US Hyperinflation Is A Myth

“And I have often said that the deleveraging will be so severe that what may come after is only moderately interesting, since you won’t hardly recognize your world once deflation has run its course.”

I’d expand that to: you will hardly recognize yourself once deflation has started in its earnest, let alone run its course.

ZH now has a nostalgic article “How I Caused the 1987 Crash” by Bruce Krasting. Back in 1987 I was not really paying much attention, and it did not have an immediate effect on my life.

What might serve as a bottom for the current crash? One would think that there would be some level … I’m trying to picture a broken money system and unable to bring it into focus.

Puru Saxena and Tyler Durden? My preference is for John Williams, his numbers say hyperinflation is inevitable, and he is correct IMHO.

Clouding the issue of unabashed fiat creation with economic mumbo jumbo only serves to muddy the waters.

The path chosen by the Fed and its cohorts in Europe is inflation and currency debasement on a grand scale, standing in their way used to be called “Fighting City Hall” back in the good old days when being wealthy meant having the mortgage on your Ten thousand dollar home paid off.

@jal
I haven’t laughed so hard in a while. It got really confusing towards the end, with Greece and hyperinflation in the US, but it was epic. Good one! I wish I has some karma to give you.
Stabilizing Ponzi…my jaws hurt. 😆

I enjoy this article and all your others, well thought out. However, what I fail to understand if all this end game has been planned, either if it ends up as a deflationary spiral or not, which country benefits the most or will use this to their own self-interest. It seems to me that to increase the velocity of money and releasing large amount of credit to the private sector, something political must happen first. No one seems to be addressing this as on the books there are new technolgies ready to come to the market ( ie. the latest is a cardboard bike for $20). Is this the end game and the only window of opportunity for the US to control China before China becomes self-sufficient with a large middle-class?

If the IMF is saying that European banks will need to sell $4.5 trillion in assets through 2013, I don’t really need to know any more. I mean, that is around $10,000 per person in Europe.

Where is the money coming from Golden Oxen? Selling gold? Or is this also “economic mumbo jumbo” 🙂

Golden Oxen –

I have to say I liked many of those charts Ilargi posted, and the linkage with Japan makes sense to me since the situation is post Gold Standard and thus directly relevant. QE has an effect certainly, its just not the one many people imagine it is. Slowing money velocity – interesting stuff, worth watching. One cause of hyperinflation is rapidly increasing money velocity, and we’re seeing the opposite here.

Likewise, its totally clear to me that homeowners and small business are reducing their overall debt, for the first time – well ever, at least according to my Fed data. Reducing debt, in our money system, is deflationary whether accomplished via default or by paying it down. And they’ve been doing this since Q2 2008. And if you even bothered to glance at the data series, you’d see just how unprecedented this is.

The recent housing price bounce is (most likely) due to the massive reduction in interest rates; most homebuyers with mortgages buy with an eye only on monthly payments. As interest rates drop, payments decline, and they can get more home for the same payment. Mark Hanson calculated that over the past 12 months purchasing power went up by about 15%. All else being equal, that should have raised prices by that same amount. It didn’t. But the really amusing bit is, overall mortgage balances dropped over that same period. Deleveraging continued – a quite solid indicator for the deflationary trend! Rates at 3.5% didn’t bring buyers out of the woodwork. Do we imagine rates at 2.5% will magically do this?

Simply asserting Ilargi’s evidence is “mumbo jumbo” says to me that either you don’t understand the case being made, or that you don’t have a valid counter-argument.

Since you believe so strongly in Williams, why not find and post some compelling case (the stuff you call mumbo jumbo) that he has produced to explain the hyperinflation that is just waiting to burst forth – specifically how gobs of new money will be created without an influx of willing borrowers. Which do not seem to exist, and haven’t since 2008. Or why money velocity will suddenly increase. Which it hasn’t.

Certainly, trends can change, but we need to first have a clear understanding of the trend currently in place, and evidence (data series) that help to show us where we are and what the direction has been are quite valuable to furthering that understanding.

We can keep an eye on velocity and if that situation changes, then we might have to revisit. I really like having numbers that we can watch to see the evolution of thesis.

Sometimes I think that people with “faith” in an outcome feel no need to actually prove their case (or show their work). “Whatever it is you’re saying, why, it has to be wrong, because its import runs counter to my article of faith.” That might work among co-religionists or members of the choir, but it doesn’t play so well among people who prefer cases to be proven based on facts and evidence.

Hambone –

Not being in the RE industry I must rely on what others say. Most of my data comes from Mark Hanson.

The foreclosure pipeline requires some large number of months to completely execute; varies by state but its anywhere from 6 months to years. There was a foreclosure moratorium put in place last year (due to the wholesale fraud in foreclosure documentation finally being acknowledged), and I’m guessing that’s a big chunk of what is causing the dry-up in distressed property today.

I’d guess allowing the banks to keep REO around and rent it out contributes to this as well. Of course it also allows the banks to avoid recognizing losses too, which is always helpful if you are particularly focused on bank welfare.

For me, real estate will be “turned around” once interest rates return back to a more normal 6.5%, when the US government stops borrowing 10% of GDP every year, when the Fed stops monetizing the debt, and when Fannie & Freddie are no longer 90% of the mortgage market. Prior to this happening, what we’re seeing is just the result of stimulus and not sustainable.

I think that in some areas where rents exceed payments by a good margin, RE might be a decent buy. But – I’m cautious. What happens when rates go back to 6.5%? A 30% drop in home prices? How much fun would that be if you’ve put 20% down?

Do we imagine the Fed will be able to keep rates at 3.5% in perpetuity?

Nice graphics. Too bad it is wrong.

Inflation Deflation phenomenoa are RELATIVE. As with all phenomenoa which is relative there is no PRRFERRED Frame of Reference.

Imagine two concentric bubbles with you…the observer…standing on the surface of the inner one. Defate the bubble that you are standing on. The exterior bubble appears to be inflating.

Now…instead of defating your bubble you inflate it. The exterior bubble appears to be deflating. In both examples the exterior bubble size was held constant.

So yes you can experience a hyperinflation during a massive deleveraging. It matters upon perspective.

Until you can understand this you will have little clue as to what is about to overwhelm you.

Tall Tom
I Cor 13

It is USA deflation that is the myth. We don’t need theory to tell us what deflation looks like in the modern, post Breton Woods, pure fiat era, since we have a real world example, Japan. So what does a ‘real’ deflation look like?

For starters, the currency of the deflating country STRENGTENS, by 100%, over its main rival over the 6 year period from the point of bubble collapse. Then it meanders sideways for at least another 17 years, with any loss in buying power quickly regained.

The primary stock market index puts in wave after wave of new lows, and after 23 years finds itself still over 75% down from the top. Similar real estate behavior.

That is not even close to what we have in the USA. Whether you call the top of the bubble as being March 2000, or some time in 2007 or 2008, it doesn’t matter, our indicators are much closer to the ‘hyper inflation’ set up, not deflation.

Is it possible we could get the deflation outcome? Certainly. But very unlikely. The USA is slowly losing World Reserve Currency status, and this is inflationary.

We’re running a GAAP deficit of $5 trillion at the federal govt. level. Within two or three years it will be well over $7 trillion, approaching 50% of GDP!!! I think John Williams is rushing it a bit with his 2013 call for hyper inflation. I would say 2014 or 2015.

Here is a fix.

It matters upon [strike]perspective[/strike].

It matters only if you can finish the month with some money left in your pocket after having obtained the necessities of life.

You should get your prospective from the “entitled” poor, not the “entitled” rich.

Does anyone remember the price of a “Shave and a Haircut”?

Hyperinflation is happening in Syria and not in Canada or USA.
Here your 1 dollar can still buy a head of cabbage.
If it was Hyperinflation than your 1 dollar would have the value of 1 cent.
Nobody uses the word Hyperinflation to describe our current environment.
It is either deflation or inflation.

Hi pipefit!
The kicking of the can down the road can go on for several years.
Maybe 4-5 years or more,nobody knows exactly how long it can last.
Japan has been doing it for over a decade.
It will eventually end but in the mean time the dollar still has the same value.

Also the laws of economics does not seem to be applying to this system because we are dealing with master swindler’s.

They have manipulated all commodities and most currencies.

ilargi,

If you look at worldwide debt as one big block, it is obviously still growing wildly, with USA federal (GAAP) debt increasing $5 trillion/yr alone. We know this debt will not get paid in today’s dollars.

I see three possible outcomes. The one you seem to be arguing is that bits and pieces get defaulted upon, one by one, in a positive feedback loop of economic contraction. Perhaps social security might be defaulted upon by increasing to the retirement age to absurd levels (85 years old?), as one example.

The textbook hyper inflation argument would be that the nanny state would bail just about everybody out, certainly itself and all the big players. They are already at this stage in Europe, and I agree with you that it isn’t proceeding very well.

The most likely outcome, I think, is some sort of debt jubilee. I don’t know the exact form(s) it could take, or even what would trigger the end game. I think it would be in conjunction with a one world currency being imposed on the planet by whoever it is that is in charge. It is quite apparent that no one is leaving the Euro, that is one clue we have to work with.

This would not be a text book hyper inflation, but close enough. You wake up one Sunday morning, and the news is that your paper money must be exchanged for the new currency, and bank accounts are frozen until they are converted. In effect, if you are a creditor, you get 10% of what you had, and if you are a debtor, most (if not all) of your debt is forgiven. If you are a saver, you get to keep 10% of your buying power.

The advantage of this ‘solution’ to the folks in charge is that it solves the problem of unpayable debt in a manner that enhances their power greatly. The other two solutions will lead to anarchy.

@ reply pipefit, I certainly am in sympathy with your point of the new currency for the old, but holders of dollars will never accept an instant 90% drop in their saved wealth to save the debtors, preposterous

Prefer sticking to the time tested workable solution of constant never ending inflation. Five years of a very workable 10% inflation rate will do wonders in the screwing of the saver and will make debtors smart again. The increased revenue to the tax man via the inflation will make his Social security bills and others manageable.

Of course bonds would crack open sooner or later in that scenario, but another round of drunken orgies in the stock market, commodity markets, and of course the real estate crowd will mute it’s effect and we can continue in our paper world of make believe for a while longer.

If Ilargi is correct, and we get a deflationary bust instead, then the question arises of how long are 7 billion people going to stand in a soup line, and how do you get out of that problem, everyone starting their own garden?

Pipefit,

Japan is not a good example of how deflation typically plays out. As Ilargi points out, they were an exporting powerhouse exporting into the biggest consumption boom the world has ever seen. They also had a very large pile of money to burn through building their four lane highways from nowhere to nowhere, since they were the world’s largest creditor when their bubble burst in 1989. This is clearly not our situation.

No one will be exporting their way out of a global economic depression. In contrast, exporters are going to feel the pain big time as their markets dry up. We can expect trade wars and protectionism to abound. Take note Germany, Scandinavia, Australia, New Zealand etc etc.

We have had the inflation, only instead of a currency hyperinflation, we experienced a 30 year credit hyper-expansion. Either one amounts to an expansion of money plus credit compared to available goods and services, and is therefore inflation. Credit is equivalent to money on the way up, but not on the way down. Credit loses ‘moneyness’ and credit infstruments are massively devalued in a great deleveraging. This is deflation by definition and it is already underway. Debt monetization is nothing in comparison with the scale of the excess claims to underlying real wealth that stand to be eliminated.

I agree that the currency of a deflating nation strengthens. This is exactly why we have been writing about the value of the US dollar increasing, which it has done. The bottom came in a long time ago, and despite the set backs that are an integral part of a fractal market, the trend is up, and will be for some time. That’s not to say it will be for the long term – far from it in fact – but for now that is the case. We have made it clear that cash is a short term bet (of the order of a few years), and that the longer term strategy is to move into hard goods at the point when one can reasonably afford to do so with no debt.

Some could do so now, while others would have to wait for prices to fall, as they inevitably do in a deflation, but not immediately. Price movements follow changes in the money supply. We have been in a counter-trend reflation since 2009, and prices have risen as a result. They may continue to do so for a while after the reflation is clearly over, but then the trend will reverse. Prices will fall, but purchasing power will fall faster, meaning that prices will rise in real terms for most people. Those who have preserved capital as liquidity will find their purchasing power enormously increased, but most other will lose purchasing power because they will have nop access to credit, highly unfavourable employment cirumstances, rising property taxes and very little actual money.

The fiat currency regime will eventually descend into chaos as beggar they neighbour devaluations become the norm, but not everyone can devalue at will or at once. The market will decide relative values for the next while. Money will go from where the fear is to where the fear is not. It will be leaving the European periphery, and increasingly the entire eurozone, and flooding into currencies like the USD, the Swiss franc, the Swedish krona, and temporarily the British pound. It doesn’t matter if the US is downgraded. Market participants will ignore the ratings agencies and vote with their feet on a kneejerk flight to safety.

You say that the US indicators are much closer to the hyperinflation set up than to deflation. I would disagree of course, for reasons Ilargi has explained (plummeting velocity of money for instance). I would also point out that the conditions you describe simply reflect the top of the rally. People extrapolate the trend of the last three years forward, but fail to anticipate trend changes. We are in one. Many markets have topped already (gold, silver, commodities, oil etc), and the rolling top of the last year or so is about to claim the American stock market as well.

The rollover in the markets will drag the real economy down with it, with a time lag, since the time constant for changes in the real economy is much longer than for the financial world where value is virtual. We are headed into the teeth of the Greatest Depression, or at least the most significant one since the fourteenth century.

Hyperinflation is simply not on the cards any time soon. The depression will proceed for many years before that becomes a serious risk, unless you live in the European periphery that is, where currency reissue is a very real risk in the relatively short term. In those currencies, loss of faith in New Drachmas, New Pesetas or New Lira is very likely, and the countries will be cut off from international debt financing, with hyperinflationary results. That is not the situation in the US at all, and won’t be for quite a long time. Eventually, when international debt financing is dead and buried, then printing will be a risk and a loss of faith in the erstwhile reserve currency could be expected.

In the meantime, debts defaults are going to skyrocket, each one doing its bit to destroy the value of credit instruments, and substract from the effective money supply. This is already underway, and the great asset grab has begun as a result. Witness the asset stripping of Greece for instance.

In Europe, endless bailouts of sovereigns and the well-connected are doing nothing to increase the money supply or the velocity of money. In contrast, the ineffectuality of governments is doing nothing more than feeding the cycle of fear by demonstrating their ineffectuality time after time. They are trying to over come contraction, but are fighting an irresistable headwind. It is not going to work. Europe is already in contraction, and as fear will be increasingly in the ascendancy, that will only get worse.

Government obligations will be shed right, left and centre (by governments of the right, left and centre) because they will have no choice. Yes, this will lead to anarchic unrest, and yes this will be met with a heavy-handed repressive response. Social polarization is very much on the cards – governments vs people, haves vs have-nots, natives vs immigrants, employers vs workers, unionized vs non-unionized, Us vs Them in general terms. This will not be pretty, to say the least. Just because it is a bad thing does not mean that it cannot happen, or that government, by their actions, can make any difference to the outcome.

Bailouts are never for the little guy. The creditors hold the political power and write the rules. They will not allow debtors off the hook. Instead of repayment in money, they will take people’s freedom instead, making debt slavery much more real than it is today. Debts will not be forgiven, but sold on to more aggressive debt collectors. This is already happening in the US, where debt collection is becoming increasingly unconscionable. Debts will only be effectively forgiven when people have nothing useful to repay, not even their labour. By then the middle classes will probably be living in latter day Hoovervilles, like the Villas Miserias populated by the formerly middle class Argentines.

Savers will have all the buying power, IF they have managed to get their savings away from dependence on the solvency of middle men. Otherwise they will likely disappear in a giant black hole of credit destruction, as yet more excess claims to underlying real wealth.

You are saying hyperinflation or even high inflation isn’t on the horizon and deflation and a strong dollar is. Does that mean all the US and European folks buying gold will be burned?

sonoran84,

Yes, many people buying gold are going to get burned. The spot price will fall a long way, but most people won’t get the spot price anyway. They’ll be desperate enough to sell their gold for a loaf of bread and half a dozen eggs at some point. Too many people buying gold are not taking care of more important things first, like holding to debt, holding liquidity (cash) and having some control over the essential of their own existence. Gold is an insurance policy to buy after you’ve done all that, and even then it’s no panacea. You can expect to have to sit on it for many years without having to rely on the value it represents, and it will not be safe to buy and sell it, perhaps for the rest of your life. Owning that concentrated a source of value has its price.

Then by that definition….

We’ve been experiencing inflation (i.e. “inflationary mode”) since 2009?
What’s the difference between inflation and an “inflationary mode” ? This language sounds dangerously close to cookie inflation.

I thought it was an either or proposition. Deflation or inflation. You don’t do both at the same time. The rise in stock and commodity markets was due to temporary return to suspension of disbelief…..not an actual change in the dynamics of credit creation.

The central banks were pissing into the wind of a larger hurricane force trend…..etc.