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With the U.S. election just six months off, political pressures will mount to
favor fiscal stimulus measures instead of restraint. Such action can only accelerate higher domestic inflation and intensified dollar debasement culminating in a Great Collapse – a hyperinflationary great depression – by 2014. [Let me explain why that is the inevitable outcome.] Words: 2766
So says John Williams (www.shadowstats.com) in edited excerpts from the Overview and Executive Summary* of his No. 414: Hyperinflation Special Report 2012 Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited below for length and clarity – see Editor’s Note at the bottom of the page. (This paragraph must be included in any article re-posting to avoid copyright infringement.)
Williams goes on to say, in part:
U.S. Economic Crisis Continues to Deteriorate
The U.S. economic and systemic-solvency crises of the last five years continue to deteriorate…[and] 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.
Hyperinflation Likely by 2014
Outside timing on the hyperinflation remains 2014, but events of the last year have accelerated the movement towards this ultimate dollar catastrophe.
Following 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. 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.
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Those latter circumstances triggered something of dollar selling panic, particularly as reflected in the corresponding buying of gold and Swiss francs, but various interventions, misdirection and manipulations helped to quell the currency disorders. Still, many financial markets were left rocking with the aftershocks of a major shift in the global view of the U.S. dollar.
Economy Will Continue to Underperform
The economy has underperformed and likely will continue to underperform consensus forecasts by a significant margin. In turn, weaker-than-expected economic growth will mean significantly worse-than-expected federal budget deficits, Treasury funding needs and banking-system solvency conditions.
More Fiscal Stimulus Coming
With the U.S. election just nine months off, political pressures will mount to favor fiscal stimulus measures instead of restraint.
- The Fed [will] be forced to provide new “easing” in an effort to continue propping the banking system (the explanation will be an effort to boost the economy). Given the Treasury’s funding needs, the easing likely will in the form of renewed buying of U.S. Treasuries, with the Fed remaining lender of last resort there.
- Consistent with the precedent set in 2008, the Fed, and likely the Treasury, also will remain in place to do whatever is needed, at whatever cost, to prevent systemic collapse in the United States.
All of these actions, though, have costs in terms of higher domestic inflation and intensified dollar debasement.
U.S. Currency Panic Possible
The U.S. dollar remains highly vulnerable to massive, panicked selling, at any time, with little or no warning. The next round of Federal Reserve or U.S. government easing or stimulus could be the proximal trigger for such a currency panic and/or for strong efforts to strip the U.S. currency of its global reserve currency status.
As the advance squalls from this great financial tempest come ashore, the government could be expected to launch a variety of efforts at forestalling the hyperinflation’s landfall, but such efforts will buy little time and ultimately will fail in preventing the dollar’s collapse. The timing of the early days—the onset—of full-blown hyperinflation likely will be coincident with a broad global rejection of the U.S. dollar, which, again, could happen at any time…
U.S. Fiscal and Dollar Problems Continue to be Discounted
The following graph of Federal Reserve notes versus gold gives a suggestion of how the markets have been discounting the mounting U.S. fiscal and dollar problems since at least 2000.
Graph 1: Federal Reserve Notes per Ounce of Gold
Taxes cannot be raised enough to bring the GAAP-based deficit into balance, and the political will in Washington is lacking to cut government spending severely, particularly in terms of the necessary slashing of unfunded liabilities in government social programs such as Social Security and Medicare.
Bankrupt governments—unable to raise adequate cash to cover obligations—invariably crank up the currency printing presses to do so, creating a hyperinflation…Over the last several years the government and Fed’s actions and policies, and economic and financial-market developments, have continued to exacerbate the circumstance, such that there is significant chance of the early stages of the hyperinflation breaking at anytime. Key to the near-term timing remains a sharp decline in the exchange rate value of the U.S. dollar, with the rest of the world effectively moving to dump the U.S. currency and dollar-denominated paper assets.
Effects of QE2 Have Debased the U.S. Dollar
The current U.S. financial markets, financial system and economy remain highly unstable and increasingly vulnerable to unexpected shocks. At the same time, the Federal Reserve and the federal government are dedicated to preventing systemic collapse and broad price deflation.
To prevent any imminent collapse—as has been seen in official activities of the last several years—they will create and spend whatever money is needed, including the deliberate debasement of the U.S. dollar with the intent of increasing domestic inflation. As shown in Graph 2 [below], those efforts included effective full monetization of recent net Treasury debt issuance. During the period of QE2, and prior to the debt ceiling being hit, the Federal Reserve more than fully monetized net Treasury issuance in the same period…
As the dollar weakened against other currencies, oil prices soared, and that spiked U.S. consumer inflation. Although the Fed likes to tout “core” inflation, net of food and energy costs, the oil inflation also has begun to spread into the broader economy.
Graph 2: Fed Monetization of Treasury Debt
Graph 3: Core Inflation from QE2
As shown in Graph 3 [above], annual “core” CPI-U inflation has risen for fourteen straight months, through December 2011, as a result of the Fed’s actions and remains an indication of a nascent, building inflation cycle. The resulting inflation here is just a foretaste of consumer inflation that likely would result from ongoing Fed “easing” actions.
The efforts to stave off systemic collapse also have resulted in uncontrolled fiscal excesses by the federal government. The deliberate monetary and fiscal abuses have resulted in de-stabilizing pressures against the U.S. currency, in generally rising gold and silver prices, and in the nascent pickup in reported U.S. consumer inflation. That inflation has been driven by unhealthy monetary policy, instead of by healthy economic demand.
Crises Brewed by Federal Government and Federal Reserve Malfeasance
The economic and systemic crises, triggered by the collapse of debt excesses that had been encouraged actively by the Greenspan Federal Reserve, have been centered on the U.S. financial system. Recognizing that the U.S. economy was sagging under the weight of structural income impairment created by government trade, regulatory and social policies…then-Federal Reserve Chairman Alan Greenspan played along with the political and banking systems. He made policy decisions to steal economic activity from the future, fueling economic growth of the last decade largely through debt expansion.
The Greenspan Fed pushed for ever-greater systemic leverage, including the happy acceptance of new financial products…designed for consumption by global entities that openly did not understand the nature of the risks being taken. Spreading the credit risks of banks among other industries, for example, was encouraged actively by the Fed as healthy and stabilizing for both the domestic and global financial systems. Also complicit in this broad malfeasance was the U.S. government, including both major political parties in successive Administrations and Congresses.
As with consumers, though, the federal government could not make ends meet. Driven by self-serving politics aimed at appeasing that portion of the electorate that could be kept docile through ever-expanding government programs and spending, political Washington became dependent on ever-expanding federal deficit spending, unfunded obligations and debt…
In a February 25, 2011 speech, Federal Reserve Vice Chairman Janet Yellen examined the results of the recent use of “unconventional policy tools” by the Fed: “Each of these policy tools tends to generate spillovers to other financial markets, such as boosting stock prices and putting moderate downward pressure on the foreign exchange value of the dollar.”
While Wall Street may hail any artificial propping it can get from the Fed’s efforts to support the markets, more than “moderate” related declines in the U.S. dollar’s exchange rate destroy any illusions of stock gains and savage the U.S. consumers’ dollar purchasing power. A declining dollar can turn U.S. stock profits into losses for those living outside the dollar-denominated world, as funds are converted back to the strengthening currency domestic to the investor. Inflation driven by dollar weakness will do the same for those in a U.S. dollar-denominated environment, where, eventually, inflation can turn U.S. stock profits into real (inflation-adjusted) losses.
Federal Budget Deficit Spirals Beyond Sustainability and Containment
Indeed, the U.S. dollar and the budget deficit do matter, and the future is at hand. As the federal budget deficit spirals well beyond sustainability and containment at an accelerating pace, and as the Fed moves with great deliberation to debase and to impair the purchasing power of the U.S. dollar, to generate rising consumer inflation, the day of ultimate financial reckoning appears to be breaking.
Attempts to Save the System Being Made at Any Cost
The Federal Reserve and the U.S. Treasury moved early in the current solvency crisis to prevent a collapse of the banking system, at any cost. It was the collapse of the banking system and loss of depositor assets in the early-1930s that intensified the Great Depression and its attendant deflation. A somewhat parallel risk was envisioned in 2008 as the system passed over the brink. The decision was made to avoid a deflationary great depression.
Effective financial impairments and at least partial nationalizations or orchestrated bailouts/takeovers resulted for institutions such as Bear Stearns, Citigroup, Washington Mutual, AIG, General Motors, Chrysler, Fannie Mae and Freddie Mac, along with a number of further troubled financial institutions. The Fed moved to provide whatever systemic liquidity would be needed, while the federal government moved to finance corporate bailouts, to guarantee any instruments or entities it had to, and to introduce large amounts of short-lived stimulus spending…
New Gov’t Initiatives Have Severely Negative Impact on Federal Deficit
In the still-early days of the crises, the Obama Administration pushed ahead with its social agenda, introducing major new government programs such as federal government control of healthcare and health insurance. Irrespective of stated goals of not increasing the federal deficit further, the resulting healthcare/insurance legislation will have a severely negative impact on the federal deficit—as will most other new legislation and “stimulus” efforts, either from massive net expenses, or from losses in tax revenues in an ever-weakening economy…
Efforts to save the system at any cost likely will continue as long as possible, with the government spending whatever money it and the Federal Reserve need to create, until such time as the global financial markets rebel. The ultimate cost here, though, will be in inflation and the increasing debasement of the purchasing power of the U.S. Dollar, and an eventual dollar collapse beyond any government or Federal Reserve control.
U.S. Economy Is Not Recovering
Economic activity in the United States began to decline in 2006 or early-2007, and it plunged from late-2007 into 2009 at a pace not seen since the Great Depression. Subsequently, economic activity has been bottom-bouncing, with some boosts from short-lived stimulus effects. Without any fundamental turnaround in structural consumer-income problems that have been driving the downturn, and with contracting, inflation-adjusted systemic liquidity, the economy has started to slow anew.
Despite pronouncements of an end to the 2007 recession and the onset of an economic recovery, the U.S. economy still is mired in a deepening structural contraction, which eventually will be recognized as a double- or multiple-dip recession. Beyond the politically- and market-hyped GDP reporting, key underlying economic series show patterns of activity that are consistent with a peak-to-trough (so far) contraction in inflation-adjusted activity in excess of 10%, a formal depression.
Existing formal projections for the federal budget deficit, banking system solvency, etc. all are based on assumptions of positive economic growth, going forward. That growth will not happen, and continued economic contraction will exacerbate fiscal conditions and banking-system liquidity problems terribly.
Hyperinflation Nears
As previously noted, before the systemic-solvency crisis began to unfold in 2007, the U.S. government already had condemned the U.S. dollar to a hyperinflationary grave by taking on debt and obligations that never could be covered through raising taxes and/or by severely slashing government spending that had become politically untouchable. Also, the U.S. economy already had entered a severe structural downturn, which helped to trigger the systemic-solvency crisis.
Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover obligations. The alternative here would be for the U.S. eventually to renege on its existing debt and obligations, a solution for modern sovereign states rarely seen outside of governments overthrown in revolution, and a solution with no happier ending than simply printing the needed money. With the creation of massive amounts of new fiat dollars (not backed by gold or silver) comes the eventual full destruction of the value of the U.S. dollar and related dollar-denominated paper assets.
The U.S. government and the Federal Reserve have committed the system to its ultimate insolvency, through:
- the easy politics of a bottomless pocketbook,
- the servicing of big-moneyed special interests,
- gross mismanagement, and
- a deliberate and ongoing effort to debase the U.S. currency…
Conclusion
Further easing by the Fed is likely in the months ahead, as the ongoing economic turmoil triggers significant further fiscal deterioration. Those actions should pummel heavily the U.S. dollar’s exchange rate against other major currencies. Looming with uncertain timing is a panicked dollar dumping and dumping of dollar-denominated paper assets, which remains the most likely event as proximal trigger for the onset of hyperinflation in the near-term.
The early stages of the hyperinflation would be marked simply by:
- an accelerating upturn in consumer prices…
- a spike in money supply velocity as the U.S. dollar, again, comes under heavy and even disorderly selling pressure, with both domestic and foreign holders getting rid of their dollar holdings as quickly as possible…
Given the current lack of political will by those controlling the U.S. Government to address the fiscal solvency issues, the U.S. has no way of avoiding a financial Armageddon. Various government intervention tactics might slow the process for brief periods…[such as:]
- supportive dollar intervention,
- restrictions on international capital flows,
- wage and price controls, etc.
Effects of any such moves in delaying the onset of full hyperinflation, though, would be limited and short-lived. There is no obvious course of action or external force at this point of the process that meaningfully would put off the nearing day of reckoning.
What lies ahead will be extremely difficult, painful and unhappy times for many in the United States. The functioning and adaptation of the U.S. economy and financial markets to a hyperinflation likely will be particularly disruptive. Trouble could range from:
- turmoil in the food distribution chain,
- electronic cash and credit systems unable to handle rapidly changing circumstances,
- political instability.
The situation quickly would devolve from a deepening depression, to an intensifying hyperinflationary great depression.
While resulting U.S. economic difficulties would have broad global impact, the initial hyperinflation should be largely a U.S. problem, albeit with major implications for the global currency system.
Long-term Survival Strategies
For those living in the United States and those holding or dependent upon U.S. dollars or dollar-denominated assets, and those living in “dollarized” countries, long-range strategies should look to assure safety and survival.
1. In terms of survival on a day-to-day basis, U.S.-based individuals should be building a store of goods in preparation for a man-made disaster, much as they would for a natural disaster such as an earthquake. Economic activity probably would devolve to a barter system, but such could take months to become fully functional.
2. From a financial standpoint survival means preserving wealth and assets.
- physical gold (sovereign coins priced near bullion prices) remains the primary hedge in terms of preserving the purchasing power of current dollars.
- silver is in this category.
- holding stronger major currencies such as the Swiss franc, Canadian dollar and the Australian dollar, likely are good hedges.
*http://www.shadowstats.com/article/no-414-hyperinflation-special-report-2012
Editor’s Note: The above article has been has edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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