Copyright 2012 by John T. Reed
I get the daily free Von Mises Institute newlsetter. You should, too. I have singled out some of their articles here as especially good.
Today, however, I got one titled “Hyperinflation Is Not Inevitable (Default Is)” by Gary North.
North says we who think hyperinflation is inevitable (theoretically, it can still be headed off) are overlooking two facts:
1. The biggest debt is the unfunded liabilities for entitlements like Medicare, Social Security and because hyperinflation usually does not last more than about two years, and the unfunded liabilities for entitlements are based on a 75 year projection, three years of hyperinflation will not solve the government’s inability to pay entitlements.
2. North says the average term of U.S. debt is 8 years so most U.S. debt won’t be affected by two years of hyperinflation.
With regard to unfunded entitlement liabilities, North says hyperinflation predictors like me overlooked that. No, I didn’t. I said in my book How to Protect Your Life Savings from Hyperinflation & Depression
that the public’s rights to medicare and Medicaid and federal retiree health care are not dollar-denominated assets. Therefore they are unaffected by hyperinflation. I called them blank checks, not dollar-denominated assets.
With regard to the average term of U.S. debt, here is a quote from Encarta:
Maturity of U.S. debt ranges from less than a year to over 20 years, with the average maturity about 3 years. More than half of the debt, however, is short term, maturing in less than a year.
So the term may not be what North says. However, I agree with North that much U.S. debt does not mature until after the projected hyperinflation which most observers expect to start around 2014 to 2017, which would mean it would end, if it had a two-year duration, around 2016 to 2019.
North’s statement of how long hyperinflations almost always last is too crude. The actual durations of many historic hyperinflations are listed on page 118 of my book How to Protect Your Life Savings from Hyperinflation & Depression.
However, the big problem is that North is assuming that when hyperinflation ends, the purchasing power of the dollar reverts to pre-hyperinflation levels. The hell it does!
Two years of U.S. dollar hyperinflation would wipe out the purchasing power of all dollar-denominated assets world wide.
When the hyperinflation ends, the U.S. dollar will be replaced by a new currency. An old-U.S-dollar-to-new-currency conversion rate will be established by the government at that time. I am not theorizing this. It is the way it has always gone in past hyperinflations except where the country in question simply ended the old currency and just let the pubic use foreign currencies forever after.
The conversion rate will be based on the purchasing power of the U.S. dollar on the day the hyperinflation was ended!
Here’s an example. Today the U.S. dollar is about equal to the Canadian dollar. $1 USD = $1 CAD. I expect we will have hyperinflation and that Canada will not. See my other headlines news articles for the reasons.
So after hyperinflation, $10,000,000 USD = $1 CAD. The U.S. ends the hyperinflation by creating a new currency called, say, the star dollar. The conversion rate to the Canadian dollar is again 1 US star dollar = $1 CAD. So what is the conversion rate for old U.S. dollars into new U.S. star dollars? $10,000,000 old USD = $1 star.
U.S. bonds and all other dollar denominated debts that have not yet matured will still be denominated in old U.S. dollars when they do mature and they can be paid off in worthless old U.S. dollars.
You may think the U.S. government would not dare do that because it would piss people off. Rather, they would convert the old hyperinflated U.S. dollars into the new non-inflating star dollars one for one. No freaking way!
The reason the old U.S. dollar is hyperinflated is they “printed” too many of them. If they allowed a one-for-one conversion into the new star dollar, there would instantly be too many star dollars, too, and the hyperinflation situation would continue unabated.
True, Germany did pass some post hyperinflation laws giving a limited number of creditors who got wiped out by hyperinflation partial clawbacks in the range of 15% to 29% of the purchasing power lost. They also levied small taxes on the windfall profits made by borrowers who got to pay debts off with worthless, hyperinflated German marks.
But fundamentally, there will be no restoration of the purchasing power of old U.S. dollar-denominated loans and bank accounts after hyperinflation ends. The end of hyperinflation means the new money is real, like the Canadian dollar which I assume will remain real throughout the hyperinflation in the U.S. Essentially, reinstating the purchasing power of U.S. bonds denominated in old worthless dollars would mean changing the wording of those contracts to say they were denominated in Canadian dollars or star dollars. But A, that would be unfair because the lenders tried to anticipate the inflation rates in the interest rates on the original bonds or loans and it is not the borrowers’ fault they anticipated low. It would be double counting to let them put an inflation premium into the interest rate when they made the loans then also get paid back in an uninflated currency like the star or Canadian dollar. And B, where in the hell would the bankrupt U.S. government get the real money to, in effect, buy trillions of Canadian dollars with which to pay off the not-yet-matured U.S. bonds?
Don’t tell me they can just “print” the star dollars to pay them off. That is what created the hyperinflation. The new star dollars will not be trusted unless there is some totally independent—probably by constitutional amendment—entity in charge of printing star dollars and they will be ultra transparent, watched like hawks, and maybe required to only “print” as many star dollars as the growth in the GDP warrants. They most certainly will NOT be allowed to print extra star dollars because the federal government is trying to spend more than it takes in.
My position is very simply that the world bond market, which is mostly Americans, will stop buying U.S. government bonds within about four years because they will see there is no chance they will be paid back as agreed or with dollars that have anywhere near the same purchasing power as the ones they used to buy the bonds.
At that point, the U.S. government will have to choose between North’s default on all U.S. government bonds and most entitlement promises on the one hand, and “printing” the money to keep paying interest and maturity redemptions on the bonds and entitlement checks to retirees and medical personal providing care for U.S. citizens on Medicare, Medicaid, federal retiree health care, etc. on the other hand.
I say they will choose to “print” money because that will enable them to blame Wall Street, Wal-Mart, and Chevron (for raising interest rates and prices in response to the government-caused hyperinflation). They figure hyperinflating will get them through one, maybe two, more elections, at which point they will retire “to spend more time with their families.”
North is correct to say that no one will accept the hyperinflated currency at the end of the two years or so that it lasts, including doctors, hospitals, nurses, FBI agents, park rangers, oil companies providing fuel for Air Force One, and so on.
That is when hyperinflation ends. When the U.S. government can no longer force anyone, anywhere to accept U.S. dollars, they will stop “printing” them.
At that point, and only then, unable to borrow by selling U.S. bonds, and unable to “print” U.S. dollars because no one will accept them, and unable to raise tax revenues enough to pay for over $100 trillion in entitlements and remaining national debt of $10 to $15 trillion or so, they government will be forced to default.
In short, North seems to be saying the federal government will not hyperinflate because it will not save them from entitlement obligations and will not save them from bonds maturing after the hyperinflation ends. He is right that hyperinflation will only benefit the government during the hyperinflation with regard to in-kind entitlement obligations (mainly medical care), but he is wrong to say that government will not be able to wipe out the real (adjusted for inflation) value of all U.S. government bonds, including those that mature after the hyperinflation ends, via a two-year hyperinflation of the U.S. dollar.
He as also wrong to say that because hyperinflation will not solve all the debt and unfunded liabilities problems that the politicians will not use hyperinflation at all. They will use it for the same reason they do everything: to get through the next election. If they default on the national debt and entitlements before hyperinflation, they will be blamed for it. If they hyperinflate, they can blame Wall Street and U.S. business for being “price gougers.”
What planet has North been living on that he thinks human politicians will voluntarily accept blame for anything that they could avoid, or at least postpone, getting blamed for?
North is right to say there will be a big default. The government will have to cut federal spending about 60%. That will certainly mean at least partial default on promises made regarding entitlements. And they may have to default on the $16 trillion worth of “full faith and credit of the United States Government” bonds they have sold. A total default on all our U.S. bonds would cut the amount of spending cuts need to live within our means to about half of the 60% I just cited. If you default and cut, you only have to cut about 30% from government spending other than interest and principal payments on debt.
So the U.S. government will cut spending 60% AFTER they try to hyperinflate their way out of the problem. And that will mean partial default on entitlement promises and maybe partial or complete default on U.S. government bonds. But the politicians sure as hell will not send out default notices or vote for sending out such notices before they first try to hyperinflate the problem away and win one more election before the federal bankruptcy hits the fan.
And I will tell you what the first default should be. Zero out entirely the pensions and retirement benefits of all U.S. Congressmen and senators who ever voted to raise the debt ceiling since 1980 and all presidents who ever signed a bill to raise the debt ceiling since 1980. And remove those presidents’ names and all personal glorifying elements from their presidential libraries. Replace the names with the dates the guy was president. Let the libraries contain only the presidential documents produced during the administration in question; nothing that glorifies the president in question as a person. End paying for the Secret Service protection and office expenses of past presidents. Let their die-hard supporters pay for them.
North wrote a response to this—to my surprise.
He spends a lot of time saying I am “attacking” him, a more famous person, to get him to respond and give me publicity. He calls that quail flushing. I would call it the way Muhammed Ali skipped a bunch of pay-your-dues fights by trash talking the heavyweight champ. It is also reminiscent of Nolo press’s perhaps inadvertent strategy of publishing their first book about how to do your own divorce in CA without a lawyer. It flopped, until the CA Bar Association denounced it. The rest, as they say, is history. Nolo subsequently became a big publisher with a lot of lawyer-avoidance titles.
So I suspect it is a decent approach. Newsweek seems to me using it lately to get publicity—calling Romney a wimp on one cover then saying Barack needs to go on another. It seems to have worked for Newsweek.
I have gotten a lot of attention from my real estate guru rankings. I got the idea to do that from an early book on how to use the Internet. It was not an attempt to provoke response to get publicity. Rather, ads by famous gurus generate interest in third-party comments about them. The Internet facilitates such directories and review pages. But the Web traffic I get from that is from what I say, generally not from any response to it by the gurus in question. (One major exception being the guru who sued me for three years—but that’s another story. See the Kaminsky reference in the Wikipedia bio some unknown person wrote about me.)
I had heard of Gary North vaguely thinking he was an economist. I thought I might have quoted him in my book on hyperinflation, but when I checked the index, he was not in it. My guess is that means he did not hit my radar when I researched the hyperinflation book, or if he did I found what he said neither helpful nor sufficiently prominent that I needed to refute it.
I did find the belief that gold is a great inflation hedge sufficiently prominent to refute it.
Also, North, who apparently did some politician-type opposition research to rebut me, fails to mention my explanation of why I criticize others who write about the same subjects as I. If you write a book about Subject A, and fail to mention prominent expert in that field X, readers may conclude that you are ignorant of X or that you did not mention him because you did not want to plagiarize him or you did not mention him because you agree with him.
In this case, I am simply ignorant of Gary North. However, in the more than two years that my book has been out, and I have been writing web articles about that book, I have received many emails saying what about Y’s writings or Z’s writings, but no one has ever asked me about North’s writings. North is no more famous in August 2012 than he was before. I mentioned him solely because of his Mises article in August 2012, not because of his great fame. If I was trying to profit from his fame, the time to do that would have been in 2010 when my book first came out.
According to his response to my article, a bunch of his readers came running to him—like middle schoolers it sounds to me—saying “Did you see what Reed said about you?” It should be noted that I deliberately waited for a while to see if any of my readers would come running similarly to me to ask if I saw what North said about me? None did. I heard about his response to my comments about his Mises article from a Google Alert that I get whenever my name in mentioned in a new Internet post. North seems to be a bit of a legend in his own mind and thinks he is also a legend in my mind and those of my readers. Nope.
North accuses me of getting the “strategy” of hoarding from John Pugsley and North.
A. I did not invent hoarding or claim I did.
B. I have never heard of John Pugsley. My books have extensive bibliographies including many books I disagree with or even hate. I would have put Pugsely in there if I had read anything of his on the topic of hyperinflation.
C. If North advocated hoarding, I was not aware of it.
D. I don’t think hoarding rises to the level of a copyrightable or trademarkable idea. It is about as generic as can be. I have a chapter about it in my book because it is a logical way to protect yourself from hyperinflation and depression, and also because it came up empirically again and again when I read the various histories of the various monetary crises. It is what people do in such crises, or wish they had.
Other than his inflated notions of how prominent he was in my mind, North seems to agree with me on hoarding.
Which begs the question of why he is talking about it at all since my criticism of North had nothing to do with hoarding.
North keeps saying that I said the government will default. Just a minute. My time line of monetary crises in my book lists two kinds of default: implicit and explicit. I think I got those terms from Rogoff and Reinhart. Implicit default is inflation; explicit is the U.S. government saying it will not pay back the money you lent it when you bought a U.S. government bond.
By leaving off the adjective, North seems to be saying that I say the U.S. government will explicitly default on U.S. bonds. I think the government will have a hard time avoiding explicit default especially the longer they wait, but I also think it’s clear that the politicians in Congress and the Oval Office are loathe to put their names on an explicit default. Rather they will implicitly default by “printing” money as long as they can get away with it. Then they will either “default” on their entitlement promises, which are not contractual and therefore not really a default per se—just a change of policy, or they will actually explicitly default on U.S. bonds because the arithmetic gives them no choice, or both.
It may be that North’s slop job use of terminology, namely “default,” which only applies to breach of contract, in a spending-cut discussion is the cause of my saying he is wrong. I say the government is going to have to cut spending by about 50% after they exhaust the procrastination benefits of hyperinflation. I surmise that maybe North is calling that a default.
That’s liberal talking-point terminology. Liberals say the government promised to pay seniors Social Security and Medicare and military retiree pensions, and so on. That’s a lie. There is no written promise to pay any particular amount or for any particular expense in the pertinent laws. Liberals talk as if there were, because they do not want their pet law repealed or modified.
Whether the U.S. government will default—in the actual meaning of that word—on U.S. bonds remains to be seen. It will probably happen. But whether the U.S. government will have to reduce entitlement payouts is beyond question. Indeed, if the U.S. government were to default on the entire federal debt of $16 trillion, we would still have to cut entitlements by about 25%. That’s how big the entitlements problem is.
Also, hyperinflation as I said above, has nothing to do with medical entitlements. Those are blank checks, not not dollar-denominated obligations. Hyperinflation only reduces the real value of contractual dollar-denonimated payments. The only contractual dollar-denominated payments are U.S. bonds. Social Security is dollar-denominated, but it is not contractual. It is just a tax that goes into the general fund and Congress has the power to raise or lower the payments to retirees whenever it wants for whatever reason. A U.S. Supreme Court decisions said that. http://en.wikipedia.org/wiki/Helvering_v._Davis
I had to chuckle at the following comment about me by North:
He has no reputation in the hard money camp. He is a specialist in real estate speculation. He has not published on any of the major hard money sites, nor was he around when the hard money movement was getting started back in 1967. I was. I began writing for that movement over 45 years ago. My first published booklet was Inflation: The Economics of Addiction. That was in 1964.
First, this is intellectually-dishonest debate tactic #26 in my web article on dishonest debate tactics:
26. My resume's bigger than yours. All the more reason why you ought to be able to cite specific errors or omissions in my facts or logic, yet still you cannot.
Size matters to North.
Then there is the fact that I was listed in Who’s Who in Hard Money Economics back in the late 1970s or early 1980s. I also wrote some articles for Inflation Survival Letter and spoke at one of their conferences in 1977. They seemed to be hard money kind of guys.
Then there is the fact that I have never been sure what hard money economics is, or cared. As I made crystal clear in my article Who buys gold?, that crowd kind of creeps me out. My book and web articles make it equally crystal clear that I own no gold or other precious metals and, at present, recommend that my readers follow that example. I recommend the fiat money of well-managed countries—about as far from hard money as you can get. Gold and silver would be okay if they were not overpriced and overtaxed and often the subject of capital controls.
North says I am a “specialist in real estate speculation.” That’s a lie. I have denounced speculation about a million times in my books and articles and speeches. I just spoke to the Money Show in San Francisco last Friday and denounced speculation at length, calling it “chimpanzee investing” because a chimpanzee could do it. I have long urged my readers to either make a bargain purchase or add value, which I have been calling the “private equity” approach in recent years.
Any reader, inculding North, wanting to know what I am a “specialist” in can easily find out by looking at my overall home page—www.johntreed.com— or, with regard to my real estate writings, my real estate home page—www.johntreed.com/realestate.html.
In 1967, I was a junior and senior at West Point. No one warned me then that my failure to write about “hard money economics” that year was going to hurt me later.
I did not write a book in 1964 because I was either in high school or in my first year at West Point.
Is North saying that no one younger than him can criticize him. I’m 66. Should be old enough to take me out of the “children should be seen but not heard” category. It would appear he will not allow criticism of him by anyone younger than he. Since he is 70, that will really cut down on how much criticism he receives. He seems to see talking about inflation as a sort of union where tenure determines who is allowed to speak. I don’t see it that way.
And this paragraph about me violates my intellectually-dishonest debate tactics #2 and #4: changing the subject and irrelevance.
My article about him makes two points: I think he is wrong to say politicians will default before they hyperinflate because they always seek to avoid blame for bad news, and that a bond maturing after hyperinflation ends has nothing to do with whether the purchasing power of that bond was wiped out during the hyperinflation and stays wiped out after the hyperinflation.
I have been reading his small print response to me for some time now and have yet to see him address either point—maybe further down the page. Sounds like Obama talking about dogs on car roofs and signatures on SEC forms and tax returns—anything but the topic at hand.
Thus far, North, who purports to be talking about me, seems to be telling readers more about himself than about the topics I criticized him for.
North’s favorite argument against my criticism of him I that I m trying to sell my book. That would be intellectually-dishonest debate tactic #3 in my article about debate tactics:
3. Questioning the motives of the opponent: this is a form of tactic number 2 changing the subject; as stated above, it is prohibited by Robert’s Rule of Order 43; a typical tactic used against critics is to say, “They’re just trying to sell newspapers” or in my case, books—questioning motives is not always wrong; only when it is used to prove the opponent’s facts or logic wrong is it invalid. If my facts or logic are wrong, my motive may be the answer to why. But let’s cut out the middleman of why my facts or logic are wrong and just point exactly what the error is. Pointing out the suspicious motive only indicates there is no error, just an attempt to insinuate an error by innuendo.
I doubt that I have sold a single copy of my book either from my comments about North or about his response to those comments. I had to comment about his Mises article because it was contradicting what I have been writing about hyperinflation.
North says he did not need to talk about Congress preferring to hyperinflate rather than default because his article was about the Federal Reserve not Congress.
I should have said something that has become second nature to me but may not be to my readers—and surprisingly not to North.
The Federal Reserve is independent of the Congress. It is supposed to prevent inflation regardless of what the Congress and the president want. What does “independent” mean in this context? The Fed gets its money to operate from its profits, not from Congress. Also, the Congress is not supposed to bother the Fed.
However, the Congress and president raise hell and threaten the Fed frequently. They are faking it most of the time because they really want the Fed around to take the blame. But the fundamental fact is the Fed was created by Congress in the Federal Reserve Act of 1913. There is nothing in the U.S. Constitution about the Fed. To paraphrase what Bill Cosby used to say to his children, “The Congress and the president brought the Fed into this world and the Congress and the president can take it out.”
When the bond market no longer buys U.S. bonds, the U.S. government will be unable to pay its bills: including social security checks, Medicare reimbursements, military pensions, military payroll, and so on. Congress and the president will pressure the Fed to “print” the money to pay them. If the Fed refuses, as it is supposed to do, the Congress and President will take over the Fed’s money “printing” role by repealing the Federal Reserve Act of 1913 in whole or in part.
Like I said, I have sort of internalized that and should remember to explain it to my readers more often.
Folks, I gotta get back to work. North’s response to my two points of criticism about his Mises article seems to go on forever, exhibiting yet another intellectually-dishonest debate tactic:
32. Protest-too-much quantity of sources: This is citing an overly long list of legal or other purportedly-authoritative citations to prove the opponent is wrong. For example, people who claim income taxes are unconstitutional typically cite a book-length list of court decisions and statute sections to “prove” they are right. In fact, income taxes are constitutional because of the XVI Amendment to the Constitution as upheld by numerous court decisions over 97 years that have dismissed the long lists of legal citations as “frivolous,” typically fining the litigant for pursuing the suit at all. Actor Wesley Snipes went to prison after failing to pay his income taxes on the grounds that they were unconstitutional. Part of the trick of this debate tactic is to get the opponent to spend days researching all the citations.
So I will leave it here. If any of my readers go all the way through North’s book-length response to my 3-page critique of two of his points and find any good points they think I should address, please tell me what they are and I will check them out. If he is right, I will correct my position, apologizing to him if necessary.
My main impression of his response is, “Wow!” The “quail flushing” gimmick apparently works at least with North. Whether it works with anyone else is questionable. The general rule among us public figures is you do not respond “down” to criticism. That is, you do not bother responding to someone less famous than you. I think I heard Bill O’Reilly recite that rule on his show once. North seems to have violated it big time plus he goes to great lengths to prove that he did. He explained why he violated the rule in this case, but I was not able to follow his explanation. The actual explanation seems to be the Shakespeare quote above:
I will not publicize my response to his response. I will just put it here at the end of my week- or two-week-old article about North’s Mises article and see if anyone notices. I do not expect they will.
John T. Reed