MORE ON THE DEFLATIONARY EFFECTS OF HIGHER OIL PRICES…
There’s been a lot of good commentary in the last 24 hours regarding the deflationary impact of higher oil prices. Much of this discussion has been based around its impacts in Japan, however, it is applicable to the USA as well. In a piece this morning FT Alphaville commentary from Macquarie and JP Morgan regarding this effect:
As Macquarie Securities noted:
“We disagree with the view that deflation means Japan is the one country to benefit from higher oil prices. In the previous commodity boom, profits peaked in 1Q07 and domestic demand in 2Q07 as higher commodity prices pushed the economy towards recession well before the Lehman’s collapse.”
Masamichi Adachi, economist at JPMorgan in Tokyo, reinforced the point:
“Some commentators argue that the rise of commodity prices is welcome in Japan, which is suffering prolonged deflation. We disagree with this view. While the rise in food and energy prices may increase households’ inflation expectations, it does not mean that they can expect higher wages in the future. Actually, in a deflationary environment with considerable slack, the opposite will likely happen as the profit squeeze will weigh on wages, further restraining labor income and consumption. The deterioration in the terms of trade—resulting from a rise in import prices and a fall in (or flat) export prices—may be the drag on domestic demand, which is still sluggish and fragile.”
That’s right. For a nation suffering a balance sheet recession the likelihood is that higher oil costs will serve only as a tax. This supply shock results in depressing aggregate demand and furthering the likelihood of deflationary pressures. Paul Krugman elaborated on this:
“So, does a rise in food and energy prices do anything to alleviate these (deflationary) problems? No. In fact, it makes them worse, by reducing purchasing power. So while the commodity surge may temporarily lead to rising headline prices in Japan, the underlying deflation problem won’t be affected at all.”
That’s exactly right. At the end of the day rising oil prices will only crunch consumer balance sheets further which increases the likelihood of recession. And for a nation with too much debt and not enough spending power that means producers will ultimately have trouble passing along any costs as end demand remains weak. This might not lead to outright deflation, but it certainly won’t result in hyperinflation.
Oil stocks and T bonds at the same time? Who knew! ?
The Ben Bernank is going to be in trouble real soon now.
So what will we call this? Rising oil prices and lower home prices.
Stagdeflation?
Screwflation?
Bernankflation?
I vote for “Bernakflation”! lol
I second that.
Inflation is going to be huge, just like in the 70 – 80ies and the sad part is that there in no Volker on the horizon.
If this stagflationary phase we are currently experiencing lasts for more than another six months, I envision the banks having another potential problem to deal with. That would be a widespread “deposit run” on all of them, but especially the TBTF mega-banks that pay the absolute lowest rates on deposits.
It will finally sink in (probably when gasoline hits $4.00/gallon) that consumer prices for essentials are rising at close to a double-digit annual pace and Bernanke and the Fed have absolutely no intention of abandoning ZIRP. At that point people will realize that it is absolutely nuts to have your money in a bank account that yields little more than zero.
IMHO that is why the Fed has crammed the banks’ reserve accounts with all that base money. It is highly likely that their deposit bases will evaporate in a ZIRP/high inflation environment. Those reserves are sitting there to act as replacement funding when that eventually happens.
Excess reserves are staying put because they’re already accounted for. Those reserves were swapped into existence to ensure that banks retained capital adequacy during the panic of 2008-2009, in reverse, the Fed took on ABS.
Under consideration right now is a (good) plan to write down principal on existing mortgages to adjust it to reality, mark to market if you will. In so doing, the loss will be born by the loan originators which will eat into reserves. That’s why they’re sitting in excess.
This fits in nicely with Basel III compliance.
Sorry but I don’t think we are going to have inflation like the 70′s,
or at least the signs of it are not on the horizon. prag cap has documented this
There is no wage growth.
Banks are not lending.
Oil and Food prices will go up and your home will be worth less.
Those two are approx 10-15% of the total costs for the average consumer but the average consumer is not making more so he’s gonna be squeezed and have to buy of something else.
The Fed is trying to engineer a releveraging cycle but its not happening.
Forget oil, what about debt service as a drag on GDP. Here’s my question from earlier posts and I think it needs to be addressed. thx
Thanks TPC, I like the formula. My question is a bit different, however, which is when do deficits threaten the currency?
In other words, when does the debt service become too great. It’s great to run $1.5T deficits, but what happens when you are buying 75% of the debt issue because anyone with a calculator and a brain can understand there is no realistic chance of the economy paying back such a huge tab?
That’s my real concern and something that needs to be addressed.
You’re making the mistake of comparing the sort of debt the US Govt has to the sort of debt the Greek Govt has. These are apples and oranges. While there is every chance that Greece will default, there is little chance that the US will due to the fact that Greece can’t create euros while the US can create dollars.
This triggers discussion of inflation, sure. I’m just pointing out that there won’t be a US default.
On the issue of debt. Many people worry about it more than they need to. At this moment, the Fed is the biggest holder of US debt and this particular slice of debt is irrelevant for several reasons:
1: Almost all interest paid on that debt is given straight back to Treasury by the Fed (minus operational expenses)
2: The Fed & Treasury are inseparable, they are the same beast now and debt to yourself isn’t debt. While the money supply needs to be inflated, there is no intention to pay that debt back, nor is there any intention to collect.
3: There is 0% chance that the Fed will become a hostile creditor.
4: Expanded vertical money through Fed OMO in bond markets (via primary dealers) can be drained from the economy through austerity measures. This can be supported by reducing the size of the Fed’s bond roll, but isn’t strictly necessary.
Onto deficit spending. Don’t worry about it. This is how the Fed/Treasury prevent deflation when people stop borrowing. It’s funded by fresh vertical money, not from repatriation of Eurodollars and if things ever start to look inflationary (such as a recovery of the money multiplier) then there are myriad channels to soak it all back up.
People understand that a personal financial deficit spells trouble, so is a local government and state government deficit. But a Federal deficit is not.
No offense, but this is sheer lunacy and will all end in tears. This must be corrected immediately and I expect TPC to step in here and provide some sanity because I think many are taking MMT way too far.
Printing dollars to pay back debt is DEFAULT. If that is your only out YOU HAVE ALREADY DEFAULTED, no matter what you call it.
In the short term, MMT is fine and so is the deficit spending. But BALANCE SHEETS MATTER…
Anyone who tells you otherwise is a fool, liar, or perhaps insane (or an economist…)
It’s hard to quantify Prescient. There are multiple ways in which govt spending can negatively impact the economy. But there is no such thing as govt spending creating default risk. It might result in hyperinflation, but not default. So, the question is – what level of spending will cause hyperinflation and/or malinvestment and adverse economic impacts.
I would argue that the govt has not necessarily spent too much, but it has been poorly allocated. So, we are getting a mix of malinvestment modest recovery and low inflation….Is it too much? No. Is it poorly allocated? Yes.
Ok, TPC, but are you accounting for unfunded, future liabilities? Even the biggest economy in the world surely has a numerical constraints as to how much debt we can take on.
But, in my view, hyperinflation is the same thing as default. Two sides, same coin.
I fear the amount of ACTUAL debt, or at least promises to pay with paper, is so much that we may be already near that point…
That is what I seek to quantify.
Hyperinflation and a complete default are somewhat similar, but I’d argue that hyperinflation is much more harmful and poses a greater threat to national security. I don’t believe, however, that the US is at any risk of either hyperinflation or sovereign default.
Hyperinflation would require a hostile dump of the US dollar as a trading currency in a co-ordinated manner by the majority of the worlds’ power players. I see no significant probability of that. Long term, I don’t believe the USD will remain, but its journey to the exit will most likely play out by a slow transition to SDRs and a re-weighting of the USD in the SDR basket.
Default, as previously explained, isn’t an option.
I’ll add to what Cullen stated by saying that what’s really going on here is the US Govt stepping in to take up economic activity that has been abandoned by a dying private sector (reminiscent of Japan). The private sector is dying for reasons that need no explanation, a credit crisis (in large part attributable to Fed policy).
This replacement is a good and necessary thing. Without it, the US economy would sink into debt-deflation and we’d have a repeat of the Great Depression. The problem, as Cullen points out, is that when the government tries to emulate the private sector, it is NEVER going to do a good job of it.
The key factor is “distribution”. Ensuring that capital flows to where capital is needed and this is best accomplished by a pull rather than push approach. Capital pull is achieved via the private sector: I have an idea, I raise capital or draw credit, my idea flies. Millions of minds driving this with a good source of funding (sound financial system), leads to solid economic growth.
In contrast, a push approach meaning a central authority (government) pushing money where it thinks that money should go means far less minds engaged in the process. This system is susceptible to corruption and fails to allocate resources and money where they are most needed. My wife lived under the USSR so I get regular insights into just how ridiculous distribution / allocation was under a highly centralized regime.
In summary. Yes, the greater role being played by the government leads to a poor outcome, but that outcome is MUCH better than the government doing nothing at all. The probability of this leading to misallocation is high, but of leading to catastrophic inflation or default is very low. The greatest threat is that the government grows fond of its new role and resists relinquishment of power once the private sector shows good signs of recovery; this is something that citizens must watch for.
This post by Mediocritas receives an A+
Well said, Prescient. Kyle Bass called this scheme “alchemy masquerading”. Really hit the head of nail.
You really should think about what you just said…
“BALANCE SHEETS MATTER”
Yes they do! And MMT is all about balance sheets and the real productive capability of the economy. If you look at all of the balance sheets in the nation including the government’s you’ll find one important fact. 100% of all savings must reside somewhere on someone elses balance sheet as a liability.
Do you really think it is wise to wipe out governments debt? It would also mean you’d have to wipe out all of the savings of the private sector!
I’d personally prefer to keep the government indebt for the next 200 years just like the last 200 years. As to the size of the annual deficit, it needs to be as large as required to pay for the private sectors preefered savings rate (and our net exports). Any smaller and the economy will shrink; any larger and we’ll get inflation.
As long as Bernanke keeps printing, commodities will keep rising. I use silver as my investment vehicle to hedge against Bernankeflation. Dollars are not what you want to be in, that’s for sure.
I would like to throw out a concern of mine to see if anyone else feels this way.
I am an admittted economics ignoramus. I have been following this blog and its links for many months, now, and have been learning much.
It seems, however, that the more I learn of our monetary system, the the less faith I seem to have in its (and our country’s) future? Is this just me, or has anyone else had these feelings?
[Example: By continuing to spend, we risk inflation. But since inflation doesn't seem to be appearing anywhere in the U.S. (outside of food and gas, which is summarily dismissed by anybody who has a modicum of money) we've increased the fed's balance sheet to prevent deflation. But where have the funds injected into the balance sheet gone? If its gone to paying off debt (deleveraging), then the government's debt increases. But that's OK, because we'll just increase the deficit spending, risking inflation, which doesn't show up in the U.S. except...... Complex? I'm confused]
That should read “…gone to paying off debt in the private sector…”
If you’re looking for the money, it never moved. Most of it is still sitting with the Federal Reserve in the accounts of member banks as “excess reserves”. The whole point of QE1 was to swap assets off the books of member banks that were eating into their capital adequacy.
Inflation is only a serious threat when those excess reserves are engaged via the money multiplier, leading to a rapid expansion of what MMT refers to as horizontal money, (but I prefer to refer to as credit).
So far there is little sign of this happening and it’s staying that way for 3 primary reasons:
#1: The Fed is paying interest on those excess reserves. While the economy continues to stink, banks perceive it as more attractive to earn interest than lend.
#2: The private sector has a reduced appetite for credit (loss of confidence + loss of ABILITY to borrow).
#3: A theory of mine: those reserves are already spoken for. The Fed/Treasury is going to announce a policy of “capital writedown”, as a way to address the housing crisis. The writedown will consume those excess reserves.
In summary, rumors of imminent hyperinflation are greatly exaggerated.
*correction: “principal writedown”, not “capital writedown”. Not my day today…
http://www.zerohedge.com/article/eric-sprott-there-no-more-silver-left
Good stuff. If oil prices constitute a large cost for your average emerging market citizen, then significant rises could prove profoundly deflationary for the west.
If oil prices rise, then thats going to reduce the real rate of return on deposits in emerging markets; that is, the interest on your money isn’t going to keep up with price rises. That is like pulling the rug out from underneath emerging market banks, who are themselves the last line of support for developed nations.
We – in the west – live under the burden of central planning in the monetary sphere. If we cannot trade cash for demand deposits at market rates we seek refuge in the monetary markets abroad. These symptoms of high oil prices, high food prices etc. all have the tendency of ruining the monetary markets abroad. The implications could be a rushed repatriation of western capital. However, that repatriation would occur at a time when western deposits are grossly overvalued with respect to western central bank notes. All of this – to me – seems to point toward a ‘scarcity’ of money.
The logic used by people like Mediocritas above:
1. The U.S. can always print money rather than default
2. Printing money will not lead to hyperinflation because there is an output gap
3. Therefore, large deficits can be monetized as longs as growth is slow and the output gap persists
What’s the problem with this logic? For one thing, the “rinse, repeat” aspect of it means deficits can be permanent, and debt higher, as long as the economy stagnates. In other words, “The U.S. can continue to service higher and higher debt as long as incomes do not grow much.”
Sound wrong? Of course. There is ceiling. At some point, the expectation of future deficits monetized by the central bank will un-anchor inflation expectations regardless of the output gap. The logic above virtually guarantees, in the absence of robust growth, that the Treasury and Fed persist until they “discover” that ceiling, or “trigger point”.
Yes, the oil price spike is deflationary, which is why QE3 will come, and QE4,5,6…For every attempt to inflate will cause deflationary commodity price spikes, leading to more attempts to inflate, and more fiscal stimulus. How does it end? Either the engine of self-sustaining growth ignites, or you have high and volatile inflation. So far, signs of the former are ebbing, so…
The author lacks any understanding of hyperinflation. It is implied that since producers have no pricing power there’s no way you can have hyperinflation. Hyperinflation is not the opposite of defaltion, it is the total lose of confidence in a currency as a medium of exchange. That is what will eventually happen to the U.S. dollar. It won’t be that the U.S. dollar buys less, the problem is that it won’t buy anything.
I very much understand what hyperinflation is. What you’re saying is that Americans will no longer want to buy the goods that US corporations are required to transact in. This implies a collapse in productivity or printing WELL in excess of productive capacity. Is that happening? Are you throwing your dollars out? Are you not using them? Are you giving them away? Is your local store not accepting them? No. Not even close. You’re just being an alarmist.
Joe, if you’re going to suggest hyperinflation as a possibility for the USA then you need to describe the scenarios under which it is likely to happen. I present the two most common sources of hyperinflation and ask you to outline how they may happen in the USA.
The primary source of hyperinflation is a political (not monetary) event. Hyperinflation occurs most commonly when extreme political events destroy all confidence in the tradability of a nations’ markets, such as when a dictator takes power, launches into a tirade against the “evil West”, seizes control of foreign assets, nationalizes industry, replaces sound management with inexperienced yes men and so forth. Such isolationist policy directly destroys trade, removing any desire to hold the nation’s currency overseas. The ensuing dump, accompanied by speculative short selling, initiates hyperinflation.
The secondary source of hyperinflation follows from the first. When a nation has engaged in (or been forced into) isolationism, trade has collapsed and the economy is in tatters, lack of economic activity combined with what remains being conducted via Black Markets means that the government loses the ability to fund its activities via taxation. Attempts to intimidate citizens into handing over wealth, or just steal it outright lead to diminishing returns. Eventually, the government discovers that deliberately printing vast amounts of money is equivalent to an unavoidable taxation of the populace, so it does so in order to meet military expenses and debts. (Ultimately this too fails, as the people create for themselves an alternative currency, for example, in Zimbabwe, trading with US dollars).
So if you’re going to suggest hyperinflation for the USA then you need to explain how either (or both) of the above scenarios can occur in the USA and make it PLAUSIBLE.
The US is no Yugoslavia or Zimbabwe. Obama is no Milosevic or Mugabe.
None of the hyperinflation sources you describe were present during Weimar period, yet hyperinflation did happen. How do you explain that?
None of the sources for hyperinflation that existed in Weimar exist in the USA.
Casanova, yes they were.
The German economy was in ruins following WW1 and was being force to make impossible reparations, not just in cash, but in coal. The ability for the German economy to recover was directly prevented by the Treaty of Versailles creating a situation where the government could not raise sufficient funds via taxation.
Condition 2 was satisfied. Germany started printing.
Mediocritas,
I have a scenario under which hyperinflation is a risk (whether or not it happens depends on a number of factors).
Imagine the country grows at around only 2% even with massive stimulus. Unemployment remains at 9%. Fiscal deficits persistently overshoot projections. The Fed feels forced to maintain and even continually increase QE. Markets begin to discount permanent Fed financing of chronically large budget deficits. Given the “out year” projections, the expectations for Fed financing are non-linear — they explode in a decade or so.
Inflation expectations are based on discounting the future. In the scenario above, inflation will eventually result. Markets, seeing that eventuality, begin to hedge, and hedging brings inflation forward (for example, as the price of farmland rises, so does the difficulty of expanding crop acreage). This is, again, a non-linear process: it starts out shallow and builds, with hedging begetting more hedging, more “forward-buying”. Inflation rises slowly and then accelerates, and by that time, the RISK of hyperinflation materialized.
What does the Fed do if that risk starts to be priced in to expectations in the scenario above? Any signal of tightening would arguably crash an economy so addicted to, and certain of, persistent stimulus. With unemployment at 9%, tightening would bring on a huge political backlash. In fact, MMT proponents would be the first to argue against it!
A manacled Fed in the face of accelerating inflation psychology is a recipe for hyperinflation risk. In the end, whether or not it happens depends on the polity’s favorite “poison” — austerity (and double-digit unemployment) versus high and volatile inflation.
The above basically describes two decades worth of experience in Latin American countries.
Hi Anon1,
First up, we’re in agreement that the term “hyperinflation” is overused by people who confuse it with high inflation. I define hyperinflation as an extended period in which the rate of inflation increases at an exponential rate. In other words, a positive second derivative. Even if inflation is very high, it’s not hyperinflation if it’s steady. I add another component to the definition to state that a hyperinflation event is not recoverable without radical action (eg, new currency, destruction of existing currency, etc).
I’m wary of comparing North America to South America as the latter walks closer to the line that denotes the start of hyperinflation (military juntas, insane monetary policy, militant unionism, etc).
Firstly, it’s possible for a nation to experience a severe economic contraction and experience high inflation without any expansion of the net money supply, provided the money supply contracts more slowly than the erosion of the economy. However, for this alone to cause hyperinflation, the contraction would have to be VERY extreme. Eg: 50% of the population dies from a virus. If external factors come into play, such as repatriation of Eurodollars, then it would require that the nation be a great trading nation to have placed sufficient money overseas to trigger hyperinflation in the first place. This would require extreme events in the nation to cause capital flight. I can’t see this occurring in the USA soon.
The only scenario under which I can see hyperinflation in the USA is if the world spontaneously and, in a hostile manner, dumps the USD as a trading currency. While I expect the USD to be replaced, I do NOT expect it to be a shock. Replacement will occur in a slow and controlled manner.
So I’m assuming that US political instability is not included in the scenario you present.
So what you are describing, the *perception* of high future inflation (whether based on reality or not), leads to what I call a “hoarding dilemma”: currency volatility that erodes trade and hence economic volatility. Over the long term, the hoarding dilemma is self-regulating (buffering) so while there may be periods of rapid deflation or inflation, simply doing nothing at all will cause the system to right itself eventually without requiring a hyperinflationary collapse.
The caveat is, of course, that monetary authorities like to meddle with things in an attempt to reduce the amplitude of economic oscillations and while this may be well intentioned, if done poorly it can make the oscillations worse, resulting in social unrest that triggers hyperinflation.
But no way to I think the Fed will be that incompetent so, again, I’m assuming we don’t get that in the USA in your scenario.
To explain how the hoarding dilemma self-corrects I have to start with the qualities of money. Trade is the engine of economic activity. No trade, no economy. Given that direct barter seldom satisfies the needs of both trading parties, spontaneous appearance of currency in all cultures is widely observed. It doesn’t matter what the currency is (shells, rocks, printed paper), provided it meets certain criteria, then it enables trades that would otherwise stall.
So an “optimal” currency is one that least inhibits the conductance of trade. The most important factors here are that the currency be physically resistant to decay but that, in an expanding economy, its VALUE experience exponential decay at a low and steady rate (~4% seems to be optimal), which requires “controlled counterfeiting” .
A currency that holds value or gains value creates the first hoarding dilemma as traders prefer to avoid using cash to settle transactions (as it gains value), or worse, they stop trading altogether as the profitability of holding cash exceed the profits of trade. In the short term, traders must lower their prices relative to cash, causing a feedback loop that manifests as deflation. Eventually, trade is eroded as cash is hoarded, leading to economic contraction. A diminishing return applies to the appreciation of money being hoarded and at some point it starts to meet the reality of a contracted economy with diminished supply. The result is inflation, accompanying an economic recovery as rising prices promote activity. The extent of inflation depends on the rapidity with which cash hoarders panic. As the economy re-activates, inflation may run high, but it is not likely to be hyperinflationary. The system corrects itself.
On the other side of the coin, a currency that loses value too rapidly creates a hoarding dilemma in which cash-equivalents are hoarded and cash is shunned. Again, trade volumes are reduced as speculators withhold supply in the hope of attaining higher prices. As money loses value, fewer people want to hold it, forcing prices to rise as relatively more money of lower desirability chases supply that is retreating into stashes and hoards throughout the system. Like above, trade erodes and the economy contracts. Eventually, hoarded assets must meet the reality of a contracted economy with reduced demand, leading to falling prices that help to kick-start the economy again.
With the rampant speculation in commodities right now, we are currently in a “hoarding dilemma”, the latter of the two cases above. Trade is suffering, the economy is threatened and hoarding is making it worse. The resultant inflation (of commodity prices at least) does not lead to hyperinflation as it will self-correct (as it did in 2008) when the reality of surplus supply (stashes) meets diminished demand. Until recently, there were no serious commodity shortages to justify inflated prices, merely speculation. Unfortunately, artificially boosted food prices led to political unrest in the Middle East, which created a true shortage of oil, hastening economic contraction.
Although the Fed is engaging in activities that appear to be expansionary, it must be admitted that these activities are being largely offset by contraction of credit from the private sector. The broadest measure of money supply (M3) which includes Eurodollar holdings, is still much lower than it was in 2007 and not soaring by any means. Pricing reflects perception of the relative state of economic activity to money supply and that perception is being driven by herd mentality, not reality. We are therefore in a “hoarding dilemma” (non-cash), leading to concentrated inflation (not general inflation) and the best way for the Fed to deal with it is to do nothing at all or tighten slightly.
Better yet, people would stop blaming the Fed and instead point the finger at the true culprit: excessive expansion of the Chinese money supply pushing Chinese speculators into blowing bubbles (now in commodities).
These have been a great series of comments Mediocritas. Thanks for that.
You’re welcome as always.
BTW, “hypeinflation” is a straw man — as you point out, war is a virtual precondition for people resorting to carting around wheelbarrows of cash. I wish people would stop using it, because, like any straw man argument, it misses the point:
A number of Latin economies suffered very high and variable inflation for years and years without anyone spotting any wheelbarrows. Check the stats on how the middle class fared versus the rich during years of chronic inflation and slow growth, and you will see what the very real threat is to our economy.
One more note: if “hyperinflation” is a straw man, why do I bring it up in the Latin context? Because it was the risk of a hyper-inflationary spiral that forced governments there to periodically adopt painful austerity: middle class-killing maxi-devals followed by a “new” currency and temporarily high real interest rates. After those austerity measures passed, the cycle would begin all over again. It was the threat of hyperinflation that damaged these economies, not its presence.
Well…..it is as obvious as 2007. I mean what is unclear about this episode of hot money chasing speculative commodities? Is demand driving oil up by 20.00 in less than a month???? Please! What about corn, wheat, soya beans, etc. Demand has spiked that much to justify 100% increases right? Sure…..why doesn’t the FED keep giving these banks all this free money to buy real tangible goods to hedge against their falling currency values. After all we might just hit $200.00 a barrel for oil. Howvever it sure as hell won’t be because of demand. Think you can’t have inflation in a depressionary contraction? Think again.
This will end much like it did in 2007 and likely very soon. When you have all buyers and no Sellers this is what happens. Price collapses. None of this is necessary and it is being provided by the FED. When you have bank gains as the rest of the underdeveloped world starves this is pure sickness.
If you think printing 2 trillion dollars will not lead to higher , or even hyperinflation you are seriously wrong.
I know, it’s laughable… but I can guarantee that the people of this once proud European country weren’t laughing one bit, especially those living on a fixed income.
Of course, at this point, the country completely fell apart. As Dr. Thayer Watkins wrote:
“The social structure began to collapse. Thieves robbed hospitals and clinics of scarce pharmaceuticals and then sold them in front of the same places they robbed. The railway workers went on strike and closed down the country’s rail system.”
At this point, businesses and citizens across the country basically refused to take the local currency.
Instead, everyone started dealing in German Marks. Keep in mind, the daily rate of inflation was nearly 100%.
Can you imagine the panic in a society when the price of just about everything doubles… every single day? It was absolute pandemonium, and the economy basically came to a grinding halt. It was like living in a war zone. Truckers stopped delivering goods. Stores, restaurants, and gas stations all shut down.
In fact, the only way to get gas was to buy it on the side of the road, from someone selling it out of a plastic can.
Steve Hanke, an Economics professor at Johns Hopkins, wrote that:
“People couldn’t afford to buy food in the free market – they kept from starving by either waiting in long lines at state stores for irregularly supplied rations of low-quality staples, or by relying on relatives who lived in the countryside.
For long periods, all [the] gas stations were closed, with the exception of one station that catered to foreigners and embassy personnel. People also spent an inordinate amount of time at the foreign-exchange black markets, where they traded huge piles of near-worthless money for a single German mark or US dollar note.”
The number of operating busses dropped by 60%… and busses were so crowded that drivers couldn’t even collect fares. Government ordered blackouts left people without heat and electricity for long periods of time.
In another ridiculous government move, they actually made it illegal to NOT accept a personal check.
Imagine… you could write a check… and in the several days that it typically takes for a check to clear, inflation would wipe out almost all of the cost of covering your check.
Of course, as is typical, the government took none of the blame. As Dr. Thayer Watkins reported, the government’s official position was that the hyperinflation occurred “because of the unjustly implemented sanctions against the people and state.”
Again… I know what you are thinking… “just because it happened in Europe doesn’t it mean it can happen here, right”?
Well guess what…
The same thing that happened in this European country – Yugoslavia – also just happened in Iceland and Greece, but on a less dramatic scale. Of course, the only reason the situations in Greece and Iceland weren’t worse is because of giant foreign bailouts. Yes… that’s right… more debt to solve the problem of already existing, insurmountable debts.
It’s all going to come to a head soon. Much sooner than most people think.
Remember too that in roughly the past 100 years this type of debt crisis has reared its ugly head in Germany, Russia, Austria, Poland, Argentina, Brazil, Chile, Poland, the Ukraine, Japan, and China.
And I believe it will soon happen right here in the United States.
Don’t believe me?
Well, the truth is that it’s already happening at the local and state levels. Take a look…
According to the Center on Budget and Policy Priorities, a Washington, D.C.-based think-tank, at least 46 states face huge budget shortfalls for 2011, on top of the deficits they still haven’t completely figured out for 2010.
The center reports that the total state budget shortfall could reach $160 billion.
And although many states got federal help over the past year, that aid is now gone.
So what are these desperate governments trying to do?
You probably won’t believe their proposals…
* SELL EVERYTHING: The state of Arizona, for example, announced earlier this year that it is selling $735 million worth of government-owned buildings, but will still occupy them by paying a 20-year lease. The government is selling the legislative buildings, the House and Senate, the State Capitol Executive Tower, the state fairgrounds, even prisons.
* RELEASE PRISONERS: In California, the state has taken the radical step of opening its prison doors and releasing thousands of inmates. About 11% of the state budget ($8 billion) goes to the penal system (more than they spend on higher education).
So California is slashing the number of inmates by 6,500 next year. In other words, they are cutting loose about 4% of the prison population.
Incredibly, other states, including New York, may soon do the same thing.
* LIFE INSURANCE: In Georgia, the government is proposing taking out “dead peasant” policies on state employees. When these folks die, the money won’t go to the dead person’s family… but to the state coffers, to help pay for more programs, insurance, and pension liabilities!
It’s simply incredible, isn’t it?
State and municipal governments are so broke, and so desperate, that they are taking unprecedented steps to at least temporarily avoid bankruptcy. Nearly every state in the union is talking about legalizing some form of gambling, to boost tax revenue. California still wants to legalize marijuana, even though it was defeated in the recent election.
Of course, none of these ridiculous steps will work on the long run.
And the truly amazing thing is that the U.S. Federal government is in even worse shape than the local governments! The only reason we haven’t seen the full brunt of this crisis yet on the federal level is because we’ve just continued to pile on more and more debt.
The states can’t print money… but the Federal government can (at least for now). And for the moment, this is all that is preventing a currency collapse of unprecedented proportions.
And this is the important point: What most people don’t realize is that the U.S. government can only continue printing dollars… as long as the U.S. dollar remains the world’s reserve currency.
In other words, this is all going to fall apart much sooner than people think. In fact, it’s already happening…
The first steps are already well underway. It is happening right now… before our very eyes.
I can’t stress this enough: You need to act now in order to protect your assets, and grow your savings in the next few years. In the next few minutes, I’m going to show you exactly how I’m protecting my own money, and what I recommend doing with your own.
But first, let me show you what exactly is going on right now…
“America… must be very worried”
Like I said, most Americans don’t believe the U.S. dollar could ever lose its spot as the world’s reserve currency.
But I am here to tell you… this process is already well underway.
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