Friday, January 01, 2010

'The U.S. has no way of avoiding a financial Armageddon'

Tyler Durden points us to a fascinating take on the economy by John Williams of ShadowStats attempts to reconstruct accurate versions of important metrics like the CPI (Consumer Price Index); the assumption is that the government's formulae have morphed over the years to help it minimize cost-of-living increases and other expenses.

I'll give ya a little warning up front. If you're looking for cheery news, click on over to Curmudgeonly & Skeptical. But if you're up for a cold bucket of reality doused in your face, read on.

The U.S. economic and systemic solvency crises of the last two years are just precursors to a Great Collapse: a hyperinflationary great depression. Such will reflect a complete collapse in the purchasing power of the U.S. dollar, a collapse in the normal stream of U.S. commercial and economic activity, a collapse in the U.S. financial system as we know it, and a likely realignment of the U.S. political environment.

Aside from that, expect the status quo.

The current U.S. financial markets, financial system and economy remain highly unstable and vulnerable to unexpected shocks. The Federal Reserve is dedicated to preventing deflation, to debasing the U.S. dollar. The results of those efforts are being seen in tentative selling pressures against the U.S. currency and in the rallying price of gold.

Put another way: have you ever seen the movie Road Warrior?

The crises have been generated out of and are centered on the United States financial system, triggered by the collapse of debt excesses actively encouraged by the Greenspan Federal Reserve. Recognizing that the U.S. economy was sagging under the weight of structural changes created by government trade, regulatory and social policies -- policies that limited real consumer income growth -- Mr. Greenspan played along with the political and banking systems. He made policy decisions to steal economic activity from the future [by encouraging borrowing], fueling economic growth of the last decade largely through debt expansion...

...As with consumers, the federal government could not make ends meet while appeasing that portion of the electorate that could be kept docile by ever-expanding government programs and increasing government spending. The solution was ever-expanding federal debt and deficits.

That's why federal spending above its revenues should be illegal, punishable by crucifixion (or perhaps something even more painful).

Purportedly, it was Arthur Burns, Fed Chairman under Richard Nixon, who first offered the advice that helped to guide Alan Greenspan and a number of Administrations. The gist of the wisdom imparted was that if you ran into problems, you could ignore the budget deficit and the dollar. Ignoring them did not matter, because doing so would not cost you any votes.

Back in 2005, I raised the issue of a then-inevitable U.S. hyperinflation with an advisor to both the Bush Administration and Fed Chairman Greenspan. I was told simply that "It's too far into the future to worry about."


Indeed, pushing the big problems into the future appears to have been the working strategy for both the Fed and recent Administrations. Yet, the U.S. dollar and the budget deficit do matter, and the future is at hand. The day of ultimate financial reckoning has arrived, and it is playing out.

Skeptical? Need proof?

Effective financial impairments and at least partial nationalizations or orchestrated bailouts/takeovers resulted for institutions such as Bear Stearns, Citigroup, Washington Mutual, AIG, General Motors, Chrysler, Fannie Mae and Freddie Mac, along with a number of further troubled financial institutions. The Fed moved to provide whatever systemic liquidity would be needed, while the federal government moved to finance corporate bailouts and to introduce significant stimulus spending.

Curiously, though, the Fed and the Treasury let Lehman Brothers fail outright, which triggered a foreseeable run on the system and markedly intensified the systemic solvency crisis in September 2008. Whether someone was trying to play political games, with the public and Congress increasingly raising questions of moral hazard issues, or whether the U.S. financial wizards missed what would happen or simply moved to bring the crisis to a head, remains to be seen.

Knowing the brilliant minds in Congress, I suspect we could hazard a guess. Kids, can you spell "in-com-pe-tence"?

Before the systemic solvency crisis began to unfold in 2007, the U.S. government already had condemned the U.S. dollar to a hyperinflationary grave by taking on debt and obligations that never could be covered through raising taxes and/or by severely slashing government spending that had become politically untouchable. The U.S. economy also already had entered a severe structural downturn, which helped to trigger the systemic solvency crisis.

The intensifying economic and solvency crises, and the responses to both by the U.S. government and the Federal Reserve in the last two years, have exacerbated the government's solvency issues and moved forward my timing estimation for the hyperinflation to the next five years, from the 2010 to 2018 timing range estimated in the prior report. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, gross mismanagement, and a deliberate and ongoing effort to debase the U.S. currency. Accordingly, risks are particularly high of the hyperinflation crisis breaking within the next year.

What the --- ? You mean the Stimulus isn't going to work?

The U.S. has no way of avoiding a financial Armageddon. Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover obligations. The alternative would be for the U.S. to renege on its existing debt and obligations, a solution for modern sovereign states rarely seen outside of governments overthrown in revolution, and a solution with no happier ending than simply printing the needed money. With the creation of massive amounts of new fiat dollars (not backed by gold or silver) will come the eventual destruction of the value of the U.S. dollar and related dollar-denominated paper assets.

What lies ahead will be extremely difficult, painful and unhappy times for many in the United States. The functioning and adaptation of the U.S. economy and financial markets to a hyperinflation likely would be particularly disruptive. Trouble could range from turmoil in the food distribution chain to electronic cash and credit systems unable to handle rapidly changing circumstances. The situation quickly would devolve from a deepening depression, to an intensifying hyperinflationary great depression.

Does that mean Jim Cramer's Mad Money will finally get canceled?

While the economic difficulties would have global impact, the initial hyperinflation should be largely a U.S. problem, albeit with major implications for the global currency system. For those living in the United States, long-range strategies should look to assure safety and survival, which from a financial standpoint means preserving wealth and assets. Also directly impacted, of course, are those holding or dependent upon U.S. dollars or dollar-denominated assets, and those living in "dollarized" countries.

Just so you get the picture, Williams offers a case study: Mugabe's fascist utopia.

Hyperinflation in Zimbabwe, the former Rhodesia, was a quadrillion times worse than it was in Weimar Germany. Zimbabwe went through a number of years of high inflation, with an accelerating hyperinflation from 2006 to 2009, when the currency was abandoned. Through three devaluations, excess zeros repeatedly were lopped off notes as high as 100 trillion Zimbabwe dollars.

The cumulative devaluation of the Zimbabwe dollar was such that a stack of 100,000,000,000,000,000,000,000,000 (26 zeros) two dollar bills (if they were printed) in the peak hyperinflation would have be needed to equal in value what a single original Zimbabwe two-dollar bill of 1978 had been worth. Such a pile of bills literally would be light years high, stretching from the Earth to the Andromeda Galaxy.

In early-2009, the governor of the Zimbabwe Reserve Bank indicated he felt his actions in printing money were vindicated by the recent actions of the U.S. Federal Reserve. If the U.S. went through a hyperinflation like that of Zimbabwe’s, total U.S. federal debt and obligations (roughly $75 trillion with unfunded liabilities) could be paid off for much less than a current penny.

What helped to enable the evolution of the Zimbabwe monetary excesses over the years, while still having something of a functioning economy, was the back-up of a well functioning black market in U.S. dollars. The United States has no such backup system, however, with implications for a more rapid and disruptive hyperinflation than seen in Zimbabwe, when it hits.

Cheered up yet? Well I, for one, have the utmost confidence in President Training Wheels.

Linked by: InstaPundit and Gateway Pundit. Thanks!


fboness said...

So, while ascribing entirely nefarious purposes to the adjusted changes to calculating government statistics, John Williams accepts the old measures as handed down on stone tablets.

Oh, really? The same people who developed the old measures also developed the new measures. This is a continuous process of improvement.

A Jacksonian said...

And then there is the problem that China has created. Lets say you take a bunch of Non-Performing Loans, bundle them up and give them a 'secure' rating and float them out into the financial stream. Sounds like the US home loan market, no? But what if this is done for the commercial and industrial market? We are about to find out what happens when this little problem that is known about for some time starts to hit the fan when China can't refloat those loan vehicles for a third time.

If Japan having 10% of its GDP based on NPLs going into its late '80s decline is 'bad', then what happens when 30-60% of a Nation's GDP is based on such things? Because China saw the hocus-pocus the US was pulling with home loan repackaging, they did the same thing with industrial and commercial loans. Like the US government China now has a lot of money out as promises that it can't cover. And because China invested so heavily in the stability of the US home mortgage holdings, what happens when those get evaporated due to hyperinflation or, indeed, any downturn that changes the value of those holdings?

The US doesn't have to implode to bring the global trade system down... just cause China to do so and that will ripple globally, too, being the #2 economy on the planet. No one really expected the late Bronze Age civilizations to fall when Troy went down: it was not a major Empire. Yet it was a hub of trade and its security ensured safe trade...and when it went the security went, trade died and Empires fell. If the US contracts in a major fashion then China implodes and there goes the trade system as the concept of 'safe haven' for funds disappears. Without safety investments go hard, and getting a 'return on investment' means keeping your value steady... if you can.

Nahanni said...

A Jacksonian hit the nail on the head.

What people (especially the America hating "cheerleaders" of the radical left) do not seem to realize is that if the US goes down the rest of the world goes with us. The last time the world faced a situation such as this was back in the 14th century with the collapse of the Venetian & Tuscan banks. The time before was with the collapse of the Roman empire. Thanks to globalization it will affect just about everyone in the world, the only exception will be isolated tribes who have little to no contact with the "modern world".

Global trade is already in a coma. Look at the numbers on the Baltic Dry Index and

The only items that are still doing well are grains, partially because the Obama administration sold our grain reserves to China in May leaving our cupboard bare.

Anonymous said...

If the U.S. went through a hyperinflation like that of Zimbabwe’s, total U.S. federal debt and obligations (roughly $75 trillion with unfunded liabilities) could be paid off for much less than a current penny.

OK, this I don't get. The unfunded liabilities are estimates of what future costs will be incurred under entitlement programs (primarily, anyway). The problem with saying that if hyperinflation comes, these unfunded liabilities will be devalued down to a current penny, is that those unfunded liabilities will have to be paid in hyperinflated dollars, no? Doctors treating Medicare patients aren't going to ask for, e.g., $100/office visit (today's price), they will ask for $100,000,000 in hyperinflated dollars, won't they?

For other debt that's already incurred under specific pricing, I can see the attraction for hyperinflation, but that doesn't seem to touch the unfunded liabilities portion (which is of course, the larger). To be able to generate tax revenues sufficient to pay off those unfunded liabilities, the US needs a sound economy. Yes, I have my doubts about this actually being the case, but I just don't think the hyperinflation scenario does anything more than solve the smaller of the two debt problems.

Brian Macker said...


Ridiculous. What matters is that you use the same metrics. If we did so then inflation rates from the past would look much smaller, and therefore we would get more concerned when running 2% inflation.

Hucbald said...

"Hyperinflation in Zimbabwe, the former Rhodesia, was a quadrillion times worse than it was in Weimar Germany."

LOL! I guess trillion really is the new billion and we have quadrillion yet to look forward to.

Glad I own a farm.

Leon said...

Democrats need to figure out if they are Mao loving communists, run of the mill public option socialists or big banking, big health fascists.

The good thing is the get to throw billions of dollar at whichever option they like.

Ain't power grand

dsm said...

@A Jacksonian,

I have a slightly different take on China. I don't think they're so much buying our debt; I think China is purchasing future foreign policy concessions. They'll offer us debt forgiveness and we'll recognize their territorial claims to Taiwan and Tibet.