Hyperinflation vs Deflation….continued

More from inside the Diner on the Hyperinflation/Inflation/Deflation Question.  Click here to read the full debate ETERNALLY  in progress.

Ashvin Pandurangi of TAE wrote:

I recommend everyone here to take a look at FOFOA’s latest (behemoth of a) post – Hyperinflation or Deflation?

The most interesting thing for me is that I agree with 99% of what he writes in that post, and I think he provides A LOT of genuine insights (such as the importance of comparing marginal [i]flow[/i] of dollars in the “physical plane” – US public deficit vs. trade deficit), but I still strongly disagree with his theoretical foundations, general worldview (including his very benign view of the monetary system – i.e. no malicious intent) and many of his conclusions.

However, I DO agree that dollar HI is a) very likely in the medium to long-term (let’s say 8-20 years) and b) much more likely than a prolonged period of regular old inflation. With regards to a), FOFOA doesn’t think that sort of timing is very important, but I most certainly do.

Anyway, it is a great post, even though it is very difficult to get through in one sitting.

I read through some of this eruption of prose from the keyboard of FOFOA, and will finish eventually but after skimming what I didn’t read in detail, the main problem here is the fact FOFOA refuses to make any kind of timing bet, which is rather critical in all of this.

Even deflationistas like myself will grant that the denoument of currency collapse can come in the form of a hyperinflation. I maintain however that an HI cannot be supported until and unless Da Goobermint or the Banks which control it start handing out free money to the end consumers. The “Free Money” could comein the form of Goobermint “Make Work” projects like the WPA or a straight Dole, or from the Banksters it could come in the form of massive new loans made to EVERYBODY, from corporations to municipal Goobermints to keep paying their workers.

At the moment, neither of these outcomes is on the horizon for the FSofA, and for 99% of the people out there, Dollars are a SCARCE commodity and hard to come by. HTF can you get an HI out of something so scarce? If you take the definition of an HI as 6% monthly inflation, you’ll double prices in about a year. If that occurs with gas here now, gas sales will PLUMMET because people don’t have the money to buy gas even at current prices.

Contrast this with the situation in Greece if/when they reissue Drachma. The Greeks will issue this TP to pay all their pensioners and Civil Service workers to keep them employed. Any beginning devaluation against the Euro of say 50% will rapidly further devalue. There is no tie to actual productivity in a Drachma reissue. There is no tie to Drachma and Oil to run the economy. The Drachma is meaningless.

The Dollar remains meaningful as long as its tie to Oil remains in place, and as long as dollars are scarce in the real econmy. Though I did not read all the way through FOFOA’s post, I don’t see where he ties together the proxy status of the Dollar as representative of a given quantity of Oil. Long as Saudi’s will take Dollars for Oil and the dollars are scarce to end consumers of said oil, you just can’t support an HI in the Dollar.

The MOMENT the Saudis will NOT take dollars for Oil is the moment it can HI. Then they become as worthless as New Drachma. Everybody who has any Dollars in the Bank of Sealy will try to dump them all at the same time, and whatever is left on the shelves of Walmart will FLY off those shelves at rapidly increasing prices. Then you’ll get your HI until all the warehouses and distribution centers are cleared of goods. Of course, Da Goobermint will likely step in here with Ration Coupons and so forth to stop that scenario from occurring.

At the moment though, there is little danger the Saudis will stop taking Dollars for Oil, because the House of Saud has a Gun duct taped to the side of its collective Sheik Heads. The Gun is the Big Ass Military,and without it the House of Saud is TOAST. The Sheiks will be LITERALLY eaten alive by the population surrounding them. This is the POLITICAL side of the equation that FOFOA never seems to deal with, all his arguments are economic ones.

In any event, for most people it is the TIMING that is most critical here. That the currency will collapse at some point is inevitable, but when do you divest and what do you do in the meantime? My “solution” here is to reamin as liquid as possible so I can divest rapidly for hard goods when the final collapse comes. To be able to do that, I forgo investments that in the interim might provide an increasing pile of funny money if I choose correctly.

Finally, on the Gold issue, the deal with Gold is that even assuming it holds some value that Fiat does not, by the time you work your way down to trading in Gold, there will just be nothing around worth buying for it. The whole JIT system will collapse, all trade with China will collapse, there just will not be anything to buy once Gold is all there is anyone “trusts” anymore. No Letters of Credit, no Bankster will be trusted for anything. You can’t move a Global Economy shipping Gold Bars from one place to another, its even probably impossible to do it moving piles of Gold from one holding cell to another in the Basement Safe of the NY Fed.

Meanwhile, until Da Goobermint starts handing out Free Money to J6P the way it does to the TBTF Banksters, I don’t think we will see HI in the Dollar. For sure, it has to wait until after both the Euro and Yen collapse also. Not on the immediate horizon, IMHO.

RE

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