Hyperinflation coming next

Sep 15, 2010

Paris, France

No time to write a short daily reckoning today...so we wrote a long one...

"Mother of a whorehouse of sh**!"

"Ah...what an a******! This morning is sh****."

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Our taxi driver was breaking down. The main road into Paris was blocked. Even at 6AM, there was a traffic jam. Nothing moved.

Except our cab. After addressing himself vigorously and colorfully to no one in particular, he took matters into his own hands. With a few more expletives, he pushed his way onto the shoulder...and excited from the freeway. The next hour and a half were spent in more jam-ups, more cussing, and some death-defying highway stunts.

"I don't know how this city stays alive. Who would want to work or do business here? You can't get anywhere. This is unusual. But everyday there's a traffic jam. And I always seem to find it.

"Whore of sh**!"

We finally arrived at our office...at 8AM.

Checking the news...the big news from yesterday was the rise in the price of gold. It went up $24 to a new all-time high. The stock market was just about flat.

What does it mean?

Well, the dollar is going down, for one thing. Bonds too. Has the long-awaited turnaround in the bond market finally begun? We don't know. We really didn't expect it so soon.

John Williams, who keeps track of what is really going on in the economy at his "ShadowStats" outfit, says to expect hyperinflation within 6 to 9 months.

Seems too early to us.

But a major turn in the bond market...and much higher inflation rates...are coming. And you don't want to be holding US bonds...or muni bonds...or any kind of bonds when they arrive.

What then?

Cash and gold. Those are the only reasonably safe positions now. Your gold will go up. Your cash will go down. You'll come out even. That will be a lot better than most people.

One thing John Williams is probably right about is that when it comes, it probably won't be led by a gradual, orderly increase in consumer prices. We're still in a de-leveraging cycle - with plenty of spare capacity and little excess purchasing power. Which means, normal demand will not push up prices.

Take the labor market, for example. There are millions of idle hands available... Labor is a big part of business costs. Until unemployment goes down and employees have some bargaining power, there shouldn't be any inflation coming from that front.

This will be a different kind of inflation...much more violent and dangerous. Prices will shoot up suddenly, quickly - as people lose confidence in the dollar. It will not be gradual, but shocking...turbulent...unexpected. Gold will hit $1,500...then, $2,000 just a few weeks later.

This hyperinflation, along with high, long-term unemployment rates, will set the stage for serious trouble.

Unemployment peaked out in the recession of the early '80s with the average jobless person out of work for a little more than 20 weeks. Today, the average jobless person is out of work for more than 35 weeks. We haven't seen anything like this since the Great Depression.

But our message today is that this is actually worse than in the Great Depression.

In the words of Dominique Strauss Kahn, who heads the IMF:

"We are not safe."

What haunts DSK, as he is known in France, is the French Revolution. People like DSK lost not only their jobs...but their heads.

Here's the report from the Telegraph:

"The labour market is in dire straits. The Great Recession has left behind a waste land of unemployment," said Dominique Strauss-Kahn, the IMF's chief, at an Oslo jobs summit with the International Labour Federation (ILO).

He said a double-dip recession remains unlikely but stressed that the world has not yet escaped a deeper social crisis. He called it a grave error to think the West was safe again after teetering so close to the abyss last year. "We are not safe," he said.

A joint IMF-ILO report said 30m jobs had been lost since the crisis, three quarters in richer economies. Global unemployment has reached 210m. "The Great Recession has left gaping wounds. High and long-lasting unemployment represents a risk to the stability of existing democracies," it said.

The study cited evidence that victims of recession in their early twenties suffer lifetime damage and lose faith in public institutions. A new twist is an apparent decline in the "employment intensity of growth" as rebounding output requires fewer extra workers. As such, it may be hard to re-absorb those laid off even if recovery gathers pace. The world must create 45m jobs a year for the next decade just to tread water.

Olivier Blanchard, the IMF's chief economist, said the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time.

"Long-term unemployment is alarmingly high: in the US, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression," he said.

*** We listen to CNN in Spanish on the radio while driving to work. If we listen to it long enough, we figure, maybe we'll understand what they're talking about.

On the radio Friday was an interview with Carmen Reinhardt. We didn't know she was a Spanish speaker. She wrote, along with Ken Rogoff, the book on sovereign bankruptcies.

"What should be done," came the inevitable question.

"Well, I am actually in favor of stimulus," said the University of Maryland economist. "But the real problem is confidence. You can't stimulate effectively unless you also address long term, structural problems. Deficits need to be brought down. Investors need to see a good plan. Otherwise, the stimulus efforts will just lead to bubbles and more debt."

*** Cut the deficits? Not in Zombie Nation.

As we mentioned last week, zombies took over the nation in 2008, with the election of Barack Obama. He was the zombie candidate.

Now comes word, from the Washington Post, that there's been a sharp rise in disability filings at the Social Security Administration. People who were perfectly capable of doing their work before the financial crisis hit in '07 have been thrown onto the unemployment roles. Desperate for income, they find they have not just lost their jobs. They've been disabled.

That gives them a way to get money from the taxpayer even after their unemployment benefits have run out. They become not just temporary zombies, in other words, but permanent ones.

The trouble with zombies is that they're expensive to maintain...and inherently dangerous. Which is to say, the welfare state works fine as long as there's enough money to keep the zombies happy. But when you get too many zombies...and not enough money to feed them properly..., you're in danger. Well, the welfare state itself is in danger.

Imagine. More than 200 million zombies. If each one ate two eggs a day it would take 400 million chickens to keep the zombies supplied.

"But wait...hold on there, Bill...you're not seriously saying that every unemployed person is a zombie. Many people lose jobs through no fault of their own. They live on savings...then go back to work. That is hardly the mark of a zombie."

Yes, of course...Mr. Compassion and Sensibility...

Don't get us wrong. We love zombies. Some of our best friends are zombies...and a lot of our relatives! Heck, we might be one too if they paid us better.

We're not saying that everyone who loses his job becomes a zombie. But that's what makes this Great Correction actually worse than the Great Depression of the '30s. There were fewer zombie supports back then. So people HAD to work. And they did. They worked on farms. And then, when the war started, they worked in factories.

The point is, they couldn't become zombies because - even with all Roosevelt's efforts to create a zombie economy - there just wasn't enough money to support them.

This is, of course, why there are so few zombies in the emerging markets too. Not that there aren't a lot of people who would like to zombies...and they'll get their turn!...but right now, the emerging markets are still too poor to be able to afford a large class of leeches.

In the 30s in America, as in most of the emerging economies today, people had to work. They might have worked cheap. They might have done work they didn't want to do. They might have had bad backs and weak knees...but they went to work anyway. They couldn't afford to be disabled.

If you go to China or Vietnam or one of the industrious emerging markets...you won't even see people sit down. They don't have time.

Work...work...work...work for wages...work for relatives...work for food...work for fun...

...it's what you do, when you have no choice.

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

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2 Responses to "Hyperinflation coming next"


Sep 16, 2010

To add to above comment of Sinivas, MTNL one of the PSU
(or better ZSU) has around 45000 employees on their
payroll..... while “ideally, it required a mere 15,000
employees to run its businesses”!!!



Sep 15, 2010

Mr. Bonner, India (an emerging market) has zombies too. They are found in its parliament and state legislative assemblies. We call them netas (politicians). They get allowance for attending parliament, health allowance, monthly free unlimited gasoline, monthly free unlimited telephone calls, plush quarters to live in, AC cars to move around and z-category security, apart from a fat salary. All these paid from the taxpayer's money. As if all this was not enough, they recently legislated for a hike to get extra income for themselves. They also have many secretaries and stooges to maintain, who also get benefits. These secretaries and stooges have their own stooges. So, all these secretaries, stooges, stooges of stooges are paid for by the taxpayer. It's a huge number. And, I have not yet counted the government employees in various government bodies and public sector units. We call them babus (beauraucrats). These netas and babus have stooges and stooges have their own stooges. And not to mention the many subsidies, loans from public sector banks and soaps given to farmers, in order to get their votes. This converts hard-working farmers into zombies, because these loans are waived off. So, the farmers are bailed out...they know they will be bailed out. So, even a rich farmer purposely defaults on the loan. Subsidies never reach a poor farmer, as they are pocketed by the middlemen (stooges and stooges of stooges).

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