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Title: Hyperinflation Special Report (2011) [Reprint- Reality for Brain-Dead Keynesian Leftist Goobers- go56, DwarF, Gobsheit, LucysStupidmom, et. al.]]
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URL Source: http://www.shadowstats.com/article/ ... rinflation-special-report-2011
Published: Jun 2, 2011
Author: John Williams, Shadowstats.com
Post Date: 2011-06-02 16:44:08 by Capitalist Eric
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HYPERINFLATION SPECIAL REPORT (2011) SPECIAL COMMENTARY NUMBER 357 March 15, 2011 __________ United States Nears Hyperinflationary Great Depression Federal Reserve and Government Have Exploded the U.S. Fiscal Crisis, Shattered Global Confidence in the U.S. Dollar but Not Resolved Ongoing Economic and Systemic-Solvency Crises High Risk of Ultimate Dollar Disaster Beginning to Unfold in Months Ahead 2014 Remains the Outside Timing for Same Contracting Money Supply Can Be Inflationary When Real Economy Contracts Even Faster Major Economic Series Suggest Formal Depression in Place __________ Hyperinflation Special Report (2011) is the fourth in a series of related writings going back to 2006. It updates and replaces the Hyperinflation Special Report (2010 Update) of December 2, 2009, which preceded: the Fed’s formal monetization of U.S. Treasury debt aimed at debasing the U.S. dollar; the sharpest post-World War II annual decline in broad money growth; the pronouncement of an official end to the 2007 recession despite no meaningful recovery; passage of the Administration’s health insurance legislation; and the mid-term election. Nonetheless, the outlook has changed little. With the passage of 15 months since the last report (updated circumstances have been covered regularly in weekly Commentaries), events just have moved this pending ultimate financial crisis into much closer time proximity. In turn, the 2010 report updated and replaced the Hyperinflation Special Report version of April 8, 2008, which was published post-Bear Stearns, but pre-Lehman, pre-TARP, pre-recession recognition and pre-2008 presidential election. The April 2008 report updated and expanded upon the three-part Hyperinflation Series that began with the December 2006 SGS Newsletter, which predated public recognition of the 2007 economic and systemic-solvency crises. This missive includes new material in addition to much of the same text that was in the 2010 edition, with revisions and updates reflecting the still-unfolding economic and systemic-solvency crises. It expands upon some areas in previous reports; and answers to questions and issues raised by subscribers have been incorporated into the text. Subscriber questions not directly answered here will be addressed in personal correspondence. __________ Section 1—Overview Great Collapse Nears The U.S. economic and systemic-solvency crises of the last four years only have been precursors to the coming Great Collapse: a hyperinflationary great depression. Such will encompass a complete collapse in the purchasing power of the U.S. dollar; a collapse in the normal stream of U.S. commercial and economic activity; a collapse in the U.S. financial system as we know it; and a likely realignment of the U.S. political environment. Outside timing on the hyperinflation remains 2014, but there is strong risk of the currency catastrophe beginning to unfold in the months ahead. It may be starting to unfold as we go to press in March 2011, but moving into a full blown hyperinflation could take months to a year, beyond the onset, depending on the developing global view of the dollar and reactions of the U.S. government and the Federal Reserve. Prerequisites to the crisis unfolding include: the Federal Reserve moving to monetize U.S. Treasury debt; the U.S. dollar losing its traditional safe-haven status; the U.S. dollar losing its reserve status; the federal budget deficit and Treasury funding needs spiraling out of control. The Fed moved to monetize Treasury debt in November 2010. A much-diminished U.S. dollar safe-haven status has become evident in early March 2011, along with serious calls for a new global reserve currency. The economy is not in recovery and should display significant new weakness in the months ahead, with severely expansive implications for the federal deficit, Treasury funding needs and requisite Fed monetization of debt. As the advance squalls from this great financial tempest come ashore, the government could be expected to launch a variety of efforts at forestalling the hyperinflation’s landfall, but such efforts will buy little time and ultimately will fail in preventing the dollar’s collapse. The timing of the onset of full blown hyperinflation likely will be coincident with a broad global rejection/repudiation of the U.S. dollar. With no viable or politically-practical way of balancing U.S. fiscal conditions and avoiding this financial economic Armageddon, the best that individuals can do at this point is to protect themselves, both as to meeting short-range survival needs as well as to preserving current wealth and assets over the longer term. Efforts there, respectively, would encompass building a store of key consumables, such as food and water, and moving assets into physical precious metals and outside of the U.S. dollar. Background By 2004, fiscal malfeasance of successive U.S. Administrations and Congresses had pushed the federal government into effective long-term insolvency (likely to have triggered hyperinflation by 2018). GAAP-based (generally accepted accounting principles) accounting then showed total federal obligations at $50 trillion—more than four-times the level of U.S. GDP—that were increasing each year by GAAP-based annual deficits in the uncontainable four- to five-trillion dollar range. Those extreme operating shortfalls continue unabated, with total federal obligations at $76 trillion—more than five-times U.S. GDP—at the end of the 2010 fiscal year. Taxes cannot be raised enough to bring the GAAP-based deficit into balance, and the political will in Washington is lacking to cut government spending severely, particularly in terms of the necessary slashing of unfunded liabilities in government social programs such as Social Security and Medicare. Bankrupt governments—unable to raise adequate cash to cover obligations—invariably crank up the currency printing presses to do so, creating a hyperinflation. The federal government and Federal Reserve’s actions in response to, and in conjunction with, the economic and financial crises of 2007, however, accelerated the ultimate process—both in terms of fiscal deterioration and global perception of the issues—moving the outside horizon for hyperinflation from 2018 to 2014. Even so, over the last year or two, the government and Fed’s actions and policies, and economic and financial-market developments have continued to exacerbate the circumstance, such that there is significant chance of the early stages of the hyperinflation breaking in the months ahead. Key to the near-term timing remains a sharp break in the exchange rate value of the U.S. dollar, with the rest of the world effectively moving to dump the U.S. currency and dollar-denominated paper assets. The current U.S. financial markets, financial system and economy remain highly unstable and increasingly vulnerable to unexpected shocks. At the same time, the Federal Reserve and the federal government are dedicated to preventing systemic collapse and broad price deflation. To prevent any imminent collapse—as has been seen in official activities of the last several years—they will create and spend whatever money is needed, including the deliberate debasement of the U.S. dollar with the intent of increasing domestic inflation. As shown in the following graph, those efforts include effective full monetization of recent net Treasury debt issuance. During the three full calendar months since the November 3, 2010 announcement of its purchase program of U.S. Treasury debt, the Federal Reserve more than fully monetized (109%) net Treasury issuance in the same period. The efforts to stave off systemic collapse also have resulted in uncontrolled fiscal excesses by the federal government. The deliberate monetary and fiscal abuses have resulted in de-stabilizing selling pressures against the U.S. currency, in rising gold and silver prices, and in a nascent pickup in reported U.S. consumer inflation. That inflation has been driven by unhealthy monetary policy instead of healthy economic demand, and it should continue to increase in the months ahead. The damage to U.S. dollar credibility has spread at an accelerating pace. Not only have major powers such as China, Russia and France, and institutions such as the IMF, recently called for the abandonment of the U.S. dollar as the global reserve currency, but also the dollar appears to have lost much of its traditional safe-haven status in the last month. With the current spate of political shocks in the Middle East and North Africa (a circumstance much more likely to deteriorate than to disappear in the year ahead), those seeking to protect their assets have been fleeing to other traditional safe-havens, such as precious metals and the Swiss franc, at the expense of the U.S. currency. The Swiss franc and gold price both have hit historic highs against the dollar in early-March 2011, with the silver price at its highest level in decades, rapidly closing in on its speculative historic peak of January 1980. Crises Brewed by Federal Government and Federal Reserve Malfeasance The economic and systemic crises, triggered by the collapse of debt excesses that had been encouraged actively by the Greenspan Federal Reserve, have been centered on the U.S. financial system. Recognizing that the U.S. economy was sagging under the weight of structural income impairment created by government trade, regulatory and social policies—policies that limited real (inflation-adjusted) consumer income growth, where the average U.S. household could not stay ahead of inflation or make ends meet—then-Federal Reserve Chairman Alan Greenspan played along with the political and banking systems. He made policy decisions to steal economic activity from the future, fueling economic growth of the last decade largely through debt expansion. (See Structural Consumer Liquidity Problems. ) The Greenspan Fed pushed for ever-greater systemic leverage, including the happy acceptance of new financial products—instruments of mispackaged lending risks—designed for consumption by global entities that openly did not understand the nature of the risks being taken. Spreading the credit risks of banks among other industries, for example, was encouraged actively by the Fed as healthy and stabilizing for both the domestic and global financial systems. Also complicit in this broad malfeasance was the U.S. government, including both major political parties in successive Administrations and Congresses. As with consumers, though, the federal government could not make ends meet. Driven by self-serving politics aimed at appeasing that portion of the electorate that could be kept docile through ever-expanding government programs and spending, political Washington became dependent on ever-expanding federal deficit spending, unfunded obligations and debt. Purportedly, it was Arthur Burns, Fed Chairman under Richard Nixon, who first offered the advice that helped to guide Alan Greenspan and a number of Administrations. The gist of the imparted wisdom was that if the Fed or federal government ran into economic or financial-system difficulties, the federal budget deficit and the U.S. dollar simply could be ignored—or sacrificed. Ignoring them would not matter, it was argued, because doing so would not cost the incumbent powers any votes. Back in 2005, I raised the issue of an inevitable U.S. hyperinflation with an advisor to both the Bush Administration and Fed Chairman Greenspan. I was told simply that “It’s too far into the future to worry about.” Indeed, attempting to push the big problems further into the future continues to be the working strategy for both the Fed, under Chairman Ben Bernanke, and the current Administration and Congress. In a February 25, 2011 speech, Federal Reserve Vice Chairman Janet Yellen examined the results of the recent use of “unconventional policy tools” by the Fed: “Each of these policy tools tends to generate spillovers to other financial markets, such as boosting stock prices and putting moderate downward pressure on the foreign exchange value of the dollar.” While Wall Street may hail any artificial propping it can get from the Fed’s efforts to support the markets, more than “moderate” related declines in the U.S. dollar’s exchange rate destroy any illusions of stock gains and savage the U.S. consumers’ dollar purchasing power. A declining dollar can turn U.S. stock profits into losses for those living outside the dollar-denominated world, as funds are converted back to the strengthening currency domestic to the investor. Inflation driven by dollar weakness will do the same for those in a U.S. dollar-denominated environment, where, eventually, inflation can turn U.S. stock profits into real (inflation-adjusted) losses (see Financial Hedges and Investments. ). Indeed, the U.S. dollar and the budget deficit do matter, and the future is at hand. As the federal budget deficit spirals well beyond sustainability and containment at an accelerating pace, and as the Fed moves with great deliberation to debase and to impair the purchasing power of the U.S. dollar, to generate rising consumer inflation, the day of ultimate financial reckoning appears to be breaking. Saving the System at Any Cost The Federal Reserve and the U.S. Treasury moved early in the current solvency crisis to prevent a collapse of the banking system, at any cost. It was the collapse of the banking system and loss of depositor assets in the early-1930s that intensified the Great Depression and its attendant deflation. A somewhat parallel risk was envisioned in 2008 as the system passed over the brink. The decision was made to avoid a deflationary great depression. Effective financial impairments and at least partial nationalizations or orchestrated bailouts/takeovers resulted for institutions such as Bear Stearns, Citigroup, Washington Mutual, AIG, General Motors, Chrysler, Fannie Mae and Freddie Mac, along with a number of further troubled financial institutions. The Fed moved to provide whatever systemic liquidity would be needed, while the federal government moved to finance corporate bailouts, to guarantee any instruments or entities it had to, and to introduce large amounts of short-lived stimulus spending. Curiously, though, the Fed and the Treasury let Lehman Brothers fail outright, which triggered a foreseeable run on the system and markedly intensified the systemic solvency crisis in September 2008. Whether someone was trying to play naive political games, with the public and Congress increasingly raising questions of moral hazard issues, or whether the U.S. financial wizards missed what would happen or simply moved to bring the crisis to a head, still remains to be seen. In the still-early days of the crises, the Obama Administration pushed ahead with its social agenda, introducing major new government programs such as federal government control of healthcare and health insurance. Irrespective of stated goals of not increasing the federal deficit further, the resulting healthcare/insurance legislation will have severely negative impact on the federal deficit—as will most other new legislation and “stimulus” efforts, either from massive net expenses, or from losses in tax revenues in an ever-weakening economy. While the U.S. Government’s 2010 GAAP-based financial statements (see GAAP-Based U.S. Government Finances. ) suggested a one-time large improvement in Medicare unfunded liabilities, due to the healthcare legislation, the GAO viewed the Administration’s claims there skeptically, offering an alternative accounting that showed net fiscal damage, not a one-time improvement, from the legislation. Efforts to save the system at any cost likely will continue as long as possible, with the government spending whatever money it and the Federal Reserve need to create, until such time as the global financial markets rebel. The ultimate cost here, though, will be in inflation and the increasing debasement of the purchasing power of the U.S. Dollar, and an eventual dollar collapse beyond any government or Federal Reserve control. U.S. Economy Is Not Recovering Economic activity in the United States began to decline in 2006 or early-2007, and it plunged from late-2007 into 2009 at a pace not seen since the Great Depression. Subsequently, economic activity has been bottom-bouncing with some boosts from short-lived stimulus effects. Without any fundamental turnaround in structural consumer-income problems that have been driving the downturn, and with contracting, inflation-adjusted systemic liquidity, the economy has started to slow anew. Popularly followed economic series should be showing convincing renewed contractions in the months ahead. Despite pronouncements of an end to the 2007 recession and the onset of an economic recovery, the U.S. economy still is mired in a deepening structural contraction, which eventually will be recognized as a double- or multiple-dip recession. Beyond the politically- and market-hyped GDP reporting, key underlying economic series show patterns of activity that are consistent with a peak-to-trough (so far) contraction in inflation-adjusted activity in excess of 10%, a formal depression (see Recession, Depression and Great Depression.). The apparent gains of the last year, reported in series such as retail sales and industrial production, should soften meaningfully in upcoming benchmark revisions. The revised patterns should tend to parallel the recent downside benchmark revision to payroll employment, while the July 2011 annual GDP revisions also are an almost certain bet to show a much weaker economy in recent years than currently is recognized in the markets. (See Section 4—Current Economic and Inflation Conditions in the United States.) Existing formal projections for the federal budget deficit, banking system solvency, etc. all are based on assumptions of positive economic growth, going forward. That growth will not happen, and continued economic contraction will exacerbate fiscal conditions and banking-system liquidity problems terribly. Hyperinflation Nears As previously noted, before the systemic-solvency crisis began to unfold in 2007, the U.S. government already had condemned the U.S. dollar to a hyperinflationary grave by taking on debt and obligations that never could be covered through raising taxes and/or by severely slashing government spending that had become politically untouchable. Also, the U.S. economy already had entered a severe structural downturn, which helped to trigger the systemic-solvency crisis. Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to cover obligations. The alternative here would be for the U.S. eventually 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 dollars (not backed by gold or silver) comes the eventual full destruction of the value of the U.S. dollar and related dollar-denominated paper assets. The U.S. government and the Federal Reserve have committed the system to its ultimate insolvency, through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, gross mismanagement, and a deliberate and ongoing effort to debase the U.S. currency. Yet, the particularly egregious fiscal and monetary responses to economic and solvency crises of the last four years have exacerbated the government’s solvency issues, bringing the great financial tempest close enough to making landfall that the hairs on the backs of investors necks should be standing on end. Numerous foreign governments/central banks have offered unusually blunt criticism of U.S. fiscal and Federal Reserve policies as the crisis has expanded, but the perceived self-interests of the U.S. government and Fed always will come first in setting domestic policy. Where both private and official demand for U.S. Treasuries had been increasingly unenthusiastic, the Fed—the U.S. central bank—effectively has been fully funding Treasury needs since December 2010, with its latest version of “quantitative easing,” a euphemism for Fed monetization of U.S. Treasury debt. The so-called “QE2” likely will be expanded, or supplemented by “QE3,” in the months ahead, as the ongoing economic turmoil triggers significant further fiscal deterioration. Those actions should pummel heavily the U.S. dollar’s exchange rate against other major currencies. Looming with uncertain timing is a panicked dollar dumping and dumping of dollar-denominated paper assets, which remains the most likely event as proximal trigger for the onset of hyperinflation in the near-term. The early stages of the hyperinflation would be marked simply by an accelerating upturn in consumer prices, a pattern that already has begun to unfold in response to QE2. Also, money supply velocity (see IInflation and Slowing/Contracting Money Growth.) will spike, as the U.S. dollar, again, comes under heavy and even disorderly selling pressure, with both domestic and foreign holders getting rid of their dollar holdings as quickly as possible. Although the U.S. has no way of avoiding a financial Armageddon, various government intervention tactics might slow the process for brief periods, and the system always is vulnerable to external shocks, such as wars and natural disasters. Government actions could include supportive dollar intervention, restrictions on international capital flows, wage and price controls, etc. (see Possible Official Actions and Responses/External Risks.). Effects of any such moves in delaying the onset of full hyperinflation, though, would be limited and short-lived. There is no obvious course of action or external force at this point of the process that meaningfully would put off the nearing day of reckoning. What lies ahead will be extremely difficult, painful and unhappy times for many in the United States. The functioning and adaptation of the U.S. economy and financial markets to a hyperinflation likely will be particularly disruptive. Trouble could range from turmoil in the food distribution chain and electronic cash and credit systems unable to handle rapidly changing circumstances, to political instability. The situation quickly would devolve from a deepening depression, to an intensifying hyperinflationary great depression. While resulting U.S. economic difficulties would have broad global impact, the initial hyperinflation should be largely a U.S. problem, albeit with major implications for the global currency system. For those living in the United States, long-range strategies should look to assure safety and survival, which from a financial standpoint means preserving wealth and assets. Also directly impacted, of course, are those holding or dependent upon U.S. dollars or dollar-denominated assets, and those living in “dollarized” countries. Physical gold (sovereign coins priced near bullion prices) remains the primary hedge in terms of preserving the purchasing power of current dollars. In like manner, silver is in this category. Also, holding stronger major currencies such as the Swiss franc, Canadian dollar and the Australian dollar, likely are good hedges (see Financial Hedges and Investments. ). In terms of survival on a day-to-day basis, U.S.-based individuals should be building a store of goods in preparation for a manmade disaster, much as they would for a natural disaster such as an earthquake. Economic activity probably would devolve to a barter system, but such could take months to become fully functional (see Barter System.). Section 2—Defining the Components of a Hyperinflationary Great Depression Deflation, Inflation and Hyperinflation Inflation broadly is defined in terms of a rise in general prices usually due to an increase in the amount of money in circulation. The inflation/deflation issues defined and discussed here are as applied to consumer goods and services, not to the pricing of financial assets, unless specified otherwise. 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 in Germany (Weimar Republic) in the early 1920s, in Hungary after World War II, in the dismembered Yugoslavia of the early 1990s and most recently in Zimbabwe, where the pace of hyperinflation likely was the most extreme ever seen. The historical culprit generally has been the use of fiat currencies—currencies with no hard-asset backing such as gold—and the resulting massive printing of currency that the issuing authority needed to support its spending, when it did not have the ability, otherwise, to raise enough money for its perceived needs, through taxes or other means. Ralph T. Foster (hereinafter cited as Foster) in Fiat Paper Money, The History and Evolution of Our Currency (see Recommended Further Reading.) details the history of fiat paper currencies from 11th century Szechwan, China, to date, and the consistent collapse of those currencies, 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, and the currency printing presses already are running overtime. Here are the definitions: Deflation: A decrease in the prices of consumer goods and services, usually tied to a contraction of money in circulation. Formal deflation is measured in terms of year-to-year change. Inflation: An increase in the prices of consumer goods and services, usually tied to an increase of money in circulation. Hyperinflation: Extreme inflation, minimally in excess of four-digit annual percent change, where the involved currency becomes worthless. A fairly crude definition of hyperinflation is a circumstance, where, due to extremely rapid price increases, the largest pre-hyperinflation bank note ($100 bill in the United States) becomes worth more as functional toilet paper/tissue than as currency. As discussed in Section 5—Historical U.S. Inflation: Why Hyperinflation Instead of Deflation, the domestic economy has been through periods of both major inflation and deflation, usually tied to wars and their aftermaths. Such, however, preceded the U.S. going off the domestic gold standard in 1933 and abandoning international gold convertibility in 1971. The era of the modern fiat dollar generally has been one of persistent and slowly debilitating inflation. As to the reporting of inflation, the following notes detail the various measures of consumer systemic prices referenced in this report: The Consumer Price Index (CPI): The CPI is the primary consumer inflation measure published by U.S. Government, through the Bureau of Labor Statistics (BLS), Department of Labor: CPI-U (Consumer Price Index for All Urban Consumers): The CPI-U is the monthly headline inflation number (seasonally adjusted) and is the broadest in its coverage, representing the buying patterns of all urban consumers. Its standard measure is not seasonally adjusted, and it never is revised on that basis except for outright errors. CPI-W (CPI for Urban Wage Earners and Clerical Workers): The CPI-W covers the more-narrow universe of urban wage earners and clerical workers and is used in determining cost-of-living adjustments in government programs such as Social Security. Otherwise its background is the same as the CPI-U. CPI-U-RS (Current Methods CPI): The CPI-U-RS is the current CPI-U with its history restated as if all the new methodologies introduced since the 1980s had been in place from day one. The involved changes have moved the CPI away from being a measure of inflation for a fixed basket of goods and services, away from being a measure of the cost of living of maintaining a constant standard of living. SGS Alternate CPI-U Measure: The SGS Alternate CPI Measure (based on 1980 reporting methodologies) is an attempt to reverse methodological changes to CPI inflation since 1980 that have changed the CPI concept from being a measure of the cost of living needed to maintain a constant standard of living, to a measure of a cost of living that reflects a declining standard of living. It is based primarily on a reverse engineering of the CPI-U-RS. (See Response to BLS Article on CPI Misperceptions for further details). GNP/GDP Implicit Price Deflator (IPD): The IPD is the rate of inflation for the aggregate economy (including consumer, business, housing, government and trade sectors) that is used in deflating nominal or current-dollar Gross National Product (GNP), Gross Domestic Product (GDP) and components of same, to “real,” constant-dollar or inflation-adjusted levels. Recession, Depression and Great Depression A couple of decades back, I tried to tie down the definitional differences between a recession, depression and a great depression with the Bureau of Economic Analysis (BEA), the National Bureau of Economic Research (NBER) and a number of private economists. I found that there was no consensus on the matter, where popular usage of the term “depression” had taken on the meaning of a severe recession, so I set some definitions that the various parties (neither formally nor officially) thought were within reason. If you look at the plot of the level of economic activity during a downturn, you will see something that looks like a bowl, with activity recessing on the downside and recovering on the upside. The term used to describe this bowl-shaped circumstance before World War II was “depression,” while the downside portion of the cycle was called “recession,” and the upside was called “recovery.” Before World War II, all downturns simply were referred to as depressions. In the wake of the Great Depression of the 1930s, however, a euphemism was sought for describing future economic contractions, so as to avoid evoking memories of that earlier, financially painful time. Accordingly, a post-World War II downturn was called “recession.” Officially, now, the deepest post-World War II recession was from December 2007 through June 2009, with a peak-to-trough contraction in the inflation-adjusted quarterly GDP activity level of 4.1%. That was somewhat worse than the 3.7% contraction from August 1957 through April 1958, which involved a steel strike, and a 3.2% contraction in the November 1973 to March 1975, which more commonly is viewed as the worst post-World War II recession prior to 2007. The 2007 recession also has been declared the longest since the first downleg of the Great Depression. I’ll contend, though, that the 2007 downturn is ongoing and much deeper than is indicated officially (see Section 4—Current Economic and Inflation Conditions in the United States.). Here are the definitions: Recession: Two or more consecutive quarters of contracting real (inflation-adjusted) GDP, where the downturn is not triggered by an exogenous factor such as a truckers’ strike. The NBER, which is the official arbiter of when the United States economy is in recession, attempts to refine its timing calls, on a monthly basis, through the use of economic series such as payroll employment and industrial production, and it no longer relies on the two quarters of contracting GDP rule. Depression: A recession, where the peak-to-trough contraction in real growth exceeds 10%. Great Depression: A depression, where the peak-to-trough contraction in real growth exceeds 25%. On the basis of the preceding, there has been the one Great Depression, in the 1930s. Most of the economic contractions before that would be classified as depressions. All business downturns since World War II—as officially reported —have been recessions. Using a the somewhat narrower “great depression” definition of a contraction in excess of 20% (instead of 25%), the depression of 1837 to 1843 would be considered “great,” as would be the war-time production shut-down in 1945. As explored in Section 4—Current Economic and Inflation Conditions in the United States., the current downturn would qualify as a “depression” per the above definitions, and it should evolve into a “great depression,” as normal commercial activity grinds to a halt in a hyperinflation. Nonetheless, the term “Great Recession” has entered the popular lexicon for the current downturn. Given the financial pain that will be attributed to the Great Recession—if that terminology holds—those naming future such events likely will be looking to come up with a different descriptor for a “recession” in the post-collapse period. Section 3—Two Examples of Hyperinflation Weimar Republic Ralph Foster closes his book’s preface with a particularly poignant quote from a 1993 interview of Friedrich Kessler, a law professor whose university affiliations included, among others, Yale and University of California Berkeley. From firsthand experience, Kessler described 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.” The hyperinflation in Germany’s Weimar Republic is along the lines of what likely will unfold in the United States. The following two graphs plot the same numbers, but on different scales. The data are the monthly averages of the number of paper German marks that equaled one dollar (gold-backed) in 1922 and 1923, with that number acting as something of a surrogate for the pace of inflation. The first plot is a simple arithmetic plot, but the earlier detail is masked by the extreme numbers of the last several months, suggestive of an extraordinarily rapid and large rise in the pace of inflation. The second plot is on a logarithmic scale, where each successive power of ten represents the next tick mark on the vertical scale. While the hyperinflation did hit rapidly, annual inflation in January 1922 already was more than 200%, up from as low as 6% in April 1921. The existing currency was abandoned at the end of 1923. Milton Friedman and Anna Jacobson Schwartz noted in their classic A Monetary History of the United States that the early stages of the Weimar Republic hyperinflation was accompanied by a huge influx of foreign capital, much as had happened during the U.S. Civil War. The speculative influx of capital into the U.S. at the time of the Civil War inflation helped to stabilize the system, as the foreign capital influx into the U.S. in recent years has helped to provide relative stability and strength to the equity and credit markets. Following the Civil War, however, the underlying U.S. economy had significant untapped potential and was able to generate strong, real economic activity that covered the war’s spending excesses. Post-World War I Germany was a different matter, where the country was financially and economically depleted as a penalty for losing the war. Here, after initial benefit, the influx of foreign capital helped to destabilize the system. “As the mark depreciated, foreigners at first were persuaded that it would subsequently appreciate and so bought a large volume of mark assets…” Such boosted the foreign exchange value of the German mark and the value of German assets. “As the German inflation went on, expectations were reversed, the inflow of capital was replaced by an outflow, and the mark depreciated more rapidly… (Friedman p. 76).” Indeed, in the wake of its defeat in the Great War, Germany was forced to make debilitating reparations to the victors—particularly France—as well as to face loss of territory. From Foster (Chapter 11): “By late 1922, the German government could no longer afford to make reparations payments. Indignant, the French invaded the Ruhr Valley to take over the production of iron and coal (commodities used for reparations). In response, the German government encouraged its workers to go on strike. An additional issue of paper money was authorized to sustain the economy during the crisis. Sensing trouble, foreign investors abruptly withdrew their investments. “During the first few months of 1923, prices climbed astronomically higher, with no end in sight… The nation was effectively shut down by currency collapse. Mailing a letter in late 1923 cost 21,500,000,000 marks.” The worthless German mark became useful as wall paper and toilet paper, as well as for stoking fires. The Weimar circumstance, and its heavy reliance on foreign investment, was closer to the current U.S. situation than it was to the U.S. Civil War experience. In certain aspects, the current U.S. situation is even worse than the Weimar situation. It certainly is worse than the Civil war circumstance. Unlike the still largely untapped economic potential of the United States 146 years ago, today’s U.S. economy is languishing in the structural problems of the loss of its manufacturing base and a shift of domestic wealth offshore; it is mired in an economic contraction that is immune to traditional economic stimuli. As the U.S. government has attempted in recent decades to assuage electorate discontent with ever more expensive social programs; as the Federal Reserve has moved to encourage debt expansion as a remedy for lack of real, inflation-adjusted, income growth; the eventual bankruptcy of the U.S. dollar was locked in. The problem here was taken on and created willingly by U.S. government officials—embraced by both major political parties—not imposed by a victorious and vengeful enemy of war. In the early 1920s, foreign investors in Germany were not propping up the world’s reserve currency in an effort to prevent a global financial collapse, and they did not know in advance that they were doomed to take a large hit on their German investments. In today’s environment, both central banks and major private investors know that the U.S. dollar will be a losing proposition. They either expect and/or hope that they can get out of the dollar in time to avoid losses, or, in the case of the central banks, that they can forestall the ultimate global economic crisis. Such expectations and hopes have dimmed markedly in the last several years, as the untenable U.S. fiscal condition has gained more public and global recognition. Zimbabwe Hyperinflation in Zimbabwe, the former Rhodesia, was a quadrillion times worse than it was in Weimar Germany. Zimbabwe went through a number of years of high inflation, with an accelerating hyperinflation from 2006 to 2009, when the currency was abandoned. Through three devaluations, excess zeros repeatedly were lopped off notes as high as 100 trillion Zimbabwe dollars. The cumulative devaluation of the Zimbabwe dollar was such that a stack of 100,000,000,000,000,000,000,000,000 (26 zeros) two dollar bills (if they were printed) in the peak hyperinflation would have be needed to equal in value what a single original Zimbabwe two-dollar bill of 1978 had been worth. Such a pile of bills literally would be light years high, stretching from the Earth to the Andromeda Galaxy. In early-2009, the governor of the Zimbabwe Reserve Bank indicated he felt his actions in printing money were vindicated by the recent actions of the U.S. Federal Reserve. If the U.S. went through a hyperinflation like that of Zimbabwe’s, total U.S. federal debt and obligations (roughly $76 trillion with unfunded liabilities) could be paid off for much less than a current penny. This sign in a restroom facility at a South African border station with Zimbabwe speaks for itself. What helped to enable the evolution of the Zimbabwe monetary excesses over the years, while still having something of a functioning economy, was the back-up of a well-functioning black market in U.S. dollars. The United States has no such backup system, however, with implications for a more rapid and disruptive hyperinflation than seen in Zimbabwe, when it hits. This will be discussed later. Section 4—Current Economic and Inflation Conditions in the United States Economic Activity and Inflation Before examining how the current circumstance can evolve into a hyperinflationary great depression, it is worth assessing the nature of the present economic and inflation conditions in the United States, along with likely near-term developments in those areas. As heavily touted on Wall Street, the official version of the current U.S. economic circumstance is that business activity is enjoying normal growth, having recovered to levels last seen before the severe recession of 2007-2009. Reported consumer inflation is below two percent, with “core” inflation holding near zero. Such follows a short but shallow bout with formal deflation. If this happy picture were real, the Federal Reserve would not be panicking, printing new money and attempting to liquefy the system at an unprecedented pace. If the economy were recovering and on a positive track, the Administration and Congress would not be panicking with extreme fiscal reactions, hoping to assuage an economically- and financially-impaired electorate in advance of a likely tumultuous 2012 election. Indeed, anecdotally, Main Street U.S.A. is not seeing this near-perfect economic environment, either. Common perception remains that the economy and labor conditions are much worse than the happy news in GDP and jobs reporting, and that inflation is running well above the price increases indicated by the government’s consumer inflation estimates. The SGS assessment of the current circumstance generally is in line with the common experience. The economy still is in broad contraction, with consumer inflation—viewed from the standpoint of the cost of maintaining a constant standard of living (as the CPI initially was intended)—running well above official inflation. Irrespective of the measure, consumer inflation has started to spike in response to Federal Reserve efforts to create inflation. Suffering from a deteriorating structural shift in consumer liquidity, the U.S. economy went into a severe contraction, starting slowly in late-2006, but plunging by the end of 2007 through early-2009. Since then the broad economy has been bottom-bouncing at a low-level plateau of activity, with spikes seen in the activity of several important series such as retail sales and industrial production from short-lived stimulus effects, and from distortions in a post-World War II economic reporting system that never was designed to handle a downturn of the present nature and severity. Broad economic activity is slowing anew, and such should painfully evident in the months ahead. Since the National Bureau of Economic Research (NBER)—official arbiter of U.S. recessions—has formally timed the recession, peak-to-trough, from December 2007 to June 2009, the renewed downturn eventually should gain official recognition as the second downleg of a multiple-dip recession, with its onset likely timed from third-quarter 2010. Considered in the pages ahead is the nature of the structural consumer-income problems driving the downturn; economic reporting quality issues that have arisen from an unprecedented downturn in the era of modern economic reporting; an assessment of recent GDP reporting against what can be supported by reporting in the underlying employment, retail sales, industrial production and housing series; pending revisions to economic series; political implications; and the near-term outlook for the economy and inflation. Structural Consumer Liquidity Problems Until structurally-impaired real (or inflation-adjusted) household income and liquidity fundamentally turn around, there can be no sustainable recovery in U.S. economic activity. The consumer accounted for 73% of reported fourth-quarter 2010 U.S. GDP. The U.S. economy is in a deepening structural change that has resulted from U.S. trade, social and regulatory policies driving a goodly portion of the U.S. manufacturing and technology base offshore. As a result, a large number of related, high paying jobs have disappeared for U.S. workers. Accordingly, U.S. consumers have found increasingly that their household incomes fail to keep up with inflation. Without real growth in income, there cannot be sustained economic growth. Growth driven solely by debt expansion, as encouraged by the Fed in recent years, ultimately is not sustainable; it is temporary, as has become painfully obvious to many in the still-evolving systemic-solvency crisis. Shown in the following graph, the U.S. trade deficit—in general deterioration since the early-1970s— initially narrowed in the current downturn, with weaker U.S. consumption and with a short-lived collapse in oil prices. Yet, the trade shortfall resumed its net deterioration in the last year or so. The brief period of deficit narrowing reflected no fundamental shift in circumstances, no healthy move in U.S. economic activity towards a basic improvement in the trade balance, or in a shift towards reinvigorating the U.S. manufacturing base. Poster Comment: The leftists will NEVER address reality, and stay happily stupid, using the rules of disinformation.
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