Article Image Ernest Hancock

Letters to the Editor • Economy - International

Zimbabwe Hyper-Inflation - What is Happening to America is Something Else

(I received this letter from a friend that splits his time between Arizona and New Zealand. Maybe you can help me come up with the word he is looking for)
Funny...and perhaps in the U.S.\'s not-too-distant future. 

However it is definitely not what is going on today (for the last month or so).  I have yet to hear anyone with an audience utter the correct economic term for what is actually going on right now, even though it\'s fairly obvious.  The first person to do so will earn some respect from me... :-)  I first said the word to my wife two weeks ago.  And once the word I\'m thinking of is spoken of widely in the mainstream media, the stage will indeed be set for hyperinflation.

No, the word is not "depression", which is already so over-used that it has lost its power to shock & make people think.

The latest issue of The Economist got the closest yet, when they observed (paraphrasing) "When people sell stocks [en masse], they are renouncing claims on real estate, factories, and equipment in favor of paper with no intrinsic value at all."  Likewise when people directly sell Real Estate, and commodities like oil and corn, AND EVEN GOLD, as they have been for the past few weeks  Yet they did not print the word which applies to this market-wide, sector-wide sell-off of anything and everything - people trading real assets for paper whose only value is that the government says so.

Do you know the word that applies?  If not, I\'ll clue you in the first time I see it in the MSM.

If you do know the word that applies, then you also know that the difference between now and the last time the word applied is that this time the government has the means to end it, at great pains to us all of course, but end it nevertheless.


6 Comments in Response to

Comment by Brock
Entered on:
I urge caution in using the words inflation or deflation. Use them in the long form to avoid confusion.

One definition of x-flation is a x-crease in the money supply - monetary x-flation. Another is a general x-crease in prices - price x-flation.

When Mike Shedlock makes his deflation case, he means monetary deflation. As Jason is using it, he's meaning price deflation. Confounding the two is not just bad form, it is also dangerous.

Three things affect general prices (assume there is such a thing for a moment): production, money supply, and money demand.

Ceteris paribus, prices are inversely related to production and money demand, while positively correlated with money supply.

So if Mish is correct in diagnosing monetary deflation (which is actually a very common-sense conclusion that he proofs well) that is counteracted by a decrease in production, which, a strong case can be made, has been decreasing for far longer than the latest period.

What is affecting the commodity prices Jason outlines is, as he notes, an increase in the demand for money. But, rather than the dollar being perceived as safe, the demand is coming from financial institutions delevering.

Consumer confidence is down, meaning the propensity to save is up. Normally, that savings is deposited in a bank and loaned for commercial and industrial investments. Right now, though, the banks are holding that cash to reduce their leverage.

If dollars were in demand for their safety, commodities would see lower prices. However, you would also see lower commodity prices if demand for commodities is off. Given the low consumer confidence, that is the more likely reason for lower prices than any dollar safety perception.

Also, if the dollar were considered safe, gold and Treasury bonds would be down. But, both treasuries and physical gold are up. Gold sellers are hard to find and are demanding hefty premiums over the spot price of "paper gold".

Now, the caution over confounding the two definitions of deflation is this: banks are not circulating the cash right now, but it is there. As the instruments they are levered against pay off over time, they will loan out that cash. If you've printed a ton of cash to counteract deflation used as a general term, those loans combined with the reduced production will send prices up very quickly.

By the time you realize it's happening, it will be too late to stop it.

Comment by Fascist Nation
Entered on:
I would have gone with the word "panic" too.

But in fairness to Michael Shedlock, he has been warning of deflation for at least two solid years. I also believe I heard Jim Rodgers mention it at one point on Goyette's long missed show.

Comment by Ernest Hancock
Entered on:

You and I both have a great respect for the many minds we have surrounded ourselves with (Like Kent & Fran Van Cleave) for our hedge against ignorance about something. You are also a great resource.

But over the years we have cordially disagreed and have often decided to just enter a prediction into our day planners so a reminder can be produced for us to examine later..... I feel another such opportunity :)

Let me think for a second about what I want to predict,... and when.

I suspect that the Dow and the price of Gold will intersect before the end of the next President's term. I think that this is most likely before the end of the summer of 2010.

I predict that this inevitability will produce an attempt to create a Global Currency before the Summer of 2009.

If Obama is elected I suspect that the entire "Free-Market" will have to undergo a complete reset in its effort to adapt to massive redistribution of the Treasuries accumulation of goodies from the bailouts. They will attempt to keep prices higher but will be forced by circumstances to liquidate for less than they claimed on their proposed budgets.

By the end of the school year in 2009 (Last half of May) there will be a "Great Distraction" that will be an attempt to rally the American People around the flag (Nuke, Aliens from Mars, whatever).

By the summer of 2009 there will be several state legislatures that will bring the idea of Secession into the minds of the people and the Federal Government will answer with threats and action in many different ways.

And the battle to End the Fed will come directly from the people and will produce the elements of a noticed domestic insurrection that will trump everything by the end of 2010.

These are just a few from the top of my head. Now how your prediction fit into that I do not know, but I am always of the opinion that the people's continued awareness and education are rarely taken into consideration. This is why things like the r3VOLution and the activism of a once thought of "lost" generation is always a surprise.

Comment by Ernest Hancock
Entered on:
On Fri, Oct 31, 2008 at 5:52 AM, Ernest Hancock wrote:

It begins….

I'll go with Kent Van Cleve's "Deflation". In fact I think we ran an article by Mish Shedlock on this.

How we doing?



Jason Says:

No fair asking Kent for help. :-)

Yes, deflation is what I think is going on at the moment. But what I find most interesting is that no one in the mainstream media - at least no one I've seen - will even say the word much less discuss it intelligently. I heard deflation bandied about casually in 2002 when it most definitely WASN'T occurring but not now, when it clearly (to me) is.

In every market, if something is down it always means that something else is up. So what is "up" in this market? If the "price" of something is down then the value of whatever you're using to buy it is up. Speaking for at least the last month or so:
The US dollar is up against major foreign currencies like the Euro
The US dollar is up against financial securities like stocks and bonds (this has been the trend for over a year)
The US dollar is up against commodities like corn and oil and (very importantly) gold
The US dollar is up against real estate (for going on 3 years now)
The US dollar is even up against consumer durable goods like autos and appliances (mainly because very few people are buying them)

In short, US paper dollars are VERY popular in the marketplace right now against virtually everything, despite the fact that they have NO intrinsic value. As far as I am aware, this scenario is unprecedented in the post-WWII economy. When your unit of measure is what's up against virtually everything else being down, the only word for it is deflation. There is not a repudiation of the US dollar going on (yet) -- quite the opposite, there's a flight into the US dollar because the US dollar is perceived by the market to be safe.

You and I may speculate that the current market is irrational in considering the US dollar to be safe. The way to monetize that speculation is to trade US dollars for something on the list above that the US dollar is currently "up" against. I think that speculating against the long-term value of the dollar against other stores of value is a good speculation, but I would not be so bold as to call it anything other than a speculation, and a decidedly contrarian one at that. Nevertheless I personally believe that the current deflationary consumer preference for paper dollars over just about anything else will not be allowed to last. The recent fed rate cut is just the opening salvo. As soon as the word "deflation" is uttered in the mainstream media the solution to this new "crisis" will be immediately clear: print even more dollars than are being printing now! So what I am speculating is...that those in control of the printing will crank it up.

That doesn't mean everything on the list will turn up against the dollar the same amount or at the same time. Commodities are inherently volatile and are likely to turn first, though for commodities other than gold the amount of the turn in real (inflation adjusted) rather than nominal terms will depend on the actual state of the economy, which I am far from confident about especially for the short term. Real estate has been down long enough and far enough that I see it going on the up list sooner rather than later, in both nominal and eventually real terms. I think stocks are also going to turn, at least in nominal terms though I don't expect to see inflation-adjusted stock market gains on pre-existing investments for a very long time. I do expect *new* stock investments made at recent market levels (Dow 8500 or so) to return real gains over reasonable time periods like 3-5 years. Foreign currencies are my least favorite investment bet, simply because they have no intrinsic value either and the major foreign governments are going to be cranking the printing press just like the US. Finally, consumer durables aren't an investment at all, just an indicator. In real terms their value consistently declines after purchase, so...don't buy a new car as an "inflation hedge" unless you really need the car.


Comment by Jefferson Paine
Entered on:
I'll go with Bob Prechter of on this, and say "deflation." He's been saying we've been in a deflationary economy for some time now, and it's only with the recent very obvious evaporation of credit (a.k.a. "bogus money") that people are starting to recognize it as deflation. Most people think of deflation just as a shortage of cash in the marketplace, but we've been in a CREDIT economy for many years now, so the truly significant form of deflation comes when the credit bubble bursts, as it just has.

Even if the Fed and its counterparts around the world try to inflate their way out of this depression, they simply can't print enough money to offset the quadrillion or so dollars in what we might call "vaporbucks" that are steaming up from the dying derivatives market.

Comment by Brock
Entered on:
OK, so Jason's describing a sell-off without regard to quality or value. I'll go ahead and forward the word he's looking for is "panic".

However, "panic" doesn't meet the last of his criteria, that is, that government can control it. There is no word other than "fantasy" that meets that criteria.