Copyright 2012 by John T. Reed
There is a near daily drumbeat of news that is telling us hyperinflation of the U.S. dollar is coming. A number of other experts, namely Kenneth Rogoff, Nouriel Roubini, and Paul Ryan have made similar forecasts of the day the ’flation hits the fan.
I am going to start listing them here as part of my efforts to get you guys to take action to protect yourselves. I got interested in this and informed about it when I researched and wrote my book How to Protect Your Life Savings from Hyperinflation & Depression.
The subheads closest to the top are the most recent. These subheads were written separately over a period of months. Any contradictions in the overall article stem from the top-most being more current.
Today’s installments of your almost daily dose of hyperinflation warnings includes Spanish depositors vandalizing banks there because they cannot get their money out (page A1 of 10/8/12 WSJ) and the IMF and World Bank telling the Euro Zone and the U.S. to get their federal government fiscal and monetary acts together (p. A2). A U.S. Ttreasury official responded by claiming,“There is broad international support for the kind of balanced fiscal plan advocated by the President.” Uh, that word “balance” means the President refuses to do anything at all until the Republicans agree to end the Bush tax cuts for the rich—which would raise $80 billion or some such—a pittance compared to the trillion dollar deficit—assuming no rich person changed their behavior so as to pay less taxes. In other words, the Treasury said to the IMF and World Bank, “Screw you, we're only interested in winning the election.” Furthermore, if the Republicans suddenly agreed to raise the taxes on the rich, the Democrats would freak and find something else to demand so they would not have to agree to any cuts. Get your savings out of U.S. dollar-denominated assets and into hard assets and well-manage foreign currencies.
Fed announces it will buy $40 billion of U.S. mortgage and other bonds until unemployment comes down.
On 9/6/12 the Chinese government announced tat any who wants can now buy or sell oil in yuan, the currency of China, not just dollars as had previously been the case.
Italy apparently has capital controls, part and parcel of a hyperinflating country’s laws. And, as always in such countries, various residents of Italy are trying to remove cash and gold to safer countries. The Italian border guards have dogs trained to smell currency.
In the U.S., we can still move the cash or gold out of the country, but I expect the U.S. government will adopt capital controls in the future. Many observers have said we already have in the form of sort of back-door disclosure requirements (FBAR and Form 8938) and the FATCA law have made foreign banks refuse to let Americans have accounts there.
Today’s WSJ says the Euro Zone economy as a whole is contracting. When that happens for two straight quarters, it is defined as a recession. In other words, with all their financial troubles recently, they have not technically been in a recession. What will it be like if they go into one, which seems likely?
Today’s Journal also says that Central Europe’s economy is “sputtering.” The U.S. is famously the main locomotive of the worldwide economy, but the European Union (27 countries 17 of which are Euro Zone) has a bigger GDP than the U.S. China, for example, exports more to the EU than it does to the U.S. So the financial difficulties in Europe, China, the U.S. (which is technically in a recovery), and in the BRIC countries generally are telling us we are about to go into another world wide recession. That will greatly increase the pressure in the U.S. to “print” money in order to make up for lower tax revenues and keep the entitlement checks—which never experience a recession—going out. “Printing” money causes hyperinflation.
Finally, today’s Journal says the nouveau riche (the only kind of riche they have) Chinese are getting their money out of China. Comically, their money is going the opposite direction from the U.S. parents taking their small children to China to learn Mandarin—the better to suck up to the “new number one country” in the future. That was another WSJ story on 6/27/12.( I said “Don’t learn Mandarin” in another web article.)
Where is the “smart” Chinese money putting their savings? In the U.S. in U.S. dollars. Also comically, they are passing me and my readers going out of the U.S. dollar into Australian, Canadian, and New Zealand dollars and Swiss francs.
I will give the Chinese partial credit for getting out of the yuan, China’s currency. But they need to start reading more current information about the U.S. debt-to-GDP ratio. Going into the U.S. dollar was last a good idea maybe back around 1995.
One actual case history in the article was taking his money out of China and putting it into Hong Kong which he noted was not under mainland China’s capital controls.
Maybe not yet, but Communist China damned sure has owned Hong Kong lock, stock, and barrel since 1997. They have the authority to extend all of their laws to Hong Kong and it would take them about ten seconds to do so.
I will give full credit to another Chinese currency refugee in the article. He is moving his money to Australian dollars in Australia. Ah. Me, too. And my readers. Australia has a 21% debt-to-GDP ratio, best in the world among creditworthy countries.
When did the U.S. last have a 21% debt-to-GDP ratio? Probably about two months after FDR was inaugurated. The closest it ever got to that recently was when Reagan was inaugurated in 1981 and the ratio was about 31%. Reagan made DC safe for deficit spenders by setting new peacetime records in that department. And the rest, as they say, is history. And because of all the deficit spending since 1981, our currency and all U.S. dollar-denominated assets are about to become history.
Another article in the 8/15/12 Journal says Australia’s AAA rating (U.S. is only AA+ with S&P) has made it a safe haven for bond investors. Ya think? I looked into buying Australian bonds when I was having trouble figuring out how to open a bank account there. My recollection was that Australia has so few bonds—what would you expect when they are only 21% of the GDP of a country with only 22 million people?—that they only sell them “wholesale” to institutions, not to retail customers. Fortunately, I was able to open a savings account in Australia. Yields on 10-year Australian government notes are now 3.221%. But Australia also has inflation of 1.2% to 3.5% in the last year. I do not like bonds because of inflation risk. My saving account there earns interest which roughly offsets it, but more importantly, I can get my money out instantly if need be. With bonds, you cannot.
When that happens, my readers and I and one rich Chinese guy will be in Starbucks in Sydney reading about it in the Australian Financial Review.
Monetary policy lesson for you: What do central banks do?
Answer: They have one job: preventing inflation, except in the U.S. were they are also in charge of holding down unemployment. Giving a central bank, the Federal Reserve, the jobs of maintaining a stable currency and holding down unemployment is stupid. The two roles conflict. Many have urged the Congress to eliminate the Fed’s duty to hold down unemployment.
The headline on the 7/6/12 Wall Street Journal is “Central Banks Take Action.”
Here’s another monetary policy lesson for you: What actions can central banks take?
Answer: Only two. They can change interest rates and they can “print” on “unpint” money. (They “print” by buying their own country’s bonds with money they conjure out of thin air and “unprint” by selling those same bonds.)
The Journal article says they are lowering interest rates and “printing” money. That is appropriate behavior if interest rates are to high and there is deflation, but neither is currently the case in China, the U.K. or the EZ. (There is deflation in Switzerland. They are a non-EZ or EU country. I recently bought some of their currency and I recommend you do the same.)
In other words, the government agencies charged solely with preventing inflation, agencies that explicitly have no stimulus role, are implementing highly inflationary monetary policies (lower interest rates and buying their own bonds with money conjured out of thin air) in order to stimulate their economies. So apparently it does not matter whether you expliticly assign the unemployment-prevention role to central banks or not. They will assume it is their role, and abandon their explicit monetary-stability post, if there is no political will among the legislators and chief executive to stimulate effectively.
Legitimate stimulation comes only from cutting government spending (called “austerity” in Europe by politicians who oppose it), deregulation (called “labor reform” in Europe), and lowering taxes. Each of these three reduces government involement in teh economy. Government is extremely inefficient and motivated by political considerations that are anti-growth. Incerasing efficiency and reducing malfeasance cause economies to grow. There is no political will in U.K., profligate European countries, or the U.S. to do the right things for growth. So their central banks are deliberately doing the wrong thing to try to make up for the lack of political will to do the right thing. God help us.
I predict “quantitative easing,” the euphemism the Fed uses to disguise hyperinfation policies, will become one of the most notorious phrases in history once the public feels its effects—up there with the “white man’s burden,” “peace in our time,” and “ethnic cleansing.” But so far, it still helps the poison go down, if I may paraphrase Mary Poppins.
I still recommend that you move your rainy-day savings to currencies of and banks in Australia, Canada, and New Zealand and into Swiss francs held in an outside-the-U.S. safe deposit box. Those countries seem less likely to hyperinflate and have farther to go in terms of borrowing to get to hyperinflation debt-to-GDP ratios. The debt-to-GDP ratios of those countries are AUS, 21%; CAD, 84%; NZD, 32%; CHF (Switzerland francs), 49%. In contrast, the U.S. debt-to-GDP ratio is 104% and climbing at a rate of 8.5% per year. Greece is 161%.
Once again, you are getting more advance warning of this pending financial crisis than any financial crisis in history. Don’t be stupid and throw away your great opporunity to get out of the way.
Jaime Caruana is the general manager of the Bank for International Settlements in Basel, Switzerland. That bank is often referred to as Basel. The BIS is a consortium of the world’s central banks. The Federal Reserve is the U.S.’s central bank. I won’t bother to quote the guy. Central bankers speak in code to avoid riling up and possibly panicking the public. You can google key words from this article to read his statement.
Basically, he says the elected officials in the G-20 countries are abrogating their duty of cutting spending and regulations. Central bankers are seeing that as requiring them to do more. But the only levers they have to pull are interest rates and “printing” money, each of which is actually related to the other. In other words, all central banks can do to make economies better is “print” money. Caruana says they have “printed,” are are continuing to “print,” too much.
That he says, “could have undesirable side effects if continued for too long.” Translation, “If you guys don’t stop “printing” money you are going to hyperinflate the currencies in question.
Yeah, they are. And they are not going to cut spending or regulation, so batten down the hatches for hyperinflation in the countries with the irresponsible elected federal officials, namely, the PIIGS, U.S., Japan, and most of the European Union.
I have moved my money to Australia, Canada, and New Zealand dollars and into Swiss francs. How much time do you have? Probably, somewhere between one day and four years. What happens if you are too late in getting around to moving it? See my web article The Day the Dollar Dies.
There has never been a financial catastrophe in which you were given more warnings, yet the vast majority of people are responding to the warnings with nothing but denial. They will end up with nothing but denial in their bank accounts. He who hesitates is lost will never be more true than in the coming hyperinflation.
A reader sent me links to four Khan Academy You Tubes on Greece’s financial problems. Khan is one of my fellow Harvard MBAs. I had seen him on TV but never watched one of his videos. I watched the first one below.
I wonder what your opinion on these videos would be (Khan Academy on the Greek financial debacle):
I found it to be pretty good basic stuff. He says what I have been telling you: debt-to-CDP ratio is the main number and it has been skyrocketing. He also explains that your D/GDP ratio going up makes your interest rates go up which makes your D/GDP ratio worse. That is called a death spiral. He did not use that phrase. Also, he failed to note that Greece is past that phase. Their interest rates went up to the point where no one will buy their bonds at any interest rate. When your credit is shot, interest rates are an irrelevant concern of the past.
He also seemed to say Greeks face what I called a “false choice” in previous net postings: austerity versus growth (from government stimulus). Once again, he failed to note that Greeks are beyond having any choice because they waited too long. In order for Greece to stop cutting government spending (austerity) and to start doing more government spending to stimulate the economy, someone has to lend Greece more money. Khan seemed to imply Greeks still can choose which to do: cutting spending or using more government spending to stimulate the economy. Nope. All gone.
Again, such decisions are a thing of the past in Greece. No one will lend them any money so stimulus is not an option. Cessation of cutting government spending is not even an option. They do not have enough money to pay their current government bills. So they need to cut more pensions, fire more government workers, and so on. When you have no money and you cannot borrow any more money, you have to cut spending down to the level of tax revenues.
Oh, Greece does think it has one more alternative: exit the Euro Zone and go back to their old Greece-only currency the drachma. When they do that, they can easily pay their bills by just printing as many drachmas as they need. One little problem with that—it causes hyperinflation. That means the country of Greece has no money that is worth anything to use to buy food or fuel or pay police, etc.
If Greeks or the U.S. want to stimulate their economies, that’s easy. Deregulate and privatize. Government “stimulus“ has no such effect. It is just a way to buy votes for the incumbents. Many think government spending on World War II ended the Great Depression. Nope. That was ended by a combination of lowering trade barriers and loosening the money supply. The war simply inspired the Fed to end their tight money supply. We cut government spending by 60% when the war ended, causing a huge economic boom.
You say deregulation is what caused the sub-prime crisis? You’re wrong, but who am I to argue with tens of millions of Greeks or Americans? So drop dead then. Riot. Burn. Wave signs. Blame foreigners. You have lots of options for venting. Only ones that will work are cutting government spending, deregulating and privatizing.
I’m loving this because the U.S. is going do the same path—only we are WORSE. Greece has implemented a severe austerity program. Our elected officials dare not even speak the word. I am hoping the rest of Europe and the U.S. will be so horrified by what Greece has done to themselves that we will put on the brakes and stop our suicidal acceleration off the same cliff as Greece.
I also watched the last Khan Academy You Tube on this. Again, it’s pretty good but he seems to suggest the position of the Greek people—we can’t take any more austerity—may have some merit. The hell it does! They borrowed so much they have no choice but to cut government spending down to the level of their tax revenue, deregulate, and deal with the results as best they can. They keep talking like another bail out is an option. So does Khan. All that would accomplish is postpone the austerity six motths or so and make the final austerity even worse.
And I really hated Khan’s not pointing out that the U.S. has a 104% debt-to-GDP ratio and is racing to catch up to Greece’s of- the-cliff 143% ratio. I get a sense that Khan is afraid of saying anything that might displease liberals. Liberals love him. I saw him on Charlie Rose. Q.E.D.
I am more concerned about saying something that is false or might lull Americans into thinking we do not already have an emergency in terms of entitlement spending and overregulation.
Socialism does not work. If you cling to it long enough, it produces total disaster, e.g., Soviet Union, Cuba, North Korea, Greece. Khan seems to recognize that, but is unwilling to say it in order to preserve his own non-profit, PBS sort of career. How about we save the country first then deal with being popular with liberals?
Governments of ten European countries have now fallen because their voters refuse to endure government spending cuts.
Greek voters are turning toward neo Nazi and extreme socialist parties. Greece got into the Euro Zone by lying, they now admit. Their “punishment?” They were forgiven for not paying 100 billion euros of debt and give more hundreds of billions of debt on more favorable terms than the market would ever give them.
So they had more elections and the voters are even more unhappy. The head of a socialist party says the austerity program Greece agreed to in order to get the loans and debt forgiveness is “null and void.” He demands more money from the other euro countries and says they are bluffing about not giving it to Greece. And he is calling their bluff! The basic Greek Socialist position is, “Yeah, we lied aabout our fiscal situation to get into the Euro Zone. And we promised to clean up our act. And we are reneging on that promise. But you have to lend us the additional money you promised, even though it was contingent on our keeping the promise we are now reneging on. And by the way, we need even more loans and we refuse to even pretend we will clean up our fiscal at to get those loans.”
The Euro Zone and the IMF say we will not give you any more loans unless you cut federal spending and privatize government companies and cut regulation. The socialists respond, “You don’t have the guts to stop making more loans to us.”
Perhaps more amazingly, the Greeks may be right about that. Germany seems to feel they have to do endless penance for the sins of their Nazi grandfathers. France’s semi-tough president was voted out of office recently. Ditto in Holland. But the Media on May 16, 2012 are now concluding the patience, and penance, of the Germans has probbaly run out.
I welcome all this nonsense because I think it is our only hope for waking up the American people to the danger of mindless federal borrowing and spending.
Could we at long last stop saying America should be more like Europe, that Europe has it all figured out? Europe has been incompetent about foreign and economic policy since at least 1914.
Time or one of those said decades ago that Europe’s post-World War II role in the world seems to be telling Americans at what temperature to serve their wines. Europe’s 21st century role seems to be showing Americans that socialism and safety netism REALLY doesn’t work. The collapse of communism in the Soviet Union and the Warsaw Pact was NOT a fluke.
Feldstein wrote an article in the Financial Times of London titled “It’s time for Spanish householders to buy bonds and save Spain.” This is called financial repression. It is where the federal government forces its citizens to overpay for federal government bonds that they can no longer sell in the free market because the combination of risk and yield sucks. Feldstein calls for a direct fiat ordering citizens to buy the bonds. When the U.S. government has done this in the past, they typically do it indirectly by 1. forcing banks and other regulated institutions to put more reserves into government bonds and 2. limiting the choices of citizens on where they can invest thereby forcing more deposits into low-interest or no-interest accounts in banks that are being forced to buy U.S. bonds. The most famous version of this in the U.S. was Regulation Q.
I expect the 21st century verison will be politicians and bureaucrats claiming they are “concerned” for the safety of the banks and the savings of Americans. They will, purely out of that concern, mind you, force banks to put their reserves into the “safest” asset—U.S. government bonds (that the government can no longer sell because they are no longer safe) and will force Americans to put their savings and pension accounts into the “safest” investment—FDIC-insured deposit acounts (“protected” by an FDIC that no longer has as much reserves as it is supposed to have and which has a $500 billion line of credit from the U.S. Treasury which does not have $500 billion and can only get it by borrowing from the Chinese and Japanese).
What financial repression really does—whether in Spain or here—is steal from citizens the interest or equity return they could earn in alternative free-market investments and ultimately—since the U.S. will eventually be forced to default on its bonds, steal the principal amount of the bonds from the banks and their depositors. If you think I am exaggerating to use the word “steal,” ask some experts who are not political. I quote a number of famous experts using that word and similar ones in my book. I am moving my money to foreign currencies and foreign banks oveseas. If the government tries to get my money, I expect I will depart to those foreign countries. I do not think even the Obama administration is ready to start holding citizens physically hostage and demandng their savings as ransom. But I am not sure about that.
When I was in the 101st Airborne Division in 1966, the battalion commander told me as an officer I would have to pressure my subordinates to buy U.S. savings bonds that paid below-market interest rates via payroll savings plans. If I did not, he said I would be relieved of my command and my career would be over. I thought he was kidding. I was a West Point cadet at the time on a 30-day internship. When my battery commander, a 1961 West Point graduate, assured me it was true, I switched from being a confirmed career officer to a “let me out of here as soon as my five-year commitment is up” short-timer.“ I did not go to West Point to become a bag man for a protection racket,” is the way I explained it to those who could not understand why a West Point graduate would “throw away” his got-it-made career. At that time, I later learned, similar pressure was also being applied to civilian government employees and employees of civilian government contractors to buy U.S. savings bonds via payroll deduction. t the time, the yield on the bonds was way belo market value. They were sold almost entirely in protection racket mode—“Nice little career you’ve got here. I’d hate to see it messed up by your not being a team player.” See the “counseling session” I was put through again and again when I became an Army officer in my article “Is military integrity a contradiction in terms?”
I wrote about financial repression in detail in the “Government and institutinoal reaction to inflation/deflation” chapter of my book How to Protect Your Life Savings from Hyperinflation & Depression. I have also written about it repeatedly in my web articles. You can find them by typing “finacial repression” into the search box at the top of each of my web pages.
Martin Feldstein is a member of President Obama’s Economic Recovery Board. He was formerly President Reagan’s chief economic advisor.
Romania’s right-leaning government lost a confidence vote in parliament. The Dutch government fell because of unpopular austerity measures. The more-left-than-Sarkozy Socialist Party candidate appears likely to become president of France.
The euro zone countries (Romania is not one) have no choice but to cut entitlement spending. Unlike the U.S., they cannot “print” money to pay their bills because they ceded that authority to the European Central Bank when they joined the euro zone. Romania can print money and since their parliament has turned against the fiscally responsible course of action, about all that is left is “printing” money which leads to hyperinflation.
The pattern is becoming clear: any party that gets out front on austerity loses the next vote and is replaced by a party that denounces austerity but has no alternative policy to offer. That means they are really the hyperinflation parties because once the bond market won’t lend you any more money, and you refuse to cut, you have to inflate by “printing” too much money. That’s worse than the cuts but the public is ignorant of that and in denial.
In order to make its federal bonds more attractive to the world bond market, Spain is threatening to seize the bank accounts of its equivalent of U.S. states.
Spain is a Euro Zone country. We should be grateful the Euro Zone started in 1999. It creates a unique and unprecedented situation where countries that over spend and over borrow cannot “print” money to escape their predicament. In the Euro Zone, only the European Central Bank can “print” money. And it won’t becuse members like Austria and Germany still shudder at the memories of the last time that stunt was tried in their countries in the early 1920s.
In the U.S., our politicians will try to “print” money when the bond market stops buying our bonds. In 2011, the Federal Reserve bought 61% of the new U.S. government bonds sold. The Federal Reserve buying U.S. government bonds is “printing” money. “Printing” money, like printing money with actual printing presses, causes hyperinflation.
People will only tolerate hyperinflation for a year or two. Then the U.S. government will be compelled to creae a new currency that is not inflated. And that will force them to do what the governments of Portugal, Ireland Italy, Greece, and Spain (PIIGS) are now doing—slash federal spending.
So we are getting a preview of our own country in stage two of the “we have no choice but to ‘print’ money” phase of the U.S. governments’ future atempts to reconcile its massive borrowing and unfunded entitlement liabilities with arithmetic and reality. Stage one is trying to “print” our way out of the mess. Euro countries have no stage one. They have to go straight to stage two.
Spain cannot print money because they are mere members of the Euro Zone, not in charge of it. The U.S. can “print” money until the entire world, including U.S. citizens, throw it back in the face of anyone who offers it, including the U.S. government itself. Farmers in 1920s Austria and Germany threw Austrian krone and German marks back in the faces of the city folk who tried to come out to buy fresh food which was unavailable in the cities. “Judefetzen” was was they called it. Jew confetti. The anti-Semitism was gratuitous and bogus, but it sure as heck was confetti. When the American people, like federal government employees, military retirees, Social Security recipients, and doctors seeking Medicare reimbursements, to name a few, figure out the U.S. government is trying to pay them with confetti, they too will throw it back in the faces of the politicians who seek to get something—reelection—for nothing.
At that point, we will be in the same situation as Greece and Spain: forced to slash federal spending. The politicians who did this to us will “retire” to “spend more time with their families.” It would be a little less painful to the nation if we made lesser cuts now, but the people in charge of making the cuts, politicians, are not concerned about pain to us, only about getting reelected one more time.
In 1980, we had 13.5% inflation. Reagan won the election that year. He told Fed chairman Volcker to end high inflation. Volcker did so by using the standard inflation fighting tool: higher interest rates. He raised U.S. bond interest rates to 13.45% in 1981.
So if inflation kicks up now we’ll just do that again, right?
Ha! We can’t. In 1981, the U.S. debt-to-GDP ratio was 40%. The national debt was about $2.5T.
Now the debt-to-GDP ratio is 104% and the national debt is $15.7T.
If you raise interest rates to 13.45% as Volcker did in 1981, the interest on the national debt would be 13.45% x $15.7T = $2.1T. Can we afford to pay $2.1T in interest? Yes. Our tax revenues are currently $2.3T. Only problem would be that would only leave $200 billion to pay for all entitelments, defense, and the rest of the federal government which for 2012 will cost about $3T. In other words, if we raise interest rates to 13.45%, or have such rates imposed on us by the world bond market, we will have to cut federal spending by $3T ÷ $3.6T (2012 budget) = 83% in order to pay the interest on the national debt.
In other words, we had the financial strength to fight and defeat inflation in 1981. We no longer have it.
Which is why I am moving my liquid assets to countries with debt-to-GDP ratios of 21% to 84%. Many of you are staring blankly at these red warning lights and taking no action. Oooookay. Whatever floats your boat, but you might want to start thinking about how you buy food when your U.S. dollar bank account, your life savings, does not have enough purchasing power to pay for a bag of groceries. If you think that’s impossible, you need to do some reading about hyperinflation in Zimbabwe, Germany, Austria, Hungary, Israel, the former Warsaw Pact countries, Latin America, and the U.S. in the time of the Revolutionary War, Civil War, and World War I. See my book How to Protect your Life Savings from Hyperinflation & Depression, When Money Dies, Hyperinflation Survival Guide (Figgie International), and Blockade, the Diary of Anna Eisenmenger.
Spain is one of the PIIGS countries—Portugal, Italy, Ireland, Greece, and Spain. Those are Euro Zone countries that have borrowed too much and are experiencing riots and having to pay very high interest rates to borrow. Specifically, they are adopting austerity measures to get their deficit-to-GDP ratio and debt-to-GDP ratios down to 3% and 60% respectively to comply with Euro Zone rules. Their current deficit-to-GDP ratio is 8.5% and their current debt-to-GDP ratio is 80%.
“Better late than never,” some American might sniff while looking down their nose at the fiscally irresponsible Spaniards.
Not so fast. The U.S. deficit-to-GDP ratio is $1.3T ÷ $15.1T = 8.6% and the U.S. debt-to-GDP ratio is $15.7T / $15.1 T = 103.6%. And there is not the slightest hint of any cuts from any federal elected official. What about Paul Ryan, you say? He wants to balance the budget in 30 years! I do not know when he plans to start running surpluses so we can reduce our debt.
Folk, we don’t HAVE 30 years. Greece needed to start getting bailouts when its debt-to-GDP ratio hit around 140%. We, however, will not get bailed out. We are too big to bail out. That is not a choice of the bailouters. There simply is no one big enough to bail us out.
When do we hit 140%? We are going up at about 8.5% per year so 140% - 104% = 36% ÷ 8.5% = 4 years and three months from now.
The daily article from the von Mises Institute for 4/3/12 is “The worst of all monetary policies.” It says a stat the Federal Reserve does not let the public see would apparently show that the Fed is “printing” even more money than it lets on. Here are the last two paragraphs of the article, the first a quote from Von Mises’ book Interventionism, an economic analysis:
The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a "crack-up boom" and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.
Against this backdrop, the conclusion is that the monetary policy of continuing to expand the money supply through bank-circulation credit provided at artificially lowered interest rates is actually the worst of all monetary policies.
I marvel at the press breathlessly reporting the latest microscopic “good news” about the economy. It is as if we were watching hurricane driven storm surge wash the foundations out from under a hundred beach houses and the media were reporting about how many homeowners had repainted their kitchens since the storm hit. The will we get extreme inflation news is unremittingly bad and steady as a rock in its trends. The U.S. debt-to-GDP ratio is climbing without pause and the Fed in always increasing or holding steady, never decreasing, the money supply.
Some alarm systems are desgined to get louder with each passing minute that no one fixes the problem. I am doing that here and in other articles, but few others, and certainly not our “political leaders” or the mainstream media.
In 2011, the Federal Reserve bought 61% of all the bonds the U.S. government sold. Prior to the bankruptcy of Lehman Brothers in the fall of 2008, the Federal reserve purchased almost no government bonds. The 3/29/12 Wall Street Journal had an op-ed with a graph showing the dollar amount of such purchases from 2000 to the present. It is a very odd-looking graph. The line runs along the bottom near zero from 2000 to the fall of 2008. Other than the tiniest blip after 9/11, the Federal Reserve bond purchases are virtually congruent with the zero baseline of the vertical axis on the left.
Then it goes nuts in the fall of 2008 climbing to around $1.6 trillion at present.
The 3/28/12 Journal article showed that the percentages of bonds bought by foreigners was falling and the percentage bought by private U.S. individuals and institutes fell much greater.
Folks, when the Fed buys 61% of the bonds that really means no one bought them. The Fed has no money. When it “buys” a U.S. government bond, it writes a check drawn on an empty bank account. Two things happen as a result: the amount of the check goes into the U.S. government’s checking account and the check, in spite of being drawn on an empty Fed bank account, does not bounce.
That’s called “printing” money because it matches the actual printing of paper currency that was done in the early 1920s in Austria, Germany, and Hungary when those countries had horrific hyperinflation.
The Fed buying 61% of the bonds in 2011 is roughly equal to GM buying 61% of its own cars in 2011—no money down and no payments ever.
I have said that we would first see interest rates on U.S. bonds rise then finally the bond market would refuse to buy them. But the intervention of the Fed is so monstrous that I think they are preventing us from seeing what I predicted.
When you sell bonds in a real market, the yields demanded by the buyers tell you what those buyers think of the borrower’s willingness and ability to repay as promised. But when a fake buyer like the Fed buys them, we cannot tell what the bond buyers think. The Fed buying hides the bond market’s feelings about U.S. government debt.
Is the Fed outbidding the private buyers? Or does the Fed get to take the bonds off the market without bidding against anyone?
If “printing” money causes hyperinflation, why do we not have much inflation at present? Inflation is the product of the money supply multiplied by velocity. Velocity is the rate at which money is spent. One definition of velocity is GDP divided by money supply. Roughly, velocity is the number of times the same dollar gets spent during a year. If velocity is low, it cancels out large money supply with regard to inflation.
You can have high inflation with high velocity and relatively low money supply and with low velocity and relatively high money supply. Right now, we have extraordinary high money supply combined with extraordinarily low velocity.
Be warned, velocity can go from low to warp speed overnight. Then we have high velocity and high money supply multiplied by each other equals hyperinflation. What would it take? People who own dollars becoming afraid that they will lose purchasing power. What would it take to cause people to start treating dollars like hot potatoes trying to foist them off on someone else ASAP before they lose more value? I don’t know. The wonder to me is that it has not yet happened.
In the Wizard of Oz, the actual Wizard operated behind a curtain that was pulled back by Dorothy‘s dog Toto in one of the climactic scenes. We cannot see what’s going on behind the Federal Reserve curtain, but I can tell you that in the last four years, the Federal Reserve has increased the size of the curtain from about 10 square feet [billion dollars] to about 1,600 square feet [$1.6 trillion dollars]. Why would they do that? Apparently they have some very large thing to hide.
The current purchasing power of the U.S. dollar hangs by a thread of trust. The continued attacks on that trust by the deficit spenders will break that thread: maybe in five years, maybe in three, maybe tomorrow. Shocks will happen—like war with Iran maybe or bankruptcy of Portugal, whatever. One of them will break that trust thread.
Netherlands has been considered one of the four strongest of the 17 Euro Zone countries. It has been a leader in calling on the weak countries to clean up their fiscal act. Euro Zone countries are not supposed to have annual deficits over 3%. I don’t know why the limit is not zero—other than politics. But Holland is now at 5% and may not get below 4.6% this year.
Their national debt-to-GDP ratio is a fairly healthy 64.5% but their household debt-to-GDP ratio is 126%.The U.S. household debt-to-GDP ratio is now 107%. A high household debt-to-GDP ratio makes it hard for the government to clean up its act because the private sector is vulnerable and teetering. Consumer confidence in Holland is now below what it was in the fall of 2008, decades long record low in most of the western world.
When strong countries move into the weak category, you have more countries who in a less strong position to resist the temptation to “print,” rather than borrow, money to pay its government’s bills
A 3/23/12 Wall Street Journal article on page A2 had four graphs showing the central bank holdings from 2008 to 2012 as a percentage of GDP. Here are the numbers for four such central banks:
• U.S. Fed 6% in 2008 to 19% of GDP now
• European Central Bank 17% in 2008 to 32% now
• Bank of Japan 22% in 2008 to 31% now but they have been a mess since 1990
• Bank of England 7% in 2008 to 22% now
Generally, these changes have been caused by the central bank in question buying the bonds of its own federal government or the Euro Zone in the case of the ECB. Quantitative Easing I and II were “printing” money by buying U.S. government bonds. When the central bank buys federal government bonds, it is “printing” money. That causes hyperinflation unless canceled out by low velocity.
Apparently, it has been canceled out by low velocity—people collecting money but not spending it—like Apple, Inc.’s $100 billion in unused cash.
Velocity can go from zero to a thousand miles an hour overnight. All that is required is that the people of the nation and the world lose their trust that the dollar will be a stable currency. Some shock in the news could do that instantly.
The Journal headline was “Fed Hosts Global Gathering on Easy Money.” Easy money relates to creation of asset bubbles. The article says commodity prices are high now. Gold is one of them and its dollar price rising indicates investors expect inflation. Since gold is currently ($1,740) near triple its historical average price in 2012 dollars—$642 an ounce—gold buyers apparently expect a whole lot of U.S. dollar inflation.
That was an article title in the 3/22/12 Wall Street Journal. So why should you worry if you don’t live in Turkey?
For one thing, Turks and other foreigners used to buy U.S. dollars to protect from instability in their own country’s currency.
For another, it reminds us that gold investors have a big target on their backs. One of the first things FDR did after inauguration in 1933 was issue Executive Order 6102 which most people say “confiscated” Americans’ gold. Actually, it only confiscated the part between what they paid you for your gold, $20.67 per ounce, and the market value at the time, which was higher. Otherwise, they just sort of condemned it by forcing you to sell it to your local Federal Reserve Bank by May 1, 1933. Turkey, is “trying to persuade Turks to transfer their vast personal holdings of gold into the country’s banking system.”
The Turk government plans to pay interest on the gold. Where do they get the income to do that unless they lend the gold out? And they are planning to have ATM machines dispense gold bars—really. I guess they will be little bars and a platoon of Turkish Army soldiers with loaded AKs will guard the machines.
Folks, do you understand the basic reason to buy gold as a hedge against inflation? It is a commodity. Commodities go up in dollar price during inflation. Is gold the only commodity? Hell, no!, but people behave as though it were.
You get the same inflation protection from copper or aluminum or nickel or zinc. But gold is worth more, you say.
No. No. I’m pretty sure a million dollars worth of gold is not worth a penny more than a million dollar’s worth of zinc.
The price per ounce means nothing, other than you can store more money’s worth in a smaller space with gold. All that matters for inflation hedging purposes is that it goes up when the purchasing power of the dollar falls.
There are eleven disadvantages to gold. They are listed at my article www.johntreed.com/golddisadvantages2.html.
Let me put this in my usual no-B.S. terms: You gotta be stupid to buy gold in 2012, and I say that as the author of a book on hyperinflation. Why? Read the article I just gave you a link to.
And look at Turkey. If you own gold, the government comes after you. They do not do that to people who own a million dollars worth of nickel. American Indians said gold was the “yellow metal that made the white man act crazy.” Yeah, and it also makes the Great Half-White Father in the Great White House crazy. Governments sort of figure that they own all gold within their borders. The 1933 laws outlawed possessing bullion gold. Why in the name of God would anyone buy an investment the possession of which has frequently been outlawed?
The Turks are half smart: Smart enough to know that they cannot trust their government or ours to maintain a stable currency, but not smart enough to know that gold is probably the worst hedge against inflation precisely because it is so popular without any reason to be other than value density.
I recently have said the U.S. debt-to-GDP ratio was 102%. I just checked http://www.usdebtclock.org/ on 3/18/12. It’s now 103%. Greece was around 145% when it recently defaulted—the biggest default ever.
On 3/18/2008, the U.S. national debt-to-GDP ratio was 69%. If we went from 69% to 103% in four years, we are climbing at a rate of 13% - 69% = 34% ÷ 4 = 8.5% per year. On the day Obama took office, the national debt was $10.626 trillion. It is now $15.536 trillion.
There is a question as to whether the bond market will let us keep borrowing until 145%. Greece had “big brothers” (EU, ECB, IMF) that could and did bail them out—sort of. We have no such big brothers because we are too big. Also, the Greek situation may yet fall apart. If Greece and/or another euro zone country defaults, or the euro zone falls apart, the bond market may spook and decide they are getting out of U.S. bonds before we get to 145%.
When we cannot borrow from the world bond market anymore, I figure we will print the $1.3 trillion (deficit) we need to borrow to pay our bills. That causes hyperinflation.
Greece defaulted finally. It was the largest sovereign default in history. Even the International Swaps and Derivatives Association, which is the fox in charge of the Sovereign Credit Default Swap hen house, admitted formally that this was a default and that the CDS insuring against Greece defaulting must pay off. Very nice of them. For a while, they said they might declare that stiffing tons of private bond holders was not really a default. Those bondholders lost $130 billion, minus whatever amount was protected by credit default swaps. Many of them refused to agree to the restructuring. Greece passed a law that just reneged on the promises they made when the bonds were originally issued.
So is Greece over? Hardly. You can tell when the world bond market thinks Greece is not a financial basket case by the interest Greece has to pay on their bonds. Stiffing the private bond holders out of $130 billion means Greece owe that much less. So they are in better financial shape, right? Not much. They previously had to pay 20% on bonds. After the default and the resulting reduction of their debt, they had to pay 18.6% on new bonds, only 1.4% below the prior bond sales. The implication is bond buyers figure there will be additional future defaults by Greece. The new replacement bonds issued to the private bondholders who were stiffed have yields of 24% to 25%, not a lot of progress.
Greece’s debt-to-GDP ratio will still be 120% in 2020. Ours is now 102%.
The Euro Zone would like us to believe this is the end of the financial troubles there—the last sovereign default. More likely it is not even the last default for Greece, let alone Europe.
The fundamental issue is that letting your debt-to-GDP ratio rise to 120% or above—the level that the U.S. will reach around April of next year—means much higher interest rates initially, followed by total inability to borrow at all. That, in turn, means hyperinflation in the U.S. because we can and will “print” dollars to pay our bills when we can no longer borrow it. In the Euro Zone, where Greece alone cannot print money, it may not mean hyperinflation, at least not now.
Reader Vince Boston sent me this
These 4 paragraphs are somewhat unusual in that:
1) They were written by the uber-liberal President of the Urban Institute
2) He makes exactly the same points that you do....although in a less incendiary manner.
3) The New York Times decided to print it.
Reischauer does not seem quite as liberal as Boston says. You can draw your own conclusions on that by Googling him. Here is Reischauer’s Wikipedia bio. He certainly is extremely experienced, knowledgeable, and mainstream. And he does advocate stimulus and tax increases along with spending cuts—a liberal solution for the most part.
If you run the numbers, tax increases are non-feasible. The government gets about 18% of the GDP year in and year out and there is nothing in terms of legislation that the government can do to change that. So the only route to greater government revenues is GDP growth. Stimulus is a nutty more-political-than-economic theory that if politicians hand out taxpayers’ money to their supporters via grants and make-work projects that the economy will grow. Since that money is already in the economy, the government’s taking it out of the economy then spending it for political purposes does nothing but reduce private sector spending and make overall spending by everyone less efficient.
Here are the four paragraphs Boston quotes:
We need to address the long run fiscal problem sooner rather than later because if we don't start to do it under our terms—that is on our timetable and in our way–market forces, international institutions or our creditors eventually will step in and dictate the corrective policies we must take. As a nation, we are not used to being ordered or required to do things and I would expect there would be considerable political turmoil should that be the case.
The larger our debt, the less flexibility we will have to respond to adverse unforeseen developments—wars, natural disaster, deep recessions, man-made crises (closing the Straits of Hormuz) etc. A spike in interest rates could force us to make sharp fiscal adjustments at an inappropriate time or in a particularly painful way. The options available to reduce spending rapidly or quickly increase revenues are often not the most sensible or politically acceptable policies.
We are slowing ceding our sovereignty in subtle ways because, unlike Japan, we depend heavily on foreign creditors to sustain our fiscal profligacy. Already we must pay more attention than in the past to our creditors' views on issues that are not central to our public debt like trade and copyright protection, human rights in the ME and China, oil exploration in the South China Sea, Iranian oil sanctions and nuclear proliferation. Our influence is eroding and our voice is diminished. Sooner or later, the American people are going to ask "Who lost our role as the lead dog?"
I am very pessimistic. The American people don't understand either the seriousness of the problem or the size of the adjustments that will have to be made to put us on a sustainable path. And the all of the incentives facing politicians work against both depicting the situation realistically or endorsing policies that would significantly address the problem.
The full Reischauer article is at http://campaignstops.blogs.nytimes.com/robert-d-reischauer-responds/.
I agree with the four paragraphs for Reischauer’s article quoted above. His “non-incendiary” wording is about as responsible as “I believe the temperature in this room will be increasing significantly in the near future” instead of yelling “Fire” in a crowded theater after you see flames and smoke in the men’s room. The American people are about to be hit by a terrible storm. It can be avoided but the steps necessary are dramatic and will force a hundred million resident addicted to federal checks to quit cold turkey. The politicians don’t want to know about that and will absolutely not say it. About 90% of the media is accepting the politicians’s approach without comment on its inadequacy. Other than John Stossel on his Fox Business show, I know of no one who is consistently beating the warning drum in an honest and comprehensive manner.
Ron Paul’s approach to the debt is roughly correct, but even if he were elected president, Republican House Speaker Boehner or Democrat House Speaker Pelosi and Democrat Majority Leader Reid would all instantly declare Paul’s budget “dead on arrival” and probably underline their positions with a quick 520- to 145 or some such vote in Congress.
A liberal or mainstream guy like Reischauer saying what non-mainstream I have been saying is another red warning light that this once-in-a-century-magnitude crisis is going to happen and soon.
March 8, 2012 “Nearly 70” members of Congress signed letter to Commodity Futures Trading commission demanding a crackdown on speculation in oil and gasoline futures. This is financial repression, a standard government response to hyperinflation. It is in response to inflation in one price—gasoline—at the moment, but it illustrates how the federal government always reacts to price increases that anger the public.
A politician is someone who takes credit for all good news, regardless of causation, and deflects blame for all bad news on other people even when the politicians in question caused or contributed to the problem. Doing “all of the above” (drilling, Keystone Pipeline, building refineries and nuclear plants, etc.) would reduce gas prices over time but the politicians here have opposed that and are afraid they will get blamed for the current high prices.
Gasoline and oil futures are extremely important because they enable responsible companies to hedge the risks of prices rising or falling. Hedgers are not speculators. They are the opposite of speculators. But they do the exact same thing as speculators: buy or sell a futures contract in the commodity in question.
Speculators, morons though they may be because they foolishly believe they can predict future prices, are necessary as the counterparties to the hedgers in many cases. Also, the more buyers and sellers in the market, the more liquid the market and that’s an very important good thing.
You can be a hedger in this markets. And you should. As a consumer of gasoline, you are a short speculator, that is, you hope the price goes down. By also taking a long position—buying a gasoline futures contract—you profit from the price going up. Roughly speaking doing both at the same time, called hedging, means you lock in the current price and you are neither hurt nor helped by price changes during the futures contract period.
Finally, there are two kinds of oil/gasoline speculators, long and short. The Congress is attacking the long speculators on the goofy theory that they are driving up the gas prices. They wish. But you cannot attack only long speculators. Cracking down attacks both short and long speculators. The short speculators, if they could, want the price to go DOWN. That is how they make their profits. Better the CFTC encourage more short speculators than crack down on longs.
For those who have read my book How to Protect Your Life Savings from Hyperinflation & Depression, my point here is, “Remember how I warned you about financial repression and exchange risk? Well, here is an example of each. You cannot count on exchanges that you use to manage risk still providing that service over time. And you absolutely CAN count on the Congress and presidents to repress you financially every time you try to resist inflation which is a deliberate government policy to levy a hidden tax on citizens.”
Oh, the reason gas prices are going up appears to be the imminent war with Iran, a nation that promised to block the strait of Hormuz if there are sanctions against them, let alone, war.
March 7, 2012 Greece unlikely to get all of bondholders to agree to restructuring of Greek national debt. Failure to got such agreement would be a national default of a developed country. Even restructuring constitutes a default although politicians and the organizations that insures against sovereign bond defaults argue voluntary restructuring is not a default.
It is possible that a default by Greece might be the shock that gets Europe and the U.S. to clean up their acts. It would be better if they let Greece do a total default and have to live within their means (Greek tax revenue as their only source of money to spend). That would require massive spending cuts in Greece. Watching that happen would have a much greater chance of inspiring the rest of Europe and the U.S. to clean up their fiscal acts.
John T. Reed