Still Waiting On Hyperinflation...
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
Well the uber doom-and-gloomers have been decidedly reticent of late. This changed recently in the blog arena. Changes in purchasing patterns of bonds later this year seem to have everyone in a tizzy now.
I renew my stance that all of this HYPERinflation rhetoric is utter nonsense. These positions are generally coupled with someone trying to sell something (commodities, coaching, advice, etc.) so please be skeptical when you see them posted.
Following is a great, level-headed article on the subject for those that are interested:
Why the Pessimists Are Wrong About Inflation
and here are the real inflation rates:
I renew my request for anyone to provide TANGIBLE evidence that we are headed for hyperinflation.
Hyperinflation is different than inflation. If you take the original defination of inflation, (and as currently used by Austrian School Economists) you track inflation as an increase in the money supply, and price increases (commonly referred to as inflation today) are the effect of the money printing. So first defining which inflation, monetary inflation, or price inflation you are talking about is required.
There is no doubt that money supply has been inflated recently. The fed publishes figures and you can see what is going on. Somewhat more difficult to see is price inflation. The CPI is the most common but is skewed to make the govt look good. Looking at prices of common goods one can see price inflation; see gasoline, health care, college tuition, food, silver, oil, etc. The basic commodities are shooting up, which means that all derivative products are also getting more expensive. One way that producers are trying to mask this is by making packages smaller; a "green" package, "effeciency" packages, etc. The net result is maybe only a 10% increase in price, but when you couple that with the 15-20 decrease in product per package, you get 30-40% inflation. And this is happening more and more in the last year or two.
So that was inflation (the two types). Hyperinflation, on the other hand, is a loss in confidence in the currency being printed. It is not like in monopoly, when the more money you get, the more prices go up (remember, at first you dont have much money, so deals are cheap, but as the game progresses and everyone has tons of cash, the bids get higher and higher, hmm, sounds like the housing bubble), but rather that people realise that there is inflation, and that the currency is not a store of value, and they go out to spend (get rid of it, ie exchange it for something of value) it before it is worth less. So hyperinflation is when people do not trust their money anymore and want to buy stuff before the price goes up (ie the value of the paper money declines further).
So hyperinflation is a rare event, but not as rare, nor as impossible as people would like to believe. Argentina is now experiencing inflation in the area of 30% per year, this is very soon going to be hyperinflation if history has any rhyme to it.
The main complication today IMO with the hyperinflation/deflation/inflation debates is that there was such a huge increase in debt (learn how money is issued from banks, they can loan (create, print) 10x the money they have on deposit) money in the last couple bubbles that when the bubbles collapse the debt money disappears, this is monetary deflation (not price deflation) but means that there is less "wealth" on paper, and real losses for many. And debt is spending today what we need to tomorrow pay for, and if the earnings and savings are not there to pay, then money is tight. So the money printing, which is going to the banks to make up for that 10x debt money they created which is evaporating, and not going to the unemployed, underwater, etc, is not having such a big effect on prices yet... But money chases yield. Not going to housing yet, still such debt, and bankers not gonna buy their own shadow inventory, so it goes to stock markets and commodities. That is why the stock market has held up so well, and why commodities are so highly priced. And that is why food, clothes, etc are showing price inflation as well.
I do not see hyperinflation (remember, this a loss in confidence in the currency) happening yet; the US is still the largest producer of food in the world, still dominant in most areas, still no clear alternative (other than gold, etc) so most will cling to the hope that the US will be a safe haven. And remember, most people would rather believe the easy lie than face the hard truth, so they will cling to what has been, rather than look at the facts and accept what is coming.
I think that the situation is unsustainable, but for hyperinflation to come, people need to realize that, accept that, and react accordingly. I do not see the realization on a large scale yet; most would rather believe the easy lie perpetuated by politicians and media and bankers and real estate pros (NAR statistics, sorry for offending any straight shooting real estate people, but so many are clueless and lie) who push housing as the best investment, retirement/'investment managers, etc. They do not yet want to think that something is wrong and take the next step to figure out what and why, which would lead to what to do. When that happens (assuming that the economy and spending continue in this same direction, major deficits, high rate of unemployment, debt overhangs, etc) then you can worry about "hyperinflation", but for now it will be inflation, or stagflation, re the 70's. And look what happened then; gold, oil, etc shot up. Interest rates shot up. Inflation shot up. And then the economy took off, after a long period. Will that happen again this time? who knows, history does not repeat, but is rhymes. Some things are different this time; high debt, low savings, cannot really lower taxes more due to already insane deficit, wars, high oil, lots of jobs have been offshored and not coming back, it is a global economy now, not a US economy, so competion is worldwide for jobs, so many may not come back soon, at least as they were.
My outlook? Things which you "need", ie oil, clothes, food, healthcare, etc, will continue to get more expensive in the near term. Things which were financed/bought with debt will continue to get cheaper in the near term, ie housing, cars, boats, vacation cabins, toys, etc. People have to get rid of the debt items (cant pay for them) and pay for the things they need. And with higher unemployment, and tighter credit (banks not giving money to customers, putting it to "pay off bad debt", investing it in stocks, commodities,etc, remember money chases yield and the bankers have been burnt on housing and consumers, wonder why your HELOC which was unused was cancelled even tho you have 800 credit?), financing is not as big an option as it was.
So what about real estate? No crystal ball, I threw it away a long time ago... but I think that having a part of net worth in real estate or income producing assets is worthwhile. betting on appreciation will be a losing game for a while IMO, but if you can cashflow a decent amount and hang on to what you have even if prices drop another 30% (it can happen...) then you will be positioned well if/when prices increase in the future (10-15 years from now). remember, bottoms take time, recoveries are not instantaneous and even with the money pumping by the fed, this will take a while. but being in place, not too high leverage, and cashflowing allows you to build equity, gain experience, and when the prices start to rise, pull the equity out of your houses and start to buy. Not your own money at that point because renters have paid it.
Those are my thoughts, lol, just lookint that this was "quick reply"
Tony.
I'm never really sure what people mean when they say this country is "bankrupt" or "insolvent".
Yes, there is massive debt and massive deficits, but I haven't heard about the government defaulting on any of this debt or trying to legally discharge the debt (the definition of bankruptcy).
The country has been in debt for 200 years now (at least), so it's something we as a nation have come to accept.
I certainly agree that if things continue in the same direction they've been headed for the past 30 years, we're in a lot of trouble...but to say that we're currently bankrupt just doesn't make anymore sense than it did 5 years ago, 10 years ago or 30 years ago...
J,
The current debt situation is like no other before in history. We only moved away from the gold standard in 1971. This means the money printed does not have to be backed by anything, only the desire to print more.
When people say the country is bankrupt, it is because we have become the sole purchaser of our treasury auctions. Other countries are no longer purchasing these. Do you see the death spiral that creates? We are purchasing our own debt to finance our own debt.
When it takes $6b a day of paper money printing to create $1b in GDP, that is not sustainable.. Do you know as of 2010, 32 states are bankrupt? Meaning they had to borrow from the FED (fake money) to cover unemployment distributions? http://www.economicpolicyjournal.com/2010/05/32-states-have-borrowed-from-treasury.html
That's bankrupt in my book..
From Wikipedia:
"Bankruptcy or insolvency is a legal status of a person or an organisation that cannot repay the debts it owes to its creditors."
also:
"As of May 6, 2011, the Total Public Debt Outstanding of the United States of America was $14.32 trillion and was approximately 98% of calendar year 2010's annual gross domestic product (GDP) of $14.66 trillion.[2][3][4] Using 2010 figures, the total debt (96.3% of GDP) ranked 12th highest against other nations."
This is including Portugal, Ireland, Italy, Greece, Spain, etc.
also:
"The U.S. government is committed under current law to mandatory payments for programs such as Medicare, Medicaid and Social Security. The GAO projects that payouts for these programs will significantly exceed tax revenues over the next 75 years. The Medicare Part A (hospital insurance) payouts already exceed program tax revenues and Social Security payouts exceeded payroll taxes in fiscal 2010. These deficits require funding from other tax sources or borrowing.[16]
The present value of these deficits or unfunded obligations is an estimated $45.8 trillion. This is the amount that would have to be set aside during 2009 such that the principal and interest would pay for the unfunded commitments through 2084."
So if they had set aside 45.8 trillion in 2009 the money plus interest would fund the programs, but now we are running deficits each year, and the funding obligations are getting larger, plus we do not have the interest helping us (remember time value of money growing for you) so the yearly requirement is going to increase over time.
Basically, we have so much debt that if the entire GDP for a year was used to pay the debt it would just pay it off (not after this year) and future obligations cannot be met.
And this is with interest rates at historic lows (artificial lows). As soon as / if interest rates increase (like in Greece) then the world will realize that the US is bankrupt.
Short answer, the US cannot pay it's current and future bills, and there is no forseable way to pay them short of massive inflation.
t-bills, caveat emptor... and maybe same for holding cash.
Tony
The value of any currency is only as good as the faith of the people that elect to use it. With all the problems in Europe and all the manipulation is Asia, the Dollar will remain the dominant currency and if the world has an issue with that I say we send gunships
It's not a question of whether the US can pay it's current debt using an entire year of GDP or not. It's whether the debt situation is reversible or not. If this country were a person filing for bankruptcy, a bankruptcy judge would want to know if the situation was reasonably reversible.
And I would argue that the debt situation in this country is reasonably reversible. Would it require some tough decisions? Of course. Would it require some sacrifice? Of course. Would it be fun? Of course not.
But, it *IS* reasonably reversible if congress, the Senate, and the President decide they want to do it.
What does it involve? Two things:
1. Balancing the budget;
2. Raising taxes.
#1 is reasonably accomplished by cutting discretionary spending and improving the efficiency of government programs (those that you don't cut). It's also accomplished by reforming some of the mandatory spending programs (SS, Medicare, Medicaid, HHS, Education, etc). But, most people believe that balancing the budget is reasonable for any President that wants to accomplish it.
#2 is just making a hard decision that sucks short-term, but is good long-term for this country and the people. Doing this is not popular, but it's certainly not unreasonable.
In terms of actual numbers, if the government balanced the budget for 2012 and beyond and reinstated the Bush tax cuts (repealed them actually), the country would be out of debt in 10 years.
To me, that's a reasonable plan to get this country out of debt. In fact, if the country were a person, this would be equivalent to saying, "You can get out of debt by not spending more than you earn and getting a second job."
Is that unreasonable to ask of someone (or the country)?
Is that unreasonable to ask of someone (or the country)?
J,
Reasonable i'm ok with. Raising taxes though on a country where:
> 47% of people pay no tax, keep having babies for the tax benefit and walk around with their hands out expecting uncle sam to cover food, shelter, etc.
> 50% of top earners pay 96% of the tax revenue.
Who exactly are you going to raise taxes on?
-AC
As a start, repealing the Bush Tax Cuts that were just extended would earn this country over $5T in the next 10 years. If we also got rid of the major corporate tax loopholes (with regards to how option are taxed, etc), we'd get not just the rest of the way there, but we'd have a surplus by 2020.
I can't speak for others, but if it means that my children could inherit a country without debt (or significantly less debt), I'd happily pay higher taxes for the next 10-20 years (and yes, my family would be personally affected if the Bush Tax Cuts were repealed)...perhaps we should consider it punishment for allowing our politicians to squander our money for so long...
As a start, repealing the Bush Tax Cuts that were just extended would earn this country over $5T in the next 10 years.
I can't speak for others, but if it means that my children could inherit a country without debt (or significantly less debt), I'd happily pay higher taxes for the next 10-20 years (and yes, my family would be personally affected if the Bush Tax Cuts were repealed)...perhaps we should consider it punishment for allowing our politicians to squander our money for so long...
You don't have a problem paying more to fund out of control gov't spending that is focused on helping those who don't pay taxes, work the system, make not attempt to find work, etc?
How about cutting spending, billions in aid for countries that hate us, troops in 150 countries, tariffs on chinese products like they do to us, tax companies who outsource instead of aiding them, etc, etc....
Yes, I have a problem with this -- whether it's the guy down the street who makes $10K a year and doesn't pay taxes or GE that earns $5.1B a year and doesn't pay taxes. Both are clearly taking advantage of the system (though in terms of raw dollars, companies like GE are ripping us off more).
But, if you reread my post above, I didn't just propose that the government raise taxes. Just raising taxes and doing nothing else is ridiculous and I have a very big problem with that.
What I proposed is a two-part plan, where the government balance the budget before it raises taxes.
To balance the budget would necessarily require that we example and revise our discretionary spending (things like Defense and Welfare, that you mention) and pass new laws for mandatory spending items (like SS and Medicare).
If we can do #1 (balance the budget), I'm more than happy to do #2 (pay more taxes).
And again, I think this approach is completely reasonable...
Brian Hancock,
You seem very certain that there will not be hyperinflation.
Where do you see the US economy in 10 or 15 years?
Do you think will have solved our debt problems?
Do you think the entitlement issues will be less than today even with the boomers reaching retirement years?
Do you think we can continue to monitorize our debts forever without consequence?
If you met a young investor, who was paying his minimums on his credit cards by putting the interest payment on a new credit card...how long do you think this system would work? Would you lend to someone with that game plan?
It all boils down to class envy. It plays well to a large segment of the population when politicians just say "soak the rich". It's a lot harder to actually solve the problem.
Also, the 50%, largely middle class citizens who pay no taxes have a lot of votes to cast, and therefore are a big target for the demogogues who play the class envy card. Or the "evil oil companies" card...etc.
You seem very certain that there will not be hyperinflation.
Yeap...this same thread has been debated on BP for over a year across other posts. The thread generally devolves into a political one like it is doing right now and people give no sound reasoning for HYPERinflation. I am a big believer that we will have inflation and that is a big reason why I have spent the last 5+ years of my life trying to find ways to combat its impact. All of the arguments about buying gold and the other nonsense will not help one bit if there is HYPERinflation. There is also no evidence that this will occur anywhere in any of the threads I have read.
It is fun to debate all of this quasi-political stuff, but I would still love to get some good discussion of why we are heading toward hyperinflation.
J Scott-
"If we also got rid of the major corporate tax loopholes (with regards to how option are taxed, etc), we'd get not just the rest of the way there, but we'd have a surplus by 2020."
J, I would argue that one reason companies are running is because of the taxes here. They cannot compete on a worldwide market if they are taxed at US tax rates (without deductions, etc) and have US labor costs. Compare them to India or China for example, or Vietnam or Indonesia... Forcing these companies to pay taxes will create lots of offshore entities... And perhaps since they are the ones "writing" the tax code (via their billions of dollars spent on lobbiests) they will write the new one even more favorable for them and worse for the average American? Dunno, but seems that they always win, they have such influence with the govt compared to average citizens.
_J Scott:
"... Is that unreasonable to ask of someone (or the country)? "
Really? Ask away. How many votes will you get? You will not get elected with that for a campaign. Thus it will not happen. That is why Bryan and others are predicting high inflation, the government cannot meet its obligations, today or in the future, in fact ever. As this becomes more and more apparant to everyone, the US bond market will start to resemble that of Greece. Yes, laugh now, but I had this same discussion several years ago about Greece. People said it could never collapse, that it was part of Euro, that countries dont collapse in modern world, that ... It is pretty simple to understand. At some point the will to pay back or pay off the debt is gone, the coersion required to extort that amount of money via taxes or inflation (the hidden tax) is too great and the population rebels. The financial situation in the US is similar.
However, I do not see it happening this week, and for the following reasons: The US is still one of the most productive countries in the world, we produce a large amount of the world's food, we can pull out of Iraq, Afghanistan, etc and save money, we can do several things to save money while also printing to inflate, we are still (somehow) the world's reserve currency (so when Europe's S hits the F people will flock to "safety"). So it will be a while, and we could even start to recover economically in the next 10 years before it happens which may push it out even further. So we are no Greece in terms of productivity and potential, and that is what is keeping us going.
I do not see the dollar folding in the short term, but in the long term all that matters is the long term, and I am betting on significant devaluation of the dollar for the next 10 years or so at a minimum.
Bryan-
"All of the arguments about buying gold and the other nonsense will not help one bit if there is HYPERinflation."
I guess I have planned my business portfolio for inflation, but I am hedging hyperinflation in my personal portfolio with some gold and silver. I have thought that in a hyperinflationary scenario (see Wiemar, Zimbabwe) gold and silver may be neccessary. In Zimbabwe they used gold and US dollars when local script collapsed, what would we use here if the dollar devalued massively?
That is my thinking on gold and silver, it is for that extreme outlier event, and my position size reflects my calculation of its risk.
For your thoughts (well articulated) about using RE and fixed long term debt to cancel/benefit from inflation, I agree with you and have a similar plan.
What do you see the chances of deflation, stagflation, inflation, hyperinflation? And from that, where do you see oil, food, RE (both commercial and residential), unemployment, US dollar going in the next 1-2 and 5-10 years? Just curious how you see things going and how this affects your risk planning and decision making.
Tony
J Scott-
Well, here is one way they are going to pay down the debt, or more correctly put, decrease the rate at which it is increasing...
"By Corey Boles and Janet Hook
WASHINGTON -(Dow Jones)- Lawmakers are considering changing how the Consumer Price Index is calculated, a move that could save perhaps $220 billion and represent significant progress in the ongoing federal debt ceiling and deficit reduction talks.
According to congressional aides familiar with the discussions, the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically.
Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government.
The proposal could lower federal spending by around $220 billion over the next decade, based on calculations by last year's White House deficit commission, which recommended the change as part of its final report."
So in effect they are going to lower the "official" inflation number to allow them to pay out less to everyone whose salary, pension, welfare, etc (seniors, disalbled, military, etc) is tied to inflation. They are going to change the numbers to "show" lower inflation. This will "save" money by not paying out what is due. If they do this a few times pretty soon they can say we have deflation, thus requring more money printing and allowing cuts in benefits for those programs.
I do not like how the govt plays with official statistics... and then these stats are quoted as correct. They have been playing with CPI since the 80's.
But I still think that the political will, and public support, will not allow them to "balance" the budget, much less pay down the debt. Not in the short term, nor in the next 10-20 years. Looking at the proposal you gave (not sure it is yours, I think it is not) I do not ever see that happening. I give it zero chance.
I think the debt ceiling will keep getting raised, they will keep playing with numbers and stats to keep the ball rolling a bit longer, and just try to stay afloat until the economy recovers and revenues increase.
That is what Bernanke is preaching, just a bit more time, just a bit more money.
We will see how it turns out, I am not hoping for the worst, but I am also realistic.
Tony.
I don't have a strong opinion about macroeconomic stuff that is largely subject to systemic risk. My portfolio is largely event agnostic because I don't pretend to know what is going to happen in the future. I do think that making my balance sheet look a lot like the gov-mint's is a pretty safe play when they control the currency though.
The trouble with all of these HYPERinflation plays is that they are very costly. Popular commodities are very overpriced right now IMO and they don't pay any current yield. Those are some pretty poor characteristics for investments IMO.
If there is HYPERinflation you can almost bet the the government will confiscate your gold Tony...thus it is not a good hedge from a historical standpoint. Luckily this isn't going to happen so it really doesn't matter :D
Tony -
I think we're probably in violent agreement on the core issue -- our government isn't doing what's in our best interest, and also isn't allowing us to hold them accountable.
I say this in a completely non-partisan way, as I believe it's nearly every politician that's to blame, not just one party or the other, and certainly not just this President, the past President or the one before that.
If nothing is done (and soon), this country is headed for a lot worse than hyperinflation. But, unfortunately, I'm not convinced anyone in government (again, from either party) will do what it takes to correct the underlying issues.
Nope...but they will fix our deficit (and in the long term...debt) problems. There is a separate thread on taxes if you guys want to debate that over there. Let's try to stay on topic as much as possible in this thread so it doesn't get moved to the political forum.
I think we're probably in violent agreement on the core issue -- our government isn't doing what's in our best interest, and also isn't allowing us to hold them accountable.
I say this in a completely non-partisan way, as I believe it's nearly every politician that's to blame, not just one party or the other, and certainly not just this President, the past President or the one before that.
If nothing is done (and soon), this country is headed for a lot worse than hyperinflation. But, unfortunately, I'm not convinced anyone in government (again, from either party) will do what it takes to correct the underlying issues.
Are we turning this into a political discussion?
Agreed. Also...
The past President made it way worse than the one before him.
The one before him did a good job of keeping the debt from growing too much.
The one before him spent a whole lot, and increased our debt considerably.
And the one before that (Reagan) set the standard for run-away deficit spending.
Okay, can we move this thread to the Political forums now that it's gotten partisan?
The national debt is just part of the big picture. The Fed, money supply, commodity prices, employment situation, and global events all contribute to inflationary (or lack of) pressures. I just don't see how we're going to see any inflation when employment is at 10% and there are no wage inflation to be expected for a long long time. Oil and other commodities (Gold included) have been going up because the Fed has been pumping money and buying up paper, the money had to go somewhere, and it went into the equity and commodity market, and drove the dollar lower. But look what happened in the last few weeks as big money is setting up for the end of QEII. Oil is falling, commodities have plateaued or started to fall, the dollar is strengthening, and treasuries continue to rise. Where's inflation going to come from? Wages are stagnant and will remain so for a long time. GDP is stagnant. Dollar-denominated commodities are not going nowhere as global uncertainties continue to seek haven into our dollar and treasuries.
I actually do have some faith in our political system, it's true politicians are avoiding making the tough decisions leading into the 2012 elections, but they all recognize we have some major problems so after 2012, whoever is President, there will be some agreement on a debt-reduction plan that should put us on a better track forward. There's a completely different mentality now and they all know it. I don't buy the gloom and doom scenarios, I don't think we'll ever see high (let alone hyper) inflation in our lifetime.
Amen Jim!
A voice of reason that is masked by all of the people shouting and running around like chickens with their heads cut off!
Agreed we'll probably never see hyperinflation (at least not in e foreseeable future), but I think it's optimistic to think we'll be able to fix the budget problems before the two major parties decide to start working towards the same goals -- which is unlikely to happen during this or the next Presidential term. With all the mandatory spending requirements, it's going to take more than just cutting discretionary spending, it's going to require rewriting laws...specifically around SS, Medicare, Etc. This will require a bipartisan effort, which I don't see happening anytime soon (unfortunately).
QEII ending, which is not really ending just being renamed and masked, does not mean FED money printing has come to an end. Commodoties are only off temporarily due to the europeans pledging to stabilize.
Our politicians haven't fixed anything anywhere, bernanke is wrong continually, unemployment is not going down, hence more stimulus will be needed, more debt, more debt more debt = continued currency devaluation = inflation.
I'm not sure who is running around with their head cut off. Hedging inflation with gold is a strategy that for some reason, if people missed the boat they get very defensive. It's one strategy of many. Some have profited hugely from this strategy - don't hate the chickens, hate the coop