Many precious metals devotees today insist that governments and central banks have no option but to keep issuing debt to bail out bad bonds and banks. But the Greek default talks are signalling another option likely to spread like wild fire: knock off zeros, and write down bad debts. This approach will hit the investment bank balance sheets hard, but it would also help alleviate debtor nations and their economies from presently hopeless levels of debt. In the near and medium term, the resulting write downs in asset prices would be dramatic and deflationary. But it could also help to reset the global economy on a stronger growth path than the ‘end of the worlders’ can presently foresee. Here is the direct link.
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The Hyperinflation scenario has nothing to do with Europe, Danielle. That is only a distraction. Hyperinflation is not a financial outcome – it is a confidence issue. With 47 States at or near Bankruptcy – the only political solution is to print more money. Do you think any municipality will go to, say, the Fireman’s union and say you have to take a 60% pay cut? No, they will simply pay them with more printed money bailed from the Fed via the Treasury. Extrapolate that to every sector – Social Security, Welfare Medicare etc.. The Banks will be bailed – do you see this stopping? When they have to buy their own T-Bills (QE2) – that should be a huge warning sign. The world is following suit – India is buying Oil from Iran (1 million barrels a day) in Gold – NOT US dollars. The ‘dollar’ is over – it just has to be played out…
Brilliant as usual 🙂
Gee Danielle, you’ve made some geat analysis in the past – but this won’t be one of them. “Cross off the zeroes and let’s all start buying equities again?” Come on. Instead they are going to start ADDING zeroes ala Weimar thru Zimbabwe.
I’m sure you adhere to the belief in the four most dangerous words ever spoken in the Stock Market – “It’s different this time”.
Can you give me a historical example where a country has monetized their debt on such a large scale as QE2 (the Federal Reserve, the Central Bank of the United States, purchased $600 billion of longer-term U.S. Treasury securities between November 1st, 2010 and June 30th, 2011) where they DIDN’T have Hyperinflation?
This is like fiat currency. In 2000 years – without exception it has all gone to zero. It usually takes about 30-40 years. The 40th anniversary of the US dollar going off the Gold Standard just occured at the end of last year. There CAN BE no result EXCEPT hyperinflation. Its financial effect on you will be directly proportioanl to you being able to accept and believe this. Those most infected with the normalcy bias will be hurt the most.
Maybe you bought too much gold on one of those … high horses!
Very informative interview. Thank You, Danielle.
I’m thinking maybe lopping of zeros may not be too good for bank accounts, 401Ks, etc. So, I’m thinking maybe owning some precious metals might be a good thing in such a scenario.
The huge debts of the US and many other countries is scary. I don’t understand how it can be solved in a good way, but maybe it can. Do let us know your thoughts on these issues. We’ve gotten ouselves in a fine mess it appears.
http://globaleconomicanalysis.blogspot.com/2010/09/debating-flat-earth-society-about.html
http://globaleconomicanalysis.blogspot.com/2011/05/hyperinflation-nonsense-in-multiple.html
http://globaleconomicanalysis.blogspot.com/2011/09/bizarro-world-inflation-about-that-2011.html
Gary, you wrote: “Do you think any municipality will go to, say, the Fireman’s union and say you have to take a 60% pay cut? No, they will simply pay them with more printed money bailed from the Fed via the Treasury.” But that is essentially what IS happening. States and municipalities are cutting expenditures drastically. Public employees (including cops, firemen, teachers, etc.) are being laid off, their wages are being rolled back (although not to the extent you have written), programs are being slashed etc.
I agree with you that inflation (I do not know about hyperinflation, but at least significantly higher inflation) is undoubtedly in the cards down the road because that is usually the course of least resistance politically. But until there is significant social unrest (ie. blood in the streets) government authorities will probably resort to more conventional approaches (ie. higher taxes, austerity oriented policies, or relatively mild printing such as the recent “quantitative easings”) until they are compelled to really ramp up the presses.
And all bets are off on near term hyperinflation in the US or Europe if governments take on a much more authoritarian bent and resort to increased repression instead of massively inflating. This is probably unlikely, but in light of recent trends, it is not entirely implausible. I think there would even be a public appetite for this. I definitely would not be surprised to see a brief military takeover in Greece (and possibly even Italy) considering its history.
By the way, the US has not experienced anything remotely close to the social, political, and economic trauma that Weimar Germany or Zimbabwe did before they resorted to hyper-inflating. I strongly suspect that it will not be a straight and quick road to hyperinflation in the US. It may take longer than the 40 years since 1971 that you cited; just look at the British Empire example. Even after two economically draining world wars hyperinflation was resisted. The pound was indeed devalued, it obviously cannot buy anything close to what it used to on the eve of WW1, but it did not rapidly go to zero.
As Ms. Park always emphasizes, it is all in the timing. Ms. Park might not be wrong in suggesting that hyperinflation may not be the only outcome, at least in the short or even intermediate term. It would be imprudent to dismiss the likelihood of significant inflation in light of the current circumstances, but betting the farm on imminent near term hyperinflation as you seem to be implying, also carries inherent risks depending on how you play it.
‘Mish’ has been wrong about this… and you can’t have ‘too much’ Gold. I repeat…
Can you give me a historical example where a country has monetized their debt on such a large scale as QE2 (the Federal Reserve, the Central Bank of the United States, purchased $600 billion of longer-term U.S. Treasury securities between November 1st, 2010 and June 30th, 2011) where they DIDN’T have Hyperinflation?
As for the Deflation argument (constantly put forth by Mish)
http://www.financialsense.com/contributors/jim-willie/deflationists-and-blind-eyes
Time to wake up and shake off the Normalcy Bias…
In 1990 there were 190 Billion us Dollars in circulation. Since 2008 they have printed 3 Trillion!!! (ECB has also printed 3 Trillion – through REPO)… do you really think there will be no consequence to this? THAT is what they thought in all hyperinflation episodes in the past 100 years… yeah – it just won’t happen. Sure – it’s different this time.
And as for ‘cuts’ do ANY of you see the political will to cut Social Security, Medicare, Medicaid or the Militray budget on a large scale? (or any scale)… this system is unsustainable – with not a hint of solution. Take a look at Rome – it’s not that different. Empires end very similarily. In Rome they debased the Gold and Silver Coins by adding base metals (hence the term ‘debase’), they taxed the people till they could no pay – many left – soldiers eventually weren’t paid… Niccolò Machiavelli (1469–1527) agrees with me in that history repeats because the passions of man never change.
Right now is one example. I think the big difference this time versus other government printing episodes is that this time the whole developed world has done the same thing at once. It is not just the US Fed, it is China, UK, Euro, Japan, Canada (CMHC this morning announcing they wish to increase the amount of mortgages they are allowed to underwrite thanks to overblown consumer borrowing), Australia, New Zealand and many more countries. The credit bubble flooded the world with more stuff than at any other time in human history, and now that over-supply will work prices lower as buyers evaporate with their now frozen lines of credit. The weight of over-capacity, over-supply, growing unemployment, all of these create a deflationary weight greater than monetary authorities can counteract.
Look at what’s been going on with the LTRO in Europe, the banks are not lending out the money but instead sitting on it knowing that a lot of the assets they have on their books are worth jack****.
How much gold is too much? Legendary investor weighs in
http://www.investmentnews.com/section/video?playerType=CMwealth&bctid=1218593541001
Thanks for chiming in Daneille,
This is the frequently discussed battle of inflation (or hyperinflation) vs. deflation. I encourage you to read the FOFOA article here:
http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html
It changed Rick Ackerman’s opinion.
As for Deflation? it is certainly not in consumer goods – food and energy costs (sneakily removed from the CPI). I mean, are you paying more for gas than your were five years ago? Healthcare costs? groceries? The asset deflation I see in the housing market, and eventually the stock market, does nothing for the economy – its a contra-indicator.
Are you saying NOW is the only time in 2000 years on monetary history where excessive money printing won’t cause hyperinflation? Keynsian’s are only capabale of delaying the inevitable. The longer the can is kicked down the road – the worse the collapse. We’re in for a doozy… hyperinflation, a treasury bubble and sovereign debt crisis’ will all be part-and-parcel.
By the way – if all governments are printing currency – do you see a better investment than in Gold?
Nope. I am saying it is not here now. We have to manage our risk in real time, and right now lower asset prices, broken capital markets, poor investment opportunities and soaring unemployment are dominating monetary stimulus. More inflation may well be in the cards eventually. But over the next year or two, weak demand is likely to trump inflation just as hard as it did from late 2007 to mid 2009. The gold bugs in late 2007 were selling the same hyperinflation hyperbole…the great recession came next and gold prices and especially companies lost with other paper assets.
I hear convincing arguments on both sides of the issue. I used to believe only in the inflationary outcome, but there is so much credit to be written off I can envisage a deflationary outcome also. There is no doubt we have an incredible increase in the paper money supply (the definition of inflation), but if debt gets written down or off, we have a decrease in the money supply. If banks are levered thirty or forty to one, that is a lot of credit waiting to evaporate. So, I hold some gold, some stocks and some cash to deploy when I get off the fence – and hope the banks don’t pull a MF Global and steal it. The only thing I am sure of is that our system of government has to change.
Danielle, how about the IMF’s Special Drawing Rights? Can’t that be a way to inflate without going through more QE? They have only used SDRs very sparingly in the near past, kind of like a test run and it always seems to knock gold back down.
What exactly are SDR’s and where do they come from?
Social security is a peanut compared to Medicare. We more or less know how many people are out there in any particular age group at any one time but what we don’t know is how chronically ill they are or might become.
Especially with all these epidemic inflammatory diseases running around from out industrialized agribusiness business. Did I say that?
Medicare is going to get its own little haircut from benefit cuts ie MRI’s and CT’s not going to be given out like candy by healthcare providers UNLESS you pay for them yourselves. And Medicare Part B is going to skyrocket come 2014 thanks to ObamaCare unless the Supreme Court rules it unconstitutional. Where oh where are the burgeoning newly-minted seniors going to get the money to pay for their own healthcare?
Occupy movements I believe are going to be very interesting to watch in the coming years. Very interesting indeed.
If you bought/held gold when it first broke out in 2001, you would have basically locked in gas prices at $1.05/gallon for life until you ran out of gold.
Sell your cheap gold for fiat, then buy the expensive gas. Or become a very good investor and buy some pseudo-gold ie AAPL, CMG etc.
You get the picture I hope. Inflation is what YOU make it to be. Really!
Good discussion.
Inflation is not here only if you believe the hedonic-adjusted CPI. In my little world there is real inflation. When TARP, QE2 and further money stimulus (aka printing) filter inro the system – the ‘hyper’ version will come. If nothing it will be continued if only to counter the civil unrest (despite popular belief – there is NOTHING in the coffers of SS, Medicare etc.). This short-term fix is, and has been, the same in every hyperinflation ever recorded. Let’s look at it another way – Danielle, do you think the money printing will stop? I’m certain it will not stop and the continuation supports the unsustainability of the system. Extrapolate. I can agree with feeling uneasy about keeping funds in the system – holding Gold and especially Silver lets me sleep better at night – no counterparty risk, it owes no one and both short term and long term history prove it to be the perfect hedge against inflation. My suggestion is to read John Williams of Government Shadow Stats. Preparation can take time – it could happen at any point but the system canbot be held together with thumb tacks and scotch tape any longer than 2014. Best of luck.
Gold is a “Crisis Hedge” not an Inflation hedge
http://inflationdata.com/inflation/inflation_rate/gold_inflation.asp
The Questionable (At Best) Value of Gold as an Inflation Hedge
http://www.trademonster.com/zine/the-questionable-value-of-gold-as-an-inflation-hedge/
The people witnessed the 2008 collapse with the US losing 750,000 jobs per month for 6 months, many assets plummeting in value, bailouts of huge corporations, open and blatant fraud and corruption in the financial sector, then the $1.5 Trillion budget deficits, then the disgraceful attempt by US leaders to deal with the debt ceiling, the president openly bribing members of congress to vote for his health care plan, and current presidential candidates openly calling for essentially the end of Social Security (our retirement safety net). After all that, people are scared to death. The government could print a mountain of money as large as Mauna Loa and it might not cause hyperinflation. People might just scoop it up and hoard it. We have lost ALL confidence in the system.
“”HYPER-INFLATION is a political choice””. Source: Hugh Hendry, Eclectica Asset Management. (And this guy is a Hardcore (!!!) Deflationista).
http://contraryinvesting.com/financial-gurus/hugh-hendry-financial-gurus/hugh-hendry-channels-irony-and-paradox-in-his-latest-financial-outlook/