Deflation, Hyperinflation & Vanishing Cheerleaders

Government Cheerleaders:
Lie to the left!
Lie to the right!
Stand up, Sit down!
Lie, Lie, Lie!
[courtesy Google Images]

Who is like unto the beast, hmm?

While the alternative-media posted its premature warnings, the Main-Stream Media (MSM) have persistently cheered the government, Federal Reserve, and monetary and economic systems.  According to the MSM cheerleaders, the “recovery” has arrived—and even if it hasn’t, it soon will—and besides, everything is under control so, “don’ worry, be hoppy.”

However, in the past month or so, I’ve been surprised to see a significant upswing in the number of MSM articles that have abandoned their cheerleading to warn of an impending economic shock.

How odd.  The MSM have begun to duplicate the “alternative media’s” warnings.

Where I’d typically found MSM articles that hollered “Rah, Rah, Rah!” for the economy and nascent “recovery,” I’m now finding a growing number of “run, you mutha’s run!” articles.  In just one day, I saw MSM articles with headlines like, “The IMF’s Prediction, the Federal Reserve and the $2.6 Trillion Time Bomb” (Huffington Post), “Schwarzman Warns of Next Financial Crisis” (Barrons.com), and “Get ready for a 4,000-point Dow drop” (Market Watch).

The sudden increase in MSM “doom and gloom” headlines implies that the alternative media’s persistent warnings may finally (and soon) be shown to be right.  Perhaps, the economy has become so fragile that even the MSM is being forced to report the truth.  Next thing you know, even our politicians might try telling the truth.

It could happen.

•  David Stockmanis a former U.S. Representative from The State of Michigan (1977–1981), Republican, and Director of the Office of Management and Budget (1981–1985) under President Ronald Reagan.  He writes as part of the alternative media and is critical of the MSM “cheerleaders”.

Stockman recently published an article entitled, “What is Around the Corner Is a Flaming Meltdown of the Fed’s Third Financial Bubble.”

Despite his hyperbolic title (“Flaming Meltdown”?), Stockman’s article clearly expresses his pessimism concerning America’s immediate future.  Stockman warns that another “Great Recession” (not a “Recovery”) is approaching and it’ll be at least as painful as that of A.D. 2008.

Stockman opened his article by complaining that when government recently admitted that the U.S. GDP suffered a 0.7% decline in the first Quarter of this year, some prominent MSM “cheerleaders” immediately declared that that loss was,

 “. . . all a mistake due to winter, strikes and unseasonal seasonals.  So don’t sweat the small stuff, the US economy actually continues bounding along at a 2.5% growth rate, as it has for the entire recovery.”

“Unseasonal seasonals,” hmm?

Our economy is “bounding along”?  No kidding?

Stockman could barely contain his contempt,

“First and foremost there is no such trend as 2.5% growth. . . .  In fact, measured from peak to trough, [the Great Recession] was the worst downturn since 1950.  Real GDP shrank by 4.2% compared to an average of 1.7% during the previous nine recessions. . . .  The compound annual growth rate over the 29 quarters since the pre-crisis peak in Q4 2007 is just 1.0% . . . .  Cumulative growth in real final sales has been only 8%.  There is no 29-quarter period even remotely this bad since the early 1930s.”

Stockman went on to list: 1) more reasons why the US economy is headed for big trouble; and, 2) more evidence that the MSM is complicit in that trouble because it’s been previously unwilling to report the reasons for the coming collapse.

For example,

“After the Great Recession, the next weakest cycle on the chart is the subpar gain of 2.2% per annum for 2001-2008. During that period the Fed expanded its balance sheet in a then unprecedented manner from $500 billion to $900 billion—but only got a housing boom and bust, not an improvement in real growth.

“Throwing the rule-book of sound money to the winds, [since A.D. 2008] the Fed then ballooned its balance sheet by 5 times to $4.5 trillion . . . and got even less to show for it. That is, a 1% economy—and that’s on the generous side.”

In order to stimulate the economy, the Federal reserve almost doubled its debt in the seven years before the onset of the Great Recession in A.D. 2008 and then increased its debt by five times from in the six years after.  Result?  Virtually no stimulus.  The Fed failed.

•  Then, Stockman declared that it’s a “near certainty that [the Fed’s] Zero Interest Rate Policy (ZIRP) will eventually end and that the dollar will rise with it.”

I agree with Stockman’s prediction that the dollar’s value will “eventually” rise significantly.  But I disagree insofar as I think that rise will only be temporary.

A rise in the dollar’s value (purchasing-power) is deflation.

Deflation causes debtors to repay their debts with dollars that are more valuable than the ones they borrowed.

Deflation thereby enriches creditors while it impoverishes debtors and thereby drives debtors towards bankruptcy.

The US government is the world’s biggest debtor and is therefore the one entity most vulnerable to US dollar deflation.

Deflation is more than government’s adversary or even enemy.  In relation to an overly-indebted government, deflation is anathema.  Deflation and an overly-indebted government can’t coexist.  There can only be one.

The fiat monetary system depends in inflation.  If the dollar enters a period of serious and persistent deflation, either the government, or the deflating dollar, will be destroyed.

I’m betting that, in the event of persistent deflation, the government will survive.

If I’m right, a deflating dollar will have to be somehow killed.

If the fiat dollar dies, so will most of value of the paper debt-instruments (like stocks, bonds, pension funds, bank accounts, etc.) denominated in fiat dollars.

If I’m wrong, the deflating fiat dollar will live and the government will expire in overt insolvency, default and bankruptcy.

•  Hitler wasn’t the first politician to propose a “1,000 year Reich”. No government wants its people to believe it’s transitory.  Every government wants its people to believe that it’s both indispensable and immortal—but no earthly government is either.

The US government is no exception.  If the idea that the almighty US government might die in bankruptcy seems impossible—remember the A.D. 1991 disintegration of the former Soviet Union.  If the government of the USSR can die, so can the government of the US.  The average American may not believe that possibility, but I’ll bet that the movers and shakers in the Federal Reserve and federal government are very much aware of the government’s potential transience.

•  If the US government’s survival is threatened by deflation, and if a choice between a deflating dollar and a viable government could be made, the intentional destruction of a deflating, fiat dollar is far more likely than an overt bankruptcy by the federal government.

However, deflation doesn’t necessarily require the death of the deflating currency or of the overly-indebted government.  A deflating dollar could be tamed (not immediately destroyed) by simply restoring significant inflation.

We could keep both the overly-indebted government and our fiat dollar, if we could cause the dollar to be inflated rather than deflated.  Inflation favors debtors since they can repay their debts with cheaper dollars.  Inflation favors consumers and is essential to the “consumer economy”.  Inflation favors the US government because it’s the world’s greatest debtor.  Therefore, an overly-indebted government has a vested interest in causing inflation.

Government wants inflation.

The problem, as Mr. Stockman observed, is that in the seven years before the Great Recession, the Federal Reserve tried to stimulate inflation by almost doubling its balance sheet.  In the six years since A.D. 2008, the Fed increased its balance sheet by another 500%.  But, despite these seemingly incredible efforts, the Fed failed to cause much inflation.

So far, government seems unable to cause significant inflation (a/k/a “economic stimulation”).  As measured by the US Dollar Index, the fiat dollar experienced roughly 20% deflation over the past fifteen months.

IF the forces of deflation can’t be “tamed” by modest, Fed-made inflation, we may be back to an either/or situation where either the fiat dollar must die or the overly-indebted government will perish in bankruptcy.

Persistent deflation might destroy the economy by precipitating a national depression.  Why?  Because people tend to save rather than spend dollars that are growing more valuable.

Deflation tends to destroy all debtors by increasing the true magnitude of their debts (they’re forced to repay their debts with more valuable dollars).  As the world’s biggest debtor, the US government could be pushed into overt insolvency, massive debt default, bankruptcy and even destruction by persistent deflation.

But deflation won’t destroy the fiat dollar by making it more valuable. As the deflating dollar becomes more valuable, it will be saved, protected, hoarded and preserved.  Deflating dollars won’t be casually spent, but they will become more precious.  Increasing the value of anything is no way to destroy it.

Deflation might destroy the economy or even an overly-indebted government.  Deflation will not destroy the fiat dollar.

•  If deflation seriously threatens the US government, I see only two ways to achieve dollar destruction:

1. Unilateral hyperinflation. If the US government acts all by itself to cause hyperinflation, it will destroy public confidence in the dollar over a period of, say, 2 years.  As public confidence falls, the dollar dies.  During hyperinflation, the true value of every debt denominated in dollars will be reduced or destroyed by borrowers repaying their obligations with cheaper dollars worth only a dime, perhaps a penny, maybe less.  Creditors will be ruined.  But debtors (including the US government) will be enriched and empowered by easily repaying virtually all of their previous debt with hyperinflated dollars.
2. Global “reset”. By “global reset,” we mean a period when virtually all the governments of the world cooperate and agree that virtually all the fiat currencies in the world (especially US dollars) will be inflated and subjected to a sudden, significant loss of value.  “Global” is not “unilateral”.

Under a global “reset” the US would renegotiate the value of the dollar in relation to some or all of the remaining world currencies so that the value of the dollar and other currencies would be fixed at reduced values (inflated) so as to eliminate much of the value of existing governmental debts.

But, even though the idea of a “global reset” is routinely referenced by today’s economists and gurus, there’s a problem that makes the “reset” improbable.

Some nations (like Greece and the U.S.) are net-debtors.  They’ll be happy to “reset” (inflate) their currencies so as to reduce or eliminate much of their debts.  A “global reset” would enrich the debtor-nations by reducing their debts.

But some nations are net-creditors.  A “global reset” could expose them to huge financial losses.  Insofar as nations like Germany and China are net-creditors, they aren’t likely to consent to a global reset which will devalue currencies and the value of their bonds.  China currently holds over $1 trillion in US bonds.  Do you think China will easily agree to a global reset that reduces the value of that $1 trillion by 50% or 90%?  I don’t.

Insofar as the global economy needs the creditor nations (Germany, China, etc.) to pull the global economic plow, I doubt that a “global reset” can be achieved without the creditor-nations’ consent.  I doubt that the creditor-nations will consent to taking a “global haircut”.  I therefore regard talk about a “global reset” as wishful thinking (unless the reset was achieved by fixing the value of each nation’s currency in relation to something tangible, like gold).  But a global reset based strictly on readjusting the relative values of the world’s fiat currencies strikes me as virtually impossible.  The creditor-nations almost certainly won’t consent.

All of which implies that IF deflation persisted and threatened the US government with insolvency, default and bankruptcy, that deflation could not be “tamed” by causing significant inflation, but a deflating fiat dollar could be destroyed by causing hyperinflation.

Implication:  As Mr. Stockman implies, there may be some deflation in our immediate future, but inevitably, we are headed towards hyperinflation as the only solution to the National Debt problem.  In hyperinflation, the US dollar will become as worthless as the former Zimbabwean dollar and the real value (purchasing power) of our National Debt will be reduced to something close to zero.  Government will shed crocodile tears over hyperinflation, but will be as secretly elated as a college graduate who just found out his college tuition debt had been canceled.

•  Is ruinous deflation heading our way? Mr. Stockman seems to think so:

“In fact, the jobs report is a lagging indicator. That’s especially true in the present US business world dominated by a stock market obsessed C-suite.”

By “C-suite,” Stockman means the corporate offices/suites of senior corporate executives who are “Chief Executive Officers,” Chief Financial Officers,” and others whose titles start with a “C”.

  “Just like in the run-up to 2008, [chief corporate executives] are over-inventorying labor, believing that the stock averages are forecasting higher sales and demand just around the corner.

“Unfortunately, what is really ‘just around the corner’ is a flaming meltdown of the Fed’s third financial bubble this century.  When the markets finally break, we will witness once again a dual liquidation of excess labor and stockpiled goods.”

A “dual liquidation” of both “excess labor” and “stockpiled goods” (excess inventory) means rising unemployment and falling prices for both labor and goods.  That means more deflation and an economic recession or depression.  And that, in turn, means big trouble for all debtors—including government.

Again, because our government is overly-indebted, it can’t survive long-term deflation which effectively increases the size of the debt.  Faced with persistent deflation, government must either create inflation to save the dollar and the government, or cause hyperinflation to destroy the deflating dollar and the government’s unpayable national debt while preserving the government, itself.

Look at Zimbabwe.  Their recent hyperinflation destroyed the Zimbawean dollar, but the Zimbabwean government survived.

I expect to see the same if the US goes into hyperinflation.  The currency will die.  The government will survive.

•  Stockman: “The same pattern holds on the productivity front.  Just like last time, bullish-minded business is over-hiring at the expense of productivity growth. On a year over year basis, 2015’s Q1 productivity in the business sector posted a tepid gain of just 0.5%—the same figure as 2014.

“In fact, after an initial surge during the excess labor liquidation of 2008-2009, productivity has flat-lined ever since.

“The false signals of returning prosperity have caused US business executives—who have become even more stock-options obsessed—to indulge in their own form of irrational exuberance.”

Stockman offers an intriguing hypothesis:  the “black swan” most likely to trigger an economic decline will fly from the offices of major corporate executives.  Mistakenly believing the government’s false claims of that a “recovery” and “returning prosperity” are “just around the corner,” these “C-suite” executives have mistakenly invested in excess labor and excess inventories.

These investments have been irrational.

When that truth is understood, the corporate executives will panic as they try to preserve quarterly profits by slashing labor and liquidating excess inventory.

•  If Mr. Stockman’s observations and hypotheses are correct, we’ll soon find ourselves at a moment when excess labor must be laid off and excess inventory must be sold off at a fraction of its intended cost. In that moment, expect corporate profits to plunge and unemployment rates to rise.

All of which should contribute to lower prices, more poverty, more dependence on government (which is already broke), increased bankruptcies and persistent deflation which—as I’ve written—will ultimately cause government to either declare bankruptcy or to print, print, print so many more fiat dollars that they hyperinflate the dollar—and the national debt—unto death.

•  There’s a growing chorus of MSM journalists who’ve abandoned economic “cheer-leading” and instead begun to echo the warnings of the alternative media and men like David Stockman. Increasingly, even the MSM believe the economy could be on the verge of a major decline.

The increased frequency of MSM warnings implies that a major economic decline could be imminent and might begin as soon as the 3^rd or 4^th quarter of this year.