Tuesday, June 30, 2015

American Hyperinflation Talk

There are enough doomsayers out there calling for hyperinflation. A recent fair assessment of the situation can be found here that is in rather clear eyed terms and an even tone. This is not as bombastic as the Shadowstats guys calling for hyperinflation any minute now... for a decade straight. This is also explicit about it being hyperinflation, which is different than others who see a period of 10-20% inflation coming that would be enough to feel like hyperinflation. It is a good read and a bit nerdy. Check it out, but the question is a good one, could it happen here?

One major thing to remember about hyperinflation is that you basically tear up any long term contracts you had. Your money management skills will be put to the test, not monthly or weekly but daily. It is a horrible situation. The wealth holders of America will not let that happen. Even if the USG hates the citizenry and only cares about its survival, it would not risk hyperinflation. In a hyperinflation, how are they going to pay their lackeys and janissaries? I do not think it happens, but something else bad will happen because as posed in the essay above, I lean towards the American economy is more house of cards today. We do not need hyperinflation for horrible pain. Sustained inflation of 10-20% will crush people because we have seen stagnant wages for decades now. The media will harp on the stagnant wages and income to the 1%, but never discuss the asset bubble focus on our economy since 1980. He who holds the asset gets the gains.

Not to sound like a song stuck on repeat but old productive economy business cycles saw wage inflation on a loop. This was partly the power of unions and partly the lack of foreign manufacturing development. It was also partly how our economy was geared: manufacturing vs. financial. Inflation would go through wages, pushing up prices but still rewarding worker productivity. Our FIRE (finance, insurance, real estate) economy recessions are due to asset bubbles being blown, then the investment cycle is hooked into that asset group, the economy grows due to that asset boom and malinvestment, then the bust comes. Wages do not inflate in an asset boom, the asset's value inflates, sending inflated wealth to asset holders. This is why 10-20% inflation for three to four years would crush Americans. Inflation makes the debt worth less, sure, but only if Americans see their wages rise with inflation. How is that going to happen? What mechanism is in place to make sure that happens? I do not see it, and raising the minimum wage to $15 will only lead to automation, immigration substitution and more unemployed Americans (sorry Unz, reduce your autism).

The fear should be that we see that type of inflation with no accompanying increase in wages. The debt remains, the dollars are worth less, but no one has the boost in earnings to make the inflate the debt away program work. You will then have a giant debt overhang with toilet paper dollars. If you go the "print dem dollars for helicopter drops" route, then hyperinflation will come and lead to a greater unraveling. A FED funded tax cut could happen, which would be akin to helicopter drops, but not straight money letters with expiration dates. Psst, FED, why not write down the debt? Oh wait, you work for the TBTF bankster crew, sorry, my apologies.

Unmentioned in the link but a player in the inflation or hyperinflation game is the idea that non-dollar players will find a way to outbid the US for raw materials. The dollar is the reserve currency! Sure, but what backs the dollar? The US army. When people don't fear our guns, that military backing will not matter. What could possibly be a rival for alternative, lesser currencies to lean on to lure raw producers away? Losing that bidding war or even just pushing the cost up for raw materials would lead to pain in America. Because Russia and China are building a separate system and are hoarding gold, the resource providers in the middle might want something that holds value in exchange for their products. This happened before in the early '70s. It can happen again, but we have already created the petrodollar so I do not know what USG can do for an encore. Tick tock dollar pimps.

13 comments:

Mark Citadel said...

We'll have to see what effects the Grexit has (if it happens of course). Bad news from China and Puerto Rican economic could compound the global crisis. America could face hyperinflation, but the Fed will do anything to ensure it doesn't happen. It is now market forces vs. the Fed. My money is on market forces, ultimately, even if only following a protracted skirmish.

Kurt said...

I think the article misses the key difference in the dollar and the IMF$ system, which is unstable because it relies on a reserve currency = US$

This make it completely different from any other currency. For the last 40 years, the US has imported more than it has produced. The dollars flowing out are used as reserves in foreign banks. These are re-invested into either treasuries, or assets.

Prior to the Euro, the treasuries were propped up by Europe. However, Europe now has an overall balance of trade and is not subsidizing this privilege - that changed to China since the 90s/00s

Since the crisis in 08 the Chinese prop is also gone. The structural support is falling away. Right now only private investment in inflated US assets keeps it propped up. Usually, when this fails (recession, etc) the governments (Europe, China) would buy treasuries to keep the system inflated and alive. This is now gone.

When there is the next crisis, this will cause the whole thing to collapse. The US economy, unlike USG, is not being run in a deficit but as we can see, USG will NEVER reduce or slash its costs - hence they will print.

THIS is when we will see Hyper, until the USD system is gone, and all currencies free float, with the reserves going back to gold.

Son of Brock Landers said...

Thank you for the comment Kurt. Have you read up on Bretton Woods 2? The dollar recycling kept our econ going.

The mutually assured econ destruction between China + America did go away in 2008. It's only a matter of time before the new game begins.

Kevin Michael Grace said...

You claim that a $15-hour minimum wage would lead to "immigration substitution." What do you mean by that, and how would it occur?

Kurt said...

I subscribe generally to the freegold theory - www.fofoa.com

Kurt said...

I will read up on Bretton Woods 2 idea but I actually think that a lot of these things are (in the background) being set up for the eventual event taking place. I think it is USG mostly that is clueless about this and refuse to think their world will ever change.

Son of Brock Landers said...

Kevin - raising the min wage to $15 will increase automation first for industries that cannot get around new min wage regs. Then it would also encourage smaller business owners to break the law by using illegal labor for menial tasks that cannot be automated. The probability of being caught and the fines would be small in comparison to savings on labor costs unless the Fedgov also created a huge and powerful illegal labor and illegal immigration prosecution system.... which it will not do.

Son of Brock Landers said...

Kurt - I agree USG system is now clueless and arrogant thinking it will last forever and always have a trump card to play.

Portlander said...

The fear should be that we see that type of inflation with no accompanying increase in wages. The debt remains, the dollars are worth less, but no one has the boost in earnings to make the inflate the debt away program work. You will then have a giant debt overhang with toilet paper dollars. If you go the "print dem dollars for helicopter drops" route, then hyperinflation will come and lead to a greater unraveling. A FED funded tax cut could happen, which would be akin to helicopter drops, but not straight money letters with expiration dates. Psst, FED, why not write down the debt? Oh wait, you work for the TBTF bankster crew, sorry, my apologies.

Um, isn't this already the case? Hasn't it been since about 2000?

The Fed funded tax cut has certainly been in place since 2008. It's kept the FreeSh*t Army mostly benign mostly "protesting" just for the kicks, certainly nothing approaching the riots of the late 60's, much less the Bonus Army threat of the 20's (heh, as if they could pull off something that organized). And it's kept the real Army well-funded and the patriotic Red States feeling a sense of duty, again nothing approaching a Bonus Army, or even Ted K/Tim McV/Weather Underground (as is more along the lines of whites wont). And it's kept the 55-65 y.o.'s (certainly Ted K/Tim McV threats in that demographic) pacified with white man's welfare, AKA Social Sec disability. $10T in deficit spending in 8 years can't help but trickled down to the dogs (to get Biblical) eventually.

Coincidence that the only turn-over among politicians have been geriatrics going off to retirement of their own volition and the _very_ occasional, and completely unexpected upset when Diebold wasn't given the call. Has any national incumbent lost a close election since 2008? How about since 2002? Elections today are as fixed-up as professional boxing.

Unmentioned in the link but a player in the inflation or hyperinflation game is the idea that non-dollar players will find a way to outbid the US for raw materials.

I'm not so sure. I think technology can smooth that over (have you priced steel, copper, or crude lately?) and carry us well into a world-wide Latin Americanization where a ruling elite has unimaginable relative wealth, a thin techno-courtier class works feverishly for fear of losing their relative status and financial insulation from the brown underclass, and the great unwashed mass veges out on the opiate/blue pill of consumer electronics and Internet (whether games, pr0n, MyFace, or blogs... it's all blue pill) and transfer payments for the necessities (EBT, Disability, Student Loans, Obamacare... each demo has its welfare).

Portlander said...

I should probably let the last sink in, but there is one chink in the NWO's grand plan: a real, honest-to-God, SHTF drought.

While it's possible, tech-ing your way out of something like that takes a non-trivial amount of lead time. It requires desalinization plants and the nukes to run them. And now we're talkin' real infrastructure and producing real goods; not just moving electrons around on silicon. Nor does it help matters any that the talent in the design and build real stuff fields has gotten pretty thin over last generation.

TroperA said...

While it's possible, tech-ing your way out of something like that takes a non-trivial amount of lead time. It requires desalinization plants and the nukes to run them. And now we're talkin' real infrastructure and producing real goods; not just moving electrons around on silicon. Nor does it help matters any that the talent in the design and build real stuff fields has gotten pretty thin over last generation.

California could have had desalinization plants set up years ago if it hadn't been for the environmentalists shrieking everytime someone tried to plant a shovel in the ground or threatened some obscure species of ant. California's refusal to live in the real world will eventually doom it to destruction. (Then its inhabitants will spill out and take over good states, turning them into CommieCrazylands and repeating the process.)

Portlander said...

Yep. And, of course, they gave-up and shutdown San Onofre completely in 2013. So that's a couple thousand MW that won't be available to desalinate if they wanted to. But I hear there's a crude glut, so no worries.

Like I said... talent in the bricks & mortar world has gotten pretty thin over the last generation. But hey, video games have never been cheaper, more convenient, and more dazzling. So we got that going for us, which is nice.

Jim B. said...

Just stumbled upon your blog, great read. I agree that the risk of hyperinflation has been exaggerated by many pundits (some of whom I greatly respect), but with my very limited understanding of economics, I would still venture to say that we can reasonably expect the unexpected in this current environment of complete insanity. That being said, I happen to favor the line of thought that you mentioned regarding a sustained period of high inflation versus hyperinflation, which may feel no different than a Weimar or Zimababwe scenario to the man on the street.

--Jim