Written by RightSideNews
Hyperinflationary Great Depression (2008)
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 than $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.
Excerpt from: Hyperinflation Special Report - ShadowStats.com
John Williams of www.ShadowStats.com [To email with question or comment on this article email to
"The decision not to halt the credit expansion eventually must lead to what Mises has called the "crack-up boom," characterized by a general flight into real values and the collapse of the monetary system. In the later stages of the expansion the additions to the money supply must be increasingly accelerated as market participants have come to expect ever-increasing prices. At some point, the system of monetary exchange must break down. Consequently, to continue the easy-money policy in order to avoid the otherwise inevitable depression must bring about an even harsher fate: the collapse of the monetary system and the market economy, with its great advantages of specialization and division of labor."
From: An Introduction to Austrian Economics - Chapter 8
- Thomas C. Taylor
The following is an important excerpt from Percy Greaves'
incredible book "Understanding the Dollar Crisis":
Q. In your opinion what is today the safest way to save in the long run?
A. That is a question people ask me very regularly. As mentioned in answer to an earlier question, everyone is interested in trying to improve his situation. For most of us, this means trying to remove our uneasiness about inflation. This is a part of everyone's problems. I face it personally just as each one of you does.
Perhaps one of the most important conclusions to be drawn from these lectures is that you cannot save yourself if the society goes down. The problem is primarily one of saving the free market society - the capitalistic system. If the system fails, we shall all flounder.
Let me give you a quick and simple illustration. For centuries Christians were taught by their churches that lending money at interest was an immoral, unchristian action. So the money-lending business was left to the Jews. A number of them became the chief money experts of the world. Many of them realized what was happening in Germany in 1920, 1921, and 1922. They went into Germany and bought everything they could, paying 10, 15 or 20 percent down, and assuming mortgages or other debts for the balance. In 1923, when the mark went to zero, their debts were wiped out. These financially intelligent Jews then became the sole owners of most of the business enterprises and investments in Germany. They found a solution - a personal solution - for the inflation.
The Jews had not caused the inflation. It was not a Jewish plot. The inflation was produced by the German politicians in power after the war. They were trying to get out of what they considered the onerous terms of the Versailles Treaty. However, some intelligent Jews who understood what was happening sought to improve their situation financially. They were merely acting as all human beings do. They were using their knowledge and understanding to improve their situation from their viewpoint. In our first lecture, it was pointed out that this is the a priori reason for every human action.
Most Germans had thought they were improving their situation by placing their savings in banks, bonds, insurance annuities, mortgages, and other assets with fixed values in marks. When the mark collapsed, these innocent but financially ignorant German people lost all of their savings. The value of their life insurance policies was wiped out. Their government bonds were worthless. All their savings in German marks had evaporated. The savings of generations of thrift were wiped out. Then, all around them, they saw Jews profiting, getting rich, seemingly at their expense. Envy and resentment soon gave way to a strong tide of anti-Semitism. This in turn led to the election of Adolf Hitler and all the ugly results that flowed out of his dictatorship. A few fortunate Jews escaped from Germany, with or without their wealth, but many did not.
So if you find a way to profit from this inflation, or even to save what wealth you have, you can be sure you will be considered a public enemy by all the suffering people around you. If you have wealth while those around you are starving, your life will not be worth much. It will not be worth any more than the lives of the Jews in Germany during the final days of Hitler.
There are, of course, some things that are a better form of savings than others. I would have to say paper money is not one of them. Some people say buy stocks. Others say buy real estate. However, let us remember that you cannot just buy stocks. You have to buy particular stocks. Some may go up. Some may go down. The same is true of real estate. If I were to get facetious, I would advise you to buy 100 shares of the "Cost of Living Index." We can be sure that will go up!
The problem is one of saving the system. We are all in it together. It is as though we were all out in a life boat in the middle of the ocean. If the boat goes down, being the richest man in the lifeboat will not save your life. It will not do you any good to own great wealth if the society is not saved. If one of you, or a few of you, could own or get title to all of Buenos Aires, it would be worthless to you without the cooperation of your fellowmen. The lights would go out. The gasoline pumps would not work. Your physical wealth would be completely without value without the social cooperation of your fellowmen. It is the free market society that must be saved.
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