On Hyperinflation (Dire predictions. Be forewarned.)

The Market Ticker - Commentary on the Capital Markets ^ | 1/12/09 | Karl Denninger

[randita]

On "Hyperinflation"

The Market Ticker

Monday, January 12. 2009

Posted by Karl Denninger

at 09:44

On "Hyperinflation"

Let's put this to rest right here and now.

"Hyperinflation", or even "Serious Inflation" (similar to what we had in the 1970s) is impossible without a means to transmit the rise in prices into wages.

In today's United States that simply cannot happen for two reasons:

• The union representation of workers has been eviscerated due to their own idiocy over the previous thirty years. In effect, they have no power to impact economic or labor policy - no matter what Gettlefinger thinks.
• Outsourcing of work to China, India, Mexico and other nations makes wage demands impossible for American workers to enforce. Such demands simply result in the loss of the job to overseas workers.

As a consequence a hyper-inflationary or even seriously-inflationary spiral is impossible to sustain.

Think about your associates, people who you know in the middle class.

Now consider that a 10% inflation rate (moderately bad "serious inflation" ala 1970s) goes on for four years.

This raises the cost of living for everyone by 46%.

How many people who you know are saving 46% of their income? How many will survive a 46% increase in their cost of living?

Such an outcome will result in half or more of America becoming immediately homeless, hungry, and as a consequence out of work. It will as a consequence crash GDP by 50% or more immediately which in turn will crash income tax receipts by a like amount at both state and federal levels.

This will in turn crash prices, but at that point it's too late as now the price crash in turn destroys what remains of the business community and further crashes tax receipts, while at the same time foreign bond investors throw up their hands and say "screw you!", cutting off all foreign capital inflows to the government.

Down that road lies immediate insurrection - that is, the violent overthrow of the government. You are delusional if you think the military could stop such a thing - 150 million Americans, maybe even 200 million of the 300 million in our population? Not a prayer in hell, even if all the Americans had was pitchforks, torches and a gallon of gasoline, and they don't - they have firearms, and lots of them. Even the Chinese, who are (by demonstrated act) willing to roll tanks over their own people would have no chance against 100 million of their citizens if hunger ever trumps fear.

This didn't happen in the 1970s because we had vastly more union work representation and they were able to force wages to keep pace for the average working man. While the pinch was bad (I grew up in it and remember it vividly) society never degenerated because the self-reinforcing crash of production, jobs and tax income never happened, and as a consequence the sort of mass-unemployment, disenfranchisement and loss of essential human needs did not come about.

Today the average working man works for WalMart or some other non-union shop and has no wage pricing power; ergo, there is absolutely no way to prevent the implosion from initiating.

The government must not engage in any sort of policy that could lead to this outcome. Absolute protection at the top levels of government must be put in place to prevent it, because if this occurs then everything - absolutely everything - that we know and love about America disappears.

This is where the Peter Schiffs and McHughs are wrong in their hyperinflation thesis and their "defensive" measures to try to do something about it (or worse, McHugh's belief that not only is this inevitable but that the government should intentionally cause it through something like a "money drop" to households.)

They are wrong because if this outcome occurs there will be no United States of America, your gold will be confiscated and/or rendered worthless by executive fiat, and at approximately the same time an angry marauding mob consisting of half the population of the country will literally loot and burn everything to the ground.

Vengence inevitably follows when justice is denied for a long enough or in an egregious enough fashion. We have seen this with Rodney King and now with the apparent BART assasination of a suspect in Oakland, and that was one man who was abused at the hands of government. Make the abuse half the population and there is a zero chance that civil and political order is maintained.

Pray that our nation's leaders aren't stupid enough to set in motion such a course of action either by accident or under the foolish belief that they can "keep the outcome under control".

Time is running out to demand and obtain justice folks. America's clock is literally ticking towards zero.

Trackbacks

Trackback specific URI for this entry

No Trackbacks

Comments

Discussion takes place at The Tickerforum Comment Zone (registration required to post)

Quicksearch

Calendar

January '09

Mon	Tue		Wed	Thu	Fri	Sat	Sun
			1	2	3		4
5	6	7	8		9	10	11
12	13		14	15	16	17	18
19	20	21	22	23		24	25
26	27	28		29	30	31

2008 Review, 2009 Forecast

Where We Are, Where We're Heading (2009)

Archives

January 2009
December 2008
November 2008
Recent...

All Topics By Date...

RSS Syndication

RSS 1.0 feed

RSS 2.0 feed

ATOM 1.0 feed

Great Places On The Web

• • Mish's Global Econ

  • Charles Hugh Smith
  • Perot Charts
  • Great Depression 2006
  • London Banker
  • Mark Wadsworth
• • RebelTraders
  • The Fund Blawg

• • Mortgage-Implode
  • Mr. Mortgage
  • California Housing Forecast
  • Bank REO
• • Bloomberg
  • WSJ (Subscription)
  • Financial Times (Sub)
• TickerForum

• Musings Of A Sentient Mind

Get ITunes (and other spoken audio) access to The Market Ticker

Reciprocal links? Email info@cudasystems.net with your request.

Top Referers

www.tickerforum.org (3965)
www.stumbleupon.com (2492)
www.google.com (1353)
ml-implode.com (1186)
patrick.net (1042)
www.denninger.net (811)
www.newsgator.com (275)
www.321gold.com (235)
www.fedupusa.org (230)
my.yahoo.com (223)

Legal Disclaimer

The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.

NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.

The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

Looking for "The Best of Market Ticker"? Check out Ticker Classics.

Visit the forum to discuss this and other investing-related topics; see the FAQ on the forum for information about Gold Donor status.

All material herein Copyright 2007/2009 Karl Denninger. All rights reserved.

 

[randita]

Before you dismiss him out of hand, go to his website and read his predictions for 2008. He was right on the money.

Then read his predictions for 2009.

[randita]

I dunno, I see this all as being a GOOD thing. This is how we get our country back...

You must not have any children or grandchildren.

[Tublecane]

“but when people are starving, they will vote for the devil himself if he promises them food”

There it is right there: “promises”. My point was that he did not deliver, but I guess the voters were more than happy to eat his promises for supper every night.

FDR may have given some people some food, but he didn’t deliver on returning the economy as a whole back to a place where everyone could feed themselves. Ultimately, the difference between how history views Hoover and Roosevelt is that it takes FDR at his word and rewards his good intentions, whereas, for whatever reason, it mistrusts everything Hoover ever said. PR is king!

[Lurker]

Where in the Constitution does it say the government can yank money out of my earnings?

The 16th Amendment.

Just saying...

L

[Publius]

Much of Denninger's article is on the money. In the current environment, deflation is the rule, and inflation is impossible because pricing power has been destroyed.

But in a fiat money system, survival is based on the adage, "Inflate or Die!" One does not get on the Federal Reserve board unless one has testified to Congress of the willingness to inflate to couteract a Kondratieff Winter event, which is something we've entered. Deflation destroys the welfare state as it destroys the entire fiat-based economy. This is why the natural tendency of politicians is to reflate any burst bubbles.

Paul Volcker has been lauded for "breaking the back of inflation", but all Volcker really did was move the inflationary bubble in consumer prices to stocks, setting off a 25-year secular bull market. The money also went into real estate. Confidence in the private sector had been restored, so money left government hands (cash and bonds) for assets in the private sector (stocks).

Over 25 years, that bubble got moved around, from real estate to stocks to real estate again. Now the bubble is in Treasuries, which are producing a negative rate of return as people run into the government's arms. As long as this continues, we will follow Japan's path into zero-rate hell. Survival of the system requires inflation, which is why we're trying one "stimulus" concept after another. The bubble needs to be moved into private assets again.

But if the supply of future bonds is to explode, where does the money come from to finance stimulus? The Chinese are altready discreetly moving out of bonds and into gold. Once we have our first failed auction and the rest of the world understands that the dollar can no longer be relied upon as a reserve currency, how do we finance our reflation efforts?

The answer comes from a scholarly paper published by the Fed in 2004. It suggested that because the government has a prior claim on IRA's and 401(k)'s due to their tax defered status, the government could seize those accounts and place them under the control of the Social Security Administration, which would create a huge pool of capital to finance government borrowing. This has already been brought to the attention of Congress but under a different guise. The argument is that because 401(k)'s are shrinking into 201(k)'s, government might need to take control of these accounts "for good of the people" to guide them into good, safe, reliable government bonds which will never lose value. Of course there will be a popular outcry.

This is where Richard McHugh and his "money drop" idea come in.

McHugh has argued that bailing out banks, Wall Street and Big Business are all well and good, but nothing will improve until Main Street is bailed out, and Main Street's problem is excessive debt. McHugh has suggested that Congress refund 5 to 10 years worth of income taxes to individuals and small businesses with the proviso that the money be used to pay down debt: credit card debt, student loan debt, car loan debt and -- most importantly -- mortgate debt. The remainder could be spent or invested. Those who were wise enough to avoid debt could spend or invest the full amount.

Denninger argues that this would lead to a hyperinflationary environment, which is true. But it would also solve the deflation problem that threatens to undermine the welfare state.

If McHugh's money drops were added to the mix to sweeten the seizure of people's retirement accounts, if would make the seizure acceptable politically. Your left hand gets robbed, while you get a money drop in your right hand. This is why I suspect both ideas will have a longer shelf life than Denninger suspects.

One of the reasons that Card Check is geting a good reception in Congress is to give workers more pricing power to support a more gentle inflation rather than find all the money running to stocks, gold and real estate.

Bottom line: Congress has to reflate this bubble unless it is willing to accept a return to the harsh discipline of the gold standard (or some other hard money standard), the end of the welfare state and the general shrinkage of the US government until it is small enough to fit into the constitutional prison that Madison designed for it. Congresscritters will never vote themselves out of a job, and the American people want nothing to get between them and their government checks.

In this political environment, deflation cannot be tolerated.

[Doomonyou]

Bumparoo

[blam]

"We could be approaching a global depression, and with the advent of technology and computers, it may engulf us at a speed most can’t comprehend. Depression at the speed of the internet, rather than the slow motion 30’s style. That is what truly frightens me."

It's a concern of mine too.

[mlo]

I don’t know if there will be hyperinflation or not, but let me make a note to myself.

Never waste my time listening Karl Denninger, whoever he is.

This is just dumb. Strong unions have nothing to do with inflation. Supply and Demand rule money just like any other market. Increase the supply of money without changing the other side of the equation and you will get inflation.

Companys will be forced to pay higher wages to stay in business. As Denninger himself points out, if nobody can pay their bills they’ll have no reason to go to work. Unions aren’t necessary to balance the equation.

[blam]

Gold Sinks Through "Major Support" as Zero-Yielding Currencies Rise; Physical Trading Jumps on "Safe Haven" Bid

[Xenophon450]

This is the crux of the inflation/deflation argument I have witnessed on multiple forums. I believe when deflation becomes a large enough issue, the Government will step in with all of it's wisdom and mandate forced lending. And that is when inflation will begin to occur. I could see Obama doing something like this, in conjuncture with congress and the Fed.

And then there's the stimulus checks...

[yefragetuwrabrumuy]

Old Frank did deliver—to Democrat party apparatchiks who then dispensed the jobs and largesse. It was particularly obvious in my town, as two brothers lorded it over the townspeople because they were lower level party functionaries.

To this day, party Democrats remember that as being “good times”, and long for the day when they had power over others, like so may zampolit, or political officers. For the first time in their lives, somebody had to bow and scrape before them, or do without.

And there was a continual media drumbeat that the Democrats provided food, jobs and housing, and the Republicans had taken them away. Importantly, the end result was the conversion of many of the people to “permanent Democrats”, who stayed with the party for decades.

Ronald Reagan, who self-identified as a New Deal Democrat, was ironically the person who finally ended their iron grip on power.

So it is vital that conservatives and Republicans remember those painful lessons. If Obama and company go up in a sheet of flame in two years, with a Republican sweep of congress, their first inclination will be to solve the problem.

And this might be a bad mistake, because Obama will take the credit for it. In Hoover’s last term, he had a Democrat congress that refused most of his economic reforms. They *wanted* a depression, because they wanted power.

Like it or not, the Republicans might have to return the favor, and let the Democrats be the minority party for 50 years. As Pelosi just demonstrated, the Newt Gingrich reforms only mattered when Democrats profited from them. Now that Democrats are in charge, they feel perfectly fine with double crossing the Republicans, and taking all power for themselves.

America was dumb enough to elect Democrat everything. So if in two years Republicans win back congress, it has to be two more years of letting Americans blame the Democrats, and then the next president, a Republican, gets credit for getting America back on its feet again.

And the Democrats get nothing, except to be despised for half a century.

[An Old Man]

It will be very interesting to see that black hair turn white. I give it 18 Mos. before it begins to show.

[sickoflibs]

It's funny to follow Peter Schiff and then watch someone like Cramer with these theories that look so stupid now (GWB defenders claim the GWB boom would have continued forever if not for subprime loans.) . Cramer also told his audience to run out and buy houses to fuel the inflation he desires.

Schiff and Jim Rogers say American is done and Asia is the next powerhouse, future of finance. Wish I had a Crystal ball to know who is right now(will we have inflation, or delation?). I also wish I followed Schiffs advice and sold my stocks in 2007. Something told me he was right and the others were wrong when I saw him briefly on Cavutobut I lacked confidence.

[wastoute]

Au Contraire! It is precisely BECAUSE I do have that I say we need (as Zero would say) take advantage of the crisis.

[An Old Man]

Pray that our nation's leaders aren't stupid enough to set in motion such a course of action either by accident or under the foolish belief that they can "keep the outcome under control".

Based upon everything I have read about this since the election, I believe Obama and the congress are actually going to try to spend their way out of this.

They have no clue as to what will happen to them if they try.

[hiredhand]

I’ve been saying that as well...that the nation will NOT make it through intact. At some point, it will be more advantageous for states to recede from the Union. We’re progressing towards that now.

[hiredhand]

It's been quite interesting to watch because when I started telling people what I saw back in late 2005, they waved me away and laughed. Now a good many of these people have been asking me what I "think" will happen because they think I can see into the future or something strange like that. All I did is TELL them what I saw occurring. They want to know what I'm doing about it, but they are so far from me and my type that what I usually tells them only makes them feel worse.

These people are like Ostriches with their heads stuck in holes in the ground...ignoring everything that goes on around them. The biggest problem with being like this is that it leaves your bottom up in the air and EXPOSED.

[Republic of Texas]

Is a violent overthrow of the federal government an impossible outcome at this point? I see a steady march to that conclusion.

[Chode]

UP.

[adm5]

First of all, if you haven't watched this, it will blow your mind: 30-minute version of I.O.U.S.A.

Then, realistically ask yourself one simple question.

HOW WILL THE UNITED STATES DEAL WITH THIS DEBT?

Answer: Massive Hyperinflation.

You think we're really going to pay off the Chi-coms and the OPEC-types with strong dollars?? You think Obambi & Co. are going to do away with entitlement programs?

Sure, it looks like a 100% chance of deflation right this second, but look down the road a year or so, and you'll see that the dollar is toast.