Tuesday, April 27, 2010

The 7 Deadly Ingredients for The Coming U.S. Hyperinflation

Imagine that you’re walking home on a chilly, overcast night…

A man comes up behind you. Sticks something in your back. And with a deep growl, he promises to hurt you if you don’t immediately take him to the ATM machine and hand over your cash.

Of course, you abide – with nervous hands you type in your PIN number… withdrawing your limit for the day.

Half your wealth is instantly gone. But at least you’re safe… for now.

The next night you take a different route home. Yet despite your route change, it happens AGAIN. You’re held up and robbed of your money. And AGAIN the night after that… destroying your savings account, your safety and your lifestyle. Now you feel that there’s no safe place.

That’s exactly what hyperinflation is like. It not only destroys the wealth you’ve amassed, but robs you of any sense of security and order. It takes you for all you’ve got.

Take Zimbabwe for example – where in 2008, inflation rates hit 231,000,000%.

“It is quite interesting to see people going in banks with bags and sometimes even suitcases,” says the businessman. “You know that there are large amounts of money in there – which unfortunately are not going to buy much.”

But businessmen aren’t the only victims of hyperinflation…

The mother of two, cries, “The things that we buy – the groceries at home, the things we get for our two children – we have to buy immediately, as soon as we get the money.”


She followed up with, “We know that if we wait a bit, the prices are going to go up again. If we wait another week, we will not be able to afford anything. People are taking the money out in suitcases or carrier bags.”

Think this type of inflation couldn’t happen in the U.S? Think again.

In this report I’ll detail the 7 deadly ingredients for the coming U.S. hyperinflation. I’ll show you why, any day now, the final ingredient is due to kick in – sending pricing skyrocketing. Rendering the money in your bank account worthless. And destroying your lifestyle as you know it.

Take the simple steps I outline at the end of this letter and you’ll have a way to protect yourself from the coming hurt.

But first, what exactly is hyperinflation? And what are the ingredients that will produce this coming disaster?

What Exactly Is Hyperinflation?

Hyperinflation isn’t just an increase in the money supply; after all the central bank increases the money supply all the time, a phenomenon we know as simple inflation and which we come to expect as a constant. Hyperinflation, however, happens when uncertainty in the future worth of the currency causes people to start trading it for things of actual utility and more reliable stores of value as soon as they can. The velocity of paper money through the system increases as people seek to get rid of it.

So hyperinflation isn’t just the expansion of the monetary base, though the expansion is at the root. The expansion is fuel, but the conflagration doesn’t start till the herd panics. Hyperinflation is also a relatively new player on the world stage and has only ever occurred in the 20th Century, most notably during Germany’s Weimar Republic in the early twenties and most recently in the Zimbabwe. A lifetime of saving is wiped out overnight. The lives of millions are upended and destroyed.

Before the early 20th Century, simple inflation had plagued civilization repeatedly. Governments figured out a long time ago how to steal wealth from their productive citizens without the danger of tax revolts. But not until the modern era of purely fiat currencies, central banks and industrialized economies has inflation been able to mutate into the modern disaster known as hyperinflation. And the pieces have been falling into place for the U.S. to experience it firsthand.

Hyperinflation’s Deadly Ingredient #1:
The Creation of Fiat Money

Before paper money, rulers would just debase the coins—that is remove the quantity of precious metals in each and increase the number in circulation. Each coin had less gold or silver in it, though the rulers who issued the currency would insist—on pain of death—that everyone pretends that the coins were worth just as much. This sort thing led to Sir Thomas Gresham’s pithy maxim: “bad money drives good money out of circulation.” That is to say that people generally aren’t fooled by a debased currency and will hold on to the unadulterated forms of money while they use the debased stuff for their transactions. They use the debased stuff for day-to-day transactions, but put the good stuff under their mattresses.

Citizens generally know that the paper currencies they are forced by law to use aren’t quite as good as gold. There is an oily, slippery quality to the paper. It’s been that way since the very first paper currency was used in China during the Song Dynasty, but at least then there was metal backing the paper. In the following Yuan Dynasty the government forced citizens to turn in their gold and silver and use the world’s first fiat currency: the Chao. The same thing would happen again in the U.S. under FDR some six centuries later.

That unbacked paper money’s value will go down gradually over time is a given, but most folks delude themselves into believing it’s for the best and that the government has it all in hand. They come to expect this gradual inflation of the money supply and decline of their currency’s purchasing power. But eventually a nation has to face the inevitable outcome of government trying to manage an economy and print wealth into existence; centralized planning leads to misinvestments on a colossal—even global—scale, and this sort of planning can only be sustained by a fiat currency since the unfettered market would never allow for it. Eventually the whole thing collapses.

You see, when money supply is fairly fixed, it ties government’s hands. When you want a strictly limited constitutional government, that’s a good thing. Of course, if you want centralized planning, market interventions and wars, gold standards are horribly restricting. That’s why governments get rid of them as quickly as they can. Then there is absolutely no need to be fiscally responsible. Then governments can use all the usual means to grow in scope and reach: the wars, welfare the market intervention previously mentioned…

And the creation of credit.

Hyperinflation’s Deadly Ingredient #2:
The Easy Availability of Credit

Credit distorts prices. It’s how the banks—under direction from the central bank—get the disaster rolling. Fractional reserve lending laws allow banks to make loans far beyond what they actually have on reserve (a fraction of those reserves, hence the name). Assets get bid up with credit and bad business ideas get funded. People get all sorts of false signals because of the availability of credit and bad decisions get made. Debts grow on all sorts of unproductive purchases and ventures. The Fed is ultimately responsible for inflating explosively unstable financial bubbles.

The message from the gov’t was clear: “C’mon in and get all the money you want! It’s easy. It’s cheap. And we’ll hand it out to anyone!”

The artificially low rates — set by a board of Fed governors, not the free market – allowed people borrowed beyond their means. To the average American, it all seemed to make sense. All their assets were going up – stocks, real estate, overall net worth.

But what goes up must always come down.

Hyperinflation’s Deadly Ingredient #3:
Bursting of the Credit Bubble

This can’t go on forever—borrowing on reserves that aren’t really there. When it stops working, those debts have to be worked out somehow. This “somehow” manifests itself as losses and write-downs. Borrowers can only service these debts for so long when the debt-fueled activities and questionable investments inevitably fail to produce enough income and returns to pay the debt and interest. When the debts can no longer be serviced, then violent reallocations occur. Businesses, livelihoods and homes are lost.

The ultimate effect is that incomes decrease, sometimes drastically, sometimes to absolutely nothing. Loans stop performing. In the latest bust, a lot of the shaky loans were securitized, sliced and diced, given good ratings by (formerly) reputable ratings agencies and then sold as investments. These securitized debts would prove to be tiny bombs that would pulverize investment portfolios globally. The debt was counted on as actual income-generating savings by large institutions—banks, pension funds, local governments, investment companies, etc—and individual investors alike, who all would come quickly to find that their investments were not worth nearly what they thought they were.

Hyperinflation’s Deadly Ingredient #4:
Sharp Contraction of Available Credit

Seeing billions disappear from your balance sheet is a hard pill to swallow. And when the banks were forced to wash it down, an funny thing happened: they stopped lending.

They stopped lending to each other. They stopped lending to consumers. And they stopped lending to businesses.

Suddenly, the small business that produces vinyl signs down the street from you gets a call from their creditor. “Excuse me, sir” the bank rep. says. “We’re not going to be able to extend you that credit line you needed to buy your next round of supplies.” Those jumbo home loans — handed out like candy years before — are now made in micro amounts. That new SUV that your niece wanted to buy? Forget it. Even with good credit, they’re not lending to her now.

For good reason, too. After the credit bubble burst, the banks finally became deathly afraid that the people they’re lending to won’t and can’t pay them back.

Poof. Gone are the days of easy credit.

In a world of sound money and no central bank to inflate the money supply and no fractional reserve lending laws to allow rampant credit growth, this shouldn’t have been a problem. People wouldn’t have “needed” the credit. But fiat money and artificially easy credit are like booze and dope; they create crippling addiction in the form of an unsustainable consumer economy. Take the debt drug away of the world’s largest credit addicts and… well, things can get ugly..

The entire system goes into shock. As mentioned above, credit becomes scarce as banks worry about every getting their money back. Without credit, both prices and economic activity start to decline.

Hyperinflation’s Deadly Ingredient #5:
The Deflation of Asset Prices

Strictly speaking, deflation is a contraction in the money supply. Of course “money” can different meanings and include different measures. If available credit is counted, then deflation does indeed take place when that credit ceases to be available. And credit ceases to be available after it has been made too cheap and plentiful by banks. Fractional reserve lending laws exist to make credit plentiful and the central bank exists to make credit cheap at their whim.

Don’t count on deflation in any real sense. Under a fiat currency, deflation can only ever be a short-term phenomena, and it generally only occurs when available credit contracts. Also keep in mind that credit is something that banks can over-issue far above actual reserves thanks to those pernicious fractional reserve lending laws.

Credit is like an appendix to the actual supply of paper dollars and tallies in account balances. Credit can and does deflate and the effect on the economy is indeed very deflationary as prices bid up by credit collapse (housing is a very obvious example, but luxury items and even needed commodities are affected by availability of credit) and activity dependent on credit ceases, and the jobs attached to those activities disappear.

Hyperinflation’s Deadly Ingredient #6:
The Rapid Printing of Money Out of Thin Air

Asset values and economic activity have to fall to painfully low levels in order for all the excesses of easy credit to be cleared away. After a while a sound economy can then be rebuilt on the basis of honest money and market-determined interest rates. But that’s not the sort of thing governments subscribe to in the Keynesian era. Governments and the rabble who elect them, believe that it’s possible to get something for nothing and that it’s possible to print wealth into existence. The average person really believes that all the government has to do is print money and take over production in order to keep the party going.

An easy way to devalue the debts is to make them easier to pay. A little inflationary easing thus seems like a really good idea. That’s how governments make inflation palatable to their subjects. It makes the weight of bad financial decisions easier to bear.

The government borrows money into existence (from the central bank) and then spends it into the economy. Governments and central banks technically are separate entities, but they collude with each other like this all the time. When citizens and foreigners won’t lend (buy bonds) and raising taxes isn’t enough, the central bank is always there willing to play ball.

The central bank can increase the monetary base as much as it wants…because it’s the entity that issues the currency. It then uses that currency to buy bonds from the government, which is just a convoluted way of saying it loans this money to the government so that the government can continue to spend money. Of course if anyone else tries this sort of legerdemain, it would be called counterfeiting. When the government and central bank does it, it’s considered economic stimulus. Then the government can spend this new money into the economy by its usual favorite venues: wars, welfare and—in times when stimulus is called for—an alphabet soup of make-work programs.

The government labels this sort of thing as “economic stimulus” or “quantitative easing”, though a more honest description would be “defrauding the minority of savers” and “prolonging the inevitable painful outcome of propping up misinvestments.”

The new administration has decided to “monetize the debt.” They are going to create new money in order to bail out various banks and businesses and even mortgage debtors. But again, governments may be able to create money, but they cannot create wealth or purchasing power; they can only steal it outright with taxes or subtly with monetary inflation. It’s a swindle. The money they create dilutes the value of that already in existence. It is a way to siphon purchasing power from those trusting souls who have saved in the currency. It’s an indirect and subtle tax. This is wrong in principle and disastrous in practice.

Hyperinflation’s Deadly Ingredient #7:
The Acceleration of Money Into the Market

If you’re keeping track at home, you probably recognize that we’re right here. We’ve seen the first six ingredients… and now all we need is the 7th and final ingredient added.

It may not come tomorrow. Or the day after. But be sure that our current monetary trajectory puts us on pace for the acceleration of money into the market.

And that’s when things get really scary.

Hyperinflation takes off when the entire population gets wise.

The money supply might have been growing in fits and spurts for decades, but the hyperinflationary storm happens when that money really starts to move around as people try to get rid of it. The prices of useful goods get bid up to embarrassing levels. The process accelerates when governments try to stabilize markets…often by adding more paper…because honestly, what else can a government do? Mismanagement and fraud are the only things governments really get right consistently. So for the government a problem that’s caused by the theft of inflation can only be solved by…more mismanagement and fraud. The entire process is self-reinforcing and results in the hyperinflationary death spiral to which all currency is heir.

The effect is that savings in the currency rapidly lose value. In an effort to sustain pretend wealth, the government wipes out real wealth. The only way to avoid this destruction is not to put one’s trust in the paper the government and the central bank issue. At some point in the future literally everyone everywhere will be rushing to exchange paper for things of real value. The trick to survival is to start before they do.

Here’s how to do it.

How To Protect Your Money

If you’re thinking that this whole fiat currency deal and the hyperinflationary death or money is an abomination, you’re right. If you’re thinking that there’s something you can do to prevent it, then you’re absolutely wrong.

This sort of thing just keeps happening over and over. Human beings seem to love making themselves slaves to the state and believing in the false promises of that false god. The rulers want more power and the ruled want something for nothing. Fiat currency has proven the most efficient way for advanced civilizations to ruin themselves. Fiat seems like instant wealth, but it’s just sure death.

Like anything else, liberty and the sound money upon which it is built, seem destined to atrophy and die. All the individual can do is be aware of the lessons of history and to take the appropriate steps to protect themselves.

You obviously need to deal in currency on a day-to-day basis, but a portion of the your savings should be in things of lasting value.

U.S. Hyperinflation Hedge #1:
Long Precious Metals / Short the Dollar

Gold and productive farmland have been much more reliable stores of wealth than paper for several thousand years. Gold is just a bit easier to hide, however, should the need arise. And right now it’s the better buy.

When speaking of the collapse of a currency, people often trot out the adage “you can’t eat gold.” By this they mean that in a true currency crisis and attendant collapse, only fuel and food and the arms to protect them will have any value. Gold, despite being branded a barbarous relic by Keynes, is actually a symbol of civilization and trade. Therefore it won’t perform its monetary function when civilization and trade break down.

In a true collapse, there may be no trade at all or what little trade there is could be limited to barter. As long as there is any exchange being done, people will find something to use as money; the guy with the cows that produce the milk you want is not always going to want the furs you have to trade. If trade goes on at all, even if barter is a large part of it, precious metals will have a place. They’ve been used as money for thousands of years because they perform the function of money so well.

On the other hand, a common assumption is that gold is absolutely the best thing to hold during hyperinflation. Not necessarily true. It will do a lot better than the failing currency…but a hyperinflationary scenario means that just about everything is doing better than the failing currency…the currency is the one thing that no one wants to hold. Depending on where things are at the start, however, it may not do the best. Right now, real estate is still in the process of falling from a extremely high levels fueled by the credit that is still vanishing. The simplest way to diversify out of the dollar is to trade it for precious metals which have proven to be a much more enduring form of savings, especially in times of crisis.

The first step you should take is to trade some of the fiat currency in your possession for something of lasting value. Buy some gold. Non-perishable food items are also a good idea, but gold (and silver) do much better as money.

U.S. Hyperinflation Hedge #2:
Begin Converting Your Savings to Something Outside the Dollar

Entire nations—particularly those who have been enabling the U.S. by buying up its dollars and lending it money—are starting to question the long-term viability of the dollar. China is getting nervous…

Personally, I think physical precious metals are the way to go.

But if owning and storing precious metals isn’t for you, there are other ways for you to protect yourself from the ravages of hyperinflation.

Here’s to protecting your wealth,

Gary Gibson
Managing Editor, Whiskey & Gunpowder

No comments: