THE GLOBAL FINANCIAL DEATH SPIRAL?
By Kristie Pelletier and Michael S. Coffman, Ph.D
September 7, 2013
Part III—Inflation or Hyperinflation?
Following [Federal Reserve Chairman] Mr. Bernanke‘s extraordinary efforts to debase the U.S. currency in late-2010, the dollar had lost its traditional safe-haven status by early-2011. Whatever global confidence had remained behind the U.S dollar was lost in July and August 2012. That was in response to the lack of political will—shown by those who control the White House and Congress—to address the long-range insolvency of the U.S. government, and as a result of the later credit-rating downgrade to U.S. Treasury debt. —John Williams, American Business Analytics & Research, LLC, 2012
The Obama administration and the mainstream media would have the American people believe that we are in a recovery following the deep recession caused by President Bush. It’s just a matter of time, we are promised, before the economy is once again robust and people are back to work. After all, claims Morgan Stanley’s CEO, James Gorman, “When [bond] rates rise, it is a reflection that the economy is recovering.” Louis Basenese, Co-Founder, Chief Investment Strategist for Wall Street Daily agrees: “Contrary to conventional wisdom that rising rates will undercut this economic recovery, it’s actually a sign that the economy is getting back to normal and won’t need the Fed to prop it up much longer.” The Fed is the Federal Reserve, the U.S. Central Bank.
Unfortunately, these are all empty promises surrounded with flashing lights, bells and whistles to distract the American people from the nasty reality that we are heading for dire trouble. It maybe even a collapse that will make the Great Depression look like a walk in the park. This is not the opinion of the authors; it is the concern of dozens of well-known economists and financial advisors cited below. John Williams, in his report above, believes that the “precursors to ultimate dollar disaster are in place; 2014 remains theoutside timing for same.” (Italics added)
Williams is a top economist who has had numerous major Fortune 500 corporations as clients. He realized the government was cooking the books to make the economy appear better than it is. He found it to be so bad that any semblance to reality was coincidental. For instance, if today’sunemployment was calculated the same way it was in the Great Depression(including long-term unemployment), it would be over 23 percent; just as bad as the Great Depression. Obama (and presidents before him) have covered up the suffering Americans should be undergoing with the huge government deficits and mammoth debt accumulations needed to pay for unemployment, welfare and other distorted social programs. Even the more July, 2013 U6 unemployment rate which includes those want to work full time, but can’t find a full time job, is 14.0 percent.
While the Obama administration is trying to hide the same type of suffering that occurred during the Great Depression with huge deficit spending, the facade is starting to crumble. Median family income is down by a minimum of $2,500 annually. Increasingly, it is being called the new normal. As is discussed in Part V of this Financial Death Spiral series, Obamacare and Obama’s Keynesian economics is destroying American lives and families. Tragically, this debt and Quantitative Easing (printing money out of thin air) will not end well for the U.S. and her citizens.
Similar to the corrupted unemployment statistics used to hide the shocking truth, consumer inflation today (July 2013) as calculated using 1980methodologywould be 9 percent. It is not the 2.5 percent reported by the federal government. While harming everyone, this hurts seniors on Social Security (SS) the most.SS benefits are calculated using the 2.5 percent consumer price index (CPI). While real inflation has been close to ten percent every year for the past three years, SS benefits have only gone up 2.5 percent; for just one year. SS benefits are buying less and less over time.
CPI no longer includes food and fuel costs to the consumer. Billionaire Steve Forbes (Forbes Media), Bob Wiedemer (economist and author of NY Times Best-Seller Aftershock), James Rickards (economist and security advisor to the Pentagon, CIA and the Director of National Security) and Sean Hyman (global currency analyst and advisor) presented stunning information in their video presentation called “Currency Wars.”After doing the math, they found that food prices have inflated 148 percent and energy prices 468 percent since 2001. This is a shock to the entire economic system, but especially impacts the poor and elderly consumers the most on a day to day basis.
There is a huge difference between what the Fed is doing today compared to the Great Depression. During the Great Depression, the Federal Reserve (Fed) contracted the economy by printing less money. Today the Fed isexpanding the economy by deficit spending and printing money out of thin air called “monetization.” Otherwise, the recession of 2009-2011 would have likely turned into a real depression. Nonetheless, even though the impact of the recession was initially hidden by government spending, the underlying economic hollowing is still occurring. The correction has not yet occurred. The longer the correction is postponed the worse the consequences, perhaps much worse than the Great Depression. Williams believes this will lead to hyperinflation:
The U.S. economic and systemic-solvency crises of the last five years continue to deteriorate. Yet they remain just the precursors to the coming Great Collapse: a hyperinflationary great depression. The unfolding circumstance will encompass a complete loss in the purchasing power of the U.S. dollar; a collapse in the normal stream of U.S. commercial and economic activity; a collapse in the U.S. financial system, as we know it; and a likely realignment of the U.S. political environment. Outside timing on the hyperinflation remains 2014, but events of the last year have accelerated the movement towards this ultimate dollar catastrophe.
Is the hyperinflation Williams predicts correct? Economists sharply disagree. For instance, economist James Montier doesn’t think so. Typically, economists believe that hyperinflation occurs when nations print money out of thin air (monetization) in order to cover huge deficit spending. It’s the classic theory of too much money chasing too few goods, resulting in rising prices to compete for the too few goods. If that was the only thing that caused hyperinflation, the U.S. would already be in it. Most economists thought inflation would skyrocket when the Fed starting monetizing the debt in November of 2008.
To help explain why the U.S. is not already in hyperinflation, Monitier has to get down into the weeds where most American’s eyes glaze over and they lose interest – at their peril. If this describes you, understand this:President Obama’s constantly claim he is “saving the middle class” is nothing but misdirection and theater. In fact, he is destroying it. To grasp what is happening, try to wade through the following pages of discussion. ExplainsMontier:
It takes something much worse than simply printing money [to create hyperinflation]. To create the situations that give rise to hyperinflation’s, history teaches us that a massive supply shock [disasters that interrupt supply of goods, like war], often coupled with external debts denominated in a foreign currency, is required, and that social unrest and distributive conflict help to transmit the shock more broadly. On the basis of these preconditions, I would argue that those forecasting hyperinflation in nations such as the US, the UK, or Japan are suffering from hyperinflation hysteria.”
Montier gives numerous examples of this fundamental need to create a massive supply shock. One of the most widely known examples of hyperinflation is the Weimar Republic (Germany). Germany’s productive capacity had been significantly damaged by World War I, both in terms of factories destroyed and the resources redirected to military use. These events clearly constituted a large supply shock. Following the war, the allies forced war reparations on the Republic which had to be repaid in gold. Germany was expected to earn this gold through exportation of manufactured goods, but it no longer had the productive capacity to even meet domestic demand, let alone have enough to export much of anything to achieve income needed to buy gold. This added even more shock to the ability of Germany to supply products of every sort.
Germany argued that the reparations were to blame for the hyperinflation. The unfavorable trade balance (lots of imports but no exports) caused the depreciation of the German mark. Inflation was“not the cause of the increase in prices and of the depreciation of the mark; but depreciation of the mark [was] the cause of the increase in prices and of the paper mark issues.”
Is the U.S. Heading for Inflation?
Certainly, Montier and other like-minded economists are correct as far as they take it. Since the U.S. has not suffered from massive supply shock like a war, this could be part of the reason we have not seen high inflation, let alone hyperinflation. Even so, inflation is much higher than the government would have us believe – up to 13 percent since 2008 according to Williams.
However, the world has never seen the type of economic crisis that exists today. As detailed in our companion articles, “The Financial Death Spiral, Parts I & II – Global Troubles” Europe, Japan, China and many other nations are on the verge of collapse. Japan’s bond market is in meltdown and China’s hidden debt puts a lie to all the glowing prosperity it publicly shows the world. The Third Currency War and the attack on U.S. dollar as the world’s reserve currency spell big problems for everyone, especially Americans.Montier even admits the European quagmire, created by socialist overspending and bad policy decisions could lead to Eurozone hyperinflation:
If one were to worry about hyperinflation anywhere, I believe it would have to be with respect to the break-up of the eurozone. Such an event could create the preconditions for hyperinflation (an outcome often ignored by those discussing the costs of a break-up). Indeed, the past warns of this potential outcome: the collapse of the Austro-Hungarian Empire, Yugoslavia, and the Soviet Union all led to the emergence of hyperinflation!
Montier, however, is not thinking big enough, nor is he considering the potentially cataclysmic impact of the loss of the dollar’s reserve currency status. Nor has he considered debt in the brew of troubles discussed previously. The U.S. national debt is $17 trillion with another $125 trillion inunfunded entitlement liabilities as of August 2013. That’s over $1.2 million per taxpayer. That’s not even including state debt and unfunded liabilities of over $4 trillion and $2.8 trillion, respectively.
Stansberry notes that “We began the year 2013 with a net public debt that has more than doubled since the year BEFORE Barack Obama took office…Various other government agencies and private companies taken over by the government also have obligations of nearly another $5 trillion.” That totals to $27 trillion! We have more government debt than any country in the history of the world, including all of Europe.
There is only one bright spot. Personal debt is going down as private citizens are getting out of debt as fast as they can. Personal purchases are almost in balance with people’s paychecks for the first time since 1965. Citizens are apparently a lot smarter than their government.
This unprecedented increase in debt due to a failed economic theory called Keynesian economics. This will be discussed in Part V of the Financial Death Spiral series. It is crystal clear, however, that the Keynesian model the U.S. (and Europe) has been following since Franklin D. Roosevelt is not only reckless, but insane.
To put this in context, the Fed cites the M0 –all U.S. dollars in the entire world at any one moment in time – skyrocketed from about $26 trillion in July, 2012 to $31 trillion in July, 2013 – a 19 percent leap! This is the result monetization. True that $31 trillion is recycled many times during the year to add up to hundreds of trillions of dollars, but you get the point. This is so serious that billionaire Jim Rogers, founder of the Quantum Fund and creator of Rogers International Commodities Index (RICI), has warned, “There’s this gigantic artificial flow of money floating into our economy, and this is going to end badly because it is artificial.” Rogers continues in another interview, “The first two central banks in the U.S. went bust and the Greenspan-Bernanke Fed will, too.” Rogers is so convinced of the coming collapse he has pulled all his money out of the U.S.
There is simply no way we can possibly pay off the national debt and unfunded entitlement liabilities. None.The only possible exception is to rein in the Fed, slash unneeded regulations to allow the free market to work like it should, and dramatically reduce the size and funding of the federal government. Even then, we would have to prepare for a decade or more of belt-tightening. More on this in Part V of the Financial Death Spiral series. Unfortunately, the present administration and the desire of the citizenry to demand more and more government handouts (as shown in the ballot box and polls), the probability of that happening is near zero. The only other possibility is high inflation or hyperinflation when the dollar is debased to essentially zero, allowing the debt to essentially become worthless.
It’s actually worse. The M1 Money Supply– money that is not in the U.S. Treasury, Federal Reserve, or in vaults of depository institutions[a] – onlyincreased 11 percent compared to 19 percent for the M0 monetary supply. That’s almost half the percentage increase of the M0 supply created with Quantitative Easing. If the M1 supply is only increased at 50 percent of the M0 increase, half of the M0 increase went into the Treasury, Fed or other depository vaults, not into Main Street where it would have benefited the middle class. However, it would have also caused inflation to jump.
The federal government’s claim that our inflation is only 2.5 percent is a malevolent misdirect designed to deceive the American people while our government and the Fed are bleeding us dry, all while papering over the real truth of the U.S economy. Since Federal Reserve Enabling Act requires U.S. citizens to pay back most of this insane borrowing,[b] the Fed and U.S. government is also stealing from the middle class to make the rich richer. That is outright theft on a staggering scale.
While Obama and the progressives badmouth the 1% for being too greedy, it’s actually the Obama administration, the progressives on both sides of the isle, and the Fed that are guilty of making it happen. The so-called 1% is only doing what they are legally allowed to do. While the 1% is not guiltless, the real scam belongs to Obama and the progressives who are guilty of creating this monster, with no small pressure from lobbyists, while deftly shifting the blame onto the Republicans and the 1%.
Going back to the conflicting theories of Montier and Williams discussed in the introduction of Part III, we are not having a “massive supply crises triggered by a war” (although the currency war could start an conventional war), as Montier says is needed to create hyperinflation, but a massive crisis triggered by the huge debt, the Fed’s monetary debasement, currency war, and/or loss of the dollar as the world’s reserve currency as described by Williams. The U.S. could survive any one of the financial crises discussed in this series, except the loss of the dollar as the world’s reserve currency. But, not all of them simultaneously.We seem to be approaching the perfect storm for a major financial collapse and perhaps hyperinflation.
Stansberry summarizes the deep concern of dozens of economists/financial experts when he says:
I expect there will be a near-complete shut-down of the American economy. Life as we have known it for more than 40 years will essentially cease to exist. Our governments on both the Federal and State level will shut down. Banks will not open. Businesses will at least temporarily shutter their doors. I expect we’ll see martial law, enforced by the U.S. military.
Deceit seems to rule in Washington no matter who is president or in power in Congress. Unfortunately this is one of the symptoms of a government having almost no checks and balances. It’s perhaps worse when progressive democrats are in power because they salivate at the idea of big government having absolute power to crush all opposition, while getting wealthy at the expense of the people they are supposed to serve. Republican progressives can be as bad. They are the primary architects who salivate after military might and have conspired with the progressive liberals to create a world government and constructed the financial house of cards that put us in this financial death spiral.
How Quantitative Easing is already causing the bond market to crash, soon to be followed by the stock market and high inflation (maybe hyperinflation) is the subject of Part IV in the Financial Death Spiral series.
Click here for part —–> 1, 2, 3, 4,
Part I—The Disintegration of the Global Financial Architecture
Part II—China, Currency Wars and the U.S. Dollar
Part III—Inflation or Hyperinflation?
Part IV—The Bond Market Crash
Part V—The Failure of Keynesian Economics
Part VI—The Success of Austrian Economics
Part VII—The Root of What’s Wrong – Progressivism
[a] M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of non bank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits(OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions.
[b] G. Edward Griffin. The Creature from Jekyll Island.