Economist Walter (John) Williams issued a special report on the evolving hyperinflation that he sees coming into the U.S. as early as 2010. Such a claim may seem incredible to most of us who have never lived in such an environment and have enjoyed the benefits of economic and political stability all our lives. To be sure, we have experienced some uncomfortable times like the deep but short-lived recession of 1981-82 and the double-digit inflation ofthe 1970 Carter Presidency. But I believe Williams makes a very, very strong case for hyperinflation with the dynamics driving it very much like that of theGerman Weimar Republic. Williams shows how it will be absolutelyimpossible for the U.S., as a massive debtor nation, to meet its trillions ofdollars of obligations going forward, given: (a) foreign savers bailing out ofthe U.S. dollar, and (b) the obligations of the U.S. now exceeding even a100% tax rate imposed on Americans!
We would much rather not believe what Williams is telling us. It would bemuch more pleasant to stick our heads in the sand and enjoy the summer atthe beach and next winter to live a luxurious life on the ski slopes or vacationin the Mediterranean or Caribbean. Ignorance is indeed bliss, but bliss for themoment cannot change longer-term realities. And quite frankly, when wespeak of “long-term,” 2010 isn’t far away. Now, if a mere 2+ years seemsmuch too soon for any kind of catastrophic inflation to develop, take a look atthe chart on your left that pictures the hyperinflationary event in Germany inthe 1920s that led to the rise to power of one of the most evil fascist dictatorsin modern history, Adolph Hitler. Note how dramatically and rapidly pricesrose. From a base of 100 in 1921 they rose by more than 22,000% by themiddle of 1923!
Ludwig von Mises has stated that policy makers can continue to inflate the system as long as the population believes inflationary problems will end. Our policy makers (and quite frankly liars) have been distorting our real cost of living for quite some time now and the constant talk about deflationary forces as well as real deflationary forces in process (such as theimplosion in the housing markets) have also served to retard fear of inflation. Those of us who have for years looked at government with suspicious eyes have seen this coming for some time. Our willingness to think outside the box the establishment tries to imprison us in has served us well. As can be seen in the next section, we have benefited very nicelythrough the sectors we have been invested in. Indeed, our Model Portfolio has more than tripled since January 2000 because of our Austrian views of economics, which allowed us to think differently than through the lenses of the Keynesians and monetarists who dominate modern economic thought.
While I have become increasingly confident that we are heading for a major inflationary event, I do not ask that you believe and trust me without doing your own homework. In fact, I highly recommend you subscribe to the work of Walter John Williams. His newsletter, Shadow Government Statistics, is a good starting point. You can subscribe from John’s Web site, which is www.shadowstats.com. I do personally subscribe to John’s work. His charge is reasonable. I think it is under $200 per year or thereabouts. Also, you might want to review an interview I did with John in the July 16, 2007, monthly issue of J Taylor’s Gold & Technology Stocks newsletter. Nearly nine months have passed since we last spoke to John, and unfortunately, his predictions have been right on track. That is not good news, to be sure. But eventually, even worse news will come to those who stick their heads in the sand and ignore the impending economic doom that will most certainly befall a nation that hasbought into the wishful thinking of Keynesian and monetarist economics, both of which suggest we can have our cake and eat it too. Life just isn’t like that and for the first time in a couple of generations, I believe, Americans are about to learn that lesson.
Quotes from John Williams’s Special Hyperinflation Report
Following are some quotes from John Williams’s special report on hyperinflation as published in the April 8 issue of Shadow
* Inflationary Recession Is in Place
* Banking Solvency Crisis Has Opened First Phase of Monetary Inflation
* Hyperinflationary Depression Remains Likely As Early As 2010
The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression. Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, and gross mismanagement.
The U.S. has no way of avoiding a financial Armageddon. Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to meet their obligations. The alternative would be for the U.S. to renege on its existing debt and obligations, a solution for modern sovereign states rarely seen outside of governments overthrown in revolution, and a solution with no happier ending than simply printing the needed money. With the creation of massive amounts of new fiat (not backed by gold) dollars will come the eventual complete collapse of the value of the U.S. dollar andrelated dollar-denominated paper assets.
What lies ahead will be extremely difficult and unhappy times for many. Ralph T. Foster, in his "Fiat Paper Money" (see recommended further reading at the end of this issue), closes his book’s preface with a particularly poignant quote from a 1993 interview of Friedrich Kessler, a law professor at Harvard and University of California Berkeley, who experienced the Weimar Republic hyperinflation: "It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty. You could buy nothing with your paper money."
This Special Report updates and expands upon the three-part Hyperinflation Series that began with the December 2006 SGS Newsletter, exploring: (1) the causes and background of the evolving hyperinflation and great depression; (2) why circumstances will differ from the deflationary Great Depression of the 1930s; (3) implications for politics and the financial markets; (4) considerations for individuals and businesses.
The broad outlook has not changed during the last year. More generally, though, developments in the economy and the financial markets have been in line with projections and have tended to confirm the unfolding disaster. Specifically, the current inflationary recession has gained much broader recognition, while the still-unfolding banking solvency crisis has confirmed the Fed’s and the U.S. government’s willingness to spend whatever money they have to create in order to keep the financial system from imploding. While the dollar has taken a heavy hit — down roughly 20% against key currencies from last year — selling of the U.S. currency still has been far short of the outright dollar dumping that eventually will lead to flight to safety outside of the U.S. dollar. That event is important to the shorter-term timing of the pending hyperinflation.
Regular readers may recognize text from last year’s Series, as well as material from various SGS newsletters, but such is the nature of revisions to prior material. Points that may be repeated from earlier newsletters are done so in sequence to help build the arguments explaining the unfolding crisis. Great thanks are extended to the numerous subscribers who offered ideas, questions and materials that have been incorporated in this report.
Defining the Components of a Hyperinflationary Great DepressionDeflation, Inflation and Hyperinflation.
Inflation generally is defined in terms of a rise in general prices due to an increase inthe amount of money in circulation. The inflation/deflation issues defined and discussed here are as applied to goods and services, not to the pricing of financial assets.
In terms of hyperinflation, there have been a variety of definitions used over time. The circumstance envisioned ahead is not one of double- or triple-digit annual inflation, but more along the lines of seven- to 10-digit inflation seen in other circumstances during the last century. Under such circumstances, the currency in question becomes worthless, as seen inGermany (Weimar Republic) in the early 1920s, in Hungary after World War II and in the dismembered Yugoslavia of the early 1990s.
The historical culprit generally has been the use of fiat currencies — currencies with no asset backing such as gold — and the resulting massive printing of currency that the issuing authority needed to support its system, when it did not have the ability, otherwise, to raise enough money for its perceived needs, through taxes or other means.
Foster (see recommended further reading at the end of this issue) details the history of fiat paper currencies from 11th century Szechwan, China, to date, and their consistent collapses, time-after-time, due to what appears to be the inevitable, irresistible urge of issuing authorities to print too much of a good thing. The United States is no exception, already having obligated itself to liabilities well beyond its ability ever to pay off.
April 17, 2008
Jay TaylorEditor of J Taylor's Gold & Technology Stocks