Monday, 23 February 2009

Logical Hyperinflationist Rebuttal

Peter Schiff has recently explained how the 'temporary strength in the dollar' has destroyed his vision of events and his clients' portfolios. Eric deCarbonnel, on the other hand, takes on Peter Schiff's critics by depicting the same hyperinflationary collapse which looms over the US.

The root cause of deflation and hyperinflation is the same: a nation plagued by mountain of debt. This mountain of debt can be in form of a massive national debt, an insolvent financial system, or both. What determines whether a debt-plagued nation experiences deflation or hyperinflation is the response of that nation’s monetary authority:

A) If the monetary authority does nothing while a country defaults on its debt, its banks go bankrupt, and its depositors see their savings wiped out, then that country will experience deflation.
B) If the monetary authority chooses to monetize a country’s national debt, its banks’ bad loans, or the savings of depositors at failed banks, then that country will experience hyperinflation.

It is simply not true. Japan did monetize debts, saved its banking system and kept the interest rates at zero. For 2 decades I have heard about bad loans kept alive in the Japanese banks. Eric's description argues : after 20 years of hyperinflationary monetary policies in Japan, you would need today ten truck loads of money to buy a loaf of bread.

Today, the US is the nation facing hyperinflation as the fed monetizes debt, and the EU looks set for deflation as the ECB allows Europe’s financial system to collapse.
The USD rally will end when Europe's financial system starts collapsing. Investors will realize that the EU won't print money to bail out its banks, and that will send the euro soaring against the dollar.

No. Europe has been bailing out its banks for over a year. It is bailing out its automobile industry. Europe will continue to bail them out not to allow its financial system to collapse and the economy to halt. Germany's opposition will likely lead to the euro's ultimate collapse. Europe is printing like mad, although quietly.

Anyone who thinks things are going badly in China hasn’t been paying attention. Optimism is growing in China. Economists now project that China will be the likely leader of an elusive worldwide economic recovery.
China has irreversibly begun to break its “dependence” on US consumers.

This cannot be serious. China has a centrally and manually orchestrated economy. Poverty, corruption, reliance on the capital and technology from the West. China is boosting its housing market by : slashing mortgage rates, lowering real estate purchase tax, council tax and land tax. This is an inflationary war footing against prudent savers. The average Chinese household may have saved up to 20.000 pounds. Optimism will turn savings into housing bubble and electronic gadgets. So much for a worldwide economic recovery.

3) China’s treasury holdings are a much bigger problem for China than they are for the US.

I love this one. While it is true that China is having problems dealing with their massive dollar reserves, to then say that those reserves are a bigger problem for China then the US is hilarious.

Simply put, if you had to choose, which problem would you rather have?

A) China’s problem of having “too much cash”
B) The US’s problem of having “too much debt”

I choose too much debt. As long as I print their 'too much cash' and I default on somebody else's lending.

The US is not facing a decade of falling prices, because :

Agricultural commodities NEED to head higher and soon, to prevent even greater food shortages and famine. The price of wheat, corn, soybeans, etc must rise to a level which encourages the planting of every available acre with the best possible fertilizers. Otherwise, if food prices stay at their current levels, production will continue to fall, sentencing millions more to starvation.

Unless you pay with currency gaining purchasing power, which will be the unfortunate case.

6) If China floated the yuan, it could easily get smashed like other export based economies.

A quick comparison of the fundamentals backing the yuan and the dollar should reveal how they would fare if the yuan was floated.

I won't sell USD/CNY. It would be pure suicide. Besides, Eric's comparison doesn't take into account the most important fundamentals; 1) USD is a world reserve currency. 2) USA are the world's biggest economy. 3) China's economy is flawed and unnatural.3) So is CNY.

ANYTHING is better than the US dollar: Yuan, euro, yen, gold, silver, oil, food, art, etc… Even the British pound will be worth more against the dollar by the end of the year. (and the British pound isn’t going to be worth much…)

This stands against 7 month USD bull market. Everything but JPY has been smashed in dollar terms. Currency trends last longer than 7 months. Price trends eliminate investors who stick to ill-conceived beliefs.


  1. Concerning the economic status of the US, most of your beliefs seem to me to be "the standard view".

    My interpretation of US economic events is this:

    Inflation(already happened)

    Deflation, possible liquidity trap(happening now)

    Hyperinflation(yet to happen)

    Between 2002 and 2008, due to inflation, it is well known that the dollar has devalued by about 50%.

    According to the M1, M2 and CPI(inflation) charts - all lines are now heading South. Vertically.So the US economy is in a deflationary spiral right now.

    Bernanke and the US Govt. have been printing money for months, buying bank stocks, toxic assets, buying currencies and together with Obama's spend, spend, spend policies are trying desperately to stimulate inflation. They have been doing this for several months now and it's plainly not working. Truckloads of dollars are out there, but noone is spending or lending - so the velocity of money is low causing an iliquid, deflationary economic situation.

    With interest rates almost at zero and Bernanke continuing to print money to no avail or effect, the situation could also be described as a liquidity trap.

    And deflationary liquidity traps, historically, always end in hyperinflation.

  2. Yes, this is the standard deflationary standpoint. I am not concerned with fears of hyperinflation. Why should I? I have stuck to my 'cash is the king' strategy for 2 years now and I am rewarded. If any signs of hyperinflation appear, I can buy virtually anything as a hedge. A house (prices falling now globally) stocks (prices crashing globally), commodities (at most bottoming now). I am worrying more about possible governments' devaluations at one swing.
    Inflation is the supply of money and credit. The supply of money and credit was expanding for decades. Credit expansion always leads to what we are witnessing now : destruction of trillions of false value created by it. It dwarfs Bernanke's and Treasury's efforts which will never bring about what they dream about.
    I was a young boy, when I experienced hyperinflation in the 80's Poland. The communist government was in control of people's payroll. The economic crisis forced it to raise the wages parabolically. The Japan's modest "cash handouts" are nowhere near that.
    Unless the central banks destroy deliberately their currencies, we are going to see debt liquidation, economic activity depressed, cash gaining value even in gold terms, growing savings, diminishing consumption, and stocks much lower than today. Deflationary depression is a self-feeding process which may last years. Government bailouts and other policies are reinforcing it.