The U.S. Cannot Avoid the Next Economic Meltdown and Hyperinflation

I was having a discussion with a ‘progressive’ (yes …one of them!) the other day whose mantra of the day was:

“If Obama and the Democrats have really destroyed the economy and were the small business anti-Christ’s like so many people believe …then someone ought to get that message over to Wall Street because earnings/stock prices etc. have never been higher.”

This he concluded was:

“Because of Obama and the democrats and not in spite of them”.

Have you ever tried to explain something to someone who wasn’t smart enough to know they weren’t very smart? Frustrating isn’t it? Not to say that this sort of arm chair analysis and conclusion are logically flawed, unreasonable, or to the casual observers even counter intuitive. If the market is always right …then times must be good for business since their stock prices are way up…right?

Nope…I wish that were the case…but it’s not. What we are seeing in the equity markets right now has nothing to do with the fundamentals. You see the problem is that when no one (with common sense, that is) can justify why stock prices are going up this far for this long in the face of this much uncertainty, there is a strong chance that they shouldn’t be going up. That isn’t investing, that’s crazy.

Remember that is was just a year ago I wrote:

“We’re not just in a recession; we’re in a negative economic mega cycle and with nothing to support the start of significant growth of any kind… Because there is absolutely nothing positive going on right now and spending by consumers has no dynamic to sustain it”

Think about it:

“Old people have lost their interest income, one out of four mortgages, or more, have had more than 100% of their equity sucked out and spent and as a result are currently upside down, easy mortgage lending is gone for the foreseeable future, and all of the homeowners whose homes were lost to foreclosure will not be able to reenter the market any time soon. The problems we have in front of us are serious, systemic, and terminal. It’s too late for the government to fix…if it wanted to”

Growth driven solely by debt expansion, as encouraged by the Fed in recent years, ultimately is not sustainable; it is temporary, as has become painfully obvious to many in the still-evolving systemic-solvency crisis.

So why are we seeing the run up in stock prices if things are so bad? First off, is the market really going up, or is the dollar going down?

Hold that thought and recognize that there are other explanations that are just as equally persuasive. Does anyone remember 2007/8 ….well the same factors that fueled the run up in housing prices, (a.k.a the “housing bubble”), specifically, the “dollar carry trade”

This term refers to the belief that low borrowing costs around the world are allowing traders to borrow at low rates, gear up and then buy higher yielding assets, or t speculate in the commodities markets . The nature of the recent earnings from the likes of Goldman Sachs and Barclays indicate that banks who are too big to fail, and too well connected to go to jail and who are able to borrow freshly printed US Dollars from the Fed at a rate of .025% in almost limitless quantities that they will borrow it and will use it to generate profits that boggle the mind, or as George Soros (a man who is no stranger to currency carry trades) put it recently:

“The banks are being gifted huge profits by central banks pumping billions into the system, which the banks simply put to work in stocks, emerging market debt, gold etc.”


The problem is that this can’t go on forever and at some point the Fed, ECB and other central banks are going to have to put their foot on the brake and start working on an exit strategy. Whether this means the end of quantitative easing or higher rates in 2012 or maybe even 2013, at some point the dollar carry trade will end. When that happens we are in for some very bad, hyperinflationary times that will be much worse than the hyperinflation in Germany in the 20’s.
Are there any Germans who can remember that back in the early 20’s it cost 21,500,000,000 marks just to mail a letter?”

The U.S. government and the Federal Reserve have committed the system to its ultimate insolvency, through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, gross mismanagement, and a deliberate and ongoing effort to debase the U.S. currency. The worst part of all of this is that as we sit here today …the U.S. has no way of avoiding a financial meltdown that will be extremely difficult, painful and unhappy times for many in the United States.
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4 comments
  1. I've been watching this all unfold with a lot of trepidation. Wondering how to position for a long term slide.First, Obama's speech will go down as a watermark. He announced his unseriousness about doing anything to reduce the deficit/debt, and the rating agencies signaled their displeasure. The government-sanctioned banking industry scam in which the path back to "health" includes borrowing from the Fed at near zero and lending to the federal government (buying treasuries) at 3% doesn't exactly inspire confidence in good fundamentals.What happens when QEII ends on July 1? And how fast does it happen? The rapid expansion of the Fed's balance sheet has caused asset bubbles to inflate. When and how fast will they deflate?And how best to reposition to profit when it happens? I hate to have to ask that question, but what's the alternative? Just let my own wealth get destroyed along with the country's future?

  2. The historical evidence for what is about to happen to us is easy to find. German, Serbia, Zimbabwe, Japan, etc.. Its frustrating our leaders either don't see it or don't care. Or they care more about reelection.

  3. @ Anonymous- Historically there have been several incidences of the extreme hyperinflation we can expect to see here. There was post WWII Hungary, and fairly recently Zimbabwe. The example you suggested from the 1920's Weimar Republic is probably the most analogous to our own based upon You hot upon scenarios in In certain aspects, the current U.S. situation is even worse than the Weimar situation. The US economy today is not in the process of rebuilding but rather is flailing about with all of it's deep rooted structural problems caused by Clinton and the exporting of all of our manufacturing jobs overseas. These structural problems run so deep that using every tried and true economic stimuli strategy in our bag of tricks won't effect it. We are woefully top heavy with entitlement programs we can't afford …compliments of politicians who like being re-elected and a public too lazy to do anything but hold their hand out or steal. Add to that a central bank that has allowed us to substitute the expansion of our personal debt for what would normally be economic growth.But most importantly when the Weimar Republic inflationary crisis was being dealt with there wasn't the additional issues inherent in entering (and trying to manage our way out of)an out of control hyperinflationary event when the currency at issue is also the reserve currency for the world. The worst part of all of this is that the government and the lying sleazeballs running it will continue to do one banking and accounting trick after another before they come clean with everyone. There aren't very many people still alice with clear memories of what the depression was really like and I don't think it's possible for 99.999% of the people in the US and the world to be able to wrap their brains around the magnitude of what is coming … The global implications are staggering

  4. @Rob, you know what sound investment advice you would give to someone else facing these circumstances…well those are the same exact wealth preservation strategies we use for ourselves. Like you I saw this storm brewing on the horizon several years ago and moved the money I have any say on and / or control of slowly out of anything that wasn't depression resistant (as much as possible) or that would not profit when the economy came crashing down. I own all of my gold at $400 an oz and lower, and at comparable levels with silver and a couple of others. Basically anything that I could touch and would retain its value in inflation adjusted nominal terms regardless of how many dollars it would take to buy it at the time. What concerns me the most however is the fact that very few of the 300 million Americans we live with in this country have ever experienced anything like what I think is coming our way in the very near future. I have witnessed how people behave when they are angry, hungry, frustrated and feel helpless and powerless and it's not a very pretty sight. Proof that most of the people won't be prepared is the sad fact that it took an act of God to get cuts of a paltry 61 billion dollars (or whatever it was) and the non stop whining about how "cruel" and "evil" these few cuts will be, not to mention how hysterical the left is over Ryan's proposed budget plan that is the equivalent of putting a band aid on a severed artery. Surviving this from a financial standpoint means preserving wealth and assets. Also directly impacted, of course, are those holding or dependent upon U.S. dollars or dollar-denominated assets, and those living in “dollarized” countries. While there will most certainly be significant global repercussions the hyperinflation will be mostly a phenomenon we get to experience here. From the things I have read people should be rat-holing enough of the essentials (food etc) to get by for several months while an effective barter system can become normalized. The good news is this: 1) It will slow and reverse our current immigration problems 2) After an event like this runs it's course everyone who comes out of it will be a die hard fiscal conservative. The reason they aren't now is because it's so easy (and makes people feel so good) to advocate for all of these programs when they don't cause any degradation of their own lifestyle…but when it does … they won't be anywhere near as anxious to bury themselves or this country in debt again anytime soon.

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