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I see this a lot. People say "the US dollar cannot experience
Zimbabwe-style hyperinflation because:
A) it is the global reserve currency, and
B) all US debt is denominated in its own
currency."
Other arguments I have seen have to do with low money velocity, which can
reverse globally within a couple hours based on fear alone, and the shrinking
quantity of "balance sheet money" or credit money. I'll address
this second fallacious argument in a later post since it is more involved.
How wrong people are. FOA intuited this back in 1998:
Basically, this is the direction the Euro group is taking us. This concept
was born with little regard for the economic health of Europe. In the future,
any countries money or economy can totally fail and the world currency
operation will continue. What is being built is a new currency system, built
on a world market price for gold. Michael, you are absolutely correct in that
the USA will see a hyper inflation of its currency and a gold price in
dollars that reflects it. Unfortunately, for most investors, the gold price
rise will be sudden and also hyper fast, as it will occur just after a rapid
plunge in dollar based assets including, stocks, debt and the entire banking
system. This action will destroy virtually all gold based paper assets as
they are also dependent on a functioning economic system.
...So, dollar hyper inflation never arrived and gold did not make its run
because world CBs bet your productive efforts on supporting the dollar
reserve. In the process, the US standard of living was raised tremendously on
the backs of most of the worlds working poor. But this is not about to last!
...A grand hyper inflation is now ahead on the trail. It should be ushered in
with a large "crackup" in the currency derivatives market. Once
this event is "in process" the paper gold markets will quickly rush
to discount against physical gold. A discount that will break our gold market
pricing and physical allocation system.
...Baloney! The evolution of Political will is now driving the dollar into an
end time hyper inflation from where we will not return. That is our call. Bet
your wealth on the other theorist's call if you want more of Their last 30
years of hard money success.
These are from FOA's posts between 1998 and 2001. Was he wrong? Or was he
early? You decide.
The following is an exchange I had just today in the comments section of an
older post, so most of you probably missed it:
FOFOA,
You describe the inflation that will take place as
"hyperinflation".
I am wondering if instead you meant strong inflation, e.g. a 1:5 gold
revaluation upwards, as hyperinflation is usually attributed to
Weimar/Zimbabwe-style inflation.
Currently debating this with a fine mind, so if you could clear this up, it
will be much appreciated.
Hello Dave,
The circulating medium is what lubricates the real economy. As such, its
specific value is meaningless except to say short-term stability of value is
important to its function as a lubricant.
But the dollar is so much more than just a circulating medium. It is the very
yard stick of a mountain of global debt that has reached its growth limit.
And when that debt structure collapses it will bring down the value of a
dollar to zero, or as close to zero as is physically possible.
Study the assignat and the mandat in France in the late 18th century if you
want to see the future of the dollar. Study John Law's Mississippi paper.
Every time a government that runs a debt and a deficit also gets control of
issuing money, it always takes it to zero.
This has been coming at the dollar for a long time now. The hyperinflation is
already present in all the debt. Every penny of one man's debt is a penny of
another man's retirement plan. It will all be liquidated at the speed of a
lightning bolt when the US Treasury market finally burps, or when the paper
gold window finally mandates "paper only".
The dollar's value will already be decimated before Bernanke even gets
started issuing the high denomination bills like we saw in Zimbabwe and
Weimar Germany. Yet he will issue them, as that will be the only way for the
US government to pay its current account, its debt service and its other
liabilities, all denominated in dollars, some structural and indexed to
inflation, others simply nominal. But it will be a mad dash to print like
"crazy".
"Old money" and "public money" has seen this coming for a
long time now. This is why the Central Banks in aggregate have switched from
dishoarding gold to hoarding gold. When the debt brings down the dollar to
zero and all paper investments tied to the value of the dollar evaporate,
gold, in global aggregate, will inherit all the purchasing power lost in the
dollar's collapse. Currency is a small part of this loss. Debt is the
motherlode!
This is different than past currency collapses because the dollar is the
global reserve currency. To view this properly, you have to realize that
because gold is globally fungible, and the dollar is the global reserve
currency and global accounting standard, gold's value reset will have nothing
to do with inflation.
Gold's value reset will be from a shift in function, as it absorbs and
inherits the global purchasing power that was previously stored in
dollar-denominated contracts, including US Treasury bonds, on the balance
sheets of the most powerful Central Banks in the world.
Everything else that is a fine store of value like fine art, classic cars,
gem stones and commodities, will retain their present purchasing power (or
close to it), but gold will be different. Gold will switch roles, from
commodity to wealth reserve par excellence.
Central banks like China that hold a lot of dollars and a little gold will
retain their present purchasing power at the least. The bonds will become kindling
while the gold becomes priceless. A simple balance sheet weighting
adjustment.
Anyone who tells you the global debt pyramid scheme has reached its
mathematical limit, but then says the numéraire of that system will
only see a gradual "strong inflation"; or anyone who tells you that
the paper gold market's fractional reserves can fail and gold will only go up
5:1... hasn't thought through the real world implications very far.
We are playing 7-layer, multi-dimensional poker here. You have to be able to
see beyond your glass fishbowl if you want to avoid the psychological trauma
of reality when it comes crashing in.
Yes, we will see something resembling Weimar and Zimbabwe-style
hyperinflation with the dollar. And the level of gold's revaluation will have
nothing to do with this currency collapse. It will have everything to do with
a separation of the monetary roles in the global collective conscience and on
the balance sheets of the richest Giants in the world.
Gold will not rise like an undervalued commodity... 5:1 as you say. It will
be more in the range of 50:1 to 100:1, and when you add in the
hyperinflation, an ounce of gold will easily pay off the US national debt as
it stands right now.
Of course the US will not be able to do that. Not if it wants to keep trading
certain "essential" commodities with certain "essential"
trading partners. It will have to honor certain paper gold contracts at the
rate they were written to keep the "lubrication" flowing. So to
speak.
Sincerely,
FOFOA
Thank you FOFOA,
IMO the debate comes down to severity and (most importantly) timing.
AFA severity, I expect it will be anywhere from far more severe than the
majority expects to catastrophic (EOTWAWKI).
I picked 5:1 because that would bring the paper currency in line with the
modern metal US currency (the melt value of quarters etc. are worth ~20% of
their nominal value). Also, it's my gut feeling that they think 5:1 can be
'gotten away with' (which is wrong, naturally, but they will try as there is
nothing to lose).
20:1 is slightly less likely, and at that point the pain from a 50-100:1
devaluation is not that much greater, so I can see TPTB shrugging their
shoulders and printing away.
AFA timing is concerned, on or around 2012 seems right, not just from the apocalyptic
expectations (which will aid it), but because round two of US mortgage resets
peak out at that time, making it patently obvious there is no escape.
Any thoughts on timing would be appreciated. Have a big to-do list between
now and then, would be nice to schedule it properly. : p
Hello Dave,
Money and power, good and evil, right and wrong, grand conspiracies and plain
dumb luck all play a role in building unbalanced systems and blowing bubbles.
But when it comes time for them to pop or collapse, these human endeavors are
all completely irrelevant. I don't employ moral judgement nor geopolitics in
my currency analysis for this very reason; they are irrelevant. Collapse is
only organized by the Superorganism and it cannot be stopped, although
under special circumstances it can be delayed.
The dollar system should have collapsed between 1971 and 1980, but it didn't.
It received an assist from Europe, the Middle East, and later from the Far
East. The purpose of this assist was to buy the time necessary to build
another currency large enough to lubricate international trade in the event
of the disappearance of the dollar. That ended in 1999 with the launch of the
euro. What kept the dollar afloat since then is anyone's guess. I have a few
theories. But they all seem to be expiring in 2010.
The euro was special in two ways. And by special, I mean special on an
astronomical time scale. It was the first man-made circulating medium to
separate itself from the nation-state, from the very ones who always crush a
currency to zero. And it was also the first to sever its ties to gold. In
other words, it was the first unbacked, irredeemable paper currency that not
only acknowledged but supported an external store of value, gold. This can
all be found in a famous speech here.
I don't know how much of my blog you have read, but I don't find the euro's
present troubles overly alarming or existentially threatening because I
understand why it is the way it is. Some European politicians and political
appointees today are doing it great harm, but not existential harm, yet. The
currency exchange numbers today are meaningless because all mediums must
devalue against the debt paradigm. "It's the debt, stupid" is more
than just the title of one of my posts. But please forgive me for meandering
"aimlessly" in this reply.
It appears to me that you are expecting a controlled devaluation of the
dollar by the Fed and the USG. This is something that is totally impossible
in my judgement. First of all, there's nothing to devalue it against today,
technically speaking. The only thing they can do is print base money to fill
the credit money hole and the USG coffers, and they are already doing this.
And they must do this. And they will keep doing this.
For the sake of your question I am trying to imagine how a controlled devaluation
might be attempted, were they stupid enough to try. If the USG was the world
biggest creditor, they could possibly devalue the denominator of all that
debt 5:1 by forgiving everyone of 80% of their debt while printing more
currency for their own needs. But the USG is actually the biggest debtor. So
it would instead be forgiving its OWN debt and punishing its creditors... out
of 80% of their savings. Do you think those creditors will then say,
"more please?"
The best analogy I can come up with is a steep, avalanche-prone ski area. The
ski patrol knocks down some of the snow after every snowfall. Because if you
let it pile too high, and get packed, the whole lot will come down all at
once. Either by gravity, or by a ski patrol cannon, or by skier, or by a deer
farting. Any way you cut it, it all comes down if there's too much of it
packed on the mountain. Gravity does all the work.
This snow pack is to the mountain what global debt is to the dollar. There's
no way to do a centrally controlled devaluation of the dollar at this end
stage of its life. It prices and denominates too many things, too many
contracts, too much debt in the world today. This is the real essence of the
dollar. Its "unit of account" function is, not its medium of
exchange quantity.
And the physical plane that underlies it is completely unaligned with this
precarious 'snow pack'. It is not representative of reality, therefore it has
no sticking power. It's ready to come down on its own, so shhhh... be quiet
and very still and let's hope the wind doesn't blow.
Regarding timing, the best I can say is "sooner rather than later."
;)
Sincerely,
FOFOA
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