Copyright 2011 by John T. Reed
It now appears clear that the U.S. government will choose hyperinflation when the bond market inevitably stops buying U.S. bonds. When is that? Impossible to say precisely but the best guess among experts seems to be somewhere between tomorrow and about seven years from now. Shocks like wars or defaults by European countries could accelerate that.
The three choices and which government will pick
On that day, the U.S. government has to either cut spending by about 50% or default on the national debt, which enables them to stop worrying about where to get the money to pay about half a trillion in interest and a couple of more trillion in principal payments.
The government is run by 536 politicians: 435 representatives in the House, 100 senators, and the president. When you give them the three choices of
1. cutting federal spending 50% overnight
2. stiffing all the owners of U.S. government bonds—most of whom are Americans or
3. “printing” the money to pay the bill they can no longer borrow to pay
they will obviously choose #3.
Why hyperinflation instead of regular inflation?
Why not inflation like in the late 1970s and early 1980s? Why does it have to be hyperinflation this time around?
Because one of the effects of high inflation in the late 1970s and early 1980s was the spread of indexation, also called cost-of-living adjustment clauses. They are in laws, union contracts, long-term leases, federal pensions, federal health care expenses, TIPs bonds, and elsewhere. As a consequence, inflation no longer works for making it easier for the U.S. government pay its bills by simply “printing” a little extra money. The more money they “print,” the higher inflation goes. The higher inflation goes, the more money the federal government has to “print” to send out Social Security and other checks.
The other reason the U.S. government now has to employ hyperinflation rather than just high inflation is the size of the U.S. national debt is too huge. Higher inflation means higher interest. When the national debt is $15 trillion, as it now is, a 1% increase in the interest the government has to pay ultimately means they need to write checks for 1% x $15T = 150 billion more.
I say “ultimately” because most U.S. government bonds have fixed interest rates so the rates would not go up until each bond matures. With regard to TIPs bonds, they have to pay more on those every six months because they are indexed.
Also, the amount of principal the U.S. government has to pay off each year is in the trillions. When the bond market stops buying U.S. bonds, all the money to pay off those multi-trillion-dollar maturing bond amounts must come from current tax revenue—forget about it—or by “printing” trillions of dollars. U.S. annual tax revenues are currently about $2.3 trillion. The principal payments on maturing bonds are more than that. We have been refinancing those maturing bonds. But when the bond market stops buying U.S. bonds, where will they get those trillions to pay off maturing bonds? Only by “printing” it.
“Printing” trillions of dollars does not cause mere inflation or even high inflation. It causes hyperinflation.
What is the definition of hyperinflation? One definition is it is when a $100 bill will not buy anything at all. Not even a gum ball.
What it will be like the day the dollar dies
What will it feel like in America when that happens? I will now try to describe that for you, based on my years of research of past hyperinflations around the world and throughout history. When it happens, it will reach a tipping point like the last snowflake that starts an avalanche. At that point, on that day, it will be too late to do most things to protect yourself. Here is what that day will probably look like. They ought to make a made-for-TV movie about it. Such a movie might inspire Americans to finally take action to head it off.
Your cell phone rings. It is your spouse.
Are you watching TV or listening to the radio now?
Turn it on. Prices are going crazy. People are going crazy.
All of them.
You turn on a news channel. Aerial video shows shopping center parking lots clogged along with adjacent streets and highways. Everybody in the country is simultaneously on the biggest shopping spree of their lives.
Video shows people having fist fights over shopping carts and even illegal parking spaces. People are bringing kids’ wagons and wheeled suitcases to use as shopping carts because there are not enough carts.
The video switches to the interiors of the stores. The shelves are empty. People are having fist fights over the few remaining items. The video shows supermarkets, hardware stores, department stores, car dealers, appliance dealers, arts and crafts stores, drug stores, pet stores, every kind of store.
The voice-over announcer explains that customers are screaming at the checkout counter over price increases between the prices marked on the shelves and the ones in the register. Hand-written signs say “no credit cards, cash or debit card only.” Customers are demanding to use their credit cards.
The announcer reports that virtually every credit card in the nation has been cancelled regardless of your payment history or credit rating, but it doesn’t matter anyway because simultaneously, every merchant in America has stopped accepting anything but cash or debit cards. And businesses that normally allow customers to pay within 30 days for no interest are rapidly switching to cash on delivery if not in advance as the only terms they offer.
And he helpfully adds that if you don’t believe him, you can call your credit card company or go to their web site, but you probably won’t be able to get through to either because the switchboards are jammed and the web sites say “too busy try again.” Audio is heard of busy signals and video shows one major bank credit card web page after another saying “Try again” on the screen. They also show some bank web pages that say all credit cards have been cancelled because of the interest rate and inflation crisis.
The announcer goes on,
No loans appear to be available because no one can figure out what the inflation is or will be so they are afraid to make a loan until they are sure they know what the inflation and market interest rates will be during the loan. That even includes short-term loans like credit cards.
It’s the same story on line. Video appears of harried on-line retailer phone answerers trying to explain to irate customers why the prices are higher and why they will not take credit cards.
Video of restaurants appears. All the customers want take out. Bigger orders than normal. No one has time to sit down and eat. They are too busy topping off their gas tank or searching for a store with some merchandise left.
Many are trying to buy foreign currency or foreign bonds, but those prices are also soaring as we speak because Americans and everyone else in the world are trying to trade U.S. dollars for other currencies and no one wants U.S. dollars.
A video of a bank office appears. A manager explains that monstrous demand for transferring cash out of various accounts into debit card accounts is overwhelming the employees and computers. In bank lobbies, people are trying to deposit piggy banks into debit card accounts or convert the piggy bank contents into cash. Many banks ran out of cash and the armored cars are going crazy making extra trips to the local Federal Reserve Banks to get more cash. Bank customers are screaming at the tellers that they want their money right now!
More video shows store employees ripping price tags off shelves and posting hand-written signs that say the only price that is official is the one in the cash register when you check out. Another shows gas station operators adding a cardboard hand-written digit to the left of their gasoline/diesel price signs to reflect the fact that gas now has a more-than-$100 per gallon price.
The inevitable experts—economists, authors, and former government officials—appear on TV news shows. They explain,
The dollar has been fiat money since the 1970s. That means there is no gold or silver or anything of value behind it. All countries have had fiat money currencies for decades. That means the currency is only as good as the trust the world has for it. As a result of more and more and more borrowing by the U.S. government, one too many straws were placed on the camel’s back of trust. The thread of trust has broken.
People in the U.S. and around the world no longer trust that they will be paid back by the U.S. government if they own U.S. government bonds and people in the U.S. and around the world no longer trust that a dollar will retain its purchasing power.
The result was quite predictable, but the politicians and the American people refused to believe. Now, because we obviously have a worldwide run on the dollar, they belatedly believe it.
“What is a run on the dollar?” a newsman asks.
Everyone in the U.S. and around the world who owns dollars or dollar-denominated bonds wants to trade them for something else, anything else, generally hard goods or a stable foreign currency if there are any.
“Can it be stopped?”
It will be stopped because people will simply not go to work if they are paid in dollars and they will not lend money if they are required, as now, to accept dollars as repayment. The sentence on all your American folding money in your pocket says, “The note is legal tender for all debts, public and private.” That is the manifestation of the “Legal Tender Laws” and court decisions. It means creditors have to accept U.S. dollars to pay off debts regardless of whether they have no purchasing power. As long as those laws remain in effect, no one in his right mind will make a loan to anyone for any reason, including to the U.S. government, unless they feel confident they can forecast inflation over the life of the loan and get more interest than the inflation rate. Right now, the inflation rate has gone hyper, but no one knows what it is nor is there any reason to believe the rate, whatever it is, will remain constant.
“How can the hyperinflation and the run on the dollar be stopped?”
End the dollar and replace it with a currency that Americans and the worldwide public trust.
“Like a dollar with gold backing?”
The public would trust that, but only after they demanded gold for the paper and always got it without delay. At present, the U.S. government does not have enough gold to do that. For decades, the U.S. government has refused to let anyone see what it is Fort Knox. I’m guessing the reason is there is very little gold in Fort Knox. Also, a gold standard would probably cause a depression because the money supply has to expand as fast as the economy and the gold supply only expands as fast as gold is discovered which is too slow. The new U.S. currency would probably be backed by a commodity index or some new central bank that was constitutionally independent, run by the nation’s most trusted people, and swore on a stack of Bibles that it would not “print” too much money.
“Would that end the run on the dollar?”
Yes, but that would only be the first step. With no ability to “print” money, which is what caused the hyperinflation,and no ability to borrow because the bond buyers no longer trust the U.S. government, the federal government’s only choice would be to cut federal spending by about 50% overnight. The money would be good again, but the federal government would not be able to collect enough of it in taxes to pay Social Security, federal pensions, Medicare, and so on.
“Would that mean rioting in the streets like in Europe?”
Probably some, but I expect Americans would figure out faster than the Europeans that rioting only makes things worse, like in the black neighborhoods in the 1960s.
“So what would Americans do?”
Scream and yell and whine for a while, then realize there is no money to continue their benefits and focus on the more urgent task than complaining futilely—finding money to buy food and pay the rent.
“How will they do that?”
Get a job, start their own business, ask friends and relatives and charity organizations for help. Many, maybe most Americans are out of practice with that because of all the disability and retirement and generous government benefits, but it is essentially just a pre-1970 sort of America. Not a return to the Great Depression. There would probably be a high growth rate in the private sector if the government did not intervene with price controls and all that. They probably will slap price controls and capital controls and tariffs on everything. That will cause a Depression, but it is impossible to maintain those controls. After they are lifted, the private sector will probably boom. Ultimately, all the money the government spends comes from private sector profits. This will force that economic lesson on Americans. The big government people will never go away, but, for a time at least, they will understand that government essentially can never get more than about 18% of the gross domestic product so the only way to grow government is to grow the GDP. That will be a bitter pill for the liberals—they call it “trickle down”—but they had their chance to see if they could defy the laws of economics, and today you can see the disaster it created.
“Who’s to blame? Wall Street?”
It doesn’t matter at this point but it’s sure as heck not Wall Street. The subprime crisis was not Wall Street’s finest hour, but it was chump change. This hyperinflation is caused by “printing” trillions of dollars. Wall Street’s worst day dealt only with billions of dollars. For example, the Fed guaranteed $30 billion of Bear Stearns assets so J.P Morgan would acquire Bear in March 2008. $30 billion. TARP was less than a trillion and it has mostly been paid back with interest. The problem today is caused by $15 trillion of national debt and deficit spending of more than a trillion a year. Wall Street firms only deal with amounts like that in their dreams. Wall Street cannot “print” money. And Wall Street doesn’t want hyperinflation. They own lots of fixed-rate bonds which is the worst thing you can have during hyperinflation. Wall Street is getting killed by this. This is all government—both Democrat and Republican.
Did the subprime crisis cause what’s happening today?
The subprime crisis, which was discovered in 2007 and 2008, has pretty much washed through the system especially today which causes the remaining underwater mortgage homes to probably no longer be underwater.
Switching to one of the financial channels we find the crawler streaming commodity and foreign currency prices—the measures of the falling purchasing power of the U.S. dollar. Precious metals and other commodities are soaring in price as are some foreign currencies like the Canadian and Australian dollars and the Swiss franc. Countries with fiscal problems like those of the U.S. also are experiencing high inflation.
On the political channels, the President, congressmen, and senators appear one after another white-faced with terror—knowing their political careers are probably over—desperately flailing at oil companies, Wal-Mart, currency speculators, bond short traders, China keeping its currency too cheap, and the other usual suspects during inflation. Shrieking in high dudgeon, they vow to outlaw, investigate, and imprison those who caused this and claim the perps are all businessmen. They promise bank “holidays” (you cannot get your money out of your bank for an indefinite period by order of the President of the United States), price controls, tariffs, and more regulation of business. Pundits debate whether the politicians will get away with blaming business. Economists debate how price controls, tariffs, and regulations will affect the economy and hyperinflation.
Back to the financial channel,where a reporter is explaining that the loan industry has almost entirely shut down. Businesses who routinely borrow for the Christmas season or to plant crops or to come out with a new product or build a new factory find no debt financing available. “There is virtually no credit available at this moment for anyone. And the number of people who want credit has suddenly exploded because of how easy the loans will be to pay off as their payments stay the same but the incomes of businesses and private sector workers adjust upward for inflation. Also, many businesses rely on routine 30-day credit. For some, the loss of that credit will just be an inconvenience. For others, they will have to cut back their business activtiy or even go out of business because they do not have the cash to pay COD.” “Will that cause a depression,” he is asked. “At the house of the businesses who must have credit, yes. But overall, everyone on earth trading all their dollars for hard goods will cause a manufacturing and other commodities boom which will offset the credit crushing of many businesses. Plus whatever business the crushed businesses did will be picked up by their competitors as new business.”
Another channel is quoting daily newspaper executives as saying most ads for tomorrow’s paper have been cancelled. The stores have no inventory to sell. Their shelves were emptied by today’s mobs frantically trading dollars for hard goods. “Can your paper survive loss of most advertising?” “Not for long. Most of our revenue is from ads. And the last two decades have not been good for newspapers. This could be the coup de grace.”
The anchor switches to another report who has been interviewing manufacturing executives. “Are they ramping up production?” “Yes, but warily. They recognize that there is still demand to buy more hard goods, but also that as the prices rise and the public spends their cash on hand that they will soon lose the ability to buy more. Essentially, today’s frantic purchases were just robbing sales from the future, not a long-term increase in demand. Also, get this, they are going to start paying the employees daily so they can go spend the money immediately before it loses value. I’m told that during hyperinflation in Germany in the 1920s, workers got paid twice a day and immediately left the factory to go spend the money.”
On another channel, a reporter comments that “It is not just the consumers who are frantic to spend their dollars. It’s also the businesses. As soon as they get money from the consumer they try to spend it on more inventory. No one wants the dollar, Both consumers and businesses are treating dollars as if they were hot potatoes or live grenades—passing them onto the next guy as fast as they can.”
More video shows vast expanses of empty seats in sports events and theatrical performances that were sold out well in advance. The ticket holders are out trying to find hard goods to buy.
Another video shows men in a bar complaining that the second round cost more than the first.
It gets far worse after the first day
The above is my best guess at the things that will happen the day the world stops trusting the U.S. dollar. It will be a “you ain’t seen nothing yet” day. Things will get far worse and more complicated in the days after the first day. We’re talking suicides, harmful laws, university endowments disappearing, persons who live on income from certificates of deposit, annuities, Social Security, bond interest, bond principal, and more screaming in anguish and anger and begging for food.
My book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition needs 320 pages to explain all this. The chapter on “Government and institutional reaction”—which forecasts the long-term responses of government, banks, stock exchanges, and so on covers 22 pages what you can expect to happen—based on what happened in the many countries that have had hyperinflation in the past.
Mainly, the book describes what the title says, how to not get hurt by this. One big piece of advice is to go to the stores and foreign currency sellers now before the above “day the dollar dies” events take place. Simple advice to follow. Sounds a little dumb today when the store shelves groan with goods. But if you wait too long, you will confront what I described above. When I wrote about the empty store shelves in a previous web article, a reader who had lived in another country that suffered hyperinflation in recent decades said the empty store shelves overnight was exactly what happened there.
You have two choices: you can convert as much of your money into food and other goods before the store shelves are empty or you can wait until after they are empty. And what’s the harm if you stock up now on food, household supplies, office supplies, inventory if you have a business, forever stamps, pennies and nickels (see my book for details), and so on? If, somehow, we avoid hyperinflation, you will simply have bought some stuff sooner than usual that you later consumed.