Is the US in a hyperinflationary depression?

Apr 13, 2011

Buenos Aires, Argentina

Stocks were down yesterday. Gold down. Oil down. Everything was down. The beginning of the end? Beats us. The Fed is still pumping in money. But investors are beginning to look beyond QE2.

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If the economy really is recovering, they say to themselves, the Fed will be able to back off from money printing. Stocks, gold, commodities - everything should go down.

Did we mention a 'hyperinflationary depression?'

What's that, you're probably wondering.

Well, it's when you have a deflationary correction...and soaring prices too. And that's what happens when the feds try to stop a major correction by pumping in huge amounts of money and credit.

But let's stop and look at how an economy works.

As an expansion gets underway, first consumers spend money that they earn. Then, they spend money that they will earn in the future. And then, they spend money that they will never earn.

The private economies of many of the world's developed nations reached the "never earn" stage in 2007. All of a sudden, lenders realized that they were never going to see their money again. Many borrowers would never earn enough money to pay off their loans.

The economy began a contraction...correcting its mistakes by writing down the value of those loans.

Markets are always discovering what things are worth. In 2007, they began to discover that a lot of the world's credits weren't worth as much as people had thought.

But then the feds were on the case.

While an individual person might run up debts greater than he can pay, the feds go one step further.

First, an expanding government lives on what taxpayers give it. Then, it lives on what taxpayers give it, plus what it can borrow from them. Then, it spends everything that it can squeeze out of taxpayers, plus what it plans to squeeze out of generations of taxpayers who haven't been born yet. Finally, when crushed all the blood out of the turnips, current and future, it spends money that no taxpayer will ever earn or pay in taxes. It just prints money.

This creates a far bigger problem. Because, no one knows what to make of this new money. Where did it come from? Who earned it? What does it mean?

Since the economy is contracting, the new money doesn't have much first. It is lent to hedge funds, banks, and other speculators. Soon, it finds its way into asset markets and basic commodity prices.

That's why we've seen so many record setting prices in recent weeks.

But this is a special kind of inflation. Instead of stimulating people to buy, spend, borrow, and makes them feel poor. They pay more for gasoline and have less left over for other things. If they have a job, their earnings barely creep up...while prices race ahead.

Want to see the process in action? It's happening already in the US. And it is even more advanced in England. Here's the report from the Telegraph:

The Centre for Economics and Business Research (CEBR) said soaring inflation coupled with low pay rises means household peacetime disposable income is at its lowest since 1921.

Rising food, clothing and energy prices mean the average British family will have 910 less to spend this year than they did in 2009.

The CEBR calculates that household disposable income will fall by 2pc this year, more than double last year's fall of 0.8pc and the biggest drop since the savage 1919 to 1921 post-First World War recession.

It forecasts inflation will average 3.9pc in 2011, its highest since 1992, as January's increase in VAT from 17.5pc to 20pc and the rising cost of oil and other commodities continue to drive up prices.

At the same time, salaries will rise just 1.9pc as unemployment remains high and the public sector makes cut-backs.
Is this the description of a hyperinflation depression? Nope. Just an inflationary far. But wait until the feds pump some more...

Stay tuned.

*** "Argentina isn't perfect, but I don't know what's better," said our old friend, Doug Casey.

Doug has built a community in Northwest Argentina. He intended it as a Galt's Gulch...a place where like-minded people could live in agreeable circumstances, even if the rest of the world fell apart.

"How's it coming," we asked.

"It's incredible. It might be the only new development in the world that actually is working. We've finished the golf course...and the spa and the clubhouse. We've got tennis courts. Polo fields. There's a boutique hotel coming in. Houses are being built.

"I decided to take a trip around the country to look at what was going on in other new, comparable communities. But none of them are comparable. Ours is easily the best place in Argentina. Maybe it's the best place in all of Latin America, I don't know.

"We already have a sports we're going to build an aesthetic spa. And we're putting a movie theatre. It's really amazing. I'm going to start my own house there soon. It will be the first house I've ever built. I want to get it finished before the world economy collapses."

On our agenda for tomorrow...taking a look at Doug's new community. And then, going on to our own place.

Trouble is, it's far away. There's no email, telephone, or television service. So, you won't hear from us for the next week.

Dear, dear reader...we hope you'll be all right without us.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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4 Responses to "Is the US in a hyperinflationary depression?"

Maulik Suthar

Apr 13, 2011

The cycles will keep going on, why focus on them. Why waste time for the things which are not in our control?

Let's think only about what we can control, our (1) emotions and (2) our asset allocation.

Riding only one asset class may be good for maximum decade or two but it will be definite disaster at some point of time in future. But I am not willing to ride only one asset class. Because ultimately all assets have some low point.

My asset diversification is protection against my lack knowledge(= ignorance) about specific trend.



Apr 13, 2011

Eq.Master Team,
It is , infact , for the very first time that I have come across in any article, about the concept of PPF( which in India generally connotes the Public Provident Fund) but which Sir Bill Bonnet has eloquently elucidated thus:
I. People spend what they earn;
II.They spend what they will earn in the future;

and finally(most importantly!)

III. They spend what they will never or ever earn !!

This analogy is applicable to almost all the economies in this present day world as a whole ??

Concluding with kudos from a humble ordinary man !


Sharad Singhvi

Apr 13, 2011

What baffles me is the fact that trillions of dollars have been spent by FED without any discernible change in employment- which is a measure of well being and economic stability. In contrast we have banks and Financial institutions making super profits and large corporations like GE getting away without paying taxes and US government facing the grim possibility of closure due to budget cuts. What kinds of measures does FED have to ensure the proper utilization of QE funds to really reap the benefits of multipler effect. To a layman it appears as if all the QE funds are being used for speculation in stocks, oil and gold. FED seems to be the ultimate sucker



Apr 13, 2011

I have been reading about hyperinflation in this newsletter regularly. My question is, Japan did something similar for 20 years - why didn't it face hyperinflation? but infact deflationary pressures.

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