hyperinflation

The definition of insolvency

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Imagine that you maxed out your credit card, your line of credit, and that you are late making payments on your Visa, your car loan, your mortgage, and all your other bills.  The bank comes to you and says if you don’t pay your credit card bill, your car loan, your mortgage, and your line of credit, we will seize your car, your house, and anything else of value that you may have bought with the credit card.  Now you look at your bills: they are $3500 every month.  But your monthly net income is $2000.  You’re insolvent.

Timothy Geithner, the Treasurer of the United States says that if Congress doesn’t increase the debt limit the United States will default.  Why?  Because the bills are higher than the income. The United States is insolvent.  This is the definition of insolvency.  And Geithner is not lying.  He is, after all, working for the Obama Administration.

So you say to the bank:  Ok.  I’ll be able to pay my bills.  Just let me start another line of credit, and I’ll be able to make the regular payments on all my bills (mortgage, credit card, old line of credit, and car loan) using the new line of credit.  The bank says sure.  Then starts handing out the money.  That bank is called the Federal Reserve, and it is monetizing the insolvency of the United States. When this happens, hyperinflation follows.  It is just a question of doing the math.

(Hat tip:  Monty Pelerin, “The Government is Like NPR pimped by Tim Geithner“)

Commodity inflation is caused by monetary inflation

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Cullen Roche of the Pragmatic Capitalist in his Dec 23 blog (via the Business Insider) made the claim that the rise in commodity prices has nothing to do with quantitative easing (emphasis his):

Well, I think it’s becoming pretty clear where the commodity price inflation is coming from – China and genuine economic strength.  The entire inflationist argument in the United States has been pretty much dead wrong for over two years running – whether you believed in hyperinflation, high inflation or default due to “money printing” you have been well off the mark.

Yet the inflation markers Roche is looking at exclude explicitly food and energy prices.  As one commenter on Gonzalo Lira’s latest blog points out, the media and the Federal government are lying:

Further the media and the FED are blatantly lying about inflation. Look at this CNN article that uses the slight [sic] of hand approach when talking about China’s inflation problems [Chinese inflation spikes on food costs].  After talking about the dangers China faces with it’s inflation it states in the article “Compare that with the United States, where the CPI has been sluggish for months. In October, the U.S. CPI increased a modest 1.2%, according to the Bureau of Labor Statistics. Excluding the volatility of food prices, the U.S. CPI rose 0.6%.”

So when it’s in China it’s inflation and when it’s in the US it’s not.  I’m not making this up.

But the fact is that somewhere around QE1, the Chinese stopped buying US debt and have been diversifying their holdings.  They are, for example, investing in oil companies in Canada.  This has resulted in a tremendous dilemma for the US.  How can they keep the behemoth of the US government running without that the Chinese invest in the Federal debt with their US dollars, made through the trade surplus with the US?  The answer is QE2, and Gonzalo Lira estimates that 60% of the new US treasury debt is now bought by the Federal Reserve.

And now, the problem of food inflation is much worse than ever.  Today, both the Financial Post and the Globe & Mail have prominent articles on the recent food inflation numbers.  Of course gold is holding around $1375; oil around $88; but these may end up skyrocketing in price soon.  Blame it on speculators if you like.  But this has everything to do with QE1,2 … infinity.  For the Federal government is now monetizing its debt and there is nothing even the newly elected Congress can do about it.  Even if they refuse to raise the debt ceiling, the government will just borrow the money from the Social Security and nothing will stop Bernanke from monetizing old debt as it expires.  When a government does this, they can expect commodities to increase: heating fuel, food, gasoline, textiles and eventually electricity.  These are the very things that we eat, wear and burn to live.  Now it’s happening and all over the media there is denial–not just the Pragmatic Capitalist, but all over the major media, even smart smart people like Niall Ferguson are still claiming that deflation is the problem.  But excuse me, when people can’t afford to eat anymore, that’s a problem isn’t it?  Are they stuck on stupid?

What happens during hyperinflation?

1.  Commodity prices, especially food, soar

In Weimar Germany food inflation was severe.  A bag of potatoes could buy a grand piano.  People used all of their disposable income just to put food on the table.

2.  Financial markets are highly volatile

The stock market in Weimar Germany would soar and plummet.  But in the end, shares in stocks lasted while the Weimar mark became worthless.  Commodity prices, though in a secular bull market, will remain volatile with huge swings as it rises steadily upward.

3. Gold and silver retain their value

In Zimbabwe, everyone who is able is a gold panner so as to buy food, for it is now possible to buy food with gold dust.

4. More stable currencies are desired

Many countries around the world use US dollars because their own currencies are so unstable.  Apparently US dollars are now legal tender in Zimbabwe.  In Weimar Germany, it would have been useless to own the likewise hyperinflated Austrian kroners instead of marks, but useful to own US dollars or Swiss Francs.

5. Real estate is uncertain asset

It may be worthwhile to own real estate debt just before an hyperinflationary period, for the value of that debt will plummet faster than interest rates can rise.  But it is also probably true that rental income will not keep up with inflation.  I read a story about hyperinflation in Chili in which a man was offered a condominium for his car.  The condominium, according to the author, is now valued in the hundreds of thousands, while the car sits in a junkyard.

What to do?

Perhaps it’s a good time to hoard large stores of food before the prices get completely out of hand.  Either that or an investor must have something that can be used to barter for food, such as wine or precious metals (in bullion–bars or coins), gold and silver.  In my view, the Canadian loonie may serve the role that the Swiss Franc did in Weimar Germany.  It is true that the loonie has suffered laughable interest rates, but the Canadian economy is resource rich and those economically healthy parts (e.g., China) of the world are pouring their money into the economy up here and are abandoning US debt.  So it might be good to have some Canadian money or some Swiss Francs.  I wouldn’t bother with the Euro at this point.

Memo to President Obama and Chairman Bernanke: A solution to the budget deficit

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Dear Mr. President, and Chairman Bernanke:

I discovered a solution to the problem of the Federal budget deficit.  The deficit stands at roughly 1.5 trillion.  The solution is to print 300 billion 100 trillion dollar bills.  Obviously such notes would eventually be worth nothing in terms of currency, as was the experience in Zimbabwe.  But I’ve now learned that the 100 trillion Zimbabwe dollar note is selling to tourists at $5 US as a souvenir. 300 billion 100 trillion dollar bills at $5 each would be worth 1.5 trillion and you could sell them to collectors, tourists and speculators alike.

Just a thought.

Have a great day.

The Righteous Investor

Peter Schiff is a mensch

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I enjoy the tenacity of Peter Schiff and his willingness to speak against the consensus. Schiff has been consistently critical of the debt bubble in the US and he predicted the fall of housing prices in the face of mocking and shouting down by other “experts”.  Consider this 2006 video from Fox News:

For a long time, Schiff has recommended precious metals and continues to do so despite many who say that gold is “hyper-overbought” (Dennis Gartman, September 29–when gold was trading at $1300).  Against those who think that there is a gold bubble, Eric Sprott claims, “I am pretty convinced that gold will go a lot higher because it is under-owned as only 1 per cent of people’s money is in it.”  Now, there is a new Tech Ticker debate between Peter Schiff and Gary Schilling.  If it is appropriate to call people who insist that gold is the best investment as “gold bugs”, then Gary Schilling is a “bond bug” because he is inflicted with a disease now appropriately named as “Fiat Currency Fever“, the irrational view that the US dollar is a the best and safest investment–despite the severe and secular bear market that the dollar has suffered since 1971 when it was taken off the gold standard.  At a certain point, Gary Schilling claims that the Federal Reserve doesn’t create money–a trillion dollars that banks have received from the Fed is just sitting in the banks.  But unfortunately Schilling seems to be dead wrong on this point, because the banks have been lending this money to the US government, and it has actually gone out into circulation in the form of food stamps, federal employee wages, unemployment benefits, Social Security benefits, etc.  There is some serious monetization of debt going on in America (cf. Monty Pelerin), for Bernanke is trying to re-inflate all the bubbles.

Despite being right most of the time, Peter Schiff still faces fierce opposition from critics, including economists–you know the guys with PhDs, who claim that gold is barbarous relic.  I agree with Schiff.  For I believe that only God can create something out of nothing, and when a central bank expands the volume of fiat money inflation is the inevitable result.  This is an immutable law of economics.  When hyperinflation hits in earnest, then all those who own precious metals will be very thankful that they listened to Peter Schiff.

Thank you Ben: in celebration of $90 oil

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Today oil is above $90.  Last night I paid $1.119 (CDN) per litre for gasoline to fill my wife’s RAV4.  Unlike most people, I actually have a smile on my face when filling up.

I really owe a debt of gratitude to Ben Bernanke; you see he told 60 Minutes that he won’t stop with QE2–600 billion.  Quantitative easing is a fluid concept.  It is really as much as you need to make everything happy again.  And this is really like pouring money into my portfolio:  my positions are short the US dollar.  I’ve sold put options in US dollars against Barrick Gold (ABX), Gold Corp (GG), New Gold (NGD), Penn West (PWE), Pengrowth (PGH): gold and oil.  I hold long positions in most of these companies too.  Thanks Ben.  You have provided me with the Bernanke put so that I can invest in these companies virtually risk-free; if the economy sucks, you have decided to poor gas (QE) on the fire, and they are assured to explode in price.  Dear Ben, have I told you recently that you’re my best friend?  Now I know you think you can control inflation.  As long as you believe you can, you will continue to put money in my portfolio.  So please, by all means, just keep it up.

Nota Bene to my esteemed readers:  I may be just a little ironic in my tone above–I’m yanking Bernanke’s chain–not that that important man has either the time or the inclination to read my humble blog.  What I actually believe is this (does this scenario seem unreasonable today?):

hat tip: Monty Pelerin, “How inflation occurs”