Friday , 19 July 2024

Why An Inflationary Depression is Likely in 3 Years and How You Can Protect Yourself

The recently approved eurozone bailout package, designed to buy more time for fiscally troubled nations such as Greece, Spain, and Portugal, is nothing short of a global Greek tragedy in the making. While one would get the impression that happy times are around the corner judging by the response of global stock markets it amounts, in fact, to nothing more than one more nail being driven into the coffin of paper fiat currencies worldwide. Words: 1119

Lorimer Wilson, editor of, provides below further reformatted and edited excerpts from Ganesh Rathnam’s ( original article* for the sake of clarity and brevity to ensure a fast and easy read. Rathnam goes on to say:

What Does the Trillion Dollar EU Bailout Imply?
Rescue plans these days don’t muster up much confidence unless they are at least around the trillion-dollar mark. Sure enough, the announced package was just shy of a trillion dollars, in an effort to, at best, kick the can down the road by three years. In all, the EU and its member countries would kick in EUR 500 billion ($650 billion) while the International Monetary Fund (IMF) will chip in with EUR 250 billion ($325 billion). In addition to these measures, the Federal Reserve agreed to an unlimited dollar-swap agreement with the European Central Bank (ECB) to help contain any unexpected surprises in the coming months from the European debt crisis. The final price will almost assuredly be greater than one trillion dollars; governments are notorious for rosy deficit projections past the current budget year.

a) Another Bailout of World’s Major Banks
Make no mistake, this supposed “containment” boondoggle was yet another bailout of the world’s largest banks. The majority of the PIIGS’s debt (Portugal, Ireland, Italy, Greece, and Spain) is held by large French and German banks. An outright default would have called into question the solvency of these banks for the second time in two years. In addition to being a bailout for the banks, it offers some respite to the PIIGS governments that were either experiencing or in danger of experiencing civil unrest and it gives the short-sighted and jittery stock markets a breather.

b) Potential Future Violence
The bailout, however, sets the stage for far greater problems down the road than if the PIIGS had been allowed to default and restructure their debt obligations. The lessons of the public-workers-union riots in Greece are not lost on government dependents in the rest of the PIIGS – that if enough buildings and vehicles were burnt, and enough people killed, their cowardly governments would cave in to their demands. Moral hazard rears its ugly head again. Therefore, it’s a foregone conclusion that the austerity measures to control spending are doomed to failure.

c) Future Additional Bailouts
The Federal Reserve’s and IMF’s participation in the eurozone bailout will not be lost on union members and politicians of heavily indebted US states such as California and Illinois. When the day of reckoning arrives for the U.S. states who are unable to close their budget gaps and whose pension plans have huge funding gaps, they will be up in arms for their bailout as well. How could the US government politically defend its bailing out Greece via the IMF and the Federal Reserve and refusing the same for its own citizens? The idea that California would be allowed to default on its obligations when Greece wasn’t is unthinkable. Therefore, the bailout of the PIIGS sets the stage for similar bailouts of bankrupt U.S. states and cities.

d) Future Inflation
The Federal Reserve’s involvement warrants a closer examination. The Fed has indicated that it will participate in dollar-swap agreements with the ECB, similar to one it undertook in 2008. Without an audit of the Fed, we can only speculate as to what exactly this swap entails but a reasonable guess is that it is an exchange of freshly printed euros by the ECB for freshly printed US dollars by the Fed at the current exchange rates. The Fed will then use the euros to either directly or indirectly purchase the debt of the eurozone nations. The ECB, in turn, will use the dollars to purchase US Treasury debt. As such, this is just a convoluted scheme to monetize government debt. It’s a cinch that the funds necessary for this bailout will be created out of thin air rather than raised via taxes or issuing debt. Only in the world of central banking and thin-air money creation can one bankrupt entity bail out another.

e) Further Decline in Economic Activity
Thanks to the egregious inflation expected in bailing out Europe and states like California, the pool of real savings in Europe and the US will become an extremely endangered species. By far, the erosion of the real-savings pool is the most damaging aspect of the bailout. Inflation to bail out inefficient or overpriced users of resources, such as government and labor unions, will divert the pool of real savings from wealth creators to these entities [thereby] thwarting their attempts to maintain or expand production levels. If there aren’t enough real savings to cover even maintenance and depreciation expenses of businesses, then the amount of goods and services produced, the real wealth of society, will begin to decline. This is the main reason why countries experiencing runaway inflation also see a decline in economic activity.

f) A 3 year Grace Period
The most alarming aspect of this bailout is that the eurozone, California, et al., will arrive at this same juncture again in about 3 years or so, when they must pay interest on their current debt plus the one trillion in bailout dollars and repay the maturing debt. In addition, they will probably be issuing new debt to fund continuing deficits. There is also a very good chance that creditors may refuse to rollover maturing debt, at which point this process will begin again.

Given that governments are reluctant to take their lumps now, what are the odds that they will do the right thing — outright default and debt restructuring — three years hence when the debt bubble is that much larger, the economy is in worse shape, and the pain of default and austerity is much higher than today’s? The words “slim” and “none” come to mind. The world is firmly ensconced on the path to an inflationary depression.

How Can You Protect Yourself?
Given this dire outlook, what is one to do? Dollar-cost averaging into precious metals such as gold and silver and other select commodities isn’t such a bad idea to protect one’s life savings. Inflationary depressions transfer wealth from holders of paper assets to holders of hard assets.

The bailout has bought a modicum of time for the PIIGS before the noose tightens once again. Fortunately, it has also provided time for the prudent and informed to prepare for the crisis and acquire hard assets while the getting is still good.

* (Ganesh Rathnam has an MBA and a MA in mechanics from the University of Minnesota and currently works for an asset management firm in India. See his website: