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Chapter 84 – Bond salesmen's propaganda that "a
dollar is a dollar" should be rewritten to say "a dollar is
3¢"
Since most ordinary people, bankers, and company presidents have never
studied currency theory, they swallow it hook, line, and sinker when the bond
salesmen tell them, "a dollar is a dollar." That piece of
propaganda should be rewritten to say "a dollar is 3¢." The
nominal dollar is officially worth no more than 14¢ of its 1940 value,
unofficially only 3¢.
If computed in 1940 constant dollars, not more than $1,380 exists of the US
$46,000 per capita gross public and private debt. More than $44,628 has been
destroyed by inflation. But sadly, the owners of this debt do not want to
hear about it. They do not wish to know that bonds are issued by governments
with the sole purpose of debasement.
To my knowledge, no government in history has paid its debts in currency
equal to the purchasing power of the currency lent to them. The people always
lose their money on bonds.
It angers me. Bond salesmen should be thrown into the East River.
-The above was written in 1985 by Dr. Franz Pick, in the book "The
Triumph of Gold" sent to me by one of my readers. The photos are from Time
Magazine.
The whole point of the deflation versus hyperinflation debate is about the
denouement, the final outcome of this 100-year dollar experiment. It is about
the ultimate end, and the debate has been going on ever since the 70s when
the dollar was separated from gold and it became clear that there would
be an end. The debate is about determining the best stance someone should
take who has plenty of net worth. And I do mean PLENTY. People of modest net
worth, like me, can of course participate in the debate. But then it can
become confusing at times when we think about shortages or supply disruptions
of necessities like food. Of course you need to look out for life's necessities
first and foremost. But beyond that, there is real value to be gained by
truly understanding this debate.
I want to apologize in advance for the length of this post, but I have to be
thorough if I want to have any chance of winning Rick Ackerman over to the
hyperinflation/Freegold side. And I think there is a chance. While deflation
and inflation are practically polar opposites, deflation and hyperinflation
look almost identical on the surface, with the main difference being the
wheelbarrows of worthless cash. As I wrote in 2009 in The Waterfall
Effect:
There is a quote I like that comes from Le Metropole Cafe. It
goes, "we will have deflation in everything we own, and inflation in
everything we use". This is partly true. It is true during the run up to
the rubber band snapping. It is true until we hit the waterfall. At that
point I have my own version of the quote. "We
will have hyperDEflation in everything measured against real money, GOLD, and
we will have hyperINflation in everything measured against paper
dollars."
My latest post on this subject was called Big
Gap in Understanding Weakens Deflationist Argument in response to Rick
Ackerman's "Big Gap in Logic Weakens Hyperinflation Argument". Rick
also received responses from Jim Willie and Gonzalo Lira. Last week, with
regard to Lira and Willie, Rick reported to his readers in "Rick's Picks":
I’ve concluded there is little to gain arguing on the
one hand with a guy who turns rabid whenever someone contradicts him, even in
a friendly way; and on the other, with a preening narcissist who comes to
argumentation in the same state of sexual arousal that Jeffrey Dahmer must
have experienced hovering over the fresh corpses of teenage boys. These guys
are bad news, as lacking in civility and manners as buzzards in a scrum, and
you’d do well to avoid them both. You might try tuning instead to the
hyperinflation arguments of Steve Saville, Peter Schiff and a few others who
seem less concerned with trouncing, slicing and dicing opponents than with
presenting facts that might better prepare you for the financial crisis
ahead. The very best of them, in my opinion, is FOFOA blogspot, where the
essays are erudite, the discussion elevated and the arguments as
knowledgeable as any you will find on the web.
I would first like to thank Rick Ackerman, and to also acknowledge his
perspicacity in this particular regard. And because he has demonstrated such
a discerning acumen in his preference for hyperinflationists (among other
things), I will try, once again, to help him see the way. As our own Blondie
likes to say (and I paraphrase for clarity), "you don't own your
baggage, it owns you." Here is Rick's baggage, in his own words:
My instincts concerning deflation were hard-wired in 1976
after reading C.V. Myers’ The Coming Deflation. The title was
premature, as we now know, but the book’s core idea was as timeless and
immutable as the Law of Gravity. Myers stated, with elegant simplicity, that
“Ultimately, every penny of every debt must be paid — if not by
the borrower, then by the lender.” Inflationists and deflationists
implicitly agree on this point — we are all ruinists at heart, as our
readers will long since have surmised, and we differ only on the question of
who, borrower or lender, will take the hit. As Myers made clear, however,
someone will have to pay. If you understand this, then you understand why the
dreadnought of real estate deflation, for one, will remain with us even if 30
million terminally afflicted homeowners leave their house keys in the
mailbox. To repeat: We do not make debt disappear by walking away from it;
someone will have to take the hit.
Rick repeats what he calls "C.V. Myers' dictum" quite often in his
deflation-oriented posts: “Ultimately, every penny of every debt must
be paid — if not by the borrower, then by the lender.” I'm going
to go out on a limb here and say that this dictum is Rick's baggage, his
foundational deflation premise, in a nutshell. And it leads him to his
"bottom line" or his analytical conclusion:
Rick's Picks Commenter SD1:
To my knowledge, no bank has ever made provisions in their lending criteria.
So to anyone subscribing to the hyperinflation theory, all I can say is there
is nothing I, and millions of other North Americans, would love more than to
take $250,000 of worthless, hyperinflated money that we worked a few days to
make, to pay off a mortgage that would otherwise
have taken twenty-five to thirty years to repay.
Rick Ackerman:That’s the bottom line, as far as I’m
concerned.
In this post I will explain the flaw in Myers' dictum. I will go into great
detail as to why the missing component in the dictum is the essential (and
inevitable) one. I will show how this one flaw in Rick's premise sends his
otherwise excellent analysis careening 180 degrees in the wrong direction
(with regard to the subject of this post). And I will explain the proper
frame of reference from which to view what I am describing. How's that for a
kick-off?
First Myers' dictum. “Ultimately, every penny of every debt must be
paid — if not by the borrower, then by the lender.” Rick:
"Inflationists and deflationists implicitly agree on this point —
we are all ruinists at heart, as our readers will long since have surmised,
and we differ only on the question of who, borrower or lender,
will take the hit." Me: Yes, someone will pay. But there is a third
option that is missing from Myers' dictum. "The hit" can be
socialized:
"Human nature has followed this path for thousands of
years. You know the old joke about outrunning the bear? Well, these lenders
will influence our financial policy as such. They will try to get their debt
securities liquefied first, spend the fiat and in this process outrun you and
I. Leaving anyone they can beat to the mercy of the hyperinflation bear
eating their remaining fiat assets…"
"…hyperinflation is the process of saving debt at all costs, even
buying it outright for cash… because policy will allow the printing of
cash, if necessary, to cover every last bit of debt and dumping it on your
front lawn!"
(The quotes are from FOA on
Hyperinflation and FOA
on Currency Styling, Currency Management, Dollar Hyperinflation and End Game
Scenarios respectively.)
As many of you know, I came to this debate, with no baggage and no hard
opinion, in 2008. And in the "doom and gloom internet community"
where I arrived there was definitely an equal helping of both deflation and
inflation/hyperinflation talk. Most of it I found less than convincing (on
both sides). The "deflation side" is actually bigger than you might
think. Most of the peak this or peak that crowd, the majority of the
survivalist community, and the Great American Collapse people are all
expecting a sort of grand deflation, whether they understand the arguments or
not.
If you want to think of a grand deflation as a deflating—or grand
contraction—of economic activity that was previously
"energized" by massive trade deficits, massive credit expansion,
and the massive structural malinvestment that flows from those easy money
expansions, well then I too am expecting a sort of grand deflation, in many
of the same ways they are. But one thing I have learned from the writer that
made the most sense to me, the writer that I found most convincing from
within my "past baggage" vacuum, is that "deflationists"
as a group still have a big gap in understanding.
Rick became a deflationist in the 1970s by his own account. And he certainly
wasn't alone. I wasn't even aware of the existence of such a debate in the
1970s let alone 2007, so I can hardly add the wide perspective necessary in
this debate from my own personal experience. What I can do, instead, is to
share with you this excerpt from the one that spoke convincingly to me, the
one that informed my developing view in 2008.
One point I hope you'll find curious in this excerpt is that deflationists
have always fixated on residential real estate. This is one of Rick
Ackerman's, almost obsessive, objections to the hyperinflation case, and it
clearly has roots in his kind. This was written in 2001, just as the housing
bubble was developing. My notes in [brackets]:
Somewhere in the 1970s era I was exposed to the thinking of
several different deflationists. It seemed that all of their conclusions came
to the same end: that dollar deflation would rule the day, no matter what.
Mind you now,,,,,, most of them were split on the
finer points of the issue, but for all of them; [de]flation would have its
day even if prices would rise somewhat. Deflation was always the final
outcome.
One of the central themes in these thoughts was concerning how this coming
deflation would impact plain old residential real estate. You see, most of
these guys advocated selling excess residential property because it was,
sooner or later, going down for the count. Mostly because the mortgage
markets would be destroyed in the deflation and nobody could buy [prices
would collapse to the cash price].
-- Note: The reader has to understand that these discussions were directed
towards people and investors that had plenty of net worth. And I do mean
Plenty! The argument wasn't about how to survive;
rather how to balance a truly conservative estate portfolio. --
As time has passed we can see several major flaws in their thinking. Flaws
that cost them a bunch of credibility, if not personal money. [I want to jump
in here with a quick quote from Gary North written
in 2002:
"I remember in 1975 hearing C. V. Myers tell attendees at a gold
conference, 'If you get this one wrong, you'll lose everything.' He was
predicting deflation. He got it wrong. He didn't lose everything."
And now back to FOA] One point, that I have touched on here several times,
was in understanding just how much ourselves and our economic structure would
and did evolve into accepting fiat money use. Even though it was, "god
forbid", separated from gold.
In one area alone, the bond markets, investors reacted far differently than
deflationists thought they would. Twenty ++ years ago [again, this was
written in 2001], it was expected that just gross increases in money printing
alone would be enough to crash the bond markets. Not talking about price
inflation here, but money inflation and that should have started a
deflationary fall in our credit markets. It almost happened, several times,
but never followed through. It seemed that the market function had evolved to
accept fiat inflation as a prerequisite to modern economic function. In a
like comparison to today's thinking; investors assumed that as long as we had
an expanding economic stance [nominal GDP growth, credibility
inflation and financial product appreciation], sourced by inflating fiat
supply, price inflation would not impact long bond credibility. We saw
confirmation of this over many years. We saw that our credit markets,
especially long bonds, were used in spite of the price inflation threat.
Indeed, there was a ready [highly liquid] market demand for bond purchases.
In hind sight, long term holders of bonds did do very well if their position
was part of a balanced holding and they didn't need to sell at bad times.
Even now, dollar bonds have gained as rates are pushed lower.
Back to the thought:
This whole IMF dollar system has always been based on an expanding fiat
theory that swells [nominal] GDP over time. Investors that bet on deflation
coming along, after each of our bouts of inflation, were badly burned as
deflation was overcome. Economic function returned, essentially because price
inflation could not rout the overall market for long credit.
The flaw in all of this was in the reserve structure of our Dollar IMF money
system. The fact that the world had to walk, lock step, with our money policy
meant that their goods production would almost always be cheaper than ours;
keeping local US price inflation under control. In other words; local
US-based price inflation could not get out of hand as long as the rest of the
world was willing to use their economic production to control it by selling
[products cheaper than we could produce them] into our expanding fiat system.
In this, the dollar [and its securities, and their derivatives] could be
inflated without end while our credit markets functioned in a
non-inflationary environment.
But there is an end.
A money system like this has a definite timeline and that point is reached
when the world can move away from keeping price inflation low in the US. That
point is reached when Another money system comes along to challenge the
dollar and, in the process, offer these other goods-producing countries a
chance to buy some "lifestyle" for themselves.
At first, the show is dull as investors keep right on buying into the dollar
argument above: that an expanding fiat base builds non-inflationary [nominal]
growth [in both GDP and securities]. This is one reason traders still buy US
long credit, not to mention chasing rising dollar exchange rates; they expect
more of the last several decades of economic theory to keep right on going.
It won't.
The dollar faction saw its match early in the 90s as the Euro was taking
shape. To counter this threat, as I have outlined here in several ways, they
promoted derivative hedges as a way of insuring dollar dominance. These
hedges, including gold derivatives, only served to leverage the entire dollar
/ IMF system beyond its ability to serve as a real fiat money system, today.
[See (my title): Is
the Fed selling Hyperinflation Insurance Backed Only by Hyperinflation?]
I mean; that our whole dollar landscape has now become just a trading asset
arena: it's now evolving away from any meaningful currency use to trade for
real goods. It can head in no other direction because our local economic
structure, the USA economic base, cannot possibly service even a tiny
fraction of the buying power currently held in dollars worldwide.
So what does this have to do with Real estate?
Take a look at any broad section of the US; Northeast, SouthWest, etc.. If any of the deflationists were correct, their
reasoning back in the late 70s and early 80s should have produced at least an
average fall in Residential real estate. Can any of you find an
"average" of property today, that is lower than early 80s prices?
Of course I'm not talking about the spikes in Hawaii, New York, Denver or San
Francisco; those are just blips on an ever rising inflation scale. Even if
they fall some from here, it isn't part of a deflationary act playing out.
Average home prices will rise all across this country no matter what the
future economy holds. A super inflationary stance by the Fed means that even
unemployed workers can buy a house and pay for it! Watch how this all comes
about. The Dow will not be much different when seen ten years from now; a
drop to 5,000 then off again, is a real possibility! [Note: The Dow dropped
from 11,000 in 2001 down to 7000 and back up to 12,000 in 2011. Again, FOA
wrote this ten years ago in 2001]
The same is true for anything perceived as something real: "even
silver" (grin).
The difference is in the drastic ups and downs derivatives will place on all
asset markets. My point is that we are on an "end time run" in fiat
dollar production that will soon produce a spike in real price inflation that
crushes hedge vehicles. One item alone, physical gold, because it is the main
wealth asset behind the next currency system [See: RPG
#1], will outrun everything by a wide margin. No matter the derivative's
hold on it!
As the Euro builds a base [which is happening right now in 2011 – see this,
this,
this,
this,
this
and this],
it will drive an inflationary recognition into our credit markets, then
freezing up our derivative markets. That perception will fuel a complete
failure of our bond markets and force the Fed to buy up any and all credit;
paying in full. [Paying full price for deflating assets? Oh my, would the Fed
ever do that? The deflationists never saw it coming!] If needed, Bush and
congress will see to it that enough money is printed so we are paid in cash
for everything! Don't laugh, this is where we are headed.
[I must insert here the rest of the famous FOA quote from above. I
affectionately call it "the front-lawn dump" and it was coined by
FOA a full 18 months before Bernanke's famous "Helicopter drop"
speech:
"My friend, debt is the very essence of fiat. As debt defaults, fiat
is destroyed. This is where all these deflationists get their direction. Not
seeing that hyperinflation is the process of saving debt at all costs, even
buying it outright for cash. Deflation is impossible in today's dollar terms
because policy will allow the printing of cash, if necessary, to cover every
last bit of debt and dumping it on your front lawn! (smile) Worthless
dollars, of course, but no deflation in dollar terms!"
Okay, now back to the original excerpt…] In the meantime, whether or
not our economy is growing, stalling or failing, will have little or no
impact on price inflation.
You see, living with real serious price inflation goes something like this:
---- "Honey, I talked to Fred again, he can't sell his house! Poor guy,
he has had it up for two years now and has to raise his asking price again.
No takers, yet. The last couple was just about to close but took a month too
long; they almost got the cash together, too. He backed out to raise the
asking price, again. Oh well, that's not so bad, we had to jump ours up three
times before selling." ----
Inflation runs crazy when a money system is forced to "print out".
We will "print out" our dollar, too. Getting there just takes time
and an alternative system to cause it.
Now I do realize that it takes a certain talent to distill deep wisdom from a 10-year-old internet forum post. And I can almost hear some
of you out there screaming, "but but but… house prices DID
collapse… d… d… DEFLATION!" Wrong. Sorry. Residential
real estate will ultimately crash to its non-leveraged cash price as
credit disappears, just like the deflationists think. But that ultimate cash
price, once reached, may actually be higher than today's leveraged prices and
be outrunning the availability of cash needed to clear the market! And all
the while real estate will keep crashing in real terms (gold).
There is always a shortage of cash during a full-bore, in-your-face
hyperinflation, which is why the printer has to keep adding zeros. His
press simply cannot keep up with prices at established denominations. It is
also why the first to touch the new cash (the "elite") have a very
valuable advantage. Hyperinflation is a grand competition for lifestyle
retention in the face of forced austerity, just like a race! Here, look at
this from the excerpt:
"Honey, I talked to Fred again, he can't sell his house! Poor guy, he
has had it up for two years now and has to raise his asking price again. No
takers, yet. The last couple was just about to close but took a month too
long; they almost got the cash together, too. He backed out to
raise the asking price, again. Oh well, that's not so bad, we had to jump
ours up three times before selling."
I'll bet the deflationists were thinking in terms of deposit+loan=price,
rather than cash. Wrong paradigm. Sorry. When the hyperinflation hits in a
reference point purely-symbolic fiat currency paradigm, the market will try
to clear for the rising symbolic cash price while the hard
currency price (denominated in gold) continues to drop like a stone.
Deflationists do have one thing right. Real estate is not a very good
investment when preparing for what's coming. That doesn't mean home loan debt
won't be hyperinflated away though. It most likely will be. And if you are
lucky enough to catch the bottom in the reference point gold paradigm during
the crisis, bless you. But it's still a poor investment choice right now,
even at 5% down, compared to putting that same cash into physical gold. More
on this in a moment.
The point of sharing this FOA excerpt was that deflationists, like other
groups that have established encampments cluttered with old baggage, tend to
miss what is actually unfolding. And for that, you might want to start with
my post The
Debtors and the Savers. Understanding the balance necessary to keep the
peace between these two groups is fundamental to understanding the political
will behind the inevitability of both Freegold and dollar hyperinflation.
Rick seems to have a number of hang-ups when it
comes to both gold and hyperinflation. His biggest is obviously real estate
and the modern home mortgage. He simply cannot seem to fathom how a system designed and managed by The Power Elites could
ever deliver a "windfall" to overleveraged, underwater homeowners
or shady, uncouth gold bugs. And, frankly, if you don't make the effort to
understand what is actually unfolding, there's a good chance it won't.
To the deflationist, "a dollar is a
dollar" just like it is to ordinary people, bankers, company presidents
and bond salesmen in the quote at the top. And even though the dollar has
already lost almost 99% of its original gold purchasing power, Rick believes
The Power Elite will make sure it stays strong until you have worked off
every last dollar you owe. Because someone has to pay! (He's right about
that.) And it's not going to be "them". (He's mostly right about
that too.)
The dollar has a long, storied past. To believe "a
dollar is a dollar" is to simply ignore its history. Of course
I'm not implying that deflationists are unaware of this chart:
But I am saying that they think the collapse of the dollar's
financial system will strengthen the dollar itself and make prices fall in
the end. This is a funny notion when you take the totality of the dollar's
journey into consideration.
The dollar was once worth 1.555 grams of gold. Then it was reduced to .888
grams of gold. Today it is able to purchase .02 grams of gold, but only at
the margin. Notice that I said "able to purchase" instead of
"is worth," and I also added "at the margin." That's
because the dollar is not worth .02 grams of gold today. Around 60 years into
its 100-year life, not unlike the human retirement age, the dollar retired to
become a purely symbolic, completely worthless token. And in the big scheme
of things, this "retirement from value" is not such a bad thing.
Someone emailed me a question the other day and this was my reply:
Hello Mark,
I don’t see much wrong with your grasp of the subject, other than those
worthless tokens are actually a good thing. What sets us apart from those
monkeys is our ability to divide labor in a way that resists the second law
of thermodynamics and allows us to organize our environment.
This division of labor requires us to use a medium
of exchange in order to avoid the double coincidence
of wants.
The question then becomes, what is better as a medium of exchange? Should it
be something of value? Or is it more beneficial to the anti-entropic process
for it to be something purely symbolic and worthless?
If you answered “something of value” I would ask, Why? Is it
because you want to hoard that thing in the case that you produce more than
you consume? And what is the net effect on man’s battle against entropy
if the circulation of that valuable medium slows due to hoarding? Conversely,
with a worthless medium, why not just exchange it
for that same valuable thing if, in fact, you do produce more than you
consume? Seems simple enough to me.
Sincerely,
FOFOA
You see, this is where we are today. We are using, as a
medium of exchange, a purely symbolic, completely worthless token. The
logical action, then, is to exchange surplus worthless tokens for something
of value. Yet still today, most everyone hoards up purely symbolic,
completely worthless tokens in the form of the debt of more tokens to be
worked off and paid by someone else. In fact, globally, this debt far exceeds
the ability for it to ever be paid (worked off by future labor), at least not
at today's dollar purchasing power of .02 grams of gold. And yet it will
be paid by someone, just as the deflationists promise! So the question then
becomes, how can an impossible debt be paid?
Answer: if it cannot be worked off by future labor, it will be
worked off by past labor, the net surplus of which was erroneously
stored in debt and dollars. The icing on the cake is that it is also the
past labor of "someone else," if the profits can be capitalized and
the losses socialized. Precisely the process we have witnessed over the past
three years, for those with eyes to see.
Rick Ackerman's somewhat-myopic focus is on home mortgages as the lynch pin
that will keep this worthless, symbolic token valuable while you toil on the
chain-gang working off your debt of worthless tokens. So let's take a look at
the larger picture to gauge the strength of this pin and the stress it must
endure.
Total US mortgage debt is a little over $14 trillion. That number includes
you and your neighbors. Of that $14 trillion, about $6 trillion sits on the
balance sheets of banks and $9 trillion has been packaged and sold to savers
like pension funds. Of that $9 trillion held by savers, about $5 trillion is
guaranteed by the US government.
So here's Rick's lynchpin that's going to keep all of you indebted homeowners
honest: $14 trillion - $5 trillion guaranteed = $9 trillion. And that $9
trillion lynchpin is so powerful because it is held by politically connected
and powerful banksters and pension funds, or so they say. Now in a minute
I'll tell you why these two groups would rather have all that debt printed
and the cash handed to them than to watch even 20% of you default on your
mortgages. But first, let's step back and take a wider look at what might be
exerting shear stress on this supposed lynch pin.
Total worthless token debt in the US, both public and private, is around $55
trillion, four times as big as that backed by physical real estate. If we add
in the government's unfunded liabilities (which definitely apply shear stress
to the dollar's lynch pin), that number comes in around $168 trillion. And
that is simply the promises to deliver worthless, purely symbolic tokens, at
some time in the foreseeable future, emanating from within the United
States. Meanwhile the US produces enough "goods and services" (loosely
defined) every year to be purchased by 14 trillion of these purely symbolic
tokens at their present level of purchasing power. And with a trade deficit
of around $500 billion per year, it appears the US is consuming roughly
103.5% of what it produces every year, in real terms.
So in real terms, that is, in terms of the dollar's purchasing power as it
stands today, it would take, let's see… $168T/($14T
produced - $14.5T consumed)= x years… hmm… somehow it's going to
take us negative 336 years to deliver those promised dollars at
today's purchasing power. Remember I said this debt would be "worked
off" in the past, without the use of a time machine I might add? Well
here you go—past surplus labor foolishly stored in dollars and dollar
financial instruments and their derivatives will be tendered. Of course the
deflationists want you to know that we will be forced to reduce our
consumption to below our production in order to pay those off. And once
again, they are correct, though not in the way they think.
Reducing consumption means reducing your standard of living. Some call it
austerity. But with forced austerity also comes the competition to avoid
reducing your standard of living. And herein lies the inevitability of US
dollar hyperinflation.
You see, those Power Elites that Rick thinks are going to support the dollar
and its $169 trillion burden (excluding derivatives) simply to make sure
you'll work off your $9 trillion dollar mortgage at today's purchasing power
are the same ones that will resist personal austerity measures the most. And
as all good deflationists know, you simply cannot resist the irresistible
without breaking something. And what they will ultimately break in their
competition to maintain lifestyle is the value of the dollar, which will
actually break quite easily due to the mountainous (think: landslide) shear
stress applied to it right now.
Now let's go back to those "banksters" that, along with the
politically powerful pension funds, are part of the Power Elite that are
going to keep the dollar strong enough so that your mortgage isn't
hyperinflated away. Remember, this is roughly $6 trillion, or 3.5% of the
dollar's debt problem, that is still sitting on the balance sheet of banks,
yet gradually being absorbed and/or guaranteed by the Fed and/or the US
government.
This is simple logic: Do you think they'd rather offload that debt onto the
Fed's book in exchange for full cash value? Or would they prefer to hold onto
those notes while you struggle to pay them off in symbolic tokens over the
next 25 years? How about this: Is it better for the health of the bank to
take possession of the houses (and then have to sell them) that roughly 20%
of the troubled homeowners are walking away from? A 2009 jingle mail study
showed that close to a fifth of troubled mortgages in the U.S. involved
borrowers who were strategically defaulting. That represents roughly a 10%
hit to the asset side of the banks' balance sheets. Yet the banks'
liabilities (deposits created when the loans were originated) remain, fully
insured by the FDIC which has no money.
Through the magic of commercial bank double-entry bookkeeping, the banks'
balance sheets are actually not exposed to decreases in the purchasing
power, or present value of purely symbolic, completely worthless token
dollars. They are, however, exposed to decreases in the value of their assets
and to the risk of default that flows from deflation. Deposits are nominal
liabilities that remain when assets deflate. So supporting deflation would
be, to a bank, like suffering a masochism fetish.
Rick thinks the banks will defend their assets by keeping the dollar strong.
But that only keeps their liabilities that much harder to meet while the
effects of deflation tend to shrink their assets making it even harder still.
Ignoring the dollar for a moment, and the flaw in Myers' dictum, what happens
to a bank's balance sheet if all of the loans are defaulted at the same time?
Or if the asset value of all of their collateral collapsed at the same time?
It would have precisely the same impact. So would a mixture of the two. The
banks have and are experiencing precisely this type of squeeze. How has their
"guardian angel" the Fed responded so far?
Rick Ackerman's view of the banks' incentive or preference to prevent (as if
they had that control) hyperinflation is exactly bass ackward. A bank's
balance sheet becomes severely damaged in deflation, yet it is made whole
through hyperinflation.
As for the pension funds, they hold this debt not for its value to maturity,
but for its appreciation in a falling interest-rate
environment and its liquidity in trade. Pension funds get in trouble when
they cannot perform nominally. They hold nominal assets and make nominal
promises (like 8% returns) which simply cannot be met in a deflation.
However, as disastrous as hyperinflation is for pensioners (the funds'
clients), it is a Godsend for the politically-connected pension managers who
were being crushed by deflation.
So once again, the incentive or preference of those who hold the note on your
mortgage to prevent (as if they had that control) hyperinflation is simply
not there. In fact, as I will show in a minute, there will be ample incentive
for these politically connected Power Elite Giants to actually encourage
the kind of printing that will take an Icelandic-style currency collapse into
full-blown Zimbabwe-style wheelbarrow hyperinflation. More on this in a
moment.
What you see is the result of the perspective you choose
A small-minded ant's only interaction with Giants may be getting stepped on
or sprayed with deadly poison. So from the ant's limited perspective, this
activity of killing ants is what Giants live for, what motivates them, and
what they spend their time scheming and planning for. Don't limit yourself to
the ant's perspective. If you want to find the tasty morsels left by Giants,
you've got to start thinking like a Giant. You can read more about ants in my
post Life
in the Ant Farm.
In his latest of several posts on this subject, Rick Ackerman presented two
responses that he found "of particular interest." The second one is
so ldo that I won't spend much time on it. It is a comment that explains the
old truism, "you can't eat your gold." That's right, gold is not at
its highest and best use being spent (circulated) as a currency during a
hunger crisis. Instead, if you are one with PLENTY of net worth, gold is the
very best way to shuttle your wealth THROUGH a crisis to the other side. If
you are forced to deploy this wealth for food during a crisis, then
you apparently planned poorly.
And with a little understanding of how a monetary collapse actually unfolds,
flipping the switch on illusions and revealing reality, you'll find that the
actual crisis itself will be relatively short-lived. My best guess is 6
months maximum—for the worst of it—beginning when the normal
distribution of food abruptly stops. So transporting your wealth to the other
side should be of great importance to those with significant savings. But if
you are one of the ants that cannot distinguish between a monetary collapse
and the myriad other problems with our civilization (i.e. you think that when
the money collapses everything else goes to permanent sh-t as well—it
doesn't by the way, look at history), then you probably think we'll be in a
Mad Max wasteland for a generation or more after the dollar finally goes the
way of the peso.
In that case, you should probably buy yourself a Texas ranch, a lot of guns,
and a few friends to help you shoot those guns, like the Circle K
Cowboys. The way I see it, the monetary collapse is going to reverse and
ultimately correct many of those myriad other problems because reality will
be uncovered and freed to exert its more balanced supply and demand dynamic.
But that's enough on the Texas Rancher's Thunderdome wasteland. The first of
the two responses that Rick found "of particular interest" was an email
he received from Charles Hugh Smith, the man "Of Two Minds" who is
bothered by the "conviction" (or what he perceives as
single-mindedness) of others, particularly hyperinflationists. He said as
much in the email:
What bothers me is the widespread conviction that
hyperinflation is “guaranteed.”
Smith is truly a man of two minds. He likes to stay uncommitted and agile, to
trade against the crowd:
I certainly wouldn’t want to debate anyone because my
arguments are those of a trader, basically, not an economist. Maybe we
will get hyperinflation, I don’t claim to
know… This smells like a one-sided trade to me, even if it is more of a
meme than a trade.
I am up on a hill with a wide view of the valley. In
this post I am attempting to share the framework in which you, too, can see
what I see rolling in. It is a tsunami called currency collapse coming in,
following a violent financial and economic
earthquake, which in our case will end in probably the most devastating
hyperinflation the world has ever seen. And the more people that come to see
what I see rolling in; the more people that join me safely on higher ground
with a view of the valley below, the more the man of two minds likes his
contrarian position in the valley below. Did you see that newish video
out of Japan? The one I have in mind?
In order to share my view with you, I am going to patiently work my way
through Smith's email, correcting errors and explaining the flaws in his
perspective as I go:
As we’ve both said, the other issue is, how do the
Elites benefit from hyperinflation?
I think we can safely define Charles Smith's "Elites" by his own
words as the Financial (Wall Street) Elites, the politically powerful
(including politically connected corporations and unions/union pension funds),
the "banksters robbing us blind" and "CONgress" along
with all the politicians running this country into the ground; basically
everyone running the Dollar International Monetary and Financial System (the
$IMFS). And he asks how do "they" benefit from hyperinflation?
Well, they will benefit, in the same way that those closest to the
printer benefit tremendously in all hyperinflations. But more importantly,
Smith's core perspective on "the Elites" is wrong. He makes the
same mistake Karl Marx made, which I explained in my post The Debtors
and the Savers. [I know, this is the second time I've linked this post.
It is intentional. I'll probably do it one more time as well.]
What I described in that post last July is the essential foundation to the
framework for understanding why US dollar hyperinflation and Freegold are,
simply, unavoidable, or to use Smith's word, "guaranteed." I have
been accused of overconfidence in my views. But I specifically and actively
limit the scope of this blog to only these two topics. I'm certainly not a
know-it-all. I only describe the things that can be clearly seen, and how to
ascend to that perspective.
Was the Japanese guy shooting that video up on a hill overconfident about his
view of the tsunami rolling in while those still down in their houses had a
more rational, balanced opinion? Perhaps they were of two minds; on the one
hand, there had just been a Richter scale 9 earthquake and they lived in a tsunami
warning zone. On the other hand, they were not exactly ocean-front properties
and it would have to be a pretty big tsunami to bring the ocean over that
levee. Surely they would hear it coming giving them plenty of time to escape.
It's all about perspective. With the proper perspective you can see things
more clearly.
In The
Debtors and the Savers I wrote:
Today we have many fine, intelligent and exacting analysts all
looking at the same economic data and coming up with vastly different
analyses of the present global financial crisis. What sets them all apart
from each other is not intelligence, or math skills, or even popularity. What
sets them apart is the foundational premises on which they operate.
And a false premise can skew a brilliant analysis
180 degrees in the wrong direction. Few analysts fully disclose their
premises. But Karl Marx did, and in this we can find the one, key flaw that
sent his analysis off in a disastrous direction.
Marx writes, "The history of all hitherto existing society is the
history of class struggle." He got this part right! What he got wrong
was his delineation of the classes.
Marx's classes were:
1. Labour (the proletariat or workers) - anyone who earns their livelihood by
selling their labor and being paid a wage for their labor time. They have
little choice but to work for capital, since they typically have no
independent way to survive.
2. Capital (the bourgeoisie or capitalists) - anyone who gets their income
not from labor as much as from the surplus value they appropriate from the
workers who create wealth. The income of the capitalists, therefore, is based
on their exploitation of the workers.
Simply put, Marx says it's the rich versus the poor. According to Marx the
rich exploit the poor to get themselves a
"labor-free income", which spawns a class struggle.
This is an attractive perspective because it requires only a
cursory, superficial judgment to place someone into one of the two camps, the
rich or the poor. If someone is driving a Bentley we immediately know which
group they are in, right?
[…]
As I said, Marx got one thing right. History does bear out the dramatic story
of centuries of class struggle. But if we eliminate his one small flawed
premise, we can see it all much more clearly.
The two classes are not the Labour and the Capital, the rich and the poor,
the proletariat and the bourgeoisie, or the workers and the elite. The two
classes are the Debtors and the Savers. "The easy money camp" and
"the hard money camp". History reveals the story of these two
groups, over and over and over again. Always one is in power, and always the
other one desires the power.
1. Debtors - "The easy money camp" likes to spend (and redistribute)
money it did not earn, either by borrowing it, taxing the savers for it, or
printing it. They like easy money because it is always and everywhere
constantly inflating, easing the repayment of their debts.
2. Savers - "The hard money camp" likes to live within their means
and save any excess for the future. They prefer hard money (or in some cases
"harder" money) because it protects their savings and forces the
debtors to work off their debts.
1789, the French Revolution, "the hard money camp" had been in
power since 1720 when John Law's easy money collapsed, and starting in 1789
"the easy money camp" killed "the hard money camp" and
took back the power. This is the way "the easy money camp", the
Debtors, usually take power... by revolting against the hard repayment of
their spending habits…
Obviously I don't want to reprint the whole article here, which is why I
linked it three times. So please go read it.
But here's the fatal flaw in this Marxian paradigm; many of we, the modern
proletariat, are savers who would prefer hard money like gold to protect our
savings. It is we, the savers, that are punished by the current easy money
system. That's why I delineated the groups as the Debtors and the Savers,
otherwise known as "the easy money camp" and "the hard money
camp."
And with the proper view of who Smith's Elite CONspirators really
represent—the easy money camp, the debtors, the hungry
collective—the answer to his question begins to develop. It is the
opposing camp, the savers, that will be most-punished by hyperinflation and
it is Smith's Elite that will profit the most during the race to spend.
If you can start to think of the administrators of the $IMFS, the
"banksters", politicians and Western Capitalists in charge of the
system as being firmly entrenched in the Debtor camp, you are well on your
way to a very rewarding enlightenment. I realize this is counterintuitive,
and counter also to much of the baggage that accumulates while reading other
"hard money" writers on the Internet, which is why I spend so much
time on it. But once it clicks, you'll be like, "OMG! WTF was I
thinking?" I have conversed via email with many extremely intelligent
people that have had this momentous "click", so I am tempted to
consider that I may be on to something.
So call me overconfident if that makes you feel better, but I'm not going to
be wishy-washy about what I can see. I'm certainly not of two minds on this.
How will "the Elite" profit from hyperinflation? By being the first
to spend the bills with new zeros added and thereby outrunning the rest of us
in the race to spend and winning the competition to retain standard of
living. Hyperinflation is the end result of the dollar-debt timeline, there
is no other way it can end. Only the severity is a variable to be considered.
Rick Ackerman and other deflationists agree with me that the unsustainable,
unstable mountain of debt must and will collapse. And they view "the
Elite" as the capitalist creditors and the rest of us poor working saps
as the proletariat debtors. Therefore they believe that when the debt
mountain collapses, their version of "the Elite" will not print
Zimbabwe-style because, even though they just took a tremendous haircut on
their bonds, they want to be sure that the super-saps among us, the proletariat
that are still working, will continue to service the remainder with dollars
of today's purchasing power.
This is a bass-ackward view in my opinion. The hungry collective provides
ample political backing and sufficient naiveté for "the [Western]
Elite" to print the full face value of their bonds and dump that
worthless paper on the public's front lawn. Furthermore, deflationists like
Ackerman as well as practically all mainstream economists provide plenty of
cover in the form of plausible deniability that hyperinflation would be the
inevitable result.
But the story runs deeper still. The reason I have been putting "the
Elite" in quotes or referring to them as "Smith's Elite" is
because, not only does he have the delineation wrong, but he is myopically
focused on only one quarter of the bigger picture.
Some of you, I know, like to think in terms of grand conspiratorial
conflicts, a "Clash of the Titans" (Clash of the Elites if you
will), or something like that. Well I can probably help you with that view in
this "Debtors v. Savers" paradigm.
We have the West which is roughly only 25% of the world's population, and
then we have the rest of the world. And oh yes, they have their own
"Elite". You'd probably guess that "the West" represents
"the debtors" in this paradigm. But you'd be wrong to assume that
the rest of the world is taking "the hard money camp" stance.
It is true, we are at the end of one of the longest-running "easy money
camp" regimes. And these things usually swing back to the other side.
But history has taught the world that while easy money regimes end in
financial collapse, hard money regimes usually end in bloodshed. And it's
usually the blood of the hard money campers that is shed. (See: the French
Revolution.)
So the rest of the world has taken a different stance this time. It has been
"in the works" for several decades.
Q: **Who does BIS really represent?
A: "old world, gold economy, as viewed thru modern eyes" or
"way to move from US$ without war".
Those are the words of ANOTHER from my post "The
Gold Man" (not Goldman) at the BIS. The BIS truly represents
"the rest of the world" from a monetary perspective. It is the
"trade union" of their Central Banks. All is not as it seems on the
surface.
So how do you view an "old world gold economy" through modern eyes?
And how do you move there peacefully with the easy money camp? It's quite
simple actually. You let nature take its course, you support that natural
course however long it takes (rather than pathologically fighting nature like
the dollar system does with its obsessive-compulsive drive to control), and
you don't deprive the easy money camp of their precious fiat. It's Freegold.
It is about allowing meritocracy to rise like a Phoenix from the ashes of the
dollar's inevitable collapse. It's not about a transfer of wealth. It is
about a re-born meritocracy. The transfer of wealth that will take place is
what blinds most people from seeing its inevitable approach.
More from Charles Hugh Smith via Rick's Picks:
As we’ve both said, the other issue is, how do the
Elites benefit from hyperinflation? The only answer I’ve ever received
is “they’ve already bought gold.” Yeah, right. As I noted,
there’s $7T in gold, total, half of which is owned by central banks,
and there’s $160T in financial wealth to protect in the world. Even if
gold went to $10K/oz there would be no more than $35 T in gold in private
hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults,
etc.) would be enough to establish a gold-backed currency. Meanwhile, the
Financial Elites would have lost all their financial wealth. Have they really
transferred all their wealth out of all financial instruments and totally
into gold and land? If so, then [who] owns the $160T in financial wealth?
First of all, it is unclear exactly how much gold there is, but it's
probably over $8T by now, and only about 18% of it is owned by central banks,
not anywhere near half. That leaves $6.6T in private hands, at today's price.
Smith exposes his ant-like perspective in this paragraph when he implies the
Giants that own the lion's share of $160T in financial products should have
already crashed the value of those financial products and exploded gold in
the stampede from one to the other, if a collapse of the dollar was really on
the horizon. On the contrary, you have to think like a Giant to see the best
way to move your Giant wealth from one system to the next. True Giants do not
panic out like ants, nor like ants imagine that Giants would. True Giants
know that if they panicked out, with the weight they carry, they would end up
transferring much LESS wealth into the new system.
Viewed from the Giant's perspective, you can see that most all of that dollar
value, that $160T will vanish in a flash. And when that happens, the market
for paper promises of gold delivery will also collapse and vanish as physical
gold gaps up (in my estimation) 40x. That's right, $160T vanishes, and $6.6T
worth of gold—in private hands—gaps up to $264T.
Oooh. Now I'll bet I've got the deflationists screaming! "You can't turn
$160T into $264T in a flash during a deflationary collapse!" Au
contraire, mon frère. What you see is the result of the perspective
you choose. Reader "Reven" recently asked this same question, to
which I replied:
It is a fallacy to compare a snapshot of gold with a snapshot
of "global asset values" because it ignores the time dimension in
which gold flows. Even if you are correct about everything in the world
(other than gold) being worth [$160T] in 2011 constant dollars, the value
of all the gold can be multiples of that amount. It is
theoretically unlimited, unlike paper wealth which is self-limiting by its
own objective metrics and economic ties. Paper wealth is limited to the
upside but unlimited to the downside. Gold is the inverse of paper, unlimited
to the upside, limited to the downside. It's not the total stock of gold that
matters, but the flow from those that already hold it.
Here are a few snippets from my post How
Can We Possibly Calculate the Future Value of Gold?
1. the storage of purchasing power is size-unlimited in a solid medium
with potentially infinite confidence and one that does not infringe upon
anything else, and
2. the storage of purchasing power in a flawed medium with a mathematical
limit (like debt) is constrained roughly to the aggregate purchase price of
everything in the world at any point in time, with a decent margin of error.
[...]
This transfer of wealth that is coming is not a direct and equal transfer. It
is not like pouring one pitcher into another. It is more like flipping a
switch on the virtual matrix. Turning off the monetary plane that hovers over
the physical plane and claims to tell you how much "stored purchasing
power" everyone has. When you turn it off, all that purchasing power
disappears in a flash. And then what lies beneath is exposed in daylight, the
real physical world. No real capital is destroyed, only the myth is
destroyed. But true capital is exposed and revalued.
And as I said earlier, true capital as a storage for purchasing power has no
limit whatsoever to its total size relative to normal prices. This is because
it uses the time dimension with unequalled confidence. Absolute confidence
allows it to stretch as far out into time as it wants. And this confidence is
a self-reinforcing, self-sustaining feedback loop in the same way that a
faulty store of purchasing power is self-limiting by its intrinsic lack of
infinite durability.
[...]
Commodities and paper investments are limited to the upside by economic
forces and future earnings metrics respectively. Yet they are unlimited to
the downside for the same reasons. Gold, on the other hand, has none of the
upside limitations that everything else has. It will only find its point of
equilibrium when enough "stock" is reassigned to "flow"
to meet demand.
[...]
Lastly, understand that currency flows through assets, not into them. In
fact, a limited amount of dollars can flow through the same gold many times,
over and over, driving it higher and higher with each pass, as long as new
gold stock is not coaxed out of hiding. And the interesting thing in this
process is that, as I said above, it actually causes the opposite of the
expected supply/demand reaction. With each pass-through of the dollar more
"flow gold" is moved into "stock gold", not the other way
around like commodities and paper.
This is the feedback loop. It is confirmation to the gold investor that his
gold is a good investment. And it also says something very distinct about the
alternatives. Namely that they are failing. And with this confirmation, it is
from existing gold holders that less supply comes. This is not true of any
other investment class because they all have objective metrics for valuation
or economically limiting forces. All except gold.
[...]
So, cutting to the chase once again, the biggest fallacy in your model is
using "Total above ground gold" as your point of comparison. It's
not the stock that matters, it's the flow.
Now, if you have a supercomputer you can try to run
this unimaginably complex flow algorithm. But be careful with your
assumptions. One wrong assumption can throw the whole thing off by orders of
magnitude.
Back to Smith. Here's that same paragraph again. Let's see if we can answer
his questions a little more concisely now that we have a new perspective:
As we’ve both said, the other issue is, how do the
Elites benefit from hyperinflation? The only answer I’ve ever received
is “they’ve already bought gold.” Yeah, right. As I noted,
there’s $7T in gold, total, half of which is owned by central banks,
and there’s $160T in financial wealth to protect in the world. Even if
gold went to $10K/oz there would be no more than $35 T in gold in private
hands, and by that time, the gold in Fort Knox (or in the PBoChina vaults,
etc.) would be enough to establish a gold-backed currency. Meanwhile, the
Financial Elites would have lost all their financial wealth. Have they really
transferred all their wealth out of all financial instruments and totally
into gold and land? If so, then owns the $160T in financial wealth?
Yes, they've bought the gold and it's still priced at around $6.6T, at least
that portion that is in private ownership. No, there will be no gold-backed
currency because we aren't going back to "hard money" because
"your Elites" wouldn't like that. No, they won't lose all their
wealth; they will gain wealth. Here are the steps as viewed, not by ants, but
by Gi-ants:
Step 1: Buy up as much physical gold as you can over a couple decades without
running the price and without panicking out of your paper, while the Western
investor is caught up in all manner of paper including paper gold.
Step 2: Wait patiently for the inevitable financial collapse. As Rick
Ackerman himself wrote, "financial collapse is not just likely, but
inevitable."
Step 3: When the collapse comes, sell that $XXXT in "financial
wealth" to the printer for fresh cash at full face value in the
name of "saving the system" and "survival of the country and
the Western way of life."
Step 4: Spend the new cash.
Step 5: Adjust your balance sheet from the old paradigm where it used to read
$160T paper/$6.6T gold to the new paradigm where it now reads $0 paper/$264T
gold. A net gain of $97.4T.
Now I must explain here that I don't view this as a nefarious plan, plot or
con. It is simply the way you deal with the inevitable collapse of the global
reserve currency at the end of its financial timeline. And if you are a
Gi-ant, it's the clearest way to transfer your wealth through the crisis and
into the future. You don't do it with a high-yielding bond Con and a
sustained deflation. LOL Gimme a break!
And if you think Congress will prevent the Fed from doing what it did in
2008… and 2009, 2010 and 2011… guess again. The USG will face a real, existential shut down this time. Nothing like the
charade that happens every few years when it's time to renew the budget or
raise the debt ceiling. This will be the real deal. Congress will DEMAND that
the Fed print "for the good of the country" (and for their own
paychecks).
Back to Smith:
This explanation — that the wealthy have already
transferred their financial assets into gold and land and thus they
don’t care if all money, bonds, mortgages, derivatives, insurance
policies, etc. all go to zero and is wiped off the books as an asset—makes
no sense because it doesn’t explain who is the bag holder to all this
“fiat-based” wealth. If the wealthy don’t own all these
financial assets, who does? Who did they sell it all to? Yet we know that the
Financial Elites own all this financial wealth and thus it will not be in
their self-interest to see it wiped out. Only debtors, i.e. Central States,
want to see hyperinflation to wipe out their debt. But who considers all that
sovereign debt an interest-paying asset? The Financial Elites, that’s
who, along with politically powerful union pension funds, banks, etc.
Yes, I know I have already addressed everything in this paragraph. But I
wanted to show you how silly it starts to read once you have a different perspective. Moving on:
Everyone seems to forget that debt is an asset to the guy on
the other side of the trade. The debtor would love hyperinflation but the
owner of the debt will resist hyperinflation with every fiber of his being
— and that includes the Financial Elite who own the debt.
Okay, here Smith moves into the first of his two strongest complaints about
hyperinflationists. Remember up at the beginning of this post I wrote that in
2008 I didn't find many of the arguments convincing on either side of the
debate? That is, until I read FOA? Well, clearly Mr. Smith has not read much
of my blog, not that I'd expect he had, because his two complaints are
completely backward in their reasoning.
Those two complaints are that he views hyperinflationists as i) not
considering that debt is an asset to someone else, and ii) that
hyperinflationists don't understand that hyperinflation is a POLITICAL event
and not a mechanical or "deterministic" event. Once again I had to
LOL when I read this backward view.
I think it's time for me to post links to my three part series again, in
which I DRIVE HOME these two topics… and how they inevitably end in
hyperinflation, not deflation:
Just
Another Hyperinflation Post - Part 1
Just
Another Hyperinflation Post - Part 2
Just
Another Hyperinflation Post - Part 3
If you haven't yet read them, you should probably start with the post I made
just prior to those, Credibility
Inflation, in order to understand what is actually deflating in our
hyperinflation.
Basically, regarding Smith's paragraph above, "the guy on the other side
of the trade," if he is well-connected enough to be considered "the
Financial Elite who own the debt" would prefer to be relieved of that
"asset" at full face value as long as he's getting that cash first.
Remember, hyperinflation is a race, not against the bear (you can't outrun
the bear) but against your neighbor.
Next:
This is basically a “politics of experience”
analysis, and very few are equipped to understand such an analysis, as
it’s outside their econometric comfort zone. They prefer a
deterministic financial analysis that there are “laws” of
economics which lead to hyperinflation, etc. Meanwhile, for me, there are
only political choices, a narrow band of which lead
to hyperinflation and a bunch of others which do not. This kind of analysis
doesn’t lend itself to refutation or confirmation by financial models
of the sort being bandied about — it’s a behavioral analysis and
a political one.
I have yet to see how banks and the Financial Elites would benefit from
hyperinflation. Without getting too fancy, it’s obvious that holders of
debt, those collecting interest on debt assets, would be wiped out by
hyperinflation. Thus as a simple matter of self-interest, we can deduce they
will not favor policies that lead to hyperinflation. If the owners of debt
(Treasuries, mortgages, corporate debt, commercial paper, etc.) were
politically powerless, then we could expect them to be steamrolled by those
who would benefit from hyperinflation. But they are not politically powerless
— it’s the debtors who are powerless, except for the Central
State, and it’s beholden to the Financial Elites who have captured the
political and regulatory classes that govern the State.
This is the introduction of Smith's "it's about politics, and
hyperinflationists don't get that" argument, which he refined in his
next post on his own blog titled "Con of the Decade" or something
like that. (By the way, this
came out after Smith's blog post, but if there's any truth to it, it pretty
much demolishes Smith's con idea and ensures—or
insures—hyperinflation.) In that post Charles Hugh Smith pretty much
threw down the gauntlet on this issue in the opening paragraph:
I described The Con of the Decade last July (2010). The Con
makes me a heretic in the cult religion of
Hyperinflation. I consider myself an agnostic about the destruction of the
U.S. dollar and hyperinflation (basically the same thing), but my idea that hyperinflation
is fundamentally a political process makes me a heretic. I skimmed a few
of the dozens of comments posted on Rick's Picks and Zero Hedge after they
posted one of my expositions on this dynamic, and didn't see even one comment
in favor of this perspective.
Now I'm not sure if this is technically a straw man fallacy if Smith has
never read FOA or FOFOA. Perhaps not. In any case, here are a few quotes from
my hyperinflation posts:
What is a deflationist? It is one who looks very closely at
the present structure of everything, the laws, the rules, the regulations,
what is supposed to happen, who should fail, etc… but ignores the
political (collective) will that backs it all up. The same political
will that always changes the rules to suit its needs as surely as the sun
rises. And it is this political will that makes dollar hyperinflation a
certainty this time around.
[…]
As FOA warned 12 years ago, these bailouts were always baked into the cake.
They are a mandatory function of the political will that backs the entire
system. This is the main element that all of the deflationists miss.
[…]
The political will (which is the same as the collective will in my
lexicon) always does whatever will lessen the immediate pain, even if it will
most certainly cause greater pain later. This is the part that is as reliable
as the sun rising.
[…]
Because we have a purely symbolic currency, a dollar-denominated deflation is
impossible... because of the political will I mentioned above!
[…]
But this is also where the political (collective) will comes into play.
It will NOT let that savers' balloon deflate. The Fed is helpless against the
debtors' balloon and the credit/debt feedback loop, but it is most certainly
NOT helpless against the savers' balloon.
The Fed has the power to keep the savers' balloon 100% full if it wants to, and
the political will to fully back that action.
[…]
This is an excellent description of what the deflationists see, and also why
they don't see the rest of the big picture. They view the monetary world as a
machine rather than a human ecology. They underestimate the will of the
"politicians and bureaucrats who are playing God." And they
also underestimate the power of fear and monetary velocity.
I think you get the picture. But if you really want to get to the heart of
this subject and see where Smith and the deflationists (notice I'm not
calling Smith a deflationist here) go wrong on cause and effect with regard
to hyperinflation and political will, you should read noteworthy deflationist
Mish
Shedlock's comment under my "Part 3" where he defended his post
saying:
"I explicitly said hyperinflation is a political
event… The amazing thing is I was agreeing with you…"
And my
responding comment where I wrote:
"…Velocity can have the same exact effect as
printing. Would you agree with this statement? Fear is the spark that ignites
it. And then the government will need to fund itself in this
hyperinflationary environment. This will entail THE massive printing that
always follows immediately after hyperinflation starts. ***THIS IS THE
POLITICAL EVENT THAT I AM TALKING ABOUT*** Not the priming beforehand. That's
already done. We are already in the summer of 1922…
…It is this LATER political event that is 100% guaranteed. That our
government will debase its currency TO ANY DEGREE to ease its own fiscal
pain. And as for the cause, the prime, it's already there. Has been for at
least 10 or 12 years now…"
And then Mish's
follow-up where he writes:
"…I agree with FOFOA about what starts
hyperinflation. I wish I would have made that perfectly clear in my post.
I disagree with him in regards to whether or not "politics" or as
FOFOA calls it (loss of faith) makes the US more vulnerable.
It was a very gentle disagreement."
I didn't call Smith a deflationist because I don't
know if he is. I haven't read enough of his blog to know if he's ever
categorized himself. Usually deflationists are happy to categorize themselves
as such, as in the case of Mish and Ackerman. But Smith appears to be a
simple skeptic, a man of two minds, as he wrote in closing of that email to
Rick Ackerman:
Maybe we will experience hyperinflation after all. I am a
skeptic, not a true believer, but I am certainly open to it as a possibility.
I think all the financial arguments are somewhat akin to biblical debates
about how many angels can dance on the head of a pin. They are fundamentally
deterministic and apolitical, while the actual process of setting policies
that lead to hyperinflation is entirely political.
I have no econometric arguments against hyperinflation, I only have political
ones. But since politics sets policy, then hyperinflation is necessarily a political choice. So a political analysis will trump an
econometric one in my view.
But I could be wrong. As a basically poor person, I don’t have much of
a stake in either outcome.
If Charles Hugh Smith happens to be reading this post, and I hope he is, I
would like to point out that my hyperinflation arguments cover the gamut. And
thanks to Rick Ackerman, I now have kudos from both camps, deflation and
(hyper)inflation:
Deflation
camp: "The very best of them, in my opinion, is FOFOA blogspot,
where the essays are erudite, the discussion elevated and the arguments as
knowledgeable as any you will find on the web."
[Hyper]Inflation camp: "FOFOA
is probably one of the very best analyst in the whole world. The more I read
from him, the more I am convinced of his vast superiority over most experts
and analysts, probably of the Schiff-Turk caliber… This is one of the very best
contributions in the inflation-deflation debate. It is long and detailed, but
the topic is extraordinarily complex."
I really despise self-promoting in this way and risking coming across as if I
think too highly of myself. The truth is quite the opposite, and I only post
these so that skeptics like Smith will at least consider my arguments rather
than dismissing them outright. I know my posts are long, and I know that some
people think I'm just a crazy gold bug, which I am not. So there has to be a good reason for a skeptic to make that commitment of
time and energy. And if he's read this far in my longest post ever, then at
least that's something!
Now before I wrap this treatise up, there was one thing I said I would come
back to that I haven't yet. And that is, if hyperinflation is guaranteed, why
aren't all these hyperinflationists snatching up real estate left and right
on the leverage that's still available? I, for one, don't have a mortgage. I
don't even have any debt because I don't have an income, other than donations
from this blog, to cover the carrying cost. And back when I was following
Peter Schiff he was a proud renter too. Perhaps he still is, I don't know.
There are literally dozens of answers to this question, almost all of them
extremely personal. But the bottom line is that real estate will continue to
fall in real terms even more than having an LTV of 95% hyperinflated away
would cover.
Even if you accept that hyperinflation is 100% certain, real estate is still
a poor investment choice to carry your wealth through. Gold is so much
better that real estate shouldn't even be considered an investment choice
(choice, as in a new investment) beyond your primary residence. Even with 10x
or even 20x presumed leverage in a near-term debt wipeout, unleveraged gold
is still a much better choice. And in addition to it being the lesser choice,
leveraged real estate also carries a non-zero political risk in
hyperinflation. I'm giving this an extremely low probability in today's
world, but under any kind of conservative and personal "one percent
doctrine" it must be factored heavily into the equation that includes
expected leverage and the carrying costs on an unknowable timetable. This is
an excerpt from an email I received a while ago:
Today I read a short little book titled Fiat Money Inflation in
France by Andrew White (published 1912). My general impression is that
there is no law so insane that it can't be enacted during a hyperinflation.
As you may know, they even passed a law such that debts increased along
with the issuance of further currency, so that for every so many additional
assignats printed, one's debts increased by 25%. Thus they took away the one
silver lining of currency debasement for the middle class. What a nightmare.
I liked this bit:
"All this vast chapter in financial folly is sometimes referred to as
if it resulted from the direct action of men utterly unskilled in finance.
This is a grave error. That wild schemers and dreamers took a leading part in
setting the fiat money system going is true; that speculation and interested
financiers made it worse is also true; but the men who had charge of French
finance during the Reign of Terror and who made these experiments, which seem
to us so monstrous, in order to rescue themselves and their country from the
flow which was sweeping everything to financial ruin, were universally
recognized as among the most skillful and honest financiers in Europe.
Cambon, especially, ranked then and ranks now as among the most expert in any
period. The disastrous results of all his courage and ability in the attempt
to stand against the deluge of paper money show how powerless are the most
skillful masters of finance to stem the tide of fiat money calamity when one
it is fairly under headway; and how useless are all enactments which they
can devise against the underlying laws of nature."
Okay, last thought on the real estate home front, and then I'll let it go. I
have a question for Rick and his commenter SD1 from
the top of the post. Remember they wrote:
Rick's Picks Commenter SD1:
To my knowledge, no bank has ever made provisions in their lending criteria.
So to anyone subscribing to the hyperinflation theory, all I can say is there
is nothing I, and millions of other North Americans, would love more than to
take $250,000 of worthless, hyperinflated money that we worked a few days to
make, to pay off a mortgage that would otherwise
have taken twenty-five to thirty years to repay.
Rick Ackerman:That’s the bottom line, as far as I’m
concerned.
How close to the business end of the printing press are these millions of
North Americans? You guys seem to assume that, during hyperinflation,
millions of American mortgage payers will have access to this river of cash early enough to benefit overall. By the time
they get their hands on it they may be struggling to meet other skyrocketing
expense like property taxes and, uh, food. Wages won't keep up. Most people
simply won't be able to keep up. And most of those who do will find that
their wealth relative to those closest to the printing press will be
declining. Like I said this is about outrunning the next guy, not the bear.
This is why I wrote, "if you don't make the effort to understand what is
actually unfolding, there's a good chance [hyperinflation] won't [deliver any
windfall in your direction]." If you really want "to pay off a
mortgage that would otherwise have taken twenty-five to thirty years to
repay," then you'd be best equipped to do so by buying some physical
gold right now!
Inevitability
Here is Rick's premise once again: “Ultimately, every penny of every
debt must be paid — if not by the borrower, then by the lender.”
If the borrowers can't pay, at least not in full, and certainly not in real
terms (today's purchasing power), and the politically connected lenders won't
take the hit, that only leaves the third option which C.V. Myers missed and
Rick can't seem to fathom.
How do I know hyperinflation is inevitable? I know that they will do the
"front lawn dump" not only because they said they would do it, and
then did it, and they continue doing it, but because it makes absolutely no
logical sense, from their perspective, to NOT do it in the face of a crushing
deflationary collapse like both Rick and I see as inevitable. It will be
judged an infinitely better option than immediate total economic collapse.
And besides, 75% of the world has been waiting patiently, for a long time, to get off the dollar standard. And it has
prepared for this very, inevitable, eventuality. So it won't be fought from
abroad.
This is very important: Once hyperinflation commences it is characterized
by a running shortage of cash, even though it appears like the
opposite to the outside observer. The currency collapses in value against
economic goods because the debt and the credit collapsed. There is no credit,
only cash, and there is a shortage of cash for everyone, including the Elite
and the government. So they, the Elite/government, print and print for their
own survival while saying it is for yours.
And for those of you that think they won't do it because they'll be afraid it
will end the dollar, end the Fed, or end fiat currency altogether, guess
again. Not a chance! After it's all said and done, Bernanke will say some
sweet things like his cuddly Zimbabwe counterpart did in this
2009 interview:
Gideon Gono: "I've been
condemned by traditional economists who said that printing money is
responsible for inflation. Out of the necessity to exist, to ensure my people
survive, I had to find myself printing money. I found myself doing
extraordinary things that aren't in the textbooks…
"There are certain things, policies with the benefit of hindsight, where
we could've managed our affairs better… We are [only] human…
"Only a fool does not change course when it is
necessary. Because economics is not an exact science, you want to be able to
be relevant. The only constant is change and adaptation…
"It's a free market, a business which must be allowed to succeed or
fail…
"What keeps me bright and looking forward to every day is that it can't
be any worse. And those who have studied the history of economies know that
we are down, but that the only thing that can happen is we will move up. That
is a certainty…
"I am modestly credited with the survival strategy of my country. The
issue is if you want to break Zimbabwe and want it to fall, just deal with
one man. You deal with Gideon Gono…
"I'm a normal guy: I miss going to the supermarket. One would like more
freedom…
"If you raise the interest rate you'll be friends of people who have
access to money. If you lower the interest rate, you'll be the darling of borrowers,
but pensioners will curse you to hell. It's never about popularity. At all
times you are definitely hurting some people in the economy…
"It's impossible to be directing the course of an entire economy and
divorce yourself from politics. Politics are important because the turnaround
of the economy hinges on political stability, but I can't tell
when that will happen…
"I have been in the trenches during every moment of survival for my
country. Any central bank governor is of necessity. When things go bad, we
governors are the fall guys. No other governor in the world has had to deal
with the kind of inflation levels that I deal with, no other governor has to
come up with the gymnastics and strategy for the survival of his country. But
let me say that in my bank resides the cutting edge of the country. I'm
privileged to be the leader of that team."
Zimbabwe still has a Central Bank,
and Dr. Gideon Gono still has a job as its governor. It will likely be no
different for Bernanke and the Fed. Extreme times call for extreme measures.
And that's how it will be spun. They will print for survival and they
will say it was for the survival of America. The dollar will end this thing
without reserve currency status, more like the peso. But at least we'll have
Freegold!
In our time and for the first time in the modern US dollar
history, the US will embark into a classic
hyperinflation for the sake of retaining its own lessened dollar for trade
use. As destructive as that might be to players in this financial house,
it is better than immediate total economic failure. It will evolve in a form much like the course of any other third world
country, if its currency too was suddenly deprived of world reserve status.
We will, like people the world over, learn to live with it and live in it.
Truly, our dollar and economy will not go away, but its function, use and
value will change dramatically.
FOFOA
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