Monday, February 06, 2006


Many people feel that hyperinflation could never happen in the US—The scenario is complete bunk and a conspiracy theory... Well, I wish I could agree, but sound logic and a strong gut feel tell me it’s nearly certain in our future. I feel that hyperinflation is the only escape mechanism our country has in resolving our economic problems.

I’ve briefly touched on this subject in the past—see “American Wake Up Call”, but I feel many of you probably need more information before making your own personal opinion/decision on the matter... Therefore, this article hopes to help you in that effort, and will take the time to share the thoughts of many others on the subject. Read what these folks have to say about Hyperinflation, and then make your own decision.

Robert Blumen from the Ludwig von Mises Institute has an excellent article on Hyperinflation. In it, he compares the Weimar Republic to Wall Street and concludes:

While the monetary madness of the 90s gave us hyperinflation in stocks, during the last few years the effects of money printing have been seen more in the housing market. As the stock bubble deranged relative prices between financial assets and consumption goods, the inflation of housing is driving home prices to unsustainable levels relative to wages and prices. Partly by artifice, partly by luck, the effects of an over heated printing press have not been felt full-on in wages and consumption goods. But Al and his band of counterfeiters at the Fed are rapidly running out of asset classes large enough to soak up the flood of greenbacks without setting off a visible inflation. If the dollars start to flow into goods and wages, then Weimar, not Wall St. will be the next destination.

This MERK Article, reprinted by FSU asks whether or not Mr. Bernanke will create Hyperinflation:

We believe there is substantial risk that central bankers will not fully appreciate that the upcoming economic slowdown we foresee is very different in nature. Both in the 1930s in the US and in the 1990s in Japan, the corporate sector was in turmoil. This time around, with some notable exceptions (think automotive sector), corporate America is in reasonable shape. It is the consumer sector that we are most concerned about. There may also be significant fallout to the financial sector should there be a collapse in housing prices. The Fed has to be careful how it applies its stimulus. The traditional stimulus will encourage corporations to invest more. The problem is that corporations are likely to be encouraged to invest overseas in search of greater returns as their traditional customers, the American consumer, is exhausted. Any stimulus will further increase pressures in producer prices as raw material prices are likely to stay elevated. Given the cheap imports from Asia and high consumer debt, pricing power is likely to remain disappointing. As a result, real wage growth is likely to be lackluster at best as corporations must minimize labor cost to remain competitive.

A slowdown in the housing market and high winter heating cost will put further pressure on consumer spending. An already negative savings rate cannot continue forever. As consumers realize that their real wages do not grow, that they cannot rely on extracting equity out of their homes, that competition from Asia may be a threat to their standard of living, the rational reaction will be to spend less. Given the dependence on the world economy on consumer spending, we believe the Fed will interpret the economic data as a warning sign that deflation could set in and a recession or even depression could follow unless the economy is ‘saved’ before a deflationary spiral is initiated.

Policy makers have a choice to bring an economy to its knees to eradicate any excess; or to provide the appropriate stimulus to try to neutralize just about any potential crisis. Ben Bernanke during his confirmation hearing to succeed Greenspan as head of the Fed, emphasized the experience of the Fed governors will help to preserve prosperity. It goes without saying that inducing a depression by choice is something few central bankers are willing to make. When a central bank takes a more active role in promoting structural change before a bubble has evolved, such as the European Central Bank (ECB) has done over the past couple of years, critics are abundant. Europe experienced hyperinflation twice in the 20th century and is more concerned about the fallout of excess credit than, for example, the Fed or the Bank of Japan.

This Freemarket News report suggest that nearly all commodities are soaring on shortages and fears of hyperinflation…

“ Furthermore, rising copper and zinc prices are further proof that silver and gold prices are not in a bubble, and not ready to "top" out any time soon. This is proof of hyperinflation, and that gold and silver have much, much higher to go. The inflation/deflation argument is about dead, but in 2003, I was one of the few to recognize that hyperinflation had continued for 2 years at that time. Today, hyperinflation has been going on for four years now.”

This Mineweb article points out that security broker Cheuvreux has raised its mid-cycle gold price estimate from $750/oz to $900/oz, suggesting the possibility gold could climb to $2,000 an ounce and higher.

London-based Cheuvreux Investment Analyst Paul Mylchreest said the gold price acts as a early warning of potential crisis, such as rising inflationary/deflationary pressures and general confidence in paper currency, particularly the U.S. dollar. "The U.S. economy will walk a fine line between inflation (possibly hyperinflation) and a deflationary slump in the next few years. In the short term, we see further reinflation with continuing asset inflation as slightly more likely," he suggested. "Even if the U.S. economy somehow muddles through, the short position in gold, central bank buying and low real yields will support the gold price."
"Gold and precious metals are the only asset class that should perform well in either an inflationary or deflationary scenario," Mylchreest declared.

This CounterCurrents article discusses the IRAN Oil Bourse (exchange) and the potential impacts to our economy:

America’s currency monopoly is the perfect pyramid scheme. As long as nations are forced to buy oil in dollars, the United States can continue its profligate spending with impunity. (The dollar now accounts for 68% of global currency reserves up from 51% just a decade ago) The only threat to this strategy is the prospect of competition from an independent oil exchange, forcing the faltering dollar to go nose-to-nose with a more stable (debt-free) currency such as the euro. That would compel central banks to diversify their holdings, sending billions of dollars back to America and ensuring a devastating cycle of hyperinflation.

AlterNet has a good discussion on the potential prospect of peak oil and its implications on the global economy.

With the cratering of the housing bubble, the U.S. economy has to fall on its ass. The global economy is likely to fall on its ass, too, since so much of it depends on the decisions of Americans to take out exotic loans for buying houses they can't afford. Large numbers of jobs will vanish in construction, remodeling, real estate sales, and the various mortgage rackets -- those things precisely related to the recent gains in GDP.

The sheer falloff in new mortgages will send a tsunami through financial markets addicted to continuous supplies of new "money" to preserve the illusion of expansion. I'd called for a Dow-4000 late in 2005. I think that was just an error in timing, and I still call for the Dow to sink into that range, or worse, in 2006. This will represent a moment of painful clarity for market professionals, as they realize that an industrial economy and the finance that serves it must be based on the expectation of generating real future wealth, not on zero-sum rackets, games of monetery musical chairs, or casino legerdemain. Hedge funds, which depend on predictable stability, will be especially vulnerable. They will certainly take some large banks down with them when they go. I'll call for the so-called government sponsored entities of Fannie Mae and Freddie Mac to groan under and then drown in a sea of nonperforming loans, probably with overtones of criminal irresponsibility.

If these things occur, ugly things would happen to the dollar. I would predict an episode something short of hyperinflation -- say a rapid 30 percent drop in dollar value -- with a later deflation in the price of things like houses, paintings by Childe Hassam and many consumer goods. Which means that standards of living will fall across the board as incomes vanish with jobs, and food and energy prices rise -- while Americans try to shed their houses at the same time that consumer products sit unsold on the shelves of WalMart, Target and Best Buy. This will spell the beginning of the end for the chain store universe.

This FNMM article discusses the current trend of everything moving against the dollar.

So where does that leave us as we enter the second week of trading in 2006? Bullish. Bullish gold, bullish miners, bullish commodities, bullish energy, bullish alternative energy, bullish tech, bullish the Euro. Simply bullish anything not called "US Dollar", with the gold and silver miners playing the starring role. We call this a blow-off folks.. Or perhaps a mark-up phase, or mini mania. Whatever it is, it is happening now, in real time, and there are a lot of people sitting sidelines, in cash, having top-called various asset classes. That money must now make a decision. "Is it real or is it Memorex?"

The fate of the dollar should be instructive going forward. On the biiwii site, the dollar has been referred to as "junk" and "intrinsically worthless" on several occasions, but that does not mean its price cannot go up at any given time. I remain open to the possibility that we may go straight into hyperinflation (do we even remember the concept of sacrificing now so that future generations may have a fighting chance economically or has the hubris and denial become so thick that we believe all our assets will simply gain in value just because?). But if that happens, your stocks (including gold stocks) are not going to be worth a hill of beans when it's all said and done.

Of course these indicators may be just beginning to roll over, in which case it would mean hell on earth for dollar holders. It would also mean an increase in inflation pressure to such a degree that the pretense that this is a healthy component of the financial and economic system would be stripped away. That would not inspire confidence in any paper assets. But it might well inspire a 4-digit gold price.

Bottom line: We are in the midst of a grand economic experiment. It has been in progress for nearly a century. As modern man tries to control his fate and attain the ideal of an ever-rising tide, there are risks and pressure building. The dollar, being the world reserve currency of the last great superpower is one of the barometers used to gauge that pressure. Gold is another. Bulls may enjoy their rising commodity, stock and foreign bond assets, but in the end, the utter debasement of the dollar would be a disaster for all Americans and likely a good part of the rest of the world. I have never lived through a hyperinflation, but my guess is that in the initial stages, it feels mighty good seeing asset prices rise.

But America's strength lies in its currency, and a fall from superpower status would be akin to slipping on a banana peel. People cheering all assets higher and the dollar lower should realize that the gains are coming at a price, and with the trillions upon trillions in collective US debt, the dollar simply cannot afford to pay that price.

Jay Taylor from HoweStreet. com writes that gold is signaling that central banks are creating too much money and too much debt. He goes on to state:

Should be a fascinating storm in 2006.

“The recent rise in Gold catalogued 74 points over about a month, a 16 percent rally from precisely the day the Fed announced it would hide M-3 from taxpayers and citizens of this great nation. That is no coincidence. Gold sees hyperinflation, monetization of debt, and intervention into free markets. Gold is telling us it expects Ben Bernanke to be an inflationist.”

Richard Russel’s comment on Dr. McHugh’s Commentary – “I found the paragraphs above to be shocking. And they may be telling us why gold and silver are refusing to correct. Yep, we may be moving into the "total insanity" phase of Fed-created liquidity. What in God's name is the Fed so afraid of?”

Bottom Line:
I could continue with article after article on the subject, but I think you get the point. Many folks believe something big is going on, and either Hyperinflation is already here, or it is on the way shortly.

I hope I was able to provide you with some useful information in which to base your decision. So, what do you think--could this happen or is it bunk?


Anonymous said...

I don't think hyperinflation is upon us yet...perhaps in late 2006. I expect it to realy take hold mid-late 2007.

It's interesting that the FED is going to stop publishing M3 data at about the same time that the Iran Oil Bourse is scheduled to open...if Iran is not attacked by then.

MMAfia said...

Here is an excellent discussion going on about the Iranian Oil Bourse, M3 and whether or not it is a conspiracy theory.

Interesting arguments posted by both sides of the camp- definitely worth a read if u haven't seen it yet.



MMAfia said...
This comment has been removed by a blog administrator.
MMAfia said...

arghh!! ok,

Here's the link in HTML


contrarian2day said...

mmafia, great link! Discussion is very thought provoking.

Personally, I'd have to side with those who believe an IRAN Oil Bourse would cause substantial harm to the dollar (over the long run — as this exchange is said to begin with a gradual shift from dollar to euro trading)

David said...

The scary thing is that there are so many factors involved.

Here is what I see over the next few years:

1) Dollar will slide significantly in the next few years. Thus inflation in imported goods.

2) Housing will deflate.
3) Oil prices will rise
4) Incomes will slide in real dollars.
5) Interest rates will rise.
6) Unemplyment will rise

Bubble Meter Blog

Out at the peak said...

A little off topic:
Did you see Exxon basically saying Bush's plan is ridiculous?

contrarian2day said...

Peak... Yes, saw and read it. I believe Bush's plan is pure political bunk and just merely dreamy, wishful thinking...

Don't get me wrong, as a veteran, I voted for the guy, (as the lesser of two evils and a more favorable stance on the troops), but I don't believe we can get there from here... It would be far too expensive (money that we don't have) and we have no policies in place. It would also take a major fundamental shift in American philosophy, along with consumer sacrifices and expenses that we are unwilling to make.

The only way we will ever slash our Middle East crude purchases by 75 percent is if our economy comes to a screeching halt due to a depression and/or Peak Oil Effects.

fennoscandian said...

As an european and as a daily reader of this blog, I'd like to see some intelligent speculation on our, europeans, lives.

How does possible petroeuro affect Europe?

How does possible USD hyperinflation affect ?

I havent' seen good speculation on the subject as of yet.

Are europeans just silently waiting the possible demise of dollar? I would expect that someone more intelligent and monetarily oriented would write some thoughts on the subject. Any links ?

permanent make up said...

Bush idea isn't ridiculous. it's possible! im pro bush!

Michael said...

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hyperinflation will be here soner than many think.