Hyperinflation Warning for U.S.
Jeff Nielson source:
www.lemetropolecafe.comBy now, most informed readers have at least a general understanding of the
concept of
“hyperinflation”. It is
the exponential increase in the prices of goods, directly caused by the collapse
of the currency in which those prices are denominated. Thus, when the United
Nations issued a warning
last
week of a possible “crisis of confidence” and/or “collapse” of the U.S.
dollar, this was also a direct warning of the imminent risk of hyperinflation in
the U.S. economy.
There is nothing surprising here. Many prominent voices have been warning of
the increasing inevitability of U.S. hyperinflation, beginning with
Shadowstats economist John Williams,
nearly a decade ago. However, when a myopic institution like the UN is now
openly warning of the “looming risk” of the collapse of the U.S. dollar, then
clearly the parameters have become desperate, indeed.
While many have some general familiarity with the concept of hyperinflation,
few yet comprehend that the unique characteristics of the U.S. economy first
make it
more vulnerable to hyperinflation than any other developed
economy; and second, would make any episode of hyperinflation inside the U.S.
far
more devastating than should the same fate befall any other developed
economy.
This “uniqueness” centers on the fact that (for the moment) the U.S. dollar
is still the “reserve currency” of the global economy: the money used for most
international transactions. This status has been a tremendous boon to the U.S.
economy for many decades. The artificial demand created for U.S. dollars because
of its extensive use in global commerce pushed-up the value of the dollar beyond
its actual worth.
This, in turn, produced two huge benefits for the U.S. economy. It produced
an artificially high standard of living for U.S. citizens, and provided U.S.
corporations with the added purchasing power for their capital which allowed
these corporations to scoop-up foreign corporations at what amounted to discount
prices.
Obviously the U.S. government has totally abused the privilege (and
responsibility) of managing the world’s reserve currency. Decades of grossly
excessive money-printing (especially
since
2008) have caused an enormous glut of dollars in the world. It is this
reckless behavior which is responsible for the global movement (now well
underway) to phase-out the dollar as “reserve currency”. Indeed, various
bilateral trade agreements and “currency swaps” have already reduced global
demand for dollars by an amount in excess of $1 trillion per year.
The combination of grossly excessive supply and rapidly falling demand is
enough by itself to put the U.S. dollar (and U.S. economy) on a “collision
course” with hyperinflation. However, this is literally only half the story when
we view the pending collapse of the dollar. The key dynamic here is the
inherent
worthlessness (today) of this debauched banker-paper.
Prior to 1971, when the world still retained a quasi-gold standard, there was
at least some connection or “anchor” for the value of the dollar to a hard
asset: gold. As a mechanism for “price stability”, it is literally impossible
for hyperinflation to ever occur in an economy with a gold-backed currency.
To understand this principle, it is first necessary to appreciate that
hyperinflation is a “crisis of confidence” even more than a reaction to economic
fundamentals. What turns “high inflation” (even crippling inflation) into
genuine “hyperinflation” is the ensuing
panic of the domestic population
to rid themselves of this banker-paper as quickly as possible. It is this
stampede to rid themselves of their currency (by buying-up goods) which
simultaneously causes the value of the currency to plummet (from lack of demand)
while prices for goods skyrocket due to over-consumption.
This brings us to one of the elementary truths of all “fiat currencies” (i.e.
“money” backed by nothing). Their “value” (indeed their
survival) is
wholly dependent on the continued confidence of the ‘sheep’ using this currency
in their commerce. An un-backed paper currency is nothing but an (unsecured)
“IOU” of the government issuing the currency. Indeed, all of our banker-paper is
now created via
debt.
Because there is no intrinsic value in our paper currencies (now that the
gold standard is gone), bankers have tried to
fake “value” in these
currencies, by attaching debt to the creation of each and every new dollar. In
other words, the U.S. dollar went from being a unit of currency which carried
“value” to one which carried “obligation”.
The difference between a currency which has
value versus one which
only implies
obligation is literally identical to the difference between
a 1-oz gold coin, and an
IOU to deliver 1 ounce of gold. The former has
intrinsic value, while the value of the latter is only as good as its
promise to deliver.
We can now see clearly the enormous difference between
real (gold-backed) “money” and the bankers’ fiat paper. The value of the former is
not dependent in any way on the “confidence” of the holder, while the value of
the latter is totally dependent upon the confidence of the holder – and his/her
trust in “the promise to pay”.
This obvious fact alone should have been enough to make all of our
governments shun the bankers’ fiat-paper, since it is common knowledge that the
success of any/all
scams is also dependent on maintaining the
confidence of the chumps being scammed. Indeed, the colloquialism “con
man” is simply shortened from “confidence man”, since well over a century ago,
our society was well aware that the primary tool of all scammers is the creation
of the
illusion of confidence in whatever scheme/scam they are
hatching.
Thus it is with all fiat currencies: they are nothing but the “confidence
scams” of bankers. These scraps of (worthless) paper are “money” backed by
nothing. And more than a thousand years of “history” with such paper has taught
us another lesson as well:
all such fiat currencies must return to their
actual value – zero.
From the moment that the bankers seduced our governments into severing the
final link with the gold standard, it was always inevitable that these fiat
currencies would plunge to zero. The only “variable” was the amount of time it
would take for the chumps to lose confidence in this banker-scam. In that
respect, the bankers are their own worst enemies.
As I alluded to previously, the bankers are responsible for the
grossly
excessive printing of these paper currencies – driving them toward zero on
the basis of “dilution” alone. However, even more rapidly, they have been
driving our currencies toward zero with the insane explosion in sovereign debt –
especially in the U.S.
Professor Lawrence Kotlikoff has calculated the
combined
debts and obligations of the U.S. government at over
$200 trillion.
With the “unfunded liabilities” of Social Security and Medicare amounting to
roughly $100 trillion alone (before we begin looking at all the other
debts/liabilities), obviously this is at least a reasonable “ballpark figure”.
Equally obvious: it is utterly impossible for the U.S.’s puny $14 trillion to
even
service these debts for much longer.
As I have written frequently, U.S. interest rates are
permanently frozen at 0%, because this deadbeat economy is so
totally
insolvent that even a 1% increase in interest rates would instantly send the
U.S. economy into a deflationary death-spiral. With $60 trillion in
current public and private debt, a 1% increase in U.S. interest rates
would drain an
extra $600 billion in interest payments out of the U.S.
economy – every year.
This means
subtracting an amount of capital equal to nearly the entire
Obama “stimulus package” – every year. It would result in an immediate plunge in
U.S. GDP of roughly 5%, even before all the “multipliers” went to work as that
capital was subtracted. Indeed, I wrote a previous commentary demonstrating how
a 0% interest rate
proves that the U.S. dollar is
already
worthless today.
We arrive at the following parameters:
- The supply of dollars has been ramped-up to all-time highs at the same time
that demand for dollars has totally collapsed.
- The combination of a totally unmanageable mountain of debt and interest
rates which are permanently frozen at 0% mean that the “fundamental” value of
the U.S. dollar has already sunk to zero.
- U.S. hyperinflation will begin as soon as “the sheep” lose confidence in the
value of the (worthless) dollar.
It is at this point that we can now analyze why the U.S. is more vulnerable
to hyperinflation (and will be harmed much worse by it) than any other Western
economy. While the U.S. has previously only experienced the benefits of having
the world’s reserve currency, it has now brought itself to the point where it
will experience the
drawbacks of that role.
Being still the primary vehicle for international commerce, as well as the
currency in which the world’s largest
debts are denominated, there is
somewhere in excess of $6 trillion in U.S. dollar holdings in the hands of
foreign entities – either in the form of U.S. Treasuries, or dollars themselves.
This means that while most episodes of hyperinflation throughout history have
been driven by a
domestic collapse in confidence, because of the vast
numbers of U.S. dollar instruments held outside the country, the U.S. could
suffer a currency-collapse (and the resultant hyperinflation) from
either a loss in domestic confidence in the dollar
or a loss of foreign
confidence.
Because the bankers have already driven the value of the dollar to zero based
on two separate fundamentals (complete insolvency
and excessive
currency-dilution), the “crisis of confidence” which leads to U.S.
hyperinflation can also be due to either fears of insolvency or merely the
consequence of excessive dilution (i.e. too much money-printing). Thus there are
already
four possible “triggers” for the collapse of confidence which
leads to U.S. hyperinflation.
This is only half the “horror story” regarding the implications of
hyperinflation for the U.S. economy, however. In the world’s most recent
experience with hyperinflation: the collapse of Zimbabwe’s currency, obviously
the domestic population of that nation has suffered considerably. What has
substantially mitigated the suffering was the availability of a
substitute
currency to use in the “blackmarket” economy which inevitably arises when a
nation experiences hyperinflation. Ironically, the substitute currency which has
lessened the devastation of hyperinflation in Zimbabwe is the U.S. dollar – the
reserve currency.
The obvious question then becomes: what will
Americans do for a
substitute currency once the U.S. dollar has “greater value” as toilet paper
than as money? The answer is “no one knows”. Certainly the (relatively) small
amounts of gold and silver currently being held and accumulated by Americans is
a partial answer – but only a partial one.
There is far too little bullion available for circulation in the U.S. economy
to allow it to function in any remotely normal manner. Much like the Japanese
economy became totally disrupted when the earthquake/tsunami destroyed vital
infrastructure (and supply chains), the collapse of the U.S. dollar would have a
similar (but much
worse) impact in disrupting U.S. commerce.
Once the
suppliers of raw materials and other goods to the U.S.
economy stopped accepting U.S. dollars as payment, U.S. businesses would have no
way to keep that flow of goods coming. Industry would shut-down. Retailers would
close due to a lack of goods on their shelves, so even if Americans
wanted to “barter” for the necessities of life, they would quickly find
retailers closed – and those few who retained any stock would a) charge
exorbitant prices; and b) would likely only accept gold or silver as
payment.
The problem for the U.S. economy in this scenario is that its own collapse
would certainly threaten the solvency of the Euro zone, and the “Euro” is the
only other currency with both the status(?) and a large enough supply to be
usable as a valid substitute in the U.S. The question is whether those
businesses inside the U.S. who had stopped using dollars would be any more
receptive toward
another form of un-backed banker-paper (of highly
questionable worth)?
The Canadian dollar would also offer a partial solution to the U.S. However,
while the CAD may be viewed as less risky than either the USD or the Euro, once
again the problem of insufficient supply arises. With the U.S. economy being (at
the moment) ten times as large as Canada’s economy, there simply isn’t a large
enough quantity of such currency to function as a surrogate for the U.S.
economy.
The U.S. economy is careening toward hyperinflation. The U.S. government is
either oblivious as to what is happening, powerless to do anything about it , or
both.
The only way for ordinary Americans to cushion the shock of what lies
ahead (in addition to stocking-up on “necessities”) is to accumulate as much
“physical” gold and silver as possible.At that point Americans will only be able to hope that the U.S. government
doesn’t repeat what it did during the Great Depression – and once again
confiscate the gold and silver of Americans…
Hardinvestor
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