Speculation on Hyperinflation

This article was written for Miles Franklin by Gary Christenson. This is speculation on a complex subject.

Hyperinflation Myths:

  1. Hyperinflation occurs in banana-republics and not modern western countries.
  2. Hyperinflation cannot occur in the United States because the U.S. issues dollars – the reserve currency.

BOTH IDEAS ARE INCORRECT. For more, read Bill Holter:

WHAT ARE THE CONSEQUENCES OF HYPERINFLATION?

  • The hyperinflations of past centuries have hurt the poor and middle classes more than the wealthy because they owned real assets.
  • Hyperinflation destroys savings, assets, purchasing power and retirement expectations, along with moral values.
  • The value of the currency is smashed. The economy “resets” and life goes on, albeit much changed.
  • Hard assets such as real estate, fine art, land, gold and silver fare better than many other assets.

CAUSES:

  • The government spends too much and creates debt unpayable via borrowing or taxes, and monetizes the debt. The central bank “prints” currency units and “buys” the debt. Watch the debt to GDP ratio.
  • Businesses and people rush to spend the currency before its value declines further. Velocity of the currency increases, people hoard hard assets, reject unbacked fiat currency units, and prefer to trade with stable currencies.
  • Interest rates and interest payments on government debt rise. Selling bonds is difficult and the central bank may become the only buyer. Watch the ratio of interest payments to total government expenses.
  • The ratio of total debt to GDP rises. The ratio of interest payments to total government expenses rises.
  • A tipping point happens. That point is difficult to predict because emotion, culture, and expectations are influential.

HYPERINFLATION IN THE UNITED STATES?

Speculation based on a few assumptions.

Official U.S. national debt has increased since 1913 at 8.8% per year every year. The rate of increase since 1971 has been the same. Assume the rate of increase will be slightly higher due to tax cuts, larger interest payments, Medicare costs and wars.

Interest rates declined (until recently thanks to central bank actions) since the early 1980s. Shorter term U.S. Treasury rates have increased for six years. The Ten-Year rate bottomed in mid-2016 and has traded higher since then. The Fed announced they want higher rates. Assume interest rates will increase for many years.

WHAT IS THE PROBLEM?

U. S. government expenses are “out-of-control,” much larger than revenues and increasing about 4.6% per year even though interest rates are low.

As rates rise the government spends more for annual interest payments, which increases the deficit and accelerates the debt problem.

If the Fed monetizes the deficits and forces interest rates lower, the dollar will devalue rapidly.

Rising debt and increasing interest rates create vicious circles that promote each other. Something will “break.”

From David Stockman “$21 Trillion and Counting

“Accordingly, there is exactly zero chance of any legislative action to stem Washington’s exploding red ink until after the 2020 election, and it will be far too late by then.”

From Charles Hugh Smith “How Much Longer Can We get Away With It?

“No doubt the Romans said, “It can’t happen here” – but they were wrong.”

YEAH, YEAH, WE HAVE HEARD IT BEFORE. LOOK FOR A PROBLEM IN DECADES.

 

MAYBE, BUT CONSIDER THE FOLLOWING FACTS AND SPECULATIONS.

  1. Official national debt rises 8.8% per year. Fact.
  2. Government expenses rise about 4.6% per year. Fact.
  3. National debt and expenses rise less rapidly when interest rates are low and declining. Fact.
  4. Interest rates bottomed 22 months ago for the 10 Year Note and before that on shorter durations. Fact.
  5. Assume the interest rate that the U.S. pays on official debt rises for seven more years at twice the rate (0.33%/year x 2 = 0.66%/year) that it declined since 2000. By mid-2025 the average rate will be over 8%, which is NOT historically high.
  6. Interest rates on the 10 Year Note fell 0.33% per year for 16 years since 2000. They have risen by 0.9% per year for 22 months since mid-2016. Fact
  7. As rates rise the debt accelerates higher. By 2025 the debt could be $39 trillion with annual interest payments more than $3 trillion. Insane!
  8. Annual government expenses, pushed higher by interest payments, could reach $9 trillion in 2025. Interest as a percent of expenses would be around 35%. Unsustainable!
  9. The purchasing power of the dollar will be small and consumer prices will be much higher.
  10. With a $39 trillion debt, huge interest payments, and a large debt to GDP ratio the dollar would be terminally weak. Ten thousand dollar gold (or far more), continual debt monetization, severe inflation and hyperinflation are believable in that scenario.

Alternatives:

  • OPTION ONE: The Fed monetizes debt and trashes the dollar. Consumer price inflation surges higher. Interest rates might stay low and stock market prices might stay high. Many suspect this scenario is preferred by the political and financial elite.
  • OPTION TWO: Interest rates increase. Severe inflation or hyperinflation will occur, and a weak dollar, higher prices, huge debt and interest payments are inevitable. Expect a reset.
  • OPTION THREE: Someone starts a global war and survival, not our self-created economic trauma, becomes important.

CONCLUSIONS:

 

  • If the Fed keeps interest rates low—more of the same financial repression—debt and expenses might take longer to become unsustainable but the dollar must be sacrificed. Higher prices for everything are inevitable.
  • If interest rates rise to normal levels, debt and interest expenses will reach unbelievable levels. Expect a weaker dollar, higher prices, social trauma and a reset.
  • The above is basic spreadsheet mathematics based on multi-decade trends in debt, spending, deficits, and interest rates. Others in government know and understand the unsustainability of the debt problem. Since politicians have not proposed a solution, no politically acceptable alternatives exist. Grim consequences are forthcoming!

Gold and silver will do well under option one – trash the dollar.

Gold and silver will do well under option two – hyper-inflationary debt, monetization, expenses, and massive interest payments.

 

Are you prepared for the consequences of exploding national debt, huge interest payments, and “out-of-control” spending?

 

Trust politicians and bankers to protect you…

OR

Call Miles Franklin (1-800-822-8080) or WhyNotGold to purchase “insurance” for your assets and retirement.

Gary Christenson

13 thoughts on “Speculation on Hyperinflation

  1. I’d have to say that this whole problem has deflation written all over it.
    Good paying jobs being lost to cheap labor over seas.
    Good paying jobs being lost to technology and more so as we go forward.
    An aging demographic who will spend less but cost society more.
    Add to that the fact that pension funds are hurting in this very low prolonged interest rate environment.
    The indebtedness of every level of society. The red ink is everywhere.
    If risk assets collapse in value, people’s retirement accounts, their home’s equity value etc, the wealth effect will diminish.

    The government is increasing the cost of everything while wages are stagnant. If you don’t have it or can’t borrow it you can’t spend it…….. deflation


  2. What you are saying is deflationary. Monetizing debt is deflationary. Paying debt is deflationary. Increasing interest rates is deflationary. They only thing that is inflationary is expanding money supply faster than debt can grow. So, our next phase is deflation. This article proves it.


  3. Gary, if the Dollar is not redeemable for gold and silver, then Dollars could not be used for purchasing precious metals. The truth is of course, that the Dollar is redeemable for gold and silver. You only need to go to a gold dealer who will happily take your worthless Dollars and sell you gold and silver. During WWII, many currencies could not be used gold and silver, One such currency was the German mark. As a matter of fact, the German mark at that time was shunned by everybody so the Germans could by foreign resources only via gold delivered to the Swiss banks. The German mark was indeed non redeemable at that time. Not even at the state level.


  4. Gary, hyperinflation was predicted during the past 20 years by many experts. You may remember economist John Williams predicting in 2010 the onset of hyperinflation in 2014. It did not happen. Why not ?

    You are right. Inflation is real. In my opinion, hyperinflation happens only during a collapse of the economy. In 1922, Germany experienced a hyperinflation because its economy, destroyed by WWI, could not produce all the goods needed. More recently in 2000, Zimbabwe experienced hyperinflation due to the inability of this country to produce enough food. People were starving and the government responded by printing excessive amounts of currency. Similar things happened after the collapse of communism in the former Soviet Union in 1990. The present hyperinflation in Venezuela is the result of the inability of that country to produce enough oil below world prices.

    Honestly, I do not see hyperinflation on the horizon in the US. Oil and food production are too strong in the US.

    Regarding the US Dollar, people have been predicting the collapse of the US dollar since the early 1980’s . Most of these “experts” died off without anybody noticing it. But there are always new generations of experts who predict the collapse of the US Dollar. I am neither concerned about a hyperinflation nor about a collapse of the Dollar. It will not happen during our life times.


    • Thank you for your comments. “Hyperinflation happens only during a collapse of the economy.” I think that is an important observation. But my question to you and historians is: “To what extent does the economy collapse due to inflation of the currency supply?”

      I’m not as confident as you about hyperinflation and collapse of fiat currencies. Maybe!
      The Deviant Investor


      • Gary, there is another characteristic of past hyperinflations. During the German hyperinflation as well as in the Zimbabwe hyperinflation lots of currency was printed and injected into the economy. That is not the case in the US. There is relatively little currency in circulation. Most of the money is in form of credit existing in checking accounts. The overhang of debt caused by credit issuance is actually a deflationary force and not a hyperinflationary force. To avoid a deflationary collapse, the Fed is forced to issue more credit in order to avoid a collapse.

        In a hyperinflation, there is more money in the economy than goods in the shops. Merchants constantly raise prises in order not to lose all their merchandise. In the US (more than in the EU), shops constantly need to offer discounts in order to induce consumers to buy. The retail gold demand is so low that one can easily buy gold bullion coins at 1.5% to 2% over spot on ebay. The premium is so low that it does not make sense to buy gold via goldmoney (more expensive than gold on ebay). There are signs everywhere that people do not have much money. So it is difficult to argue the case for hyperinflation.

        One more point. Ultimately, hyperinflation is the result of a collapsing confidence of the public into the national currency. In the case of the US, there are very sophisticated tools to manipulate commodity prices via the futures market. So even if the US has overissued US Dollars, there is only a very low risk that the confidence in the US Dollar will collapse anytime soon. People watch the gold price and are very happy to hold Dollar denominated assets because they see with their own eyes that the gold price has gone nowhere during the past decade. We both know that this is an illusion but the fact remains that the majority of the market participants are convinced that gold is going nowhere. The way to make money is to invest into paper assets and not into gold.


  5. Maybe not in my lifetime, but hyper-inflation will occur in the U.S.

    Give it time. We are already becoming a banana-republic.

    Slowly, but it’s happening. Just look around you.

    Nothing lasts forever, and the U.S. is on a down-ward spiral from here.


  6. An important fact needs to be clearly and specifically stated: The damaging effects are intentional. The effects are not random, natural, or “to be expected.” They are the result of a deliberate pattern of actions specifically meant to bring down the financial system involved, for the purpose of benefiting the powers who cause them.


  7. We know they know based on the article recently written by Wolf Richter. He states the FDIC is explicitly warning about WHEN the next downturn comes. Oh they know alright.



    • Perhaps we don’t live in the same world. I see consumer price inflation and inflation of the supply of currency. Yet our currency is not redeemable in silver or gold. Fiat currencies inflate.
      The Deviant Investor


    • Then by your measure does the spread between CPI and asset inflation reflect leverage in the system? Then either the consumer needs to leverage up, or asset holders need to deleverage to narrow that spread? I would say the chance of the former is nil.


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