Hyperinflation is nigh so gold will go high
By Egon von Greyerz
This coming autumn, we are likely to see the beginning of
the hyperinflationary phase of the sovereign debt crisis. Hyperinflation
normally hits an economy very quickly and unexpectedly and is the result of
the currency collapsing. Hyperinflation does not arise as a result of
increasing demand for goods and services.
The course of events in a hyperinflationary
scenario can be summarised as follows:
- Chronic government deficits
- Debt issuance and money
printing escalating rapidly
- Bonds falling – interest rates
rising fast
- Currency collapsing
The above process turns into a vicious circle that
accelerates quickly. The more money the government prints, the faster the
currency will fall and the faster the currency falls the more money the
government must print. Once the hyperinflationary spiral has started, it will
feed itself like we have seen in the Weimar Republic, Zimbabwe, Argentina and
many other places.
Rates will go to 15-20%
What will exacerbate this process is a financial system
which is totally bankrupt in all but name. If banks valued their toxic assets
at market instead of at maturity, no bank would be standing today. As longer
term government bonds start falling, this will also put upward pressure on
short term rates with Central Banks losing control of their manipulation of
rates. This will lead to rates going into the teens in the next 2-3 years
like in the late 1970s. Virtually no borrower, whether public or private can
afford rates just two or three percent higher and definitely not rates of 15%
or 20% which we are likely to see – at a minimum. Also, with higher
rates, the whole derivatives market of $1.5 quadrillion will blow up since
these instruments are all interest rate sensitive.
In a world of exponentially growing sovereign deficits
and debts, the outcome of the biggest credit bubble in history has always
been guaranteed. But the road there has been laborious. Through financial
repression combined with lies and propaganda, governments and central banks
have managed to extend the suffering for ordinary people for the benefit of a
small elite who has built incredible wealth. The average person is, directly
through personal debt or indirectly through sovereign debt, responsible for
the $230 trillion global debt but can of course never repay it. On the other
side of the balance sheet, these debts have all accrued in the form of assets
or wealth of a similar amount to an extremely small elite. This massive
inequality is what creates social unrest and eventually revolutions and the
problems we now see emerging around the world are most likely the start of
that.
Fed policy has totally failed
Governments have since the 1987 crash and the early 1990s
property bubble desperately tried to avoid the inevitable. In a panic,
Greenspan lowered US short term rates from 8% in 1990 to 2.5% in 1992, thus
fuelling the beginning of the final phase of the Fed’s 100-year destruction
of the world financial system. Bernanke took over in 2006 when the subprime
crisis started and he became the most profligate Fed chairman in history.
During his reign, US Federal debt went from $8 trillion to $17 trillion and
rates went from 5% to zero. It took the US over 200 years to go from zero
debt to $8 trillion
Egon von Greyerz
