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http://www.fgmr.com/hyperinflation-l...in-moment.html
Hyperinflation Looms – The Dollar Arrives at Its ‘Havenstein Moment’
April 20, 2010 – There is an interesting article in Canada’s Globe & Mail about the lack of growth in the US money supply. Ignoring for the moment that the quantity of dollars in circulation is significantly underreported, it observes:
“The money supply in the United States is doing something that almost never happens: it’s shrinking, after taking into account inflation. Similar episodes in the past have usually been scary times for investors. Declines in the amount of money in circulation have coincided with recessions, and some analysts looking at the current trend say it is a harbinger of trouble. Despite signs that the U.S. is in recovery, they worry that the money supply numbers indicate the economy remains vulnerable to the feared double-dip downturn, or is close to experiencing deflation.”
I agree with the first half of this proposition about a renewed economic downturn, but not the second. In fact, rather than deflation, the dollar is moving ever closer to hyperinflation.
How is deflation possible when crude oil prices have more than doubled since their post-Lehman crash low? Or more broadly, how can there be deflation when the price index of 19 commodities compiled by the Commodity Research Bureau rose 47% during this same period? It cannot of course, which means there is no deflation.
The ongoing decline in the purchasing power of the dollar has been masked by wealth destruction as over-priced assets like houses fall back to realistic levels. There is also the problem that the mainstream media broadcasts only the government calculated CPI, which is an inaccurate measure of the dollar’s eroding purchasing power.
As John Williams of www.shadowstats.com notes: “Over the decades, the BLS [Bureau of Labor Statistics] has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept.” John reports that his “SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to about 9.5%” in March from a year ago.
So the Globe & Mail article is wrong about deflation, but I am not drawing attention to it just because I agree that “the economy remains vulnerable to the feared double-dip downturn”. Instead, this article unintentionally offers compelling evidence that the dollar is approaching hyperinflation.
The so-called “shrinking” money supply that arises when adjusting for the loss of purchasing power from inflation is a characteristic portending imminent hyperinflation. Let’s call it a ‘Havenstein moment’, named after the ill-fated president of the Reichsbank who presided over the destructive hyperinflation that devastated Weimar Germany.
I first explained this phenomenon in September 2007 and questioned then whether the dollar would eventually hyperinflate because Ben Bernanke would follow the footsteps of Herr Havenstein. I quoted an insightful section from Murray Rothbard’s excellent book, The Mystery of Banking, that explicitly explains the consequences of the inflation-adjusted money supply. Here is the relevant part of that quote:
“When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels. Total cash balances are no longer sufficient to carry transactions at the higher price.”
As the Globe & Mail observes, these circumstances prevail today. Prices of goods and services are rising, but as it warns, the quantity of dollars in circulation is “shrinking, after taking into account inflation.” This “shortage of money” is being widely misinterpreted as deflation, which is exactly what happened in Weimar Germany shortly before the Reichsmark was swooped up in its hyperinflationary whirlwind.
Rothbard provides his usual brilliant insight to explain what happens once the “Havenstein moment’ is reached. There are two alternatives.
“If the government tightens its own belt and stops printing (or otherwise creating) new money, then inflationary expectations will eventually be reversed, and prices will fall once more – thus relieving the money shortage by lowering prices. But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public’s cash balances to ‘catch up’ to prices, then the country is off to the races. Money and prices will follow each other upward in an ever-accelerating spiral, until finally prices ‘run away’…[i.e., hyperinflate]”
Weimar Germany took the second alternative.
The dollar has now reached its ‘Havenstein moment’. Will policymakers follow the prudent advice of Murray Rothbard and ‘tighten its belt’? Or like Herr Havenstein, will Mr. Bernanke continue to ‘print’?
No need to ponder these two alternatives. The Federal Reserve must ‘print’, for one reason. Despite the noble goals assigned to it in textbooks and offered in Congressional hearings, the Federal Reserve exists for only one reason – to make sure the federal government gets all the dollars it wants to spend, which consequently has put the dollar on a hyperinflationary course.
Spending by the federal government is out of control, causing it to borrow record amounts. The money to fund this growing mountain of debt must come from savings or ‘printing’, and the sad fact is that there is not enough accumulated savings in the known universe to satisfy the spending aspirations of Washington’s politicians. So beyond what it can collect from taxpayers and extract from the world’s savings pool, the dollars the federal government is spending can only come from one place – the ‘printing press’, which in the prevailing monetary system means bookkeeping entries of the Federal Reserve.
This process of creating new dollars ‘out of thin air’ creates the hyperinflation, which the ‘Havenstein moment’ indicates is near. Sadly, like Weimar Germany, few people are prepared for this impending destruction of the dollar, but the remedy is simple – as much as practical, avoid the dollar. Own physical gold and physical silver instead.
http://www.fgmr.com/hyperinflation-l...in-moment.html
Hyperinflation Looms – The Dollar Arrives at Its ‘Havenstein Moment’
April 20, 2010 – There is an interesting article in Canada’s Globe & Mail about the lack of growth in the US money supply. Ignoring for the moment that the quantity of dollars in circulation is significantly underreported, it observes:
“The money supply in the United States is doing something that almost never happens: it’s shrinking, after taking into account inflation. Similar episodes in the past have usually been scary times for investors. Declines in the amount of money in circulation have coincided with recessions, and some analysts looking at the current trend say it is a harbinger of trouble. Despite signs that the U.S. is in recovery, they worry that the money supply numbers indicate the economy remains vulnerable to the feared double-dip downturn, or is close to experiencing deflation.”
I agree with the first half of this proposition about a renewed economic downturn, but not the second. In fact, rather than deflation, the dollar is moving ever closer to hyperinflation.
How is deflation possible when crude oil prices have more than doubled since their post-Lehman crash low? Or more broadly, how can there be deflation when the price index of 19 commodities compiled by the Commodity Research Bureau rose 47% during this same period? It cannot of course, which means there is no deflation.
The ongoing decline in the purchasing power of the dollar has been masked by wealth destruction as over-priced assets like houses fall back to realistic levels. There is also the problem that the mainstream media broadcasts only the government calculated CPI, which is an inaccurate measure of the dollar’s eroding purchasing power.
As John Williams of www.shadowstats.com notes: “Over the decades, the BLS [Bureau of Labor Statistics] has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept.” John reports that his “SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to about 9.5%” in March from a year ago.
So the Globe & Mail article is wrong about deflation, but I am not drawing attention to it just because I agree that “the economy remains vulnerable to the feared double-dip downturn”. Instead, this article unintentionally offers compelling evidence that the dollar is approaching hyperinflation.
The so-called “shrinking” money supply that arises when adjusting for the loss of purchasing power from inflation is a characteristic portending imminent hyperinflation. Let’s call it a ‘Havenstein moment’, named after the ill-fated president of the Reichsbank who presided over the destructive hyperinflation that devastated Weimar Germany.
I first explained this phenomenon in September 2007 and questioned then whether the dollar would eventually hyperinflate because Ben Bernanke would follow the footsteps of Herr Havenstein. I quoted an insightful section from Murray Rothbard’s excellent book, The Mystery of Banking, that explicitly explains the consequences of the inflation-adjusted money supply. Here is the relevant part of that quote:
“When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels. Total cash balances are no longer sufficient to carry transactions at the higher price.”
As the Globe & Mail observes, these circumstances prevail today. Prices of goods and services are rising, but as it warns, the quantity of dollars in circulation is “shrinking, after taking into account inflation.” This “shortage of money” is being widely misinterpreted as deflation, which is exactly what happened in Weimar Germany shortly before the Reichsmark was swooped up in its hyperinflationary whirlwind.
Rothbard provides his usual brilliant insight to explain what happens once the “Havenstein moment’ is reached. There are two alternatives.
“If the government tightens its own belt and stops printing (or otherwise creating) new money, then inflationary expectations will eventually be reversed, and prices will fall once more – thus relieving the money shortage by lowering prices. But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public’s cash balances to ‘catch up’ to prices, then the country is off to the races. Money and prices will follow each other upward in an ever-accelerating spiral, until finally prices ‘run away’…[i.e., hyperinflate]”
Weimar Germany took the second alternative.
The dollar has now reached its ‘Havenstein moment’. Will policymakers follow the prudent advice of Murray Rothbard and ‘tighten its belt’? Or like Herr Havenstein, will Mr. Bernanke continue to ‘print’?
No need to ponder these two alternatives. The Federal Reserve must ‘print’, for one reason. Despite the noble goals assigned to it in textbooks and offered in Congressional hearings, the Federal Reserve exists for only one reason – to make sure the federal government gets all the dollars it wants to spend, which consequently has put the dollar on a hyperinflationary course.
Spending by the federal government is out of control, causing it to borrow record amounts. The money to fund this growing mountain of debt must come from savings or ‘printing’, and the sad fact is that there is not enough accumulated savings in the known universe to satisfy the spending aspirations of Washington’s politicians. So beyond what it can collect from taxpayers and extract from the world’s savings pool, the dollars the federal government is spending can only come from one place – the ‘printing press’, which in the prevailing monetary system means bookkeeping entries of the Federal Reserve.
This process of creating new dollars ‘out of thin air’ creates the hyperinflation, which the ‘Havenstein moment’ indicates is near. Sadly, like Weimar Germany, few people are prepared for this impending destruction of the dollar, but the remedy is simple – as much as practical, avoid the dollar. Own physical gold and physical silver instead.
| Price vs. Value in the Inflation/Deflation Debate http://www.fgmr.com/price-vs-value-i...on-debate.html | ||
| Aug 26, 2008 - A friend recently wrote to me saying that value is what you are offered when you want to sell something. I disagree. What is offered is a price, which may be above, below or at fair value of the item being sold. For example, we all know that stocks sell at a price that at any time can overvalue, undervalue or fairly value that stock. The same thing can happen with houses. In the United States, and indeed much of the world, house prices rose in recent years during a period of easy credit in which mortgages and other loans were plentiful. The availability of easy credit always leads to bad investments and money being spent unwisely. Proof of this point is self-evident from the bankruptcy of lenders like IndyMac Bank and the collapse of Fannie Mae and Freddie Mac and other institutions that extended housing loans imprudently. We are now seeing the inevitable shake-out from a period of easy credit, and housing prices are declining as a result. For example, the widely watched Case-Shiller home price index released today by Standard & Poor's indicates that the decline in U.S. home prices is accelerating. Prices dropped a record -15.9% in the past year. This decline in the price of homes is wealth destruction. But wealth destruction is not deflation. Many people confuse this point. Deflation is the opposite of inflation. Both are monetary phenomena. Inflation is an increase in the quantity of money, with the consequence that each unit of money purchases less and less over time as the inflation proceeds. Deflation is a contraction in the quantity of money, with the result that each unit of money purchases more and more over time as the deflation proceeds. Right now, M3 (the total quantity of dollars in circulation) is growing by over 15% per annum. This rate of growth is highly inflationary, so the dollar is being inflated. This inflation is incurring even though there is much wealth destruction as a result of declining house prices. | ||
| M3 Resurrected http://www.fgmr.com/m-three-resurrected.html | ||
| September 3, 2007 - M3 has been resurrected, so I have my trusty roadmap back. We can once again closely track what is happening to the dollar by watching the annual growth rates of M3, which is the total quantity of dollars in circulation. I have been extremely critical of the Federal Reserve and time and again derided its decision announced back in November 2005 that it would stop reporting M3 after February 2006. The Fed's reasons were that banks would save $1 million of administrative costs annually and further, that M3 according to the Fed was no longer needed. By any rational test, both of these reasons come up short. They just do not seem plausible. In today's age of computer-based accounting and reporting, are we to believe that banks manually process by hand reports for the Federal Reserve, Office of the Controller of the Currency, FDIC and other agencies? No, it doesn't seem believable that reporting this one statistic is a burden or a significant cost. And how can the quantity of money and its rate of growth remain important to European central banks but not the Fed? No, the Fed's stated justification did not make sense. Clearly there had to be some other reason for the Fed's decision to stop reporting M3, particularly given the reality that central banks only tell you what they want you to hear. What did the Fed not want us to hear? My view has been that the Fed does not want anyone watching it inflate the money supply. The Fed does not want anyone to see the true growth in the quantity of dollars in circulation. Here's what I wrote early last year about this important point: "What is the real reason the Federal Reserve stopped reporting M3? The answer is very simple. The Federal Reserve wants to hide the truth. They want to hide the fact that they are inflating the dollar." (The end of M3 - Hiding the Truth About Inflation) In other words, if the quantity of dollars increases faster than the demand for dollars, the price of goods and services rise. We get inflation when there are simply too many dollars chasing those goods. Now with M3 having been resurrected we can once again see those dollars being created, but is not the Fed to whom we owe our thanks. Rather it is John Williams of Shadow Government Statistics (SGS) www.shadowstats.com who is now calculating and making this M3 information available. Here are John's own words to explain how he does it: "M3 consists of M2 plus institutional money funds, large-denomination time deposits, repurchase agreement liabilities and eurodollar holdings at foreign branches of U.S. banks. More than 70% of the non-M2 components of M3 are accounted for by institutional money funds and large time deposits. The Fed has continued reporting institutional money funds as a memorandum item in its H.6 report on Money Stock Measures. Large time deposits at commercial banks is reported regularly in the Fed's H.8 report on Assets and Liabilities of Commercial Banks. These numbers allow modeling of a good estimation of the large time deposit number used in M3 calculations. Representing less than 30% of non-M2 components of M3 and less than 10% of total M3, the repos and eurodollars are being modeled by SGS econometric models."  This chart will be familiar to long-term readers of these letters. The blue line plots the annual growth rates of M3 at each month end, and we can see a clear picture of what happened to the dollar over the past 32 years - inflation, disinflation, and even deflation for that brief period in 1992 when M3 had a negative growth rate (i.e., M3 was less than it was the year before). Note that the blue line ends in February 2006 because it is based on data provided by the Federal Reserve. The period since then - which is noted by the red line - is based on the data available from SGS. And while that red line is an eye-opener, it should not be too big a surprise to the readers of these letters. I've been writing about the "Bernanke inflation" since he was first appointed Federal Reserve chairman. It has been my expectation that Ben Bernanke will go down in history with Rudolf Havenstein, the hapless manager of the Reichsbank during the horrific hyperinflation of Weimar Germany. They speak the same language. Bernanke drones on about adding "liquidity", but that is the same thing Havenstein used to say. Here is a useful and insightful quote by Murray Rothbard in his excellent book, "The Mystery of Banking". It provides a detailed explanation of what happened in Weimar Germany, which also provides us with some guidance as to what is now happening and will continue to happen to the dollar: "When expectations tip decisively over…to inflationary, the economy enters a danger zone. The crucial question is how the government and its monetary authorities are going to react to the new situation. When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels. Total cash balances are no longer sufficient to carry transactions at the higher price. The people will then clamor for the government to issue more money to catch up to the higher price. If the government tightens its own belt and stops printing (or otherwise creating) new money, then inflationary expectations will eventually be reversed, and prices will fall once more—thus relieving the money shortage by lowering prices. But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public's cash balances to "catch up" to prices, then the country is off to the races. Money and prices will follow each other upward in an ever-accelerating spiral, until finally prices "run away,"…Chaos ensues, for now the psychology of the public is not merely inflationary, but hyperinflationary, and [the] runaway psychology is as follows: "The value of money is disappearing even as I sit here and contemplate it. I must get rid of money right away, and buy anything, it matters not what, so long as it isn't money." A frantic rush ensues to get rid of money at all costs and to buy anything else. In Germany, this was called a "flight into real values." The demand for money falls precipitously almost to zero, and prices skyrocket upward virtually to infinity. The money collapses in a wild "crack-up boom." In the German hyperinflation of 1923, workers were paid twice a day, and the housewife would stand at the factory gate and rush with wheelbarrows full of million mark notes to buy anything at all for money. Production fell, as people became more interested in speculating than in real production or in working for wages. Germans began to use foreign currencies or to barter in commodities. The once-proud mark collapsed. The absurd and disastrous way in which the Reichsbank—the German Central Bank—met the crucial clamor for more money to spend immediately in the hyperinflation of the early 1920s is revealed in a notorious speech delivered by Rudolf Havenstein, the head of the Reichsbank, in August 1923. The Reichsbank was the sole source of paper money, and Havenstein made clear that the bank would meet its responsibilities by fulfilling the increased demand for paper money. Denominations of the notes would be multiplied, and the Reichsbank would stand ready to keep its printing presses open all night to fill the demand. As Havenstein put it: "The wholly extraordinary depreciation of the mark has naturally created a rapidly increasing demand for additional currency, which the Reichsbank has not always been able fully to satisfy. A simplified production of notes of large denominations enabled us to bring ever greater amounts into circulation. But these enormous sums are barely adequate to cover the vastly increased demand for the means of payment, which has just recently attained an absolutely fantastic level, especially as a result of the extraordinary increases in wages and salaries. The running of the Reichsbank's note-printing organization, which has become absolutely enormous, is making the most extreme demands on our personnel." In contrast to Havenstein, Bernanke doesn't need a printing press to create 'money'; he has a computer to do that. And that is exactly what he has been doing, as is clear by the page-1 chart. The result is also clear from what he has been telling us. We all know that the Federal Reserve is just one of the central banks that have been adding "liquidity" over the past few weeks as the subprime mess worsened, and adding "liquidity" is just another way of saying adding newly printed currency. So is hyperinflation in our future? At this stage, no one of course knows, but we do know that more inflation is in our future. After all, the above chart is telling us that message loud and clear. | ||
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