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The U.S. Dollar is Doomed, High Inflation then Hyper-Inflation

Economics / Inflation Oct 22, 2010 - 04:28 AM GMT

By: Puru_Saxena

Economics

Best Financial Markets Analysis ArticleAusterity be damned, at this rate Mr. Bernanke will go down in the history books as one of the greatest money creators ever to have walked this planet! 

Never mind sky-high deficits and a crushing debt overhang, at its most recent FOMC meeting, the Federal Reserve all but guaranteed another round of quantitative easing.


While the American central bank did not officially expand its quantitative easing program last month, it did reiterate its willingness to institute more aggressive monetary policy measures in order to combat the risks of deflation.  Furthermore, Mr. Bernanke did officially downgrade the Federal Reserve’s outlook for inflation.

The truth is that the US is insolvent and its policymakers will stop at nothing in order to avoid sovereign default.  So, it should come as no surprise that at its latest meeting, the Federal Reserve downplayed the risk of inflation, thereby setting the stage for another round of money creation.

Make no mistake; Mr. Bernanke has already created copious amounts of money. Granted, the Federal Reserve’s previous monetisation was highly secretive, but you can be sure that it did occur.  Allow us to explain:

You will recall that during the depths of the financial crisis, the Federal Reserve expanded its own balance-sheet and bought all sorts of toxic assets from the financial institutions.  By doing so, Mr. Bernanke created money out of thin air and bailed out the major banks.

Thus, the banks were able to dump their garbage assets on to the Federal Reserve and once they received the newly created cash in exchange for these securities, they loaned this money to the US government by purchasing US Treasuries.  In summary, in the previous round of quantitative easing, the Federal Reserve created new money and instead of lending it directly to the US government, it used the banking cartel as its conduit.  Back then, not only did the Federal Reserve create more than a trillion dollars, it also dropped its discount rate to almost zero; thereby allowing banks to borrow money cheaply!  It should be noted that since the banks were able to obtain such inexpensive funding from the Federal Reserve, they had absolutely no qualms about re-investing this capital in US Treasuries.  

At first glance, the Federal Reserve’s stealth monetisation plan seemed flawless.  The banks offloaded their toxic assets on to the Federal Reserve, they made fortunes by investing in US Treasuries and the American government got access to a cheap source of funding.  Magic!

Despite the fact that this financial wizardry was a lifeline for American policymakers and their banking cronies, let there be no doubt that it was an unmitigated disaster for the American public.  Not only did the Federal Reserve nationalise the banks’ losses but more importantly, Mr. Bernanke’s money creation efforts have seriously undermined the viability of the US Dollar.   

It is noteworthy that since bailing out the major banks and orchestrating the stealth monetisation, the Federal Reserve has been busy purchasing US Treasuries.  Furthermore, it is now almost certain that in next month’s FOMC meeting, Mr. Bernanke will unleash yet another round of quantitative easing.  In other words, in order to fund Mr. Obama’s out of control spending, Mr. Bernanke will create even more dollars out of thin air!  Allegedly, this new round of money creation will drive interest-rates lower, thereby helping the US economic recovery.  Or so the story goes.  

Unfortunately, as any serious student of economic history knows, there is no such thing as a free lunch.  By adding trillions of additional dollars to the monetary stock, Mr. Bernanke may succeed in bailing out his friends in high places but he is seriously jeopardising the US Dollar.  In fact, bearing in mind the recent developments, it has become clear to us that the Federal Reserve wants to debase its currency.  In our humble opinion, the US Dollar is a doomed currency and there is a real risk of an abrupt plunge in its value.

If our assessment turns out to be correct and Mr. Bernanke unleashes the second phase of quantitative easing, you can be sure that the US Dollar will slide against most un-manipulated currencies (which are few and far between) and hard assets.  In fact, monetary inflation is the prime reason why we believe that the ongoing bull-market in stocks and commodities will continue for several more months. 

Look.  The US economy is swimming in debt and the total obligations (including social security, Medicare and Medicaid) now come in at around 800% of GDP!  Furthermore, this year alone, Mr. Obama’s administration plans to spend another US$3.5 trillion, meanwhile the US Treasury will raise roughly US$2.2 trillion from issuing new government debt!  Clearly, these numbers are unsustainable and you can bet your bottom dollar that the Federal Reserve will end up buying a large proportion of the newly issued US Treasury securities.  As the American central bank funds more and more of Mr. Obama’s spending by creating new money, it will trash the value of its currency.  In fact, given the growing imbalance between the government’s spending and tax receipts, very high inflation is inevitable and even hyperinflation cannot be ruled out.

For the sake of their financial well being, it is crucial that investors understand that inflation or even hyperinflation is a monetary phenomenon and a strong economy is not a pre-requisite for the debasement of a national currency.  Whatever the reason, if a central bank decides to significantly increase the quantity of money in the system, that currency’s purchasing power will always diminish.  This is how fiat-money regimes have operated since the beginning of time and this era is no different. 

It is interesting to note that throughout recorded history, the worst excesses of inflation occurred only in the 20th century.  Undoubtedly, this was a direct consequence of the adoption of fiat-money. 

Figure 1 highlights all the hyperinflationary episodes in recorded history and as you can see, with the exception of the French Revolution (1789-1796), all of the other disasters occurred in the last century.  In fact, it is an ominous sign that 29 out of the 30 recorded hyperinflations in human history occurred during the 20th century!
   
Figure 1: Hyperinflations in history

Source: Monetary regimes and inflation, Peter Bernholz

Let there be no doubt, a paper money system usually ends in the reckless destruction of money and it is no coincidence that all hyperinflations in history have occurred in the presence of discretionary paper money regimes.  Furthermore, it is important to understand that a political system based on democracy is inherently inflationary and political leaders have been responsible for all major inflations in the past.  Conversely, history has shown that monetary systems binding the hands of political leaders are essential for keeping inflation in check.  If history is any guide, metallic monetary systems have shown the largest resistance to inflation and this is due to the fact that currencies anchored by a tangible asset cannot be inflated ad infinitum.    

It is our conjecture that the current monetary system is absolutely pathetic; a system designed to enslave society.  Unfortunately, the vast majority of humans do not understand the endless inflation agenda and this is why the perpetrators get away with this crime.  Furthermore, let it be known that the Federal Reserve is largely responsible for the incredible inflation we have experienced over the past century. 

Figure 2 plots the cost of living in Britain, France, Switzerland and the US.  As you will note, the cost of living in these nations was relatively stable for over 160 years (1750-1913) but once the Federal Reserve came to power in 1913, everything changed.  Suddenly, the cost of living exploded in these nations, so it should be clear that the Federal Reserve’s covert policy of currency inflation and debasement is solely responsible for this mind numbing inflation.

Figure 2: Cost of living in various nations (1750-1998)

Source: Monetary regimes and inflation, Peter Bernholz
    
Unfortunately, the Federal Reserve and its allies have not finished inflating and over the following years, they will create even more confetti money.  Under this scenario, cash will continue to lose purchasing power and the asset poor middle-class will get even more impoverished.  If our assessment is correct, cash will prove to be a disastrous ‘asset’ over the next decade and once the Federal Reserve’s manipulation ends, fixed income securities will also depreciate in value. 

Bearing in mind our grave concern about high inflation and the very real possibility of hyperinflation, we continue to favour hard assets such as precious metals and energy.  At present, we have allocated roughly half of our clients’ capital to these sectors and it is our belief that this should be an adequate inflation hedge. 

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets.  In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com

Puru Saxena

Website – www.purusaxena.com

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients.  He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Copyright © 2005-2010 Puru Saxena Limited.  All rights reserved.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Rick
22 Oct 10, 10:04
Nuts To Gold & Silver! Purchase TIPS!

Granted, the vast majority of fiat currencies will depreciate in value, and it will be nearly impossible to avoid some period of high inflation.

However, the U.S. dollar will likely survive after this downturn although it will lose a considerable amount of purchasing power in the process. But make no mistake; other fiat currencies will depreciate in tandem. Moreover, as bad as the U.S. dollar is being demonized, most other fiat currencies are in even worst shape.

Consequently, this is why I have been recommending the purchase of inflation-protected government securities such as TIPS which will automatically track the CPI-U index. Securities such as these will prove invaluable in periods of high inflation or hyper inflation.


Shelby Moore
22 Oct 10, 11:40
wrong, wrong, & wrong

Rick,

Your advice is wrong, wrong, and wrong!

1. you didn't explain why you think gold & silver are poor investments. Give specifics. Because afaics, they are outperforming everything (unleveraged, not trading) since 2002.

2. CPI-U is lie and isn't tracking the loss of PPP, but gold and silver are.

3. CPI-U would never keep pace in a hyper-inflation. Besides in hyper-inflation, the value of the bonds go to 0, and that includes those that claim to be indexed to inflation.


Rick
22 Oct 10, 18:26
TIPS & Pharohs

Shelby: Just how many times must I explain why gold & silver are poor investments? Well how are these for "specifics" then?

http://www.chrismartenson.com/forum/historical-gold-chart-adjusted-actual-inflation/33364

http://www.libertyforlife.com/banking/us-roosevelt-gold-theft.htm

http://www.buyandhold.com/bh/en/education/history/2000/hunt_bros.html

http://news.silverseek.com/SilverSeek/1265765715.php

http://www.project-syndicate.org/commentary/feldstein18/English

I can submit still more "specifics" as to why gold and silver investments are absolute duds, but what's the point? I would have thought by now that it should have already been evident to many as to why such investments historically have been habitual "losers".

You can take my advice for what it's worth. Don't try to enter the game with the big players; you'll just get yourself trampled on. In the House of Rothschild, the House always wins.

Now in reference to TIPS, well of course the CPI-U is a "lie", but at least the mighty pharohs are throwing a few crumbs to us peasants. In dealing with these types of people, one just has to learn to play by the rules. If not, then one should stay out of the game altogether, lest they'll surely get trampled under the pharoh's stone.

Furthermore, if it ever should come to pass that U.S. government securities were to become valueless, then it would become a completely different ball game. In such a scenario, everything else would become valueless in short order (including gold and silver).


gAnton
22 Oct 10, 19:32
Bernanke At The Bat

Bernanke is indeed the king of unintended consequences. In the next two years, in the best case our country will be traveling through a dangerous economic mine field. There will be surprises and surprises. But with Bernanke at the Fed helm, I'm not at all sure that we'll make it.

Nothing makes much sense any more. For example, Obama and his accomplices believe that if China would just raise the exchange price of their currency, the US unemployment problem would go away. What unbelievable nonsense! If you use the same algorithms and definitions to calculate the 1932 depression unemployment rate and our current unemployment rate, we have lesser unemployment by very little, and I'm sure that after the coming elections, using the above process our employment rate will be higher than that of the 1932 depression era.

Not only is QE-2 obviously very hazardous, but there are many very dangerous and negative consequences that I haven't heard discussed. For example, the Chinese are a very stoic people, but I don't think that Bernanke can count on their stoicism in regard to QE-2. In a bad dream several nights ago i heard this conversation between to Chinese politicans:

First Chinese politician: Boy, that Bernanke is a brilliant economist. By forcing the US dollar inflation rate up 10%, he has reduced his debt to us by 100 billion dollars, and there's nothing we can do about it.

Second Chinese politician: What do you mean "a brilliant economist"? The man's a crook and a thief. And what do you mean "there's nothing that we can do about it"? We have a trillion dollars of their junk bonds, and with this guy Bernanke running wild, these will soon be worthless. We should immediatly dump these bonds on the world market at a greatly reduced rate while we can still get something for them.

****

And now the pitcher holds the ball

And now he lets it go.

And now the air is shattered by

The force of Bernanke's blow

Somewhat bands are playing

And somewhere people laugh and shout

But there is no job in Mudville

Mighty Bernanke has struck out


kdd
23 Oct 10, 08:13
Fiat is not necessarily the reason

Fiat currency is seen as the culprit. It is not. It is PRIVATELY ISSUED FIAT CURRENCY that is the culprit. If the U.S. Congress would adhere to the Constitution and issue and regulate the money supply, and issue Treasury notes again (Greenbacks) then we wouldn't have national debt. Very simple. State owned banks such as in North Dakota and Australia work excellently. Interest goes back to the treasuries and finances more low interest lending. If we did this on a national scale as was originally intended by the Founders, then we would never have needed the illegal personal income tax. The Federal Reserve Act needs to be repealed. The Federal Reserve needs to be nationalized, because it's as federal as Federal Reserve.


Shelby Moore
23 Oct 10, 10:32
gold & silver story

Rick,

The argument that gold is not a superior hedge against inflation is ludicrous. The proponents of that argument use the peak price of gold in 1980 and the 30 year bond bubble hence, to do the calculation. But the fact is that gold is a multi-generation investment (that is what the Rothschild family understands). You can buy a good men's suit with one ounce of gold, just as your could in 1900. Whereas, the dollar has lost 98% of its value since 1900.

The FDR confiscation of gold was ignored. Less than 1% of the people who had gold lost it. Not even a single case was prosecuted by the government. The government dare not try to actually go into the homes of people to steal their gold, they will lose in massive rebellion. However, you are correct that the government will tax the gold & silver, and they will create a new bond bubble after the current dollar dies. And to play in that new fiat, you will have to convert your gold & silver to that new fiat, and the government will tax you:

http://www.marketoracle.co.uk/Article20327.html

But some of us never want to sell our gold and silver. It is permanent holding. Thus it is the best investment of all time. The government can never get it nor even know you have it. Those people who are coveting fiat things, well yes you people will get what you deserve (slavery to your government). YOU DESERVE THAT RICK.

Rick are you man or woman? Non-homosexual men don't bend over, nor open their legs.

==========Silver==========

http://www.chrismartenson.com/forum/historical-gold-chart-adjusted-actual-inflation/33364

Silver declined in price when the Americas were mechanically mined. Silver mainly occurs in shallow, near surface deposits (unlike gold which typically increases in grade at depth), thus silver was highly destabilized by mechanization. This provided the political means to de-monetize silver, which was complete by 1971.

Now much of the silver near surface has been depleted, as well the surplus supply from de-monetization has been deleted:

http://www.coolpage.com/commentary/economic/shelby/Silver%20Up%20To%205x%20More%20Rare%20Than%20Gold.html

And silver is fully de-monetized, meaning the monetary demand is a fraction of what it was throughout human history. And yet the human population has exploded to 7 billion, to double again in 50 years or less.

You are looking at the 2002 bottom of the several hundred year decline in the silver price. It is precisely at this time that everyone will be sure that silver is the worst investment of all time, and it is precisely the time when it is the best investment of all time. The mass delusion of crowds and thus investing works that way.


Shelby Moore
23 Oct 10, 11:12
1998 ends 309 year public wave

Rick,

Sorry for the double posting, but just read something very important.

The reason silver declined is because it is the money of the people, i.e. it goes up during a 309 year private wave, and it declines in the recently ended 309 year public wave:

http://www.martinarmstrong.org/files/Nice%20Try%20but%20No%20Cigar%2010-9-2010.pdf#page8

(goto to page 8 of the PDF, numbered 6 on the page)


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