CREDIT CONSUMPTION & GLOBAL DEBT: WHY FIAT CURRENCY HYPERINFLATION IS NOW A CERTAINTY.

The only thing ‘wrong’ with deflation is that it makes sovereign and derivative debt unrepayable. The smart money is betting on hyperinflation.

The regular and central banks (along with their political hirelings) keep saying that our enemy is deflation. But that’s a somewhat inclusively dishonest use of the personal pronoun there: deflation is their enemy, not ours. They’re the ones with the whopping great sovereign and derivative debt exposures. The only way the banks can survive is through enough easing and printing to inflate away their debt. Those on low wages and fixed incomes will get killed by inflation, but they don’t care about us. We will reach the point where we can’t consume anything any more….but they don’t care about that either.

Look at the US at the moment: consumer credit card debt leapt hugely – by $8.6 billion – in April. This was a ginormous slice of the total increase in credit, which shot up by $20.5 billion. Economists insist that this is a sign of confidence; I take the contrary view: this is the strugglers maxing out plastic cards because their incomes aren’t enough to live on.

Investors are waking up to the truth of what’s been happening since 2009. Near-zero interest rate ‘Zirp’ protected bank exposures: but as I said at the time, it stopped wealthy retired Boomers from consuming. The motive wasn’t economic, it was about saving the financial system.

The élites claim that deflation is the enemy, but this is in part a justification of why chucking fiat currency at the economy isn’t a problem. QE has been rationalised as safe economic stimulation, but its real raison d’etre wasn’t economic turnaround: it was to provide banks and multinational businesses with free money, thus enabling balance-sheet shrinkage and retention of stock market confidence respectively.

The time has come when we need to understand that Zirp and QE were used to buy time until they had their ducks in a row. The enemy for ‘Them’ is deflation…because that makes their debts bigger and bigger every year. Their greatest saviour can only be hyperinflation: wiping out fiat currency’s value such that their debts can be repaid with ease, and the fiatometer then rewound back to where it was in the year of our Nixon, 1972.

With all the debts in paper toilet tissue – and all the assets in safe havens like gold – the banks can leap from ruin to riches in one mighty leap. So while gold looks uncertain and the Buck looks strong, remember that both those valuations are manipulated to suit the financial system and Western debt…not us, the citizens. The Libor rate was fixed for them, not us. Real price deflation for the ordinary citizen would be bad for them, not us.

The acid test as always is to ignore what the media-sovereign-banking axis says, and instead watch how the savvy folks are behaving to ensure their survival throughout the madness to come.

Australian author and financial guru Jim Rickards has changed his portfolio to minimise fiat deposits, instead borrow in ropey currencies, and use that to be solid-value assets. He wrote a piece two days ago, and this extract is telling:

‘[Warren] Buffett has purchased large offshore assets in China and elsewhere that produce non-dollar profits that he can retain offshore tax-free….A huge part of Buffett’s portfolio is in financial stocks — particularly in banks and insurance companies — that are highly leveraged borrowers…..Buffett can profit when inflation wipes out the liabilities of these financial giants….in short, Buffet is using leverage to diversify into hard assets in energy, transportation and foreign currencies.’

This is the classic hyperinflation escape route: borrow in doomed currencies, buy assets that will massively increase their value during hyperinflation, then pay off the debt in the near-worthless currency…..and thus profit from reduced debt alongside rising asset values. Result: wealth if you’re lucky, survival at worst.

Hedge fund billionaire Paul Singer, founder and CEO of Elliott Management, is making similar moves. In his latest letter to investors, released towards the end of May, Singer boldly asserted that by far the best trade now is to short “long term claims on paper money.”

Former Pimco boss Bill Gross moved to short German bunds in April – that is, betting that in the end, bond yields based on a toytown currency like the euro must rise. This is fundamentally the same strategy as Singer, and closely related to Buffet’s: no confidence in fiats.

Five days ago, Gross looked at The Shenzhen Composite Exchange – a sort of latter-day USM in China that tracks newer and younger shares. He thinks that assets on this exchange have risen far too quickly (108% so far this year) to be maintained, so he’s shorting that too. When the correction takes place, he’ll move in and pick up cheap assets.

When everyone with a genius for spotting ends and beginnings starts to play variations on the same theme – borrow in over-valued currencies and buy undervalued assets/ speculate in undervalued currencies and short overpriced assets – then it seems to me obvious that the positions being taken add up to a certainty that the main preparation they’re making is for out of control hyperinflation among those with unrepayable debts.

When things reach this point, the idea of deflation being ineluctably tied to low consumption becomes risible: once confidence is lost in the currency, the rush for the exit is unstoppable. The best example of this on the planet at the moment is Venezuela – where economic muddle and rising poverty have produced all the signals of chronic deflation: but it is, clearly, teetering on the edge of a German 1923 moment. Yet some as yet unexploited assets in that country mean that investment in those assets at the right moment could make a person Gatsby-rich.

Some of us have been saying since around 2008 that deflation would come first due to falling real incomes produced by neoliberal austerity…but then hyperinflation would be induced to both wipe out Western debt and create a more competitive exporting currency. Nobody seems to have thought about what happens when the time comes to buy raw materials in Reichsmarks: but as I wrote earlier, that isn’t really their concern. The goal is to remain upright when The Bomb goes off, and then revalue. What happens to the citzenry is of zero concern to these odd people.

I’m not a qualified adviser and so you must do what you think fit in this context. But today, I’m happy about having switched massively from cash to assets. And once the signs are clearer, I’ll be happy to take on debt on a rubbish currency (eg, the euro) – both for living expenses, and in readiness for the moment when hyped assets (eg, the UK property market) go from correction to collapse.

Fiat currency destruction is coming. Good luck, keep calm, and don’t ignore it.

Recently at The Slog: Why no politician wants to investigate the petrol price scam

27 thoughts on “CREDIT CONSUMPTION & GLOBAL DEBT: WHY FIAT CURRENCY HYPERINFLATION IS NOW A CERTAINTY.

  1. I have been waiting patiently to cash in on my hedged positions as I watch the valuations tumble since I took them in 2011. It is well written pieces like this that I remain in a positive frame of mind.

    Off topic but a very enlightening listen.

    Like

  2. From what I have read over the last few years, they have been stoking inflation but, it just won’t take off, as you say because those that used to spend are no longer able to. How are they going to induce hyperinflation when folk have even less freedom to spend?

    Like

  3. Indeed a very enlightening listen. As the guy says, change it or, lose it, we have lost it, it’s far too late now even if you could mobilise enough folk, they would crush us like ants before any movement against them got going, and when the L.A.W.S. (lethal autonomous weapons systems) are able to be employed it’s going to make the Hungers Games look like a picnic. We just have to suck it up and hope for an event of such magnitude that it blows these psychopaths off course for long enough for us to re-group. Oh, of course that depends on whether there’s anything good on the telly or not….

    Like

  4. Where can I buy a port….er…cheap….er…in the Mediterranean …er with a currency that’s going to go bust soon….hmmm

    Like

  5. Scarcity,already many business are folding unable to product,what the products reduction in supermarkets & many other areas because their is no returns,no investment,never before have the “wealth creators” had so much wealth to create with & they can’t produce anything,only turning competition into monopolies. But others that can produce like China need to empower their own people to become the new market,since the West has destroyed it own market as always,the west ideology is a false one & by not listening to Einstein once again they have destroyed their power base for power

    Like

  6. I cant wait for the bond bubble to explode and then watch all that cheap dough explode and wipe out the emerging markets when the dollar rises. I am going to get my popcorn. Then I am going to riot like all upset citizens will do when they blame their government for the lose of all their pensions and wealth destroyed. Could be fun!!

    Like

  7. Warren Pollock asserts we are facing a war with China as are Russia,is this reasonable and when and how will that effect all the dosh being secreted in Singapore?

    Like

  8. Nice post! I agree that QE did not light off the inflation that was intended and people like Paul Krugman of the NYT are saying we need to do more to ignite inflation. Raising the minimum wage along with raising the income level for “managers” to around 52K (in the US) so you must pay time and a half for all hours over eight below this level are also part of this pattern. If this doesn’t work then they will bring in the helicopters and start dropping cash. One way or another they will create inflation and as you have pointed out it’s the ONLY way out for them.

    Like

  9. And we all witnessed what happened in the Middle East when inflation took the price of basic food beyond the reach of ordinary folk. It might be a way out for them but, it might have unintended consequences of a magnitude far greater than deflation.

    Like

  10. They (‘They’) cannot generate hyperinflation, if ‘they’ could ‘they’ would have.

    In places where management would rather not experience it, (Argentina, Iran, Belarus) hyperinflation appears! It is a form of currency arbitrage (selling the currency you have for one you want or need). Two currencies: sell sterling to buy euros?

    Don’t think so. Sell euros to buy sterling (or dollars) maybe, but much EU ‘wealth’ is in the form of real estate which is bid up with lower-priced currencies. As the real estate asset is bid up, the (hyper-)inflationary impulse is dampened.

    As for Buffett or Gross as prognosticators, they can’t guess any better than anyone else. Buying ‘assets’ in China looks like a fool’s errand from here.

    Like

  11. “Look at the US at the moment: consumer credit card debt leapt hugely – by $8.6 billion – in April. This was a ginormous slice of the total increase in credit, which shot up by $20.5 billion. Economists insist that this is a sign of confidence; I take the contrary view: this is the strugglers maxing out plastic cards because their incomes aren’t enough to live on.”

    The author of this piece, a certain Tony Sagami, is pretty much in agreement with you:

    http://www.mauldineconomics.com/connecting-the-dots/weak-consumer-spending-the-canary-in-the-bear-market-coal-mine

    A couple of sample sentences from the piece:

    “And what Americans are buying are necessities. All five categories of discretionary purchases—leisure, clothing, consumer electronics, dining out, and travel—were down for the month.”

    “Consumers Hoarding Gas Savings: The price of a barrel of oil fell by more than 50%, and every single American household is estimated to pocket an average of $750 in 2015 from lower gas prices. However, that extra cash has not turned into higher consumer spending.”

    “So despite the quartet of big gas savings, non-existent inflation, an improving job market, and higher wages… consumer spending is deader than a doornail.”

    Like

  12. I liked the video above. So if I have this right, everything we’ve been told the last few decades is a total lie? Climate change, the coming “crisis” (financial, social etc), the end of oil (read Engdahl), the entire War on Terror against an innocent Eastern people, even perhaps sacred shibboleths of ecology such as biodiversity. Even your diet of wheat and sugar is based on a USDA lie. (Go paleo and get into Crossfit!)

    Once you step out of that fear “box” you can really start to think properly and concentrate on solutions to things.

    Like

  13. Strong inflation of goods and services can only occur if there is a strong growth in the amount of money to buy said goods and services. The vast majority of ‘money’ today is in the bank accounts of corporations and the 1% and they main thing they buy is financial assets so those have inflated.

    There is no possible way I can see to get large amounts of money into the hands of the general populace so I believe strong goods and services inflation much less hyper inflation is impossible. Governments are not going to suddenly double or triple transfer payments that provide income to citizens and pay raises are not going to happen for most either. Nor are citizen anywhere going to suddenly go on a credit binge to boost their spending.

    Again, without a strong increase in the amount of money in the hands of consumers (God I hate that word) inflation is not possible. One can envision shortages of various commodities and things and maybe prices will start to rise on that but that means that volumes will just fall and so too again will prices.

    Like

  14. Pingback: Ay, there’s the rub … | Library of Libraries

  15. No, you don’t have this right, not everything you have been told is a total lie – but in order to discover what was truth and what was not you have to do your own background research – something many people are too lazy or too ill-educated to attempt.

    Like

  16. “The only thing ‘wrong’ with deflation is that it makes sovereign and derivative debt unrepayble.”

    I can certainly see your point but I do not think so (I am a wage-earner).
    From my wage-earner point of view there is much more wrong than good with deflation (IMHO your statement only applies to rentiers).

    J. M. Keynes, who was the first to clearly describe the effects of Inflation/Deflation on the distribution of wealth (and on production), just said : “Inflation is unjust and Deflation is inexpedient”.

    From ESSAYS IN PERSUASION
    BY
    JOHN MAYNARD KEYNES
    MACMILLAN AND CO., LIMITED
    ST. MARTIN’S STREET, LONDON 1931
    Chapter “Social Consequences of Changes in the Value of Money” (1923)

    “Each process, Inflation and Deflation alike, has inflicted great injuries. Each has an effect in altering the distribution of wealth between different classes, Inflation in this respect being the worse of the two. Each has also an effect in overstimulating or retarding the production of wealth, though here Deflation is the more injurious.”

    “We see, therefore, that rising prices and falling prices each have their characteristic disadvantage. The Inflation which causes the former means Injustice to individuals and to classes, particularly to rentiers; and is therefore unfavourable to saving. The Deflation which causes falling prices means Impoverishment to labour and to enterprise by leading entrepreneurs to restrict production, in their endeavour to avoid loss to themselves; and is therefore disastrous to employment. The counterparts are, of course, also true, namely that Deflation means Injustice to borrowers, and that Inflation leads to the over-stimulation of industrial activity. But these results are not so marked as those emphasised above, because borrowers are in a better position to protect themselves from the worst effects of Deflation than lenders are to protect themselves from those of Inflation, and because labour is in a better position to protect itself from overexertion in good times than from underemployment in bad times.
    Thus Inflation is unjust and Deflation is inexpedient.”

    As capitalism means mass production as well as mass consumption, IMHO excessive debt accumulation is just the result of (unjust) wage compression (to the benefit of the 0.1%, i.e. the richest rentiers).

    Economic growth and sustained Inflation are the only possible cure.

    Like

  17. I tend to agree with you, but it all pretty scary. I am buying more gold and silver anyway, but I would not advise anyone to follow my example.

    Like

  18. “The economist, who was one of the few who predicted the Great Recession, warned last year that the US and UK economies wouldn’t make a sustainable recovery due to the problem of high levels of private debt – public debt being more a symptom than a cause of this economic malaise.
    In this interview he gives a detailed explanation as to why the austerity-heavy economic policy of the Conservatives (and the Liberal Democrats), and the austerity-lite version from Lab is naïve and will lead not to economic growth but to economic stagnation.”
    http://www.debtdeflation.com/blogs/2015/05/06/the-naivety-of-the-uk-economic-debate/#comments

    Like

  19. Accepting you are not a “qualified adviser” I am never the less curious as to what are the hard assets you have moved into ?
    Obviously not UK property but gold or equities or ???
    Thanks

    Like

  20. Two properties in France to rent out (rental sector here woefully under-supplied) and a Mercedes motor home which has running costs but offers mobile luxury….something I suspect will be in demand before too long.

    Steering clear of gold as it is bent, buying some land here and there. I have lost money by staying out of equities, but the game is no longer to make money: the plan now is to have inflation-proof income and no fiat cash that can be electronically stolen.

    If Syriza beat the Troika, I shall buy property in Greece.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s