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So, it
looks like I’m a hyperinflationist after
all. Reminds me of the joke
about the cowboy who chats up a woman
at a bar – a lesbian,
as it turns out. She tells him she spends her
days thinking about nothing but women. “As soon as I get up in the morning, I think about women,” she says. “When I shower, I think about women. When I watch TV, I think about women. I even think about women when I eat. It seems that everything
makes me think of women.” The cowboy goes
home that night thinking that maybe he’s
a lesbian too. Another tavern, another night: A stock
broker strikes up a conversation with a stranger who seems obsessed
with the idea that hyperinflation is about to
wreck the economy.
“From the moment I open my
eyes in the morning, my head is
filled with worries about how the financial
system and the world’s currencies
are hurtling toward disaster. Watching the stock market rise relentlessly,
I grow more certain each day that it
can only end badly. I think the real estate disaster has barely begun and that, for tens of millions of
us, the American Dream is
about to turn into a nightmare.” “Hmmm,”
says the stockbroker.
“I guess that makes me a hyperinflationist too.”
And so it goes. A conversation between a hardcore inflationist and an equally hardcore deflationist might meander for hours without generating much argumentative heat. That’s because both see the financial system in smoldering ruin after the smoke has cleared; it is
only on the matter of how
the disaster will unfold that they
disagree. I’d thought until yesterday that deflation was far more likely to do us in, turning an endless Great Recession into a Second Great Depression.
My scenario called for falling prices and wages, imploding asset values and an economy drowning in bankruptcies. Hyperinflationists are expecting
a quite different endgame — one in which prices soar relative to fiat
money, debtors pay off loans with confetti, creditors and savers are wiped out, and hoarders of bullion live like kings. I am now
convinced, after stridently arguing the case for
deflation since the late 1970s, that the hyperinflationists will be right.
Stunning Insights
Why have I changed my mind?
For the answer, you’ll
need to read FOFOA blogspot‘s latest essay, Deflation or Hyperinflation? Nothing I had read before it
even came close to making
the case for hyperinflation, since the arguments seldom went beyond
nebulous theories and
shoot-from-the-hip speculation.
This one does, though
– and brilliantly: first by deconstructing my strongest arguments with great care and refuting them one by one; then by explaining how human nature itself, impelled by self-interest, will push our debt-addled financial system toward a hyperinflationary dénouement. There are some stunning insights along the way, the moreso because FOFOA is able to bring them to readers by making some heavy
ideas go down like a
soufflé. One of them, debated endlessly, questions whether the Powers That Be would “allow” a
hyperinflation to occur, since
that would render their financial assets worthless. FOFOA prepares
us for his counterintuitive
answer by recalling the joke about how, if you want to survive, you don’t actually need to outrun the bear that is
chasing you and your friend.
His logic has extremely bullish implications
for gold. I’ve always
been bullish on the stuff
myself regardless of whether it is
hyperinflation or deflation that
gets us. But I was never entirely comfortable with my own arguments, since deflation in theory would render hard cash more valuable than other assets,
including bullion.
Reading FOFOA’s essay,
however, I had an epiphany when he cited a 2002 quote from inflationist
Gary North: “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.” The reason
Myers didn’t lose everything was that he owned
gold up the wazoo, even after it peaked
at $850 in 1980. I
know this because Myers wrote about it in his newsletter, but also because when I interviewed him at his Spokane home for a
freelance article I’d pitched
to Barron’s, he let me fondle the largest solid-gold nugget I’ve ever seen outside
of the Smithsonian. It was
sitting on his desk, along with rolls
of gold coins that today would be worth
as much as a house.
C.C. Myers’ Dictum
Some of you will know Vern Myers as one of my guiding lights. It was his 1977 book The Coming Deflation, with a logic that seemed
immutable, that made me a deflationist.
He argued, simply, that “Ultimately every penny of every debt must be paid – if not by the borrower,
then by the lender.”
This implied, for one, that
if debtors walked away from their
mortgages, it would reduce the wealth of their creditors by exactly the amount that had
been owed. Deflationists would logically infer from this
that a nearly
quadrillion-dollar derivatives bubble
that has yet to implode will shrink the world’s wealth by that amount when the collapse finally comes. However, FOFOA (whose identity apparently is a well-guarded secret) explains how all of the hyper-leveraged
paper underlying the bubble is likely
to be redeemed at face value. That would be hyperinflationary, of
course, but those who are
able to get their hands
on the money first -i.e., the Masters of the Universe
– will have a chance to spend
it before it becomes completely
worthless. This has implications for the mortgage debt that I have always insisted the Masters would not forsake by promoting a hyperinflation. More likely, explains FOFOA, is that home prices will go “hyper,” and that
if you are prepared to
swap gold for dollars at the perfect
moment, you may be able to pay off your mortgage with proceeds from the sale of just a handful of gold coins. (To access
timely and precise forecasts for gold, silver and other investment vehicles, click here for a free
trial subscription to Rick’s Picks.)
This essays
deserves to be read by the widest possible
audience, since it explains so clearly
why we must hold gold in preparation for
the dollar’s collapse. As far as I am concerned, a more compelling argument for hyperinflation has yet to be made.
Rick Ackerman
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