John Williams, who is the founder of ShadowStats.com, stated during a recent interview that the US is on track to become victim of hyperinflation the latest in 2014. He believes that “open ended QE” (which is nothing more than monetizing debt) is the key problem. He explains there is an annual deficit of 5 trillion dollar per year in the US, which includes the unfunded liabilities. He declares the situation “beyond containment”. Central planners are responding to the current economic problems by simply increasing the amount of printed money. John Williams his expectations are that we’ll soon see a heavy sell off in the dollar, quickly followed by a significant first spike in inflation. That will ultimately lead to hyperinflation the latest somewhere in 2014. We are just before the kick off of inflation.
We recently mentioned in our article “Money printing and inflation” that in fact inflation IS the expansion of the money supply. Inflation results in price inflation (the phenomenon of rising prices). Usually there is a time period between those two events, which makes it hard for most people to relate them to each other. Inflation and price inflation are often confused in spoken language but it’s mandatory to understand this fundamental difference.
Hyperinflation is a situation that most people can’t imagine they could go through in their lives. Among economic and financial experts and commentators, it’s a subject that triggers a lot of debate. The least you can say is that there is a consensus on when and how hyperinflation hits. If you think about it, it’s very strange as the world has experienced so many periods of (hyper)inflation. Even in the 20th century, the number of countries that were hit by severe hyperinflations exceeds what most of us expect (see table below; courtesy of Miles Franklin). Honestly, it’s beyond us that even in the scientific world there is no consensus. The funny result is that most people belong to one of the two camps: either they think that inflation and possibly hyperinflation will hit, either they expect a deflationary situation.
Hyperinflation vs inflation
First off, what exactly is hyperinflation? We think that the blog post from FOFOA “Just Another Hyperinflation” is excellent and that it provides an in-depth answer to our question. We consider it a must read for anyone trying to understand the concept of hyperinflation. It also puts the notion of deflation into perspective.
I would like to clear up probably the most common misconception about hyperinflation. What most people believe is that massive printing of base money leads to hyperinflation. No, it’s the other way around. Hyperinflation leads to the massive printing of base money.
Hyperinflation, in most people minds, conjures images of trillion dollar Zimbabwe notes. But this image is simply the government’s reflexive response to the onset of hyperinflation, which is actually the loss of confidence in the currency. First comes the loss of confidence (hyperinflation), then, and only then, comes the massive printing to keep the government and its obligations afloat.
You see, hyperinflation is exactly like deflation. The only thing hyperinflation has in common with inflation is part of its name. It looks just like a deflationary depression. In fact, it IS a deflationary depression, with a different numéraire, being GOLD.
The key in this view is to understand that debt (owned by banks & Central Banks) and credit (in the form of paper money) are not balanced anymore, although they were in the past. A desperate move to rebalance that situation is what (Cental) Banks are aiming to do with their actions. That’s why you see today for example tightened conditions of commercial banks in providing credit or the massive buying of mortgage backed securities and bonds by Centrals Banks. These actions result in a widening gap between debt and credit. It’s against that background that you should interpret FOFOA’s fundamental statement: “Hyperinflation is the process of saving debt-backed assets (MBS’s etc.) at all costs, even buying them outright for cash.”
The point here is that this tactic only works as long as all circumstances remain unchanged. As soon as the awareness on a larger scale kicks in and a tipping point is reached, it will be the market that pushes interest rates higher. Several other types of events could cause the situation to spiral out of control as well. It seems like it’s just a matter of time till one of those things happen! When we reach that point, (Central) Banks will not be able to justify money printing anymore … but the damage will be done, sadly enough.
Mind also the unit of measurement that can make a huge difference in understanding a situation, for example expressing an economic situation in terms of fiat currency or in terms of gold. Measuring a situation in gold for example could show a deflationary view, while in nominal US dollar terms it can look totally different.
The bottom line is what Andy Hoffman wrote: “EVERY fiat currency regime throughout history has COLLAPSED, and EVERY new attempt will do the same.”
Grant Williams about (hyper)inflation
We asked Grant Williams if he thinks hyperinflation will hit in 2014. He is the author of the respected newsletter Things That Make You Go Hmm and is very well positioned to have a clear and neutral view on the economy. He told us that the sharp sell-off in the dollar may not happen for a while as just about every other currency is being overtly weakened simultaneously. However, he believes there is a very real risk of extreme inflation and he doesn’t rule out hyperinflation can kick in.
Grant Williams closely monitors the velocity of money which has been falling since 2008 as well as the excess reserves parked at the Federal reserve which have been rising during the same period.
Right now, the Fed is “confident” that once they get the velocity of money rising, they can simply and effectively stop those excess reserves from pouring into the economy in search of a productive home. Of course, they were also ‘confident’ that subprime was ‘contained’ and that there would never be a national decline in house prices.
If they fail to successfully extricate themselves from the corner they have backed themselves into, then there is a very real possibility of hyperinflation but for it to happen by 2014 is, perhaps, a bit of a stretch.
Financial astrology and (hyper)inflation
We went on for an alternative view by a financial astrologist. Karen Starich from Astrology Traders is specialized in providing specific dates and in-depth analysis of the financial markets.
Karen believes that what Bernanke has done on September 13th had nothing to do with the economy and everything to do with a grab for power and effort to take control of the financial outcome right now. “With Pluto moving direct on the 17th tells me there were already certain algorithms and government statistics that were showing recovery. Pluto moving direct is strong for the dollar. So, the economic numbers were likely to improve in Q4 and the chairman had to make a move to take credit for it or it would appear that with no QE in 2012 that the Fed policies did not work.”
Karen thinks that the dollar is having another pullback in October which will most likely be the bottom. The US will most likely start to see a strengthening dollar particularly at the end of December and into January. Oil prices will most likely stabilize and new drilling begins with the direct motion of Pluto as well. We could see counter intuitive forces in 2013 with the dollar/gold moving higher together and oil going lower. ”Inflation will most likely be gradual.”
She looks at the power elite as semi-gods who are trying to be God. ”The air is very thin up there and I believe they are broke apart their own rigged game which became clear in the Libor scandal, because it does not work anymore. The process will repeat over and over until the people realize that the emperor has no clothes. I personally believe that moment is not too far off.”
Protect yourself with gold & silver
So in the light of all of this to come, whether it is inflation or hyperinflation, the most logic way for you to protect yourself is by preserving purchasing power in the form of Gold & Silver. Since 1913, which is the year where the Central Bank was founded, the US dollar has lost 98% of its value. By contrast, Gold has preserved its purchasing power since then. During a hyperinflationary period, Gold prices surge dramatically. It doesn’t mean though you are making profits when, say, the gold price doubles. You are simply preserving your purchasing power in an environment where the value of the currency has declined by 50%.