Skip to comments.Signs Hyperinflation Is Arriving
Posted on 10/30/2010 5:58:05 PM PDT by blam
Signs Hyperinflation Is Arriving
Economics / HyperInflation
Oct 30, 2010 - 10:18 AM
By: Gonzalo Lira
Back in late August, I argued that hyperinflation would be triggered by a run on Treasury bonds. I described how such a run might happen, and argued that if Treasuries were no longer considered safe, then commodities would become the store of value.
Such a run on commodities, I further argued, would inevitably lead to price increases and a rise in the Consumer Price Index, which would initially be interpreted by the Federal Reserve, the Federal government, as well as the commentariat, as a good thing: A sign that the economy is recovering, a sign that normalcy was returning.
I argued thatfar from being a sign of recoveryrising CPI would be the sign that things were about to get ugly.
I concluded that, like the stagflation of 79, inflation would rise to the double digits relatively quickly. However, unlike in 1980, when Paul Volcker raised interest rates severely in order to halt inflation, in todays weakened macro-economic environment, that remedy is simply not available to Ben Bernanke.
Therefore, I predicted that inflation would spiral out of control, and turn into hyperinflation of the U.S. dollar.
A lot of people claimed I was on drugs when I wrote this.
Now? Not so much.
In my initial argument, I was sure that there would come a moment when Treasury bond holders would realize that they are the New & Improved Toxic Assetas everyone knows, there is no way the U.S. Federal government can pay the outstanding debt it has: Its simply too big.
So I assumed that, when the market collectively realized this, there would be a panic in Treasuries. This panic, of course, would lead to the spike in commodities.
However, I am no longer certain if there will ever be such a panic in Treasuries. Backstop Benny has been so adroit at propping up Treasuries and keeping their yields low, the Stealth Monetization has been so effective, the TBTF banks arbitrage trade between the Feds liquidity windows and Treasury bond yields has been so lucrative, and the bond market itself is so aware that Bernanke will do anything to protect and backstop Treasuries, that I no longer think that there will necessarily be such a panic.
But that doesnt mean that the second part of my thesiscommodities rising, which will trigger inflation, which will devolve into hyperinflationwill not occur.
In fact, it is occurring.
The two key commodities that have been rising as of late are oil and grains, specifically wheat, corn and livestock feed. The BLS report on Producer Price Index of commodities is here.
Grains as a class have risen over 33% year-over-year. Refined oil products have risen just shy of 13%, with home heating oil rising 18% year-over-year. In other words: Food, gasoline and heating oil have risen by double digits since 2009. And the 2010-11 winter in the northern hemisphere is approaching.
A friend of mine, SB, a commodities trader, pointed out to me that big producers are hedged against rising commodities prices. As he put it to me in a private e-mail, We sometimes forget that the commodity markets arent solely speculative. Most futures contracts are bought by companies who use those commodities in their products, and are thus hedging their costs to produce those products.
Very true: But SB also pointed out that, hedged or not, the lag time between agricultural commodities and the markets is about six-to-nine months, on average. So he thought that the rise in grains, which really took off in JuneJuly, would hit the supermarket shelves in JanuaryMarch.
He also pointed out that, with higher commodity costs and lower consumption, companies are going to be between the Devil and the deep blue sea. My own take is, if you cant get more customers, then youre just gonna have to charge more from the ones you got.
Coupled to these price increases is the ongoing Currency War: The U.S.contrary to Secretary Timothy Geithners statementsis trying to debase the dollar, so as to make U.S. exports more attractive to foreign consumers. This has created strains with China, Europe and the emerging markets.
A beggar-thy-neighbor monetary policy works for small countries getting out of a hole of their own making: It doesnt work for the worlds largest single economy with the worlds reserve currency, in the middle of a Global Depression.
On the contrary, it creates a backlash; the ongoing tiff over rare-earth minerals with China is just the beginning. This could easily be exacerbated by clumsy politicking, and turn into a full-on trade war.
Whats so bad with a trade war, you ask? Why nothing, not a thingif you want to pay through the nose for imported goods. If you enjoy paying 10, 20, 30% more for imported goodsthen hey, lets just stick it to them China-men! Theyre still Commies, after all!
Furthermore, as regards the Federal Reserve policy, the upcoming Quantitative Easing 2, and the actions of its chairman, Ben Bernanke: There is an increasing sense in the financial markets that Backstop Benny and his Lollipop Gang dont have the foggiest clue about what theyre doing.
Bruce Krasting just yesterday wrote a very on-the-money précis of the trial balloons the Fed is floating, as regards to QE2: Basically, Bernanke through his WSJ mouthpiece said that the Fed was going to go for a cautious, incrementalist approach, vis-à-vis QE2: A couple of hundred billion at a time. You know: Just the tipjust to see how it feels.
But then on the other hand, also just yesterday, Tyler Durden at Zero Hedge had a justifiable freak-out over the NY Fed asking Primary Dealers for their thoughts on the size of QE2. According to Bloomberg, the NY Fed was asking the dealers how big they thought QE2 would be, and how big they thought it ought be: $250 billion? $500 billion? A trillion? A trillion every six months? (Or as Tyler pointed out, $2 trillion for 2011.)
Thats like asking a bunch of junkies how much smack they want for the upcoming yearhalf a kilo? A full kilo? Two kilos?
What the hell you think the junkies are gonna say?
Between BKs clear reading of the tea leaves coming from the Wall Street Journal, and TDs also very clear reading of the tea leaves by way of Bloomberg, youre getting a seriously contradictory message: The Fed is going to lightly tap-tap-tap liquidity into the marketsjust a littlejust a few hundred billion dollars at a time
while at the same time, the Fed is saying to the Primary Dealers, Were gonna make you guys happy-happy-happy with a righteously sized QE2!
The contradictory messages dont pacify the financial marketson the contrary, they make the markets simultaneously contemptuous of Bernanke and the Fed, while very frightened as to what they will ultimately do.
What happens when the financial markets dont really know what the central bank is going to do, and suspect that the central bankers themselves arent too clear either?
So to sum up, we have:
Rising commodity prices, the effects of which (because of hedging) will be felt most severely in the period JanuaryMarch of 2011. A beggar-thy-neighbor race-to-the-bottom Currency War, that might well devolve into a Trade War, which would force up prices on imported goods. A Federal Reserve that does not seem to know what it is doing, as regards another round of Quantitative Easing, which is making the financial markets very nervousnervous about the Feds ultimate responsibility, which is safeguarding the U.S. dollar. A U.S. economy that is weak to the point of collapse, where not even 0.25% interest rates are sparking investment and growthand which therefore prohibits the Fed from raising interest rates, if need be. A U.S. fiscal deficit which is close to 10% of GDP annually, and which is therefore unsustainableespecially considering that the total U.S. fiscal debt is well over 100% of GDP. These factors all point to one and the same thing:
An imminent currency collapse.
Therefore, I am confident in predicting the following sequence of events:
By March of 2011, once higher commodity prices reach the marketplace, monthly CPI will be at an annualized rate of not less than 5%.
By July of 2011, annualized CPI will be no less than 8% annualized. By October of 2011, annualized CPI will have crossed 10%. By March of 2012, annualized CPI will cross the hyperinflationary tipping point of 15%. After that, CPI will rapidly increase, much like it did in 1980.
What the mainstream commentariat will make of all this will be really something: When CPI reaches 5% by the winter of 2011, pundits and economists and the Fed and the Obama administration will all say the same thing: Happy days are here again! People are spending! The economy is back on track!
However, by the late spring, early summer of 2011, people will realize whats going onand the Federal Reserve will initially be unwilling to drastically raise interest rates so as to quell inflation.
Actually, the Fed wont be able to raise rates, at least not like Volcker did back in 1980: The U.S. economy will be too weak, and the Federal governments balance sheet will be too distressed, with its $1.5 trillion deficit. So at first, the Fed will have to let the rising inflation rate slide, and keep trying hard to explain it away as a sign of a recovering economy.
Once the Fed realizes that the rising CPI is not a sign of a reignited economy, but rather a sign of the collapsing dollar, they will pursue a puerile inflation fighting scheme of incremental interest rate hikesmuch like G. William Miller, the Chairman of the Fed from January of 78 to August of 79, pursued so unsuccessfully.
2012 will be the bad year: I predict that hyperinflations tipping point will be no later than the first quarter of 2012. From there, it will accelerate. By the end of 2012, I would not be surprised if the CPI for the year averaged 30%.
By that point, the rest of the economyunemployment, GDP, all the rest of itwill be in the toilet. By that point, the rest of the economy will no longer matter: The collapsing dollar will make 2012 the really really bad year of our Global Depressionwhich is actually kind of funny.
Its funny because, as you know, I am a conservative Catholic: I of course put absolutely no stock in the ridiculous notion that The Mayans predicted our civilizations collapse in 2012!thats all rubbish, as far as Im concerned.
Its just one of those cosmic jokes that 2012 will turn out to be the year the dollar collapses, and the larger world economies go down the tubes.
As cosmic jokes go, all Ive got to say is this:
Good one, God.
Thanks blam, a straight shot.
I am not sure this is true
Hard to have inflation when nobody has any money.
You will know when your wallet is full but you are broke.
"In addition, the average increase in 15 commodities yoy to October is 35%. Food costs are up 48% and energy 23%. Real inflation is up 7%, not the 1.6% the Fed lies about."
Wheat futures have surged 63 percent since the month of June. Wheat has recently been selling well above 7 dollars a bushel on the Chicago Board of Trade.
But wheat is far from alone. In his recent column entitled "An Inflationary Cocktail In The Making", Richard Benson listed many of the other commodities that have seen extraordinary price increases over the past year....
*Agricultural Raw Materials: 24%
*Industrial Inputs Index: 25%
*Metals Price Index: 26%
*Palm Oil: 26%
*Iron Ore: 103%
Now, as those price increases enter the chain of production do you think that there is any chance that they will not cause inflation?
Do you think there is any chance at all that producers and retailers will not pass those costs on to consumers?
What happens when inflationary policy meets a deflationary market? THIS.
When home prices and salaries start going up, you can worry about hyperinflation. Until then, these are just temporary commodity price spikes caused by bad government policy - and the deflationary depression remains firmly in place.
...and crop failures that have occurred around the world - wheat in Russia and soybeans in Argentina.
You're right on the money.
Well I have cut to the bone.
If we get to the front step of hyper-inflation, it will be tamped down by World War III, because there’s no better spark for war than a depletion of raw materials- or the inability to pay for said raw materials. That’s when the rubber really hits the road. If enough developed nations begin staring at an angry, jobless, starving populace, there will be war and it will not be pretty.
As I have as well
My wife and were dicussing a backyard garden and buying flour \ wheat wholesale to make our own bread
will we go back to having apples and oranges and nuts in our Christmas stockings?
Land tv? I am getting a nice sailboat. With Sirius Radio and dvd. I figure to survive on it nicely.
Whoa! Any Port in a storm...
Ah, the fruits of globalism. Isn’t it working out grand for the average American?
Lol, I’ve actually been thinking about getting a sailboat to.
Rube Goldberg design?
They are cheap. The key is knowing how to sail and having a good Hurricane Hole.
Schematic of a Vietnamese tunnel. A hidden tunnel or your own might be useful during a "die-off", if it comes to that.
You shouldn’t have a problem learning how to sail. The problem is overcoming seasickness if you’re prone to it like I am. Hurricane’s are seasonal but in a world without law, pirates might be a problem where every you travel. Seems it would be safer to travel in groups.
That’s just what I was thinking.
I don’t know what it is (hyper-inflation or simply massive devaluation of the US$...), but I am sure sick of pretty much everything in the grocery store jumping in price every week. Of particular concern is meats - Beef, Chicken, and Pork all have gone through the roof.
And all other groceries and produce are also getting much more expensive - Yet my own income has not increased in over 2 years. Taxes are about to go up. How am I better off under Obama and the RAT-controlled congress?
And I pray that Millions keep asking the same question not only this Tuesday, but through the next 2 years.
This fellow’s pretzel logic won’t save him. Oil is increasing in price! Wow! The only problem is, the price of oil has deflated 57% from its’ last high. Even a huge oil spill and a moratorium on drilling in the GOM had no effect on the price. (I do think oil is a good investment, just bought some CVX.)
I got out of Treasuries some time back as I was worried about them too. That was a mistake, cost me some easy and safe profits.
We are seeing inflation in everyday products like food, and deflation in assets. That’s perhaps the worst scenario possible other than outright hyperinflation. But in hyperinflation, the cost of all things increases by orders of magnitude daily. We are nowhere near that. In hyperinflation, the price of gasoline would go from $3.00 a gallon on Monday morning to $200 a gallon by Noon. By evening the price would be $1,000 a gallon. THAT’S hyperinflation.
We have overcapacity in almost all areas of production. We have high unemployment and low demand for goods. That is not a recipe for hyperinflation. I’m not sure why people seem to long for hyperinflation, but they do. I don’t think they are going to get it.
Precisely, Mr. Jeeves. Price distortions are not inflation, let alone hyperinflation.
Today, milk at Walmart in Radcliff, KY was $3.92 a gallon. It was $2.30 last week.
Most don't start out that way. Economic uncertainty drove them to purchase gold, silver, etcetera. They want their investments to do well. Apocalyptic economic prognostications begin to appeal.
It's a slow process, morphing into the stereotype that is derided as a "gold bug" in certain quarters. And, it's a pity, watching it happen to otherwise sane and steady people. That's not to say that an investment in precious metals hasn't been a good one since the start of this decade, far from it. But, that doesn't appear to be enough for some.
So, we get gold porn like this, coming oddly enough from people looking to sell gold. I waver back and forth. I have some precious metals myself, and am glad it's paying off. But, I don't think I'll be dancing in the streets if it rapidly quintupled in value because of some dire economic development. I'll have big problems in that eventuality, that a vastly more valuable investment won't solve. And, so will everybody else. It's nothing to cheer about.
It is also recommended by the author of The One-Hour Meltdown
Terminology is getting me confused. It appears that we are headed for a massively depreciating US dollar due to QE. May not be inflation in the normal sense, since as you state nobody has any money. Can verify that myself here in California. Cash is hard to find. Lots of downward price pressure due to that. All the QE cash apparently is going into US Treasuries to keep the bankrupt Fed and Banking system at least appearing solvent due to their toxic assets and unfunded liabilities. People that have a clue are putting what little cash they have into dollar depreciation protection devices such as commodities. As the value of the dollar depreciates, the value of the commodity rises in dollars. So in the long run the commodities will become the new money. Fiat dollars will be worthless. It really wont matter how many dollars it takes to buy something, since we will all end up bartering.
I understand the difference, blam. Thanks for posting the link for those who don’t, though.
God has nothing to do with fiat currency being printed like water and going into hyperinflation.
Well salaries are not going up like they did in the 70’s to match the inflations.
I hope it does not end up like one huge Katrina.
Salaries cannot rise due to the unemployment rate and the illegal immigration rate. Someone just as talented, will take the job for less money. So we are potentially headed for the worse possible scenario for the US dollar. And since we have over educated Marxists apparently running the show, what other possible outcome can there be ? Monetary depreciation, commodity price increases, loss of confidence in the dollar, dropping salaries, massive unemployment and no way out for the feds. The good news apparently is that the debt will not be a concern. Reminds me of a dog chasing his tail.
ping to myself
That’s a great Christmas gift suggestion and thanks for the link. It contains a lot of good information.