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With deflation tightening its choke-hold on the global economy, we thought we’d
drop in on our supposed nemesis, Gonzalo Lira, to see
how he has been coping in
these very un-hyperinflationary times. To his
credit, the erstwhile arch-inflationist, bending to
reality, has acknowledged forthrightly
that deflation rules the economic and financial worlds right now. “Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative) – in short, everything
screams ‘deflation.’
” He wrote those words a month ago in an essay entitled How
Hyperinflation Will Happen, and although we are obliged to point out certain dangers in relying too heavily
on the scenario he describes,
readers should trust, as we do, that he
has gotten the big picture right. He asserts,
for one, that economic recovery is no longer remotely possible for the
U.S. We agree. Nor, as he makes clear, is it a case of double-dipping into recession, as most economists and the mainstream
media would have it;
as Lira flatly states, we
never emerged from the first recession. The inevitable result, he says – and again we concur
— is that an epic financial panic centered on the dollar’s
collapse is coming, and it will push the U.S. from intractable recession into full-blown Depression.
As to how we
might prepare for this, Lira has his ideas and we have ours. Possessing physical bullion in any form will be
a part of the solution no matter what, as he would
undoubtedly agree. Where we part company, however, is on the crucial question of whether
any of us will be able to respond defensively, let alone advantageously, once the avalanche has begun. While Lira talks about shifting assets from paper
to real goods as hyperinflation plays
out, our fear is that the dollar’s
complete destruction will
occur so swiftly – think May
2010’s flash crash, but on a global scale
– that there will be no chance for anyone to liquidate intangibles
(to whom?) in order to
replace them with real goods. For all we know, the world’s bourses will be shuttered for a week or longer, diverting angry mobs to branch banks whose vaults,
as the mobs are fated to discover,
hold precious little cash. Under the circumstances,
it’s possible Americans
will have no opportunity
to get money out of banks,
or cash out of stocks, much less
catalyze a hyperinflation by shoveling dollars from who-knows-where into Lira’s short list of defensive assets: “residential property, as well as equities in
long-lasting industries; mining, pharma and chemicals especially, but no
value-added companies, like tech, aerospace
or industrials.”
‘Burp’
Starts a Panic
Despite our concerns about the speed of the collapse, we think Lira’s
description of how it is likely to trigger is not merely plausible, but riveting.
Since a summary would not do it justice, we’ve supplied the link above In brief, however, he believes that
a panic out of dollars will begin
with a price “burp” in some essential commodity such as oil. A nervous market will seize on the idea as never before, turning it into a flight from U.S. paper and currency. Lira has imagined the
entire collapse in such vivid detail that we expect
most readers will find his
scenario not merely plausible but compelling. Still, some unanswerable
questions will remain,
including how securities
regulators will react. Will they quell the panic too quickly for events to play out as Lira has predicted?
What if the commodity
exchanges raise margin requirements to 100 percent as soon
as panic hits? That would shut
out nearly all players save those with
cash. Come to think of it,
where would that cash come from – and
what would even constitute
“cash” in our totally
digitized financial
system? Also, if the hedgies
can somehow get their hands on piles of
cash after miraculously liquidating stocks into a collapsing market and having their trades settle in just a day or two, how much of that cash could they deploy in commodities, given that lock-limit rules would effectively
bar all but a lucky handful
of bidders from getting aboard?
These are not niggling
questions, but rather the reflections
of someone who has spent quite a
few years in the trading pits. Now that I have raised these issues, perhaps more
such questions will occur to you when you read
Lira’s essay
— critically, as you
should. The point is
not to cut him down, but
to help readers understand
that it is impossible to predict with confidence how a hyperinflationary panic will play out. Because of this, even diligent hoarders of physical gold and silver should not be comforted by the notion that they possess
the “ultimate hedge.”
While ingots, Maple Leafs, junk silver
and such may prove to have been the best possible defense
against financial
Armageddon, there’s no guarantee
that these tried-and-true investables will not be decimated in the interim by the increasingly powerful deflationary forces that are presently asphyxiating the world’s financial system. And if gold does plummet, only to reverse course with a
vengeance at some point thereafter, there’s no reason to think it will be
easy to convert the metal, even priced
astronomically in dollars, into
farmland or other assets high on the pyramid of hard essentials.
We’re All ‘Ruinists’
We want readers to understand nonetheless that, despite any public disagreements we’ve had with inflationists
in the past, we view the theoretical
distance between us as slight.
We are all of us Ruinists
at heart, after all, and it is not the imminent, smoldering,
wreck-of-an-economy that we see
differently, only the path that takes
us there. If we
have come to “see the light” of the hyperinflationists’ logic,
it is through the
realization that
hyperinflation doesn’t need
a push from rising wages or prices to occur – only the looming epiphany of the dollar’s worthlessness.
At that level, and even though we still
believe a hyperinflationary
spike will only fleetingly disrupt an otherwise ruinously deflationary decade yet to be endured, we
have no meaty bones to pick with Lira, or Gary North – or, even, with the volatile Jim Willie, whose
work we have always enjoyed. Although they reacted with glee – and in one case, sadistic
pleasure – when we wavered briefly
in our steadfast commitment to deflationist
arguments, we must concede
that Lira had good reason to pounce as he did. (Our wife, with a Masters Degree in Speech and Rhetoric, told us the day after that our
essay had more
argumentative holes than
a wheel of Swiss cheese.) But if Lira and other hyperinflationists are to be frank, they will
need to acknowledge that there is
no predicting the course of the coming
crash, let alone the very
crucial matter of whether
the dollar’s plunge
into de facto worthlessness
is likely to occur in an hour, a day, a week, a month, or perhaps even longer. Such details will ultimately matter, of course,
and greatly, but we should have no illusions about handling
them advantageously once
the Day of Reckoning arrives. Since the collapse could begin as soon
as…TODAY!!, now is
the time to get ready.
On that note, we’ll
leave you with a link to the book that we consider
the best work on preparedness,
Sean Brodrick’s The
Ultimate Suburban Survivalist Guide.
Rick Ackerman
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