The U.S. economic and systemic-solvency crises of the last four years only have been precursors to the coming Great Collapse: a hyperinflationary great depression. Outside timing on the hyperinflation remains 2014, but there is strong risk of a currency catastrophe beginning to unfold in the months ahead…moving into a full blown hyperinflation [in a few] months to a year… depending on the developing global view of the dollar and reactions of the U.S. government and the Federal Reserve. [Let me go into more detail.] Words: 2726
The Great Collapse Nears
The crisis will encompass a collapse in:
- the purchasing power of the U.S. dollar;
- the normal stream of U.S. commercial and economic activity;
- the U.S. financial system as we know it; and a likely realignment of the U.S. political environment.
Prerequisites to the crisis unfolding include:
- the Federal Reserve moving to monetize U.S. Treasury debt;
- the U.S. dollar losing its traditional safe-haven status;
- the U.S. dollar losing its reserve status;
- the federal budget deficit and Treasury funding needs spiraling out of control.
The Fed moved to monetize Treasury debt in November 2010. A much-diminished U.S. dollar safe-haven status became evident in early March 2011, along with serious calls for a new global reserve currency. The economy is not in recovery and should display significant new weakness in the months ahead, with severely expansive implications for the federal deficit, Treasury funding needs and requisite Fed monetization of debt.
As the advance squalls from this great financial tempest come ashore, the government could be expected to launch a variety of efforts at forestalling the hyperinflation’s landfall, but such efforts will buy little time and ultimately will fail in preventing the dollar’s collapse. The timing of the onset of full blown hyperinflation likely will be coincident with a broad global rejection/repudiation of the U.S. dollar.
With no viable or politically-practical way of balancing U.S. fiscal conditions and avoiding this financial economic Armageddon, the best that individuals can do at this point is to protect themselves, both as to meeting short-range survival needs as well as to preserving current wealth and assets over the longer term. Efforts there, respectively, would encompass building a store of key consumables, such as food and water, and moving assets into physical precious metals and outside of the U.S. dollar.
By 2004, fiscal malfeasance of successive U.S. Administrations and Congresses had pushed the federal government into effective long-term insolvency… GAAP-based (generally accepted accounting principles) accounting then showed total federal obligations at more than four-times the level of U.S. GDP that were increasing each year…in the uncontainable four- to five-trillion dollar range. Those extreme operating shortfalls continue unabated… [and amounted to] more than five-times U.S. GDP… [as of] the end of the 2010 fiscal year.
Taxes cannot be raised enough to bring the GAAP-based deficit into balance, and the political will in Washington is lacking to cut government spending severely, particularly in terms of the necessary slashing of unfunded liabilities in government social programs such as Social Security and Medicare.
Bankrupt governments—unable to raise adequate cash to cover obligations—invariably crank up the currency printing presses to do so, creating a hyperinflation. The federal government and Federal Reserve’s actions in response to, and in conjunction with, the economic and financial crises of 2007, however, accelerated the ultimate process—both in terms of fiscal deterioration and global perception of the issues—moving the outside horizon for hyperinflation from 2018 to 2014. Even so, over the last year or two, the government and Fed’s actions and policies, and economic and financial-market developments have continued to exacerbate the circumstance, such that there is significant chance of the early stages of the hyperinflation breaking in the months ahead. Key to the near-term timing remains a sharp break in the exchange rate value of the U.S. dollar, with the rest of the world effectively moving to dump the U.S. currency and dollar-denominated paper assets.
The current U.S. financial markets, financial system and economy remain highly unstable and increasingly vulnerable to unexpected shocks. At the same time, the Federal Reserve and the federal government are dedicated to preventing systemic collapse and broad price deflation. To prevent any imminent collapse—as has been seen in official activities of the last several years—they will create and spend whatever money is needed, including the deliberate debasement of the U.S. dollar with the intent of increasing domestic inflation. As shown in the following graph, those efforts include effective full monetization of recent net Treasury debt issuance. During the three full calendar months since the November 3, 2010 announcement of its purchase program of U.S. Treasury debt, the Federal Reserve more than fully monetized (109%) net Treasury issuance in the same period.
The efforts to stave off systemic collapse also have resulted in uncontrolled fiscal excesses by the federal government. The deliberate monetary and fiscal abuses have resulted in de-stabilizing selling pressures against the U.S. currency, in rising gold and silver prices, and in a nascent pickup in reported U.S. consumer inflation. That inflation has been driven by unhealthy monetary policy instead of healthy economic demand, and it should continue to increase in the months ahead.
The damage to U.S. dollar credibility has spread at an accelerating pace. Not only have major powers such as China, Russia and France, and institutions such as the IMF, recently called for the abandonment of the U.S. dollar as the global reserve currency, but also the dollar appears to have lost much of its traditional safe-haven status in the last month. With the current spate of political shocks in the Middle East and North Africa (a circumstance much more likely to deteriorate than to disappear in the year ahead), those seeking to protect their assets have been fleeing to other traditional safe-havens, such as precious metals and the Swiss franc, at the expense of the U.S. currency…
Federal Government and Federal Reserve Malfeasance
The economic and systemic crises, triggered by the collapse of debt excesses that had been encouraged actively by the Greenspan Federal Reserve, have been centered on the U.S. financial system. Recognizing that the U.S. economy was sagging under the weight of structural income impairment created by government trade, regulatory and social policies—policies that limited real (inflation-adjusted) consumer income growth, where the average U.S. household could not stay ahead of inflation or make ends meet—then-Federal Reserve Chairman Alan Greenspan played along with the political and banking systems. He made policy decisions to steal economic activity from the future, fueling economic growth of the last decade largely through debt expansion.
The Greenspan Fed pushed for ever-greater systemic leverage, including the happy acceptance of new financial products—instruments of mis-packaged lending risks—designed for consumption by global entities that openly did not understand the nature of the risks being taken. Spreading the credit risks of banks among other industries, for example, was encouraged actively by the Fed as healthy and stabilizing for both the domestic and global financial systems. Also complicit in this broad malfeasance was the U.S. government, including both major political parties in successive Administrations and Congresses.
As with consumers, though, the federal government could not make ends meet. Driven by self-serving politics aimed at appeasing that portion of the electorate that could be kept docile through ever-expanding government programs and spending, political Washington became dependent on ever-expanding federal deficit spending, unfunded obligations and debt.
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 imparted wisdom was that if the Fed or federal government ran into economic or financial-system difficulties, the federal budget deficit and the U.S. dollar simply could be ignored—or sacrificed. Ignoring them would not matter, it was argued, because doing so would not cost the incumbent powers any votes. [When,] I raised the issue of an inevitable U.S. hyperinflation with an advisor to both the Bush Administration and Fed Chairman Greenspan back in 2005 I was told simply that “It’s too far into the future to worry about.” Indeed, attempting to push the big problems further into the future continues to be the working strategy for both the Fed, under Chairman Ben Bernanke, and the current Administration and Congress.
In a February 25, 2011 speech, Federal Reserve Vice Chairman Janet Yellen examined the results of the recent use of “unconventional policy tools” by the Fed, [saying,] “Each of these policy tools tends to generate spillovers to other financial markets, such as boosting stock prices and putting moderate downward pressure on the foreign exchange value of the dollar.” While Wall Street may hail any artificial propping it can get from the Fed’s efforts to support the markets, more than “moderate” related declines in the U.S. dollar’s exchange rate destroy any illusions of stock gains and savage the U.S. consumers’ dollar purchasing power. A declining dollar can turn U.S. stock profits into losses for those living outside the dollar-denominated world, as funds are converted back to the strengthening currency domestic to the investor. Inflation driven by dollar weakness will do the same for those in a U.S. dollar-denominated environment, where, eventually, inflation can turn U.S. stock profits into real (inflation-adjusted) losses…
Indeed, the U.S. dollar and the budget deficit do matter, and the future is at hand. As the federal budget deficit spirals well beyond sustainability and containment at an accelerating pace, and as the Fed moves with great deliberation to debase and to impair the purchasing power of the U.S. dollar, to generate rising consumer inflation, the day of ultimate financial reckoning appears to be breaking…
Efforts to save the system at any cost likely will continue as long as possible, with the government spending whatever money it and the Federal Reserve need to create, until such time as the global financial markets rebel. The ultimate cost here, though, will be in inflation and the increasing debasement of the purchasing power of the U.S. Dollar, and an eventual dollar collapse beyond any government or Federal Reserve control.
U.S. Economy Is Not Recovering
Economic activity in the United States began to decline in 2006 or early-2007, and it plunged from late-2007 into 2009 at a pace not seen since the Great Depression. Subsequently, economic activity has been bottom-bouncing with some boosts from short-lived stimulus effects. Without any fundamental turnaround in structural consumer-income problems that have been driving the downturn, and with contracting, inflation-adjusted systemic liquidity, the economy has started to slow anew…[However,] despite pronouncements of an end to the 2007 recession and the onset of an economic recovery, the U.S. economy still is mired in a deepening structural contraction, which eventually will be recognized as a double- or multiple-dip recession. Beyond the politically- and market-hyped GDP reporting, key underlying economic series show patterns of activity that are consistent with a peak-to-trough (so far) contraction in inflation-adjusted activity in excess of 10% – a formal depression…
Existing formal projections for the federal budget deficit, banking system solvency, etc. all are based on assumptions of positive economic growth, going forward. That growth will not happen, and continued economic contraction will exacerbate fiscal conditions and banking-system liquidity problems terribly.
As previously noted, 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. Also, the U.S. economy already had entered a severe structural downturn, which helped to trigger the systemic-solvency crisis.
Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover obligations. The alternative here would be for the U.S. eventually 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) comes the eventual full destruction of the value of the U.S. dollar and related dollar-denominated paper assets.
The U.S. government and the Federal Reserve have committed the system to its ultimate insolvency, 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. [Nevertheless…], the particularly egregious fiscal and monetary responses to economic and solvency crises of the last four years have exacerbated the government’s solvency issues, bringing the great financial tempest close enough to making landfall that the hairs on the backs of investors necks should be standing on end.
Numerous foreign governments/central banks have offered unusually blunt criticism of U.S. fiscal and Federal Reserve policies as the crisis has expanded, but the perceived self-interests of the U.S. government and Fed always will come first in setting domestic policy. Where both private and official demand for U.S. Treasuries had been increasingly unenthusiastic, the Fed—the U.S. central bank—effectively has been fully funding Treasury needs since December 2010, with its latest version of “quantitative easing,” a euphemism for Fed monetization of U.S. Treasury debt.
The so-called “QE2” likely will be expanded, or supplemented by “QE3,” in the months ahead, as the ongoing economic turmoil triggers significant further fiscal deterioration. Those actions should pummel heavily the U.S. dollar’s exchange rate against other major currencies. Looming with uncertain timing is a panicked dollar dumping and dumping of dollar-denominated paper assets, which remains the most likely event as proximal trigger for the onset of hyperinflation in the near-term.
The early stages of the hyperinflation would be marked simply by an accelerating upturn in consumer prices, a pattern that already has begun to unfold in response to QE2. Also, money supply velocity will spike, as the U.S. dollar, again, comes under heavy and even disorderly selling pressure, with both domestic and foreign holders getting rid of their dollar holdings as quickly as possible.
Although the U.S. has no way of avoiding a financial Armageddon, various government intervention tactics might slow the process for brief periods, and the system always is vulnerable to external shocks, such as wars and natural disasters. Government actions could include supportive dollar intervention, restrictions on international capital flows, wage and price controls, etc. Effects of any such moves in delaying the onset of full hyperinflation, though, would be limited and short-lived. There is no obvious course of action or external force at this point of the process that meaningfully would put off the nearing day of reckoning.
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 will be particularly disruptive. Trouble could range from turmoil in the food distribution chain and electronic cash and credit systems unable to handle rapidly changing circumstances, to political instability. The situation quickly would devolve from a deepening depression, to an intensifying hyperinflationary great depression. While resulting U.S. economic difficulties would have broad 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.
Physical gold (sovereign coins priced near bullion prices) remains the primary hedge in terms of preserving the purchasing power of current dollars. In like manner, silver is in this category. Also, holding stronger major currencies such as the Swiss franc, Canadian dollar and the Australian dollar, likely are good hedges…