24 May 2018
by Gary Christenson, Deviant Investor:
- Hyperinflation occurs in banana-republics and not modern western countries.
- Hyperinflation cannot occur in the United States because the U.S. issues dollars – the reserve currency.
BOTH IDEAS ARE INCORRECT. For more, read Bill Holter:
WHAT ARE THE CONSEQUENCES OF HYPERINFLATION?
- The hyperinflations of past centuries have hurt the poor and middle classes more than the wealthy because they owned real assets.
- Hyperinflation destroys savings, assets, purchasing power and retirement expectations, along with moral values.
- The value of the currency is smashed. The economy “resets” and life goes on, albeit much changed.
- Hard assets such as real estate, fine art, land, gold and silver fare better than many other assets.
- The government spends too much and creates debt unpayable via borrowing or taxes, and monetizes the debt. The central bank “prints” currency units and “buys” the debt. Watch the debt to GDP ratio.
- Businesses and people rush to spend the currency before its value declines further. Velocity of the currency increases, people hoard hard assets, reject unbacked fiat currency units, and prefer to trade with stable currencies.
- Interest rates and interest payments on government debt rise. Selling bonds is difficult and the central bank may become the only buyer. Watch the ratio of interest payments to total government expenses.
- The ratio of total debt to GDP rises. The ratio of interest payments to total government expenses rises.
- A tipping point happens. That point is difficult to predict because emotion, culture, and expectations are influential.
HYPERINFLATION IN THE UNITED STATES?
Speculation based on a few assumptions.
Official U.S. national debt has increased since 1913 at 8.8% per year every year. The rate of increase since 1971 has been the same. Assume the rate of increase will be slightly higher due to tax cuts, larger interest payments, Medicare costs and wars.
Interest rates declined (until recently thanks to central bank actions) since the early 1980s. Shorter term U.S. Treasury rates have increased for six years. The Ten-Year rate bottomed in mid-2016 and has traded higher since then. The Fed announced they want higher rates. Assume interest rates will increase for many years.
WHAT IS THE PROBLEM?
U. S. government expenses are “out-of-control,” much larger than revenues and increasing about 4.6% per year even though interest rates are low.
As rates rise the government spends more for annual interest payments, which increases the deficit and accelerates the debt problem.
If the Fed monetizes the deficits and forces interest rates lower, the dollar will devalue rapidly.
Rising debt and increasing interest rates create vicious circles that promote each other. Something will “break.”
From David Stockman “$21 Trillion and Counting”
“Accordingly, there is exactly zero chance of any legislative action to stem Washington’s exploding red ink until after the 2020 election, and it will be far too late by then.”
From Charles Hugh Smith “How Much Longer Can We get Away With It?”
“No doubt the Romans said, “It can’t happen here” – but they were wrong.”
YEAH, YEAH, WE HAVE HEARD IT BEFORE. LOOK FOR A PROBLEM IN DECADES.
MAYBE, BUT CONSIDER THE FOLLOWING FACTS AND SPECULATIONS.
- Official national debt rises 8.8% per year. Fact.
- Government expenses rise about 4.6% per year. Fact.
- National debt and expenses rise less rapidly when interest rates are low and declining. Fact.
- Interest rates bottomed 22 months ago for the 10 Year Note and before that on shorter durations. Fact.
- Assume the interest rate that the U.S. pays on official debt rises for seven more years at twice the rate (0.33%/year x 2 = 0.66%/year) that it declined since 2000. By mid-2025 the average rate will be over 8%, which is NOT historically high.
- Interest rates on the 10 Year Note fell 0.33% per year for 16 years since 2000. They have risen by 0.9% per year for 22 months since mid-2016. Fact
- As rates rise the debt accelerates higher. By 2025 the debt could be $39 trillion with annual interest payments more than $3 trillion. Insane!
- Annual government expenses, pushed higher by interest payments, could reach $9 trillion in 2025. Interest as a percent of expenses would be around 35%. Unsustainable!
- The purchasing power of the dollar will be small and consumer prices will be much higher.
- With a $39 trillion debt, huge interest payments, and a large debt to GDP ratio the dollar would be terminally weak. Ten thousand dollar gold (or far more), continual debt monetization, severe inflation and hyperinflation are believable in that scenario.
- OPTION ONE: The Fed monetizes debt and trashes the dollar. Consumer price inflation surges higher. Interest rates might stay low and stock market prices might stay high. Many suspect this scenario is preferred by the political and financial elite.
- OPTION TWO: Interest rates increase. Severe inflation or hyperinflation will occur, and a weak dollar, higher prices, huge debt and interest payments are inevitable. Expect a reset.
- OPTION THREE: Someone starts a global war and survival, not our self-created economic trauma, becomes important.
- If the Fed keeps interest rates low—more of the same financial repression—debt and expenses might take longer to become unsustainable but the dollar must be sacrificed. Higher prices for everything are inevitable.
- If interest rates rise to normal levels, debt and interest expenses will reach unbelievable levels. Expect a weaker dollar, higher prices, social trauma and a reset.
- The above is basic spreadsheet mathematics based on multi-decade trends in debt, spending, deficits, and interest rates. Others in government know and understand the unsustainability of the debt problem. Since politicians have not proposed a solution, no politically acceptable alternatives exist. Grim consequences are forthcoming!
Gold and silver will do well under option one – trash the dollar.
Gold and silver will do well under option two – hyper-inflationary debt, monetization, expenses, and massive interest payments.
Are you prepared for the consequences of exploding national debt, huge interest payments, and “out-of-control” spending?
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