*****The Results Of Hyperinflation*****

Quotar.com reports about hyperinflation.

(emphasis mine) [my comment]

Hyperinflation: "No one was prepared. The shelves in the grocery stores were empty"


The Weimar Hyperinflation? Could it Happen Again?


"It was horrible. Horrible! Like lightning it struck. No one was prepared. The shelves in the grocery stores were empty. You could buy nothing with your paper money." — Harvard University law professor Friedrich Kessler on the Weimar Republic hyperinflation (1993 interview) [This quote is from Ralph Foster's book, "Fiat Paper Currency - The History and Evolution of Our Money,"]

Some worried commentators are predicting a massive hyperinflation of the sort suffered by Weimar Germany in 1923, when a wheelbarrow full of paper money could barely buy a loaf of bread. An April 29 editorial in the San Francisco Examiner warned:

"With an
unprecedented deficit that's approaching $2 trillion, [the President's 2010] budget proposal is a surefire prescription for hyperinflation. So every senator and representative who votes for this monster $3.6 trillion budget will be endorsing a spending spree that could very well turn America into the next Weimar Republic."

In an investment newsletter called Money Morning on April 9, Martin Hutchinson pointed to disturbing parallels between current government monetary policy and Weimar Germany's, when 50% of government spending was being funded by seigniorage — merely printing money. However, there is something puzzling in his data. He indicates that the
British government is already funding more of its budget by seigniorage than Weimar Germany did at the height of its massive hyperinflation; yet the pound is still holding its own, under circumstances said to have caused the complete destruction of the German mark [the pound is already dead]. Something else must have been responsible for the mark's collapse besides mere money-printing to meet the government's budget, but what? And are we threatened by the same risk today? Let's take a closer look at the data.

History Repeats Itself — or Does It?

In his well-researched article, Hutchinson notes that Weimar Germany had been suffering from inflation ever since World War I; but it was in the two year period between 1921 and 1923 that the true "Weimar hyperinflation" occurred. By the time it had ended in November 1923, the mark was worth only one-trillionth of what it had been worth back in 1914. Hutchinson goes on:

"The current policy mix reflects those of Germany during the period between 1919 and 1923. The Weimar government was unwilling to raise taxes to fund post-war reconstruction and war-reparations payments, and so it ran large budget deficits.
It kept interest rates far below inflation, expanding money supply rapidly and raising 50% of government spending through seigniorage (printing money and living off the profits from issuing it). . . .

"The really chilling parallel is that the United States, Britain and Japan have now taken to funding their budget deficits through seigniorage [I have warned before to stay away from the dollar, pound, and yen. They are finished]. In the United States, the Fed is buying $300 billion worth of U.S. Treasury bonds (T-bonds) over a six-month period, a rate of $600 billion per annum, 15% of federal spending of $4 trillion. In Britain, the Bank of England (BOE) is buying 75 billion pounds of gilts [the British equivalent of U.S. Treasury bonds] over three months. That's 300 billion pounds per annum, 65% of British government spending of 454 billion pounds. Thus, while the United States is approaching Weimar German policy (50% of spending) quite rapidly, Britain has already overtaken it!"

The San José State University reports that The Worst Episode of Hyperinflation in History: Yugoslavia 1993-94.

The Worst Episode of Hyperinflation in History:
Yugoslavia 1993-94


Under Tito Yugoslavia ran a budget deficit that was financed by printing money. This led to rates of inflation of 15 to 25 percent per year. After Tito the Communist Party pursued progressively more irrational economic policies. These irrational policies and the breakup of Yugoslavia (Yugoslavia now consists of only Serbia and Montenegro) led to heavier reliance upon printing or otherwise creating money to finance the operation of the government and the socialist economy. This created the worst hyperinflation in history up to this time.

By the early 1990s the government used up all of its own hard currency reserves [gold] and proceeded to loot the hard currency savings of private citizens [The Treasury's market manipulation has the same effect of looting the wealth of private citizens]. It did this by imposing more and more difficult restrictions on private citizens access to their hard currency savings in government banks.

The government operated a network of stores at which goods were supposed to be available at artificially low prices. In practice these store seldom had anything to sell and goods were only available at free markets where the prices were far above the official prices that goods were supposed to sell at in government stores. In particular
, all of the government gasoline stations eventually were closed and gasoline was available only from roadside dealers whose operation consisted of a parked car with a plastic can of gasoline sitting on the hood. The market price was the equivalent of $8 per gallon.

The combination of the shortage of gasoline and the government confiscation of German Deutsche mark deposits created a bizaar episode. A man after repeated attempts to get the government to let him withdraw his Deutsche mark deposits as Deutsche marks announced the was going to commit suicide in front of a government building by dousing himself with gasoline and igniting it. On the appointed day he showed up with a canister of gasoline. The media was there to film his protest. The police were also there and arrested the man. Afterwards the television station got numerous phone calls asking what had happened to the canister of gasoline.

Most car owners gave up driving and tried to rely upon public transportation. But the Belgrade transit authority (GSP) did not have the funds necessary for keeping its fleet of 1200 buses operating. Instead it ran fewer than 500 buses. These buses were overcrowded and the ticket collectors could not get aboard to collect fares. Thus GSP could not collect fares even though it was desperately short of funds.

Delivery trucks, ambulances, fire trucks and garbage trucks were also short of fuel. The government announced that gasoline would not be sold to farmers for fall harvests and planting.

Despite the government desperate printing of money it still
did not have the funds to keep the infrastructure in operation. Pot holes developed in the streets, elevators stopped functioning, and construction projects were closed down. The unemployment rate exceeded 30 percent.

The government tried to counter the inflation by imposing price controls. But
when inflation continued the government price controls made the price producers were getting ridiculous low they stopped producing. In October of 1993 the bakers stopped making bread and Belgrade was without bread for a week. The slaughter houses refused to sell meat to the state stores and this meant meat became unvailable for many sectors of the population. Other stores closed down for inventory rather than sell their goods at the government mandated prices. When farmers refused to sell to the government at the artificially low prices the government dictated, government irrationally used hard currency to buy food from foreign sources rather than remove the price controls. The Ministry of Agriculture also risked creating a famine by selling farmers only 30 percent of the fuel they needed for planting and harvesting.

Later the government tried to curb inflation by requiring stores to file paper work every time they raised a price. This meant that many of the stores employees had to devote their time to filling out these government forms.
Instead of curbing inflation this policy actually increased inflation because the stores tended increase prices by a bigger jump so that they would not have file forms for another price increase so soon.

In October of 1993 the created a new currency unit. One new dinar was worth one million of the old dinars. In effect, the government simply removed six zeroes from the paper money. This of course did not stop the inflation and between October 1, 1993 and January 24, 1995 prices increased by 5 quadrillion percent. This number is a 5 with 15 zeroes after it.

In November of 1993 the government postponed turning on the heat in the state apartment buildings in which most of the population lived. The residents reacted to this withholding of heat by using electrical space heaters which were inefficient and overloaded the electrical system. The government power company then had to order blackouts to conserve electricity.

The social structure began to collapse. Thieves robbed hospitals and clinics of scarce pharmaceuticals and then sold them in front of the same places they robbed. The railway workers went on strike and closed down Yugoslavia's rail system.

In a large psychiatric hospital 87 patients died in November of 1994.
The hospital had no heat, there was no food or medicine and the patients were wandering around naked.

The government set the level of pensions.
The pensions were to be paid at the post office but the government did not give the post offices enough funds to pay these pensions. The pensioners lined up in long lines outside the post office. When the post office ran out of state funds to pay the pensions the employees would pay the next pensioner in line whatever money they received when someone came in to mail a letter or package. With inflation being what it was the value of the pension would decrease drastically if the pensioners went home and came back the next day. So they waited in line knowing that the value of their pension payment was decreasing with each minute they had to wait in line.

Many Yugoslavian businesses refused to take the Yugoslavian currency at all and the German Deutsche Mark effectively became the currency of Yugoslavia. But government organizations, government employees and pensioners still got paid in Yugoslavian dinars so there was still an active exchange in dinars. On November 12, 1993 the exchange rate was 1 DM = 1 million new dinars. By November 23 the exchange rate was 1 DM = 6.5 million new dinars and at the end of November it was 1 DM = 37 million new dinars. At the beginning of December the bus workers went on strike because their pay for two weeks was equivalent to only 4 DM when it cost a family of four 230 DM per month to live. By December 11th the exchange rate was 1 DM = 800 million and on December 15th it was 1 DM = 3.7 billion new dinars. The average daily rate of inflation was nearly 100 percent. When farmers selling in the free markets refused to sell food for Yugoslavian dinars the government closed down the free markets. On December 29 the exchange rate was 1 DM = 950 billion new dinars.

...
The telephone bills for the government operated phone system were collected by the postmen.
People postponed paying these bills as much as possible and inflation reduced there real value to next to nothing. One postman found that after trying to collect on 780 phone bills he got nothing so the next day he stayed home and paid all of the phone bills himself for the equivalent of a few American pennies.

...
On January 24, 1994 the government introduced the super dinar equal to 10 million of the new new dinars. The Yugoslav government's official position was that the hyperinflation occurred "because of the unjustly implemented sanctions against the Serbian people and state."


Source: James Lyon, "Yugoslavia's Hyperinflation, 1993-1994: A Social History," East European Politics and Societies vol. 10, no. 2 (Spring 1996), pp. 293-327.

Economywatch reports that Inflation, Famine and Instability in Zimbabwe.

Zimbabwe Economy: Inflation, Famine and Instability

Harare, 20 Aug 2008. Zimbabwe has been experiencing ridiculous inflation, widespread famine, social instability and an uncompetitive economy. What was the cause of these disastrous conditions, and what can be done to avoid them in the future?

...
When inflation is rampant, citizens stockpile goods, as they are worth more than the money that could buy them. This creates a scarcity of supply, and makes valuating inflation difficult.

Zimbabwe has been plagued with inflation since its currency began in 1980, but the hyperinflation only began in about 2004, with the rate hitting 624% early in that year.

The land reforms in the early 90s had a drastic effect on food supplies. These reforms led to President Robert Mugable taking land back from white farmers. Since the brutal farm invasions, crop production has plunged and the economy has suffered. Now, more that 4 million people, or a third of the nation, have to rely on aid from the World Food Programme.

Agricultural exports, which were once a significant source of income to the fertile country, have all but vanished, and this has resulted in Zimbabwe incurring even more of a trade deficit. Mugabe attributes its lack of food to former-British Prime Minister Tony Blair's use of chemical weapons to initiate famine and drought in Africa.

Hyperinflation also robs the citizens of any wealth they may have had. It also causes any little wealth there may be in the nation to be converted into a more stable currency, such as gold, the US Dollars, Euro, Pounds or physical assets overseas. This exodus of currency further reduces the country's financial capacity, and the problem continues to worsen.

The government feels the pain, too.
Any taxes paid become nearly worthless by the time they reach the government (the receivable amount is never met by the payable), nobody will buy the government debt, and the financial power of any entity holding such debt is immediately reduced.

In early 2007, the country's central bank banned any price rises, stating that inflation was illegal. Yet with few people buying or selling anything how will this help? Will Zimbabwe have to abandon their currency entirely and use something else? Or will it take a fundamental change in government leadership to pull the country back into the global scene?

Year Inflation Rate
1980 7%
1981 14%
1982 15%
1983 19%
1984 10%
1985 10%
1986 15%
1987 10%
1988 8%
1989 14%
1990 17%
1991 48%
1992 40%
1993 20%
1994 25%
1995 28%
1996 16%
1997 20%
1998 48%
1999 56.9%
2000 55.22%
2001 112.1%
2002 198.93%
2003 598.75%
2004 132.75%
2005 585.84%
2006 1,281.11%
2007 66,212.3%
2008 9,030,000%

Charles Cole, EconomyWatch.com

My reaction:

1) A colossal amount of wealth is about to destroyed by the collapse of the dollar, pound, and yen.

2) It will strike like lightning. The shelves in the grocery stores will become empty as retailers can't afford to restock them. Most people won't be prepared.

3) When inflation is rampant, citizens stockpile goods, and paper money becomes toxic. This creates a scarcity of supply (commodities which are bought as a store of wealth become unavailable for consumption). In other words, even if production wasn't down 20 percent, the dollar's collapse would still create a food shortage as a result of hoarding.

4) The US/British/Japanese government will not have the funds to keep the infrastructure in operation (Pot holes will develop in the streets, elevators will stop functioning, etc).

5) The unemployment rate will exceeded 30 percent, as the US/British/Japanese service sector implodes.

6) The United States, Britain and Japan, like the Weimar Republic, have now taken to funding their budget deficits through seigniorage.

7) As inflation accelerates, any taxes paid will become nearly worthless by the time they reach the US/British/Japanese government.

8) Nobody will buy the US/British/Japanese government debt

9) The financial power of any entity holding US/British/Japanese government debt will be immediately reduced.

10) Food stamps and social security payments will be made worthless by hyperinflation.

11) There is likely to be fuel shortages which will impact critical services (delivery trucks, ambulances, fire trucks, garbage trucks, etc) as the dollar price of fuel soars.

12) The US/British/Japanese government will pass laws to try to control price rises. These efforts will fail.

13) The social structure will begin to collapse.


Conclusion: While the dollar collapse has already begun (gold at $1070), most of the above will happen in 2010.

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40 Responses to *****The Results Of Hyperinflation*****

  1. Numonic says:

    Anonymous, I bet there were people like you when we were on gold standard saying the same thing. Back then are transactions were done with gold certificates in relation to physical gold just as much as we use electronic money in relation to physical money today. So I'm sure there were those saying, how can there be a run on the physical cash(gold coins) everyone is using credit(gold certificates), saying ""It's a run on physical cash people!" and making fun of anyone hoarding things with the best intrinsic value but they soon found out the truth. The sad thing is there was evidence all around them before the collapse but they were just too blind to see it.

  2. Numonic says:

    jokingly mocking saying ""It's a run on physical cash people!""

  3. Bowtie says:

    I'm buying the gold buffalo coming out oct. 29.

  4. Bowtie says:

    Not sure where your respective positions are, but I think there will be runs for paper cash. People are not smart enough to demand gold yet.

  5. Bowtie says:

    I still demand cash now. And I'll demand cash until people realize its worthless. Then I'll pay my student loans off with worthless cash. But people will demand cash before they demand precious metal.

  6. Bowtie says:

    sure, but I don't think the credit cards will work once atm's stop. And if the credit cards work after atm's stop, people will still value cash much more than electronic numbers. In other words, if banks shut down and no one can get cash from banks, people will demand cash from other people. Cash is king until hyperinflation.

  7. Anonymous says:

    @Bowtie

    I hate to break it to you, and anyone else that thinks like you, but the only legal tender in the US will be the dollar...

    No matter what you may barter with with the people around you...

    Corporations and the government will always demand dollars...

    Because of this, most people will keep on demanding cash no matter how worthless the dollar becomes...

    Proof: Zimbabwe still printing paper, so did Germany in the 30s and the US in the 30s...

  8. Bowtie says:

    It eventually ends. Otherwise we'd all still be using denarius.

  9. Bowtie says:

    I agree that they are both inherently worthless. However, people currently have faith in our currency and the digital currency. Sheer faith, force, confidence and habit keeps this system going. I believe that faith will last longer in the paper form of fiat rather than the digital form. No matter how you look at it, people value tangible more than intangible. this is all schematics, why do we care if paper will last longer than digital?

  10. Bowtie says:

    ugh... I like numonic's posts. no reason to mock people, we're all on the same team.

  11. Anonymous says:

    Asking for dollars is like asking for quarts. A dollar of what? A quart of what?

    We have been conditioned to believe a dollar is money when in reality it is just a unit of measurement.

    I don't remeber the exact figure, but a dollar is supposed to equal approx 320 grams of silver.

    But like the above posters have said about credit cards and physical cash; as long as people are willing to accept "dollars" for payment you can fob them off with worthless bits, bytes or cotton/linen pieces of paper.

  12. Anna says:

    I would really appreciate more civility in this discussion.

    Please stop using vulgarity, profanity, derisive humor in your posts. It only makes you look desperate and uneducated.

    Eric, just want to say that in my opinion, tolerating these types of comments discourages people who have legitimate opinions (on either side) from posting, and also cheapens your fantastic blog/research.

  13. Anonymous says:

    US government is testing investor's confidence on US dollar just like we are testing the limit of the earth. Don't be excessive.

    However, don't use bad government to rationalize your gain building on top of suffer of the most. Selfishness is the source of evil.

    We are inherently interdependent - climate, atmosphere, war, epidemics. Selfishness won't survive long.

  14. Bowtie says:

    I don't remember the exact measure, but the term dollar derives from a private mint and it meant ounce of gold, and ounce is a unit of measure.

  15. Anonymous says:

    I've been reading this blog for several months but this is my first comment though. I'm not English speaker so I tend to only read discussions rather than join them.

    However those personal invectives make even reading rather unpleasant. Anna very nicely summed up what I've been thinking for a while. So, please, keep good manners here. Thank you.

    Martin

  16. Anonymous says:

    Ok I went and found the definition of a silver dollar and I was off with the 320 grams.

    http://chestofbooks.com/reference/Manual-Useful-Information/The-Standard-Silver-Dollar.html

    The Standard Silver Dollar
    The coinage of the standard silver dollar was first authorized by Act of April 2, 1792. Its weight was to be 416 grains standard silver; fineness, 892.4; which was equivalent to 3711/4 grains of fine silver, with 443/4 grains of pure copper alloy. This weight was changed by act of January 18, 1837, to 4121/2 grains, and fineness changed to 900, thus preserving the same amount of pure silver as before. By act of February 12, 1873, the coinage was discontinued. The total number of silver dollars coined from 1792 to 1873 was 8,045,838. The act of 1873 provided for the coinage of the "trade dollar," of weight 420 grains, and an act passed in June, 1874, ordered that all silver coins should only be "legal tender at their nominal value for amounts not exceeding $5." The effect of these acts was the "demonetization" of silver, of which so much has been said. February 28, 1878, the coinage of the standard dollar of 4121/2 grains was revived by act of Congress; $2,000,000 per month was ordered coined, and the coins were made legal tender for all debts, public and private.

    From February, 1878 to November 1, 1885, 213,257,594 of these standard dollars were coined under the above act.

    If you want more information on the origin of the term dollar look at http://projects.exeter.ac.uk/RDavies/arian/dollar.html

  17. Anonymous says:

    @Anonymous

    That is great that you found a source...

    However, it's of little meaning now a days...

    The American dollar, nor American coins, is backed by PMs any more...

    And I highly doubt it will be in the future...

  18. Numonic says:

    Bowtie, what is this cliche i hear of people paying things off with worthless dollars? How does holding something that is loosing value help you pay for things, don't you have to be holding something that is increasing in value first? Like for instance holding gold and silver and then paying the fixed loan with the profit you've made from holding gold and silver. You people need to stop using these cliches without understanding them.

    A couple used cliches in economics that are just stupid and incorrect.

    1. "Gold is money"(this is stupid, gold is not money today, it used to be and it will be again very soon, but it is not right now.) There is no difference between the definition of the word currency and money, stop trying to pretend there is one. Allot of people try to do this to try to make gold look cool. Gold doesn't need your props. It's rare and has many valuable properties.

    2. "printing money out of thin air".( most people assume this is done by the central bank through the Bureau of Engraving and Printing but the BEP does not print money out of thin air, it prints money out of cotton-linen. The term printing money out of thin air is really meant for the part of the money supply that is backed by nothing and the commercial banks create this, not the mint.

    Also please know that Gold certificates are to Debit/ATM Cards as the St. Gaudens Gold coin is to the Federal Reserve Note.

  19. Anonymous says:

    Actually I take that back...

    There is one thing that backs the US dollar...

    And that is the mighty US military...

  20. Grounds for deletion:

    1) Comments containing:

    LOL (if directed at someone)
    FUCKING
    Moronic
    anoyinmouse
    etc...

    2) insulting/aggressive/nasty comments

    3) No more lyrics. It isn't the same without the music.

    4) Any comment making fun of "hoarding" in any way.

    5) Angry rants

    -----

    To everyone else, sorry for all the unpleasant comments.

  21. Anonymous says:

    Keep up the good work eric!! To others that are not grown ups, we that visit this site want informations that we can use in this harsh environment we live in. So please at least act like grown ups!
    Thanks,
    IceViking

  22. Anonymous says:

    Eric,

    Thanks for posting some ground rules.
    Your blog is great!

  23. PaxAmericana says:

    Eric,

    I think you should show in detail which countries you think will not be hit by collapsing fiat currencies. This is to critique your logic. For example, do you think France or Italy would not sink in your scenario? What about Mexico or Austria?

    You list the US, UK, and Japan, but a lot more than just three countries sank when the British default destroyed the currency reserve system in 1931.

  24. Anonymous says:

    What I really want to know is how many currencies are going to be gold backed...

    It was talked about that the GCC nations would have their currency gold backed, but there isn't confirmation on this yet..

    I just want to know how gold will play in this other then a hedge...

  25. Anonymous says:

    So no more hyperinflation this year ?

  26. Anonymous says:

    One interesting and dissenting voice amongst the hyper-inflation scenario is Robert Prector's Elliott Wave newsletter.

    He is convinced that in the credit based monetary system that we have in place that the forces of deflation will win this round because the money supply is based on debt - and that means willing lenders and willing borrowers. Both are curtailing their lending and borrowing right now. The crux of his argument at this juncture is that credit will be destroyed faster than it can successfully be created and borrowed.

    I am having a difficult time believing this in light of how much the money supply is growing. However, charts that I have seen is that vast amounts of this newly minted credit is sitting in bank balance sheets and is not being lent out. I do not understand enough about how the credit is created and by whom - and what do they ultimately expect from the transaction. The Fed is a private consortium of banks that have no ultimate wish for their owners to lose money by lending/creating fictitious credit and not being paid back. What gives? What is the system designed for?

    Ultimately - the money is coming and going somewhere and I do not understand how the money supply (inflation) can continue when our manufacturing base has been sold down the river and we will be unable to service our debts. We are increasingly unable to generate money in this economy and thus loans will be destroyed much faster than they can be replaced - a net contraction of credit should take place. And that is Deflation.

    How will Inflation take hold in such a scenario?

    Mike

  27. Anonymous says:

    We have physical economy deflation with a ralative monetary hyperinflation.

    Thanks to derivatives.

    That's the crux of all this. The derivatives market.

    As long as that is there, and those debts are honored by screwing up everything else, we're screwed.

    That's the truth of the matter in terms of 1.4 quadrillion, or if it helps 1400 trillion, or 1,400,000 billion.

    All of these are worthless bets that should be canceled. If we do, the big banks are toast.

    If we do not, everyone else including the big banks are toast.

    It's very simple, end the Fed, pass the HBPA of 2007, switch to the American Credit System that Alexander Hamilton and the U.S. constitution states is our money supply, controlled by congress.

    Use this re-found power to initiate treaties with Brazil, Russia, India, China. Then other countries will join if the big 5 do this.

    Now you can rebuild the economy focusing on BLUE collar jobs, not green or white collar.

    You rebuild our crumbling infrastructure which has the benefits of two fold - making commerce more efficient (cheaper) and providing long term jobs and thus wealth creation that can be used to stabilize your supermarkets and malls.

    You invest in education far more than we have the last 40. You don't teach for a test, you teach context. You teach REAL things like, why it's important to develop technologies to replace our dwindling resources by being able to import them from....SPACE.

    So you have a long range goal of fusion powered spacecraft capable of getting to say Mars in 1 week. The underlying tech is already there! It just need to be improved, tested, and developed. The ideas, the theories, are already there.

    You then also have a long range goal

    It's sad, I was born in 1978, and around 1983 I wondered, why aren't we going to Mars? Why? We went to the moon in 7-8 years, it was about 11 years since we went to the moon, and I could clearly tell our tech in 1983 including computers far outstripped what they had in circa 1961. I just didn't understand it. The best answer I got, was we'll go to Mars by 1990. I thought around 1983 that this was unacceptable.

    So what do you think I think now at 31, it's 2009, and they are saying Mars is 20-50 years away.

    Because we need to stop spinning our wheels because we're caught up in the Stock Market fantasy, and actually build something and DO SOMETHING this past couple of generations. These past 40 years, we've been doing NOTHING BUT GOING BACKWARDS.

    I myself am sick of it. At least I know either we'll finally get what we want, or we're going to be very sorry we didn't stand up sooner.

    Obama, get your head out of your butt. I voted for you, and you haven't changed squat. Obama's a corporatist, in the pocket of the Queen of England, to our own peril. His actions are clear. I was wrong, (and I had suspected) but hopeful he wasn't a corporatist. Well he is, and that's not what the American people voted for. So my fellow dems you better realize that really, really fast.

    More of the same. Never did I think, Obama would stand for something as stupid as McCain did saying 'the fundamentals of the economy are strong', yet Obama has 10x those moments recently claiming all about how he helped stabilize the economy.

    Well Mr. Nero Obama, guess how stupid you'll look (and drag our democratic party down with it) when this economy collapses. It never really stopped, we're so much worse off than we were in March, yet people go oh, we're at dow 10k, we're past it. Bull. Besides if you look at the dollar, you'll see that even though the dow rose from 6k to 10k, you gained nothing because of the dollar decline.

    Kucinich was/still is the man. I sure hope he runs again. I'd really love some combo of the following three Kucinich/LaRouche/Paul. These are the only three men making sense.

  28. Anonymous says:

    Hyperinflation is already here, we're just keeping it at bay by Goldman Sachs and others constantly shorting gold. Where would the dollar REALLY be, if we weren't constantly shorting it?

    We very well seen in the near future dow 100k, yet it's worth less than dow 2k.

    We're so screwed, it's not even funny. There will be no getting out of this mess, because the derivatives screwed up the entire system. Now their funny money will destroy everything.

    Don't believe me? I bet you will have changed that tune in short order. Just watch.

  29. Anonymous says:

    My theory...

    We are beginning to see massive deflation of extraneous assets (assets not necessary for sustaining life). Look at the baseball card market, for example. This is just like 1989, when things were still looking good. That market finally collapsed after the 1990's flooded the market with a variety of flashy cards. Now baseball cards are just cardboard.

    Here's where it gets interesting though. At the same time as the bubble is deflating, we will see hyperinflation in commodities.

    Keep in mind, Americans are used to spending something like 12% of their income on food. Imagine a world where credit deflation allows families the equivalent of only half of the asset stream they used to enjoy, but they direct nearly all of it toward food, oil, shelter, and hard assets; thereby driving up the price.

  30. Numonic says:

    Anonymous said...

    "Keep in mind, Americans are used to spending something like 12% of their income on food. Imagine a world where credit deflation allows families the equivalent of only half of the asset stream they used to enjoy, but they direct nearly all of it toward food, oil, shelter, and hard assets; thereby driving up the price."

    Your conclusion doesn't make sense, just because the percentage of their income going toward food, oil, shelter and hard assets has increased doesn't mean the amount of money going towards those things have increased. It just means that people have gotten poorer and are making cut backs in everything except for those things. And in that case the deflationary forces seem more powerful than the inflationary forces and chances are some people will have to also make cut backs in those things.

    I keep coming across people who have trouble with math.

  31. Numonic says:

    Robert Prector is correct in saying that the credit contraction is deflationary(meaning it causes prices to drop) but can anyone give me another reason why the banks aren't lending other than that they are doing so because they want prices to drop? That's the reason I believe banks aren't lending. I see the system as a ponzi scheme cycle where the lending is the reason the prices of the houses and assets were going up and this profit allowed borrowers/investors to borrow from the assets they owned that rose in price to pay for things and to pay down loans. So it seems the source of the price rise/decline is the banks lending or lack there of. If these banks were lending, there wouldn't be these "defaults" because is it not true that a loan can be paid through another loan? Plus the prices of houses would be rising if the banks gave out more loans for home ownership. More people getting homes, means less homes on the market, meaning the price of homes rising. Now I believe there is nothing physically preventing the banks from increasing lending(because it's electronic) and that they are willfully choosing to decrease lending. My question again is why do you think they are decreasing lending? My answer is that they want prices to fall, what do of you all think? Do you think that there is a natural/mathematical force preventing banks from increasing lending or do you think banks have a choice and are choosing to decrease lending for a reason? If it is the latter why do you think the banks are choosing to decrease lending?

    It seems banks abandoned reserve requirements a while ago, so I doubt reserve requirements are the reason banks are decreasing lending(well at least not in the sense that the banks are trying to follow the rules of not holding more electronic money than the reserve requirements permit them to.) I have my own theory of why banks are decreasing lending and it's related to the subject of reserve requirements but reserve requirements aren't just rules for the sake of having rules. Reserve Requirement rules are there whether or not a bank chooses to set those rules because a bank has to keep a certain amount of physical cash on hand for withdrawals. Anyway that's my theory, what's yours?

    Tell me people, why are banks decreasing lending?

  32. Ifindoubt says:

    Numonic, if a bank can borrow money at almost no cost from the fed and invest in higher rate treasuries, pocketing the difference, then they have less motivation to lend to the public with a dubious ability to pay them back.

  33. Numonic says:

    But why does the public have a dubious ability to pay them back? Can't the public just borrow from another bank or borrow against his/her home to pay them back like they've always been doing? What really caused so many homes to be underwater? What came first, banks decreasing lending or borrowers defaulting on loans? It's the banks own fault that their assets became illiquid. If banks did not decrease lending, more people would be borrowing and spending(particularly on homes) and the price of the homes would rise and with the rise in price of homes, people could borrow against their homes to pay down debt and the banks assets would remain liquid. If I'm missing something please let me know.

    I thought about it and I can understand why a bank would want liquid assets. A liquid asset being an asset that can be sold quickly and cheaply(with little loss of value). So a bank wants these assets to return a profit or at least break even so that if they have to sell them to the Fed to get legal tender to fill deposit withdrawal obligations they will be able to get enough. But this goes against the act of decreasing lending because I figure the more lending the more the value of the asset rises, so the banks are hurting themselves by decreasing lending. The economy was largely based on people borrowing off of the rise in price of homes and the rise in price of homes is based on the easy credit lending so decreasing lending would be the cause of the decrease in prices of the homes and the decrease in borrowing and ability to pay down loans. The only reason I can see banks putting themselves in this position is if they had no choice but to sell those assets to the Fed because they were short on funds to meet legal tender deposit withdrawal obligations. Meaning the banks have a shortage of legal tender.

  34. Anonymous says:

    @ numonic
    numonic said
    I keep coming across people who have trouble with math.

    well u should stop visiting those seedy strip joints

  35. Numonic says:

    This is Numonic and I apologize if I've said anything to upset anyone. I really want us to have a thorough discussion on the topic of Hyperinflation. As I'm reading this blog article I can't help but see that everything that I've been saying is the cause for hyperinflation is true. Tell me that the decrease in lending is not the same thing as price control? Decreasing lending as a price control is currently working but other countering forces such as emerging markets(China) are interfering and causing this method of price control to fail by increasing it's spending and buying of goods. In fact hyperinflation is the event of price controls coming to an end. This does not mean that banks increased lending, this means that the efforts to decrease lending no longer worked to decrease prices, as the prices were rising not because there was too much money chasing too few goods but because the seigniorage of the currency was decreasing/ending. What causes hyperinflation is in fact the END of seigniorage. And what causes the end of seigniorage is the default/failure to deliver hard money upon obligated deposit withdrawals. Technically a shortage of physical currency causes hyperinflation. Regaurdless if you believe that there is or isn't a shortage of Federal Reserve Notes, the fact of the matter is in past history we see here that a shortage of the currency caused the hyperinflation. In fact i bet in all cases of hyperinflation, the cause was a shortage of hard money(physical currency which includes whatever the currency is at the time even if it's only paper). Many people will try to refute this by pointing out the enormous amounts of printed currency during these hyperinflations but my view is that those enormous amounts of printed currency are effects of the rise in prices not causes. I've explained it before that in a banking system there will always be a small number of transactions that use physical cash, and if the prices of those small transactions are sky high, there will be people withdrawing the amount of physical cash to pay for it. Meaning if someone usually uses physical cash to buy a loaf of bread, if the price of the loaf of bread rises to a million dollars, then those people will withdraw a million dollars in physical cash to pay for that loaf of bread.

  36. Numonic says:

    When prices get this high and the currency is still in small denominations, shopkeepers will choose to accept more convenient and less cumbersome forms of currency such as an ounce of gold or silver in place of all those bills. And it's not that the govt. is against the public using something else other than the physical currency to buy things, quite the contrary, they would rather the entire public forgo any transactions with physical cash but they wouldn't want the public using gold and silver simply because gold and silver is even more rare and difficult to produce and would cause the price of those commodities to rise even more against their currency if the public began to use them. They want the entire public using something that is more easier to create which is why they push the use of debit cards and electronic transactions but in every banking system there is always a minority of transactions done with the hard money. And this is the problem all banking systems come across. So the withdrawal of so many physical bills becomes cumbersome for the shopkeeper and the shopkeeper seeks more convenient currency, gold and silver. To counter this the govt. prints larger denominated bills to make it more convenient to carry around, preventing a massively larger devaluation of their currency from the public's use of the rare gold and silver even though the currency is in it's end stages. They are just trying to keep the seigniorage alive for as long as they can. But once the seigniorage has begun it's loss in value, it drops rapidly from there as the rise in price makes it more difficult to print the currency fast enough to supply depositors who use physical cash for minor transactions which are rising high enough forcing depositors to withdraw large chunks of physical cash from their deposits.

    Price controls become more visible during hyperinflations because more and more of them fail leaving only a few areas with price controls and the fewer areas with price controls the more visible the price controls are.

  37. Numonic says:

    n this blog they mention many times how there is a shortage of hard money, that's the physical currency. Whether or not the currency was minted with gold or paper is irrelevant, the fact is that the physical currency was in shortage during this hyperinflation. They say the govt. put restrictions on the amount of hard currency that could be withdrawn from deposits, but i believe the govt. had no power over this and the fact is that there just wasn't enough physical currency to meet the demands of depositors, and this is why there was a limit on how much hard currency depositors could withdraw from the banks.

    The article says:

    "In an investment newsletter called Money Morning on April 9, Martin Hutchinson pointed to disturbing parallels between current government monetary policy and Weimar Germany’s, when 50% of government spending was being funded by seigniorage – merely printing money. However, there is something puzzling in his data. He indicates that the British government is already funding more of its budget by seigniorage than Weimar Germany did at the height of its massive hyperinflation; yet the pound is still holding its own, under circumstances said to have caused the complete destruction of the German mark [the pound is already dead]. Something else must have been responsible for the mark’s collapse besides mere money-printing to meet the government’s budget, but what? And are we threatened by the same risk today? "

    The answer to the something else that was responsible for the mark's collapse was that it failed to mint enough hard currency to meet demand and the answer to the second question is yes we are.

    Did anyone else notice in the Yugoslavia hyperinflation that prices were rising high even before the first new larger denominated bill was created?

  38. Numonic says:

    Also the way seigniorage is used in this blog is not really showing seigniorage for what it is.

    The article says:

    "It kept interest rates far below inflation, expanding money supply rapidly and raising 50% of government spending through seigniorage (printing money and living off the profits from issuing it). . . ."

    It's true the government spending is done through printing but using the word seigniorage in this context is wrong(the right word is Quantitative Easing). The currency has always had seigniorage since it's inception. The seigniorage is the face value of the currency minus the intrinsic/market value of the currency(basically the minting cost). If the currency is made of gold and gold on the market is $16/oz and the currency is an ounce of gold with $20 inscribed on it, the seigniorage is $4. Due to legal tender laws making the currency payable for all debts, anyone using Federal Reserve Notes in the US benefits from the seigniorage. The Federal Reserve through the Bureau of Engraving and Printing prints/mints the Federal Reserve Notes and exchanges those notes for Treasury Securities and this is what they mean by govt. spending being done through monetization/printing. But saying govt. spending is being done through seigniorage is saying that the profit made from the difference of the value of 1 gram of cotton/linen coming from the Fed and the value of one gram of cotton/linen coming from the market has something to do with government spending through printing. Seigniorage has nothing to do with it. For instance if I give a $100 bond to the Fed in exchange for a $100 Federal Reserve Note, regardless of the value of that $100 bill to it's market value, that bond is still for $100. So seigniorage has nothing to do with it. Again, what causes hyperinflation is in fact the END of seigniorage. And what causes the end of seigniorage is the default/failure to deliver hard money upon obligated deposit withdrawals. Technically a shortage of physical currency causes hyperinflation.

  39. Numonic says:

    As I said, the banks aren't lending because they need the prices of their assets to go down and I just thought of another reason why they need their asset prices to go down. How would the Fed be able to justify bailing out the banks if the prices of the assets were stable at the highs or going higher. They're having trouble getting approval for the bailouts even now as asset prices are tanking, it would be impossible for them to get approval for the bailouts if asset prices were stable at their highs or rising. So the banks have to decrease lending and cause borrowers to default otherwise the true reason for the bailouts will be realized. And that true reason is not that the bailouts are there to help push up asset prices(because the banks are always in control of that regardless of what the Fed does) the true reason is that the banks have a shortage of physical cash. This fact being revealed would be detrimental to the FDIC and US dollar.

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