good prospects, and why not see how Ecudor is doing seeing as the CIA seem to love the place ATM. Apart from that it is companies that provide essential goods and services especially the cheaper alternatives. Cigs and Alcohol, the very cheap supermarkets, discount store chains (£1 shops), also researching past recessions to see which sectors fared well.

Just a shame I dont have anything to invest:(I could have made a good investor, I predicted water companies would rise after privatisation. I knew that Carlisle group would do great during the 2nd gulf war, and I was warning everybody a few months before the credit crunch that house prices were about to start droping.

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Quote:and why not see how Ecudor is doing seeing as the CIA seem to love the place ATM

Correa Defaults on Ecuador Bonds, Seeks Restructuring (Update4)
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By Stephan Kueffner

Dec. 12 (Bloomberg) -- Ecuadorean President Rafael Correa halted payment on foreign bonds he calls “illegal” and “illegitimate,” putting the South American country in default for a second time in a decade.

The government won’t make a $30.6 million interest payment by Dec. 15, when a monthlong grace period expires, Correa told reporters in his office in Guayaquil. The $510 million bonds due in 2012 plunged to 23 cents on the dollar from 31 yesterday and 97.5 cents three months ago.

“I have given the order that interest payments not be made,” Correa said. “The country is in default.”

By defaulting, Correa, a close ally of Venezuelan President Hugo Chavez, fulfills a threat he has made since a 2006 presidential campaign that ended in a landslide victory. His decision comes as a deepening global economic slump throttles demand for oil, the country’s biggest export. Ecuador, which defaulted in 1999, owes about $10 billion to bondholders, multilateral lenders and other countries.

“I couldn’t allow the continued payment of a debt that by all measures is immoral and illegitimate,” Correa said. “It is now time to bring in justice and dignity.”

‘Serial Defaulter’

Correa, 45, said the government will present a restructuring proposal in coming days. “We want creditors to recoup part of their money,” he said.

“Ecuador is moving further into isolation,” said Vicente Albornoz, head of the Cordes research institute in Quito. “The hardliners in the government won.”

A debt commission Correa formed last year said in a 172- page report in November that the global bonds due in 2012 and 2030 “show serious signs of illegality,” including issuance without proper government authorization. Correa invoked the 30- day grace period on the interest payment last month, saying he wanted to analyze the commission’s findings.

“Ecuador is a serial defaulter,” said Arturo Porzecanski, an international finance professor at American University in Washington. “They defaulted in the 1980s, 1990s and this decade. A lot of other countries have had one or two defaults, but Ecuador tops them all.”

Correa, who holds a doctorate in economics from the University of Illinois at Urbana-Champaign, has said he will not sacrifice spending on health and education to pay the debt. Ecuador’s foreign obligations are equal to 21 percent of its $44 billion gross domestic product. Argentina’s debt, by comparison, was equivalent to 150 percent of its GDP when it defaulted in 2001, according to Goldman Sachs Group Inc.

‘Just Political’

Oil, which has plunged 67 percent since July amid the global financial crisis, accounts for about 60 percent of Ecuador’s exports. Finance Minister Maria Elsa Viteri said on Nov. 18 the country’s fiscal accounts remain “strong and healthy.” Ecuador had $5.65 billion in cash reserves as of Dec. 5, according to the central bank.

The default was triggered by the combination of the decline in oil with “a ridiculous ideology,” said Claudio Loser, the former director of the International Monetary fund’s Western Hemisphere department, who now is a scholar at the Inter- American Dialogue. “The financial need wasn’t so great that it was forced to declare a default,” Loser said.

The South American country has defaulted six times since it separated from Gran Colombia in 1830, according to “Debt Defaults and Lessons from a Decade of Crises,” a book published in 2007 by Federico Sturzenegger and Jeromin Zettelmeyer.

“It’s a final blow to external investors, and particularly any energy investors that may have retained interest

http://www.bloomberg.com/apps/news?pid=206...&refer=home

[DJOldskool]

lol, it was just a thought, add not a major energy exporter to not depending on exports to the west:)

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Quote:lol, it was just a thought, add not a major energy exporter to not depending on exports to the west:)

Equador is a land of banks;)

[hilly7]

When I said Silver I went with .9999 Silver. This can also be used to make Collidial Silver, so it has multi use. Many Canadian coins are .9999 while American coins are .999. At the first of it however it will be food, ammo, clothing, etc.

I read an article a while back from a guy in Russia that went through their depression, can't remember where it was, but it was good. He talked of how people still retained some of the wants like hair bows, finger nail polish, etc. How a bottle of Vodka in the window was everybody's lust, but not attainable. He talked about the upper class freezing because they refused to burn cow dung to keep warm. How food was a rarety and very tradedable. HIs family not only survived but thrived due to knowing how to smoke fish. He also talked about how people that lived or migrated too far were the first to go due to lack of substance and thieves. People in the cities and burbs seemed to fair the best due to trading.

If the dollar crashes, and I think they are doing it intentionally, it will take with it several fiat currencies. It would appear that this is global. Perhaps for a reason.