July, 2009

Hyperinflation Is On the Horizon!

Definition of Hyperinflation
According to Wikipedia, hyperinflation is defined as follows:

"In economics, hyperinflation is inflation that is very high or out of control, a condition in which prices increase rapidly as a currency loses its value. Definitions used by the media vary from a cumulative inflation rate over three years approaching 100% to inflation exceeding 50% a month. In informal usage, the term is often applied to much lower rates. As a rule of thumb, normal inflation is reported per year, but hyperinflation is often reported for much shorter intervals, often per month."

Examples of Hyperinflation
There are numerous examples of hyperinflation throughout history in such economically and culturally diverse countries as Angola, Argentina, Austria, Belarus, Bolivia, Bosnia-Herzegovina, Brazil, Bulgaria, Chile, China, Georgia, Germany, Greece, Hungary, Israel, Japan, Krajina (incorporated into Croatia in 1998), Madagascar, Mozambique, Nicaragua, Peru, Philippines, Poland, Romania, Russia, Taiwan, Turkey, Ukraine, United States, Yugoslavia, Zaire (now the Democratic Republic of the Congo) and Zimbabwe.

The following descriptions of four of the most prominent cases of hyperinflation are taken directly from Wikipedia:

1. China
   As the first user of fiat (paper) currency, China has had an early history of troubles caused by hyperinflation. The Yuan Dynasty printed huge amounts of fiat paper money to fund their wars and the resulting hyperinflation, coupled with other factors, led to its demise at the hands of a revolution. The Republic of China went through the worst inflation in 1948-49. In 1947, the highest denomination was 50,000 Yuan. By mid-1948, the highest denomination was 180 million Yuan. The 1948 currency reform replaced the Yuan by the gold Yuan at an exchange rate of 1 gold Yuan = 3 million Yuan. In less than 1 year, the highest denomination was 10 million gold Yuan. In the final days of the civil war, the silver Yuan was briefly introduced at the rate of 500 million gold Yuan. Meanwhile the highest denomination issued by a regional bank was 6 billion Yuan (issued by Xinjiang Provincial Bank in 1949). After the Renminbi was instituted by the new communist government, hyperinflation ceased with a revaluation of 1:10,000 old Renminbi in 1955.
   
   
2. United States
   During the Revolutionary War, the Continental Congress authorized the printing of paper currency called Continental Currency. The easily counterfeited notes depreciated rapidly, giving rise to the expression "not worth a continental."
   
   Between January 1861 and April 1865, the Lerner Commodity Price Index of leading cities in the eastern Confederacy states increased from 100 to over 9,000. As the U.S. Civil War dragged on, the Confederate States of America dollar had less and less value, until it was almost worthless by the last few months of the war.
   
   
3. Germany
   Germany went through its worst inflation in 1923. In 1922, the highest denomination was 50,000 Mark. By 1923, the highest denomination was 100 trillion Mark. In December 1923, the exchange rate was 4.2 trillion Marks to 1 U.S. dollar. In 1923, the rate of inflation hit 3.25 x 106 percent per month (prices doubled every two days). Beginning on 20 November 1923, 1 trillion old Marks were exchanged for 1 Rentenmark so that 4.2 Rentenmarks were worth 1 U.S. dollar, exactly the same rate the Mark had in 1914.
   
   
4. Zimbabwe
   Hyperinflation in Zimbabwe has persisted since the early 2000s, shortly after that country’s confiscation of white-owned farmland and its repudiation of debts to the International Monetary Fund. Figures from November 2008 estimated Zimbabwe’s annual inflation rate at 89.7 sextillion (1021) percent (i.e. prices doubled every 24.7 hours). In April 2009, Zimbabwe abandoned printing of the Zimbabwean dollar, and the South African rand and U.S. dollar became the standard currencies for exchange. The government does not intend to reintroduce the currency until 2010.
   

Causes of Hyperinflation
There is a great deal of debate about the actual causes of hyperinflation. However, most hyperinflationary events appear to include the following three root causes:

1. excessive creation or printing of money by a country’s private central bank in an effort to resolve speculative bets on the books of private banking institutions without yielding anything of real value to the economy;
   
   
2. a loss of confidence on the part of the people using a country’s currency for everyday transactions and/or domestic/foreign institutions who have invested in said country’s currency;
   
   
3. a country debt level which is so extreme that cost cutting and/or revenue growth are not viable options to eliminate the debt level.
   
   

The Causes of Hyperinflation Are Present in the United States Today

1. Excessive Money Creation for Non-productive Purposes
   The anecdotal evidence is that the United States Government, via the private central bank known as the FED, has created money in a manner that is unprecedented in our country’s history. Although we don’t know all the details, we do know that the FED’s balance sheet (one measure of money supply) has tripled since September, 2008.
   
   Worse yet, the vast majority of the money spent, lent or committed has not, and will not, be used for producing things of value (roads, schools, bridges, electrical grid upgrades, dams, reservoirs, other infrastructure projects). Rather the vast majority of the money spent, lent or committed has gone to bailing out financial institutions who made bad bets via various types of DERIVATIVE PRODUCTS (refer to my March, 2009 and June, 2009 Commentaries on the evils of DERIVATIVE PRODUCTS).
   
   I say the evidence is anecdotal because we need an audit of the FED to find out the truth. Representative Ron Paul of Texas is the driving force behind HR1207, which now has 256 co-sponsors, to audit the FED. The companion bill in the Senate is S604.
   
   Ben Bernanke, Chairman of the FED, has recently warned that an audit of the FED could trigger an economic collapse. In other words, let the FED do whatever it wants with no accountability to anybody whatsoever or else bad things will happen. Talk about audacity!
   
   
2. Loss of Confidence in the U.S Dollar
   It is clear that foreign investors are losing confidence in the viability of U.S. dollar denominated investments such as Treasury instruments (bonds, notes, bills) and Agency debt (Fannie Mae, Freddie Mac, etc.). Examples of such a loss of confidence are as follows:
   
   
   1. The BRIC countries (Brazil, Russia, India and China), along with Japan, have issued calls for a new world reserve currency to replace the U.S. dollar;
      
      
   2. China has established bi-lateral trade relationships with several countries (Brazil, Russia, South Korea, Malaysia, Argentina, Indonesia, Belarus, etc.) in which trade takes place using the currencies of the two countries, by-passing the use of the U.S. dollar as the clearing currency;
      
      
   3. China has allowed institutions in Hong Kong to issue bonds denominated in its currency, the Renminbi (the Chinese Yuan is the principal unit of the Renminbi and the terms Renminbi and Yuan are sometimes used interchangeably by Westerners). This is a step in creating a domestic and international market for China’s currency;
      
      
   4. instead of purchasing U.S. Treasury and Agency debt in the same quantities as in the past, China is investing its new trade surplus funds in commodities of all types.
      
      
3. Excessive and Unsustainable Debt Levels
   Please refer to my points #6 and #7 of my April, 2009 Commentary entitled "Don’t Believe the Spin that the Economic and Banking Crisis is Subsiding" I have repeated them here to illustrate the dire nature of the United States’ debt levels:
   
   From April, 2009 Commentary:
   
   
   6. The U.S. Government and Federal Reserve have now spent, lent or committed almost $13 trillion in an effort to overcome the longest lasting recession (now in its 17th month) since the 1930’s. By way of comparison, the total GDP (gross domestic product) of the U.S. was just over $14 trillion in 2008. Worse yet, there are clear signs coming from the business, banking, and government fraternities that a lot more money than $13 trillion will be needed to solve the various problems confronting the U.S.;
   
   7. The U.S. Government is projecting a budget deficit of between $1.75 and $2 trillion for fiscal 2009 which ends September 30, 2009 and budget deficits averaging almost $1 trillion annually until 2019. Worse yet, even before these projected deficits for fiscal 2009-2019, the U.S. Government has, based on GAAP (Generally Accepted Accounting Practices), a negative net worth of $59.3 trillion dollars (IT’S BANKRUPT) and total federal obligations of $65.5 trillion. The $65.5 trillion exceeds the GDP (Gross Domestic Product) of the ENTIRE WORLD!
   

Is The United States, Via The Fed, Deliberately Pursuing A Policy Of Hyperinflation?
In my opinion, the answer is a resounding YES! Since the United States is bankrupt, it must pursue one of two courses of action to resolve this mess:

1. default on its debt of all types, thereby advising anybody who has invested in such debt that they will not be paid; or
   
   
2. pursue a policy of hyperinflation so that it can repay its debt of all types in dollars that will be worth far less than they are today.
   
   

In my opinion, the United States, via the FED, has chosen the hyperinflation option as the lesser of two evils.

Expected Impact Of Hyperinflation, Especially If It Follows Derivatives Tsunami #2 (See June, 2009 Commentary) Which I Expect To Be The Case

1. Extremely high prices and/or shortages for the basic necessities of life such as food, medicines, medical care, gasoline, oil, natural gas, propane, etc.;
   
   
2. a dramatic collapse in the value of U.S. Dollar denominated paper assets such as savings accounts, U.S. Treasury debt (bonds, notes, bills), U.S. Agency debt (Fannie Mae, Freddie Mac, etc.), corporate bonds, state and local bonds, etc.;
   
   
3. much higher prices for "hard assets" such as commodities, precious metals, etc;
   
   
4. continued deterioration in the prices of residential real estate and a STUNNING COLLAPSE in the prices of commercial real estate. Expect the latter event prior to year end 2009;
   
   
5. uncertainty with respect to the pricing of common stocks. In a normal hyperinflation, common stocks should skyrocket in price. In this case, any escalation in common stock prices might only accrue to companies involved with precious metals and, possibly, other commodities and energy;
   
   
6. much higher interest rates, possibly reaching the teens or higher;
   
   
7. additional bankruptcies of both large and small companies;
   
   
8. unemployment rates that exceed the 25% - 30% seen in the 1930’s Great Depression;
   
   
9. outright collapse or substantial impairment of public and private pension plans such that individuals will not be able to count on the pension payments that they had expected in their "golden years;"
   
   
10. significant alterations to all entitlement programs funded by the U.S. Federal Government, especially Social Security, Medicare and Medicaid. The bottom line will be a substantial reduction in benefits for almost everyone;
    
    
11. a disproportionate negative impact on the "middle class," which is the backbone of an economically sound country;
    
    
12. secession movements by states which will be somewhat similar to the breakup of the Soviet Union in 1989;
    
    
13. increased protests, crime and violence, possibly resulting in the institution of martial law, as U.S. citizens become more desperate due to loss of jobs, homes, investments, pensions, etc;
    
    
14. increased reliance on various barter systems whereby like-minded individuals trade needed goods and services with each other;
    
    
15. a possible war (there are numerous flashpoints throughout the world) or swine flu outbreak which would serve to distract Americans from their dire economic circumstances;
    
    
16. a possible "bank holiday" in which all banks are closed for an undetermined time so that new bank rules can be imposed, weak banks can be closed, etc.
    

Timing of Hyperinflation
I expect hyperinflation to arrive on the scene as early as November/December, 2009 but certainly by the first quarter of 2010.

Actions You Can Take To Defend Yourself And Your Loved Ones
The first six items below are repeated from my June, 2009 Commentary entitled "Derivatives Tsunami #2 Is On Its Way" Items #7, #8 and #9 are new additions to the list:

1. Don’t believe the "spin" that things are getting better! This will only encourage you to overspend and/or spend on the wrong items at a time when you can least afford to do so;
   
   
2. Make sure you secure fixed (not variable) rates of interest on any debt you have. This will protect you from the coming higher rates of interest;
   
   
3. Try to locate additional part-time opportunities to earn income as your full-time job just might evaporate in the months to come. Especially focus on part-time opportunities that have the potential to become full-time opportunities;
   
   
4. If possible, have a few months of cash available in a safe place outside of the existing banking system in the event a "bank holiday" is declared;
   
   
5. If possible, have a few months of non-perishable food supplies, medicines, and other necessities available in the event of any significant disruption in our "just-in-time" distribution system;
   
   
6. If you have any discretionary investment funds available, consider purchasing a few gold and/or silver coins from a reputable dealer;
   
   
7. Lock in prices, wherever you can, for items such as heating, oil, propane, etc.;
   
   
8. Establish relationships with like-minded friends and relatives so that you have a strong support group to see you through the difficult times;
   
   
9. Above all, THINK FOR YOURSELF! Don’t let anybody else think for you.
   
   

Please remember that it was the actions of the sociopaths in our commercial and investment banks, aided and abetted by our politicians, that permitted the creation, sale and distribution of DERIVATIVES which, in turn, have destroyed, are destroying and will continue to destroy the "American dream" for millions of Americans.

In closing, I’d like to leave you with these words from Thomas Jefferson:

"The system of banking is a blot left in all our Constitutions, which, if not covered, will end in their destruction ... I sincerely believe that banking institutions are more dangerous than standing armies; and that the principle of spending money to be paid by posterity ... is but swindling futurity on a large scale."