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Philip Haslam: When Money Destroys Nations

Understanding how currencies collapse
Monday, March 23, 2015, 4:54 PM

The global debt glut, plus the related money printing efforts by the world's central banks to try to stimulate further credit growth at all costs, leads us to conclude that a major currency crisis -- actually, multiple major currency crises -- are practically inevitable at this point.

To understand better the anatomy of a currency collapse, we talk this week with Philip Haslam, author of the book When Money Destroys Nations. Haslam is an authority on monetary history, and more recently, has spent much time in Zimbabwe collecting dozens of accounts of the experiences real people had as the currency there failed. 

This week, he and Chris discuss the process by which a hyperinflationary currency collapse occurs:

In South Africa, there's a river called Suicide Gorge where you can jump off from the top of a series of waterfalls. You jump off each waterfall, and you can then go down to the next. But the problem is, once you jump off each waterfall, you can’t get back up again. So we used this analogy to describe the process of hyperinflation.

Typically, as a government prints money, you get levels of inflation. But that’s inflation based on historic money printing. Every year, when you get your salary increase, you base it on historic processes. You take the latest consumer price index and then build it into your wage increases. If you're a business, you'll build it into rent increases and price increases of your products. But it's all based on historic inflation.

But then the time comes when a cultural shift occurs and people begin to say "Hang on a second, my salary increase was based on historic inflation, but I'm beginning to lose purchasing power -- I'm getting poorer and poorer. Stop giving me increases based on last year, and give me increases based on next year." So the inflation becomes based on a future money printing, rather than historic money printing. That's what we call our first 'gorge moment'.

That leads very quickly then into our second gorge moment, which is where the rate of price increases actually outstrips the amount of money in the economy and you get money shortages. In 2003, the economy in Zimbabwe experiences fierce money shortages. You had massive queues at the banks, real shortages, everyone trying to take their money out of the banking system. It became a real problem as people began to distrust the banks more and more. They actually wanted to hold their money directly, concerned that the banks actually did not have it.

Gorge moment three is when that pressure begins to work its way into the real economy and margins begin to decrease to the point where stores begin to close. That is a real cultural shift. Before, stores were open; goods were expensive but you could still get food and you could still get goods and services. But at gorge moment three, the formal supply sector shuts down.

Gorge moment four is when the banking system begin to stop lending. If you are lending money to someone and, a day later, that money you lent has lost value, you no longer want to make loans. You're going to use that money to go speculating and buy things that will hold value. So gorge moment four is very close to gorge moment three. Stores close and credit dries up. People stop lending.

Following this stage is gorge moment five: a curious consumption hysteria develops that we call 'scorched money'. It's when people try to take their money and get rid of it as fast as they can because if you hold it instead, it's going to lose value by the next day and you can buy less and less with it as time goes on. People will do anything to get rid of their money and find anything that will hold some value of some sort. It’s a crazy, consumption hysteria where everyone’s buying everything. There is huge amount of demand, but in reality, production has stopped. So you have this entire consumption of the economy where all goods and services get consumed.

Finally comes the sixth gorge moment which is the death of the currency and the final collapse of the money-based system.

Click the play button below to listen to Chris' interview with Philip Haslam (52m:19s)

Transcript: 

Chris Martenson: Welcome to this Peak Prosperity podcast, I am your host, Chris Martenson. Well, here we are in 2015, the world is now carrying over two hundred trillion dollars in debt. Central banks are busy printing money to bail out a hopelessly off-track system of crony capitalism, and an even larger problem looms in the not too distant future. Namely, money and debt are growing exponentially. But those are just claims against real wealth, which cannot grow exponentially. The world, after all, is finite.

But the lure of an easy fix today has proven entirely too hard to resist for politicians in diverse cultures across all of history. Romans, Germans, Chinese, North, Central and South Americans, and many others have succumbed at one time or another, sometimes repeatedly, to the lure of printing money, with equally terrible and predictable results every time.

But today, you, we, are being asked something extraordinary, which is to believe that this time is different. This time, the central bankers are going to get it right. They will print just enough to encourage growth and stave off deflation without igniting a currency-destroying event. Now, to help us understand where we are in that delicate path with nirvana on one side and currency destruction on the other, and to understand what it’s actually like to live through a hyper inflationary event—which is really just a loss of faith in currency—we have invited Philip Haslam, author of the new book, When Money Destroys Nations, to speak with us.

The book is a fascinating mix of ground level stories of hardship, survival, and skillful maneuvering by ordinary Zimbabweans as their currency imploded, as well as very easy and understandable explanations of the economics and decisions that drove the process.

Welcome Philip, it is really great to have you on our program today.

Philip Haslam: Hi Chris, and greetings to your listeners.

Chris Martenson: Oh, well thanks for that. So you wrote much of the book from the ground level at the experiences of ordinary people in Zimbabwe. Why did you take that approach?

Philip Haslam: I have been interested in monetary economics for the last fifteen years, and have been going around doing presentations on the global banking system and how the economic world works, particularly from a monetary focus.

During one of those presentations, my current coauthor, who was a colleague at the time, said "you know, we have an example of what happened when a country printed money on a large scale in Zimbabwe, right next door to us." I live in South Africa and we had heard a few stories, but nothing really substantial.

He then followed on to say that he believed there are stories that had not been told, that are just waiting to be told, and I thought that was very interesting, and I decided to interview some Zimbabweans that I knew, and the more I interviewed, the more I was gripped.

The stories were fascinating. They keep me up at night. I would just lie in bed thinking about them, you know... "wow. This actually happened right next door to us." Then I decided to go through to Zimbabwe to interview people on the ground, as many people as I could.

At the time, I interviewed seventy-five people in detail, just with the goal to hear their stories, and the book, When Money Destroys Nations, is a combination of that process, trying to document: Wow... this is what happens to ordinary people on the ground as the government begins to print money.

Chris Martenson: Can you share one of these illustrative stories with us?

Philip Haslam: Yes, I think it is good to highlight the high-level perspective of what happened. Then I can share individual stories of people as they endured it.

Money printing began to put pressure on all those companies that produced goods and services and who delivered goods to the market. So it was your retail and your manufacturing sectors who came under a significant pressure.

Obviously, when you print money it is very easy for consumers because you get this newly printed money and they can go and buy real goods and services. But it’s the stores on the other side that actually have to bear the brunt of that newly printed money.

So businesses came under significant pressure, and by 2006 most of the stores began to empty. The fuel stations began to run dry, did not have any fuel, and could not get any fuel. Water ran out, electricity was cut, and so you had this real secession of supply and produced many fascinating economic things if you look at it with an economic hat.

But individuals going through that were under significant pressure. Most people who lived in the cities had based their entire lives around being able to go to stores to buy food and to be able to turn on the tap to get drinkable, potable water. Now suddenly those supply systems were removed and the economy then descended into a barter economy. You couldn’t... it was very difficult to purchase things from the stores and the only way you could get proper goods and services was to find friends who had various goods, and you would bring your goods to your meeting place. Typically, they would meet around social networking places, such as golf clubs and those sorts of things. In the back of the golf club, people would meet and physically barter milk in return for wood, or grain in return for fuel, that sort of thing.

One of the guys I interviewed, his wife did all the sourcing of the food. He was a CEO of a large company in Zimbabwe, and his wife had to leave urgently because her mother fell ill. And so she said "look, just look after the house for a week and I’ll be back hopefully at the end of the week. Can you feed the kids and do all of those things?" And suddenly, he was in a bit of a pickle because he’d go to the shops, couldn’t find anything. Could not get anything. He was not connected into the network as his wife was, so he tried to find some food. Could not get any food, and very quickly his sons consumed whatever there was in the house. He then managed to source through one of his friends, a large kilogram of cheese. So for three days they lived on cheese. And eventually, he got so desperate, he could source fuel through his company, so he got fuel, drove to the border and went and did a huge shop at the border in South Africa, because he just couldn’t get anything. He said it was a remarkable time, and he did not... he had no idea what to do, given that he could not go to the stores to fetch his food.

Chris Martenson: That seems counter intuitive that more money equals less stuff. It happens a lot, but I think for a lot of people they’re going to be wondering what that process is. People who have not lived through that inflation. I am certain that people in Venezuela understand this process at the moment. Why is it that printing money leads to things vanishing from stores?

Philip Haslam: We have to assume a small island economy where you just have a few people on the island and each person specializes in different things and there was a currency being used. If we go and increase the amount of currency that is being used on that island, everyone who did not have that money before now has that money and can go spend freely. When I asked people what would happen if we went and printed money on this island, everyone says, well, that is obvious. Prices would rise.

There is actually an economic process for that. So first of all, people get all this money, they go and they spend the money to buy real goods and services, and businesses that supplied those goods then have to go restock their store. But by the time they restock their stores, prices have risen. So their net margins begin to decrease. And so it puts significant margin pressure on suppliers, manufacturers and store owners in an economy.

And depending on the level, certainly it begins to grow, so that pressure grows, and the margins begin to decrease and people are working harder and harder just to make the same amount of economic value. And the time comes, as the government prints money, and it begins to escalate, that those margins then become negative and stores begin to shut down.

Chris Martenson: So they are taking in a hundred units of money for something they just sold, but by the time they want to restock it, it costs a hundred and ten units of money, and that is just coming straight out of their bottom line. So really, it is a time problem. The inflation is going faster than your ability to run as a business, something like that. And that’s why we see ... it’s really just pure economics, right? The stores are basically... the longer they do it, the more money they lose. They are making it down in volume, as it were.

Philip Haslam: Yes, I mean, there is this idea, hey we can go print money and give it to people and they can go spend it and everything is okay. But the reality is there is no economic value being created when money gets printed. So the benefit that consumers have is the cost to producers. Unfortunately, all of our economic numbers that you see by—measures and metrics that economists use to measure an economy and economic growth and all those things, those are all focused on consumption. Very, very little emphasis on real production. So, you can go print money and cause your consumption numbers to increase and everyone’s happy. But on the other side, it’s the suppliers and producers that actually are taking the pain.

Chris Martenson: Now this is a really important point, one that we’ve covered a lot at Peak Prosperity, particularly most recently I’ve covered it a lot around Japan. So Japan is busy printing money and they’re doing it specifically to drive the value of the Yen down. And they want to do this so that their exporters get this boost. And they’ve gotten this big boost. You have your Sony’s, Toyotas... they have had this big boost, but this is the thing that is missing from money for most people’s understanding of money: Money is not a real thing; it is a concept. And so, because it’s not a real thing, you can’t create purchasing power out of thin air. So when you print money and you transfer, in Japan’s case, benefit to producers or exporters, or in another case like Zimbabwe, where you transfer this benefit to consumers, from an accounting identity standpoint, one person’s gain is another person’s loss. All you’re doing when you print money is you’re just transferring purchasing power from point A to point B; you’re picking winners and losers in this story. Is that how it plays out? There is always a set of winners and losers?

Philip Haslam: Absolutely, we... in my book Money Destroys Nations, we have tried to highlight that and to show the winners and the losers. But as an economy begins to descend into hyperinflation, there are very, very few winners. The only winners are those that export into foreign currencies. But those who rely on local supply are hampered, so both consumers and producers locally. It really is an alternative path that a country can go to when faced with major debt. So as debts become due, a government can allow its country to default and to experience the pain of a significant contraction, and what some people would call deflation, et cetera. Or they have an alternative to print money on a large scale to pay off their debts. Then that manifests in quite a different set of economic processes, and yet it really is just a manifestation of debt default, but in the process, also collapsing of the currency.

Chris Martenson: I see, so let’s review this then with Zimbabwe. What errors did the central bank of Zimbabwe make, and how did those decisions get made? I am going to guess that there was some debt involved somewhere in this story for them.

Philip Haslam: Absolutely. Hyperinflations are always driven by debt and deficit spending, and it was no different in Zimbabwe’s case. By 1997, the country had been consuming significantly in debt, and they were in the process of facilitating a further credit line with the World Bank, who was getting a hundred million dollar facility for them. At the time, they decided to declare a pension payout for war veterans. And they also sent a whole lot of troops to the Democratic Republic of Congo, and those are expensive things, and the world bank was concerned about the Zimbabwe government’s ability to repay.

And I think there was also a significant amount of relational breakdown that actually happened at that time. But the net result was that in 1997 there was a credit crisis. All lenders withdrew their funding, and the government then decided to continue its spending on a daily basis, but funding this with newly printed money.

That started in 1997 and it took eleven years to work its way through the system and to result in the final collapse of the Zimbabwe dollar as a currency.

Chris Martenson: What was Zimbabwe like before all this began as a country. I mean, from the outside, after the hyperinflation people look at it as sort of a basket case, but it was actually a bread basket, wasn’t it?

Philip Haslam: Yes, Zimbabwe was one of the most prosperous countries in Africa at the time. They had a significant agricultural sector that exported a lot of produce to Europe and to the rest of Africa. They have, even currently to this day, significant mineral wealth, and a very developed mining sector. Their banking system was very developed, one of the most developed in Africa. It was a fiat currency system very similar to the currency systems that you see today in America, Europe, Japan, et cetera. And it was very developed. Very developed supply chains, cities had developed around good, healthy infrastructure, good dams and electricity, and access to basic services for most people. It was like how you would see most countries around the world today, although they had a slightly lower bank rate, probably in the region of sixty to eighty percent of people had bank accounts.

Chris Martenson: That is actually quite high by some standards. So, what... back to the errors then, so there’s some debt, there’s a need to accommodate this debt. Theoretically, they should have had decent external reserves with all that exporting. But the head of the Zimbabwe Central Bank at the time, that was Gideon Gono? Was that the character?

Philip Haslam: Yes, Gideon Gono was the reserve bank governor that was head of the reserve bank during the time of the hyperinflation. So from 2003 onwards to the end, he was the guy that facilitated the vast majority of money printing.

Chris Martenson: I saw some headlines where he basically said, "hey, I just was doing what you guys were doing. I just was first." So he's actually casting himself as something of a trailblazer when compared to the European Central Bank, or the Federal Reserve.

Philip Haslam: Yes, he stated on numerous occasions, "look, we are justified in the money printing that we did over these years because we lived the process." If you look in Japan and Europe and America, they are all doing exactly what Zimbabwe did in the late nineties, early two thousands. And he obviously would blame hyperinflation on other things, particularly he said foreign powers were the influences to hyperinflation. But far from being ashamed of what happened, he is proud of it, and openly comparing Zimbabwe to the other countries of the world.

Chris Martenson: Well that is... good luck with that career rewrite for him. But the serious part of this is: Is he right in any respect that there are parallels that are in any way comparable or reasonable between what Zimbabwe did and what Japan, the United States or Europe is doing?

Philip Haslam: There are significant parallels. Zimbabwe responded to its debt crisis with money printing. There have been fifty-two hyperinflations in the last hundred years. The standard process that leads a country to hyperinflation is that a government will consume a debt and everyone is happy while that happens. It’s great, a whole lot of vested interest groups are encouraging..." the government should spend on this, and government should spend on that." And a time comes when debt limits get reached. Creditors become weary and they pull their funding. It is the same thing that happened in Zimbabwe; it is what you see happening around the world. We are seeing debt, decreased liquidity, decreased incentive for lenders to lend, and governments, just like Zimbabwe, are responding to that by printing money to repay their debts and to continue funding their day-to-day expenses.

Chris Martenson: They have been getting away with it... I mean the scale of printing in Japan for example, utterly dwarfs anything that Zimbabwe tried. Yet Japan seems to be mired in anything but hyperinflation. How do we begin to account for the differences?

Philip Haslam: I think there are a couple of things. The first and most significant would be that money printing takes time to work its way through the system. In Zimbabwe, what happened is very similar to how it is working around the world. They printed money and initially fed it to pay off government debt, but fed it through the banking system. So the banks were the first recipients of the newly printed money.

In fact, by 2003, they were receiving newly printed money on a daily basis. That actually physically would go to the reserve bank and receive large suitcases of newly printed money. They initially sat on that money because they wanted to use it for the reserves, and they were worried about risks associated with banking, et cetera. And a time came when, as inflation began to grow, they began to realize, "hang on a second. We are sitting on all this cash, and it is all unproductive cash." And so there was a fair amount of money printing happening and it was all going into the banking system, and was being absorbed, and then a time came when that money was then released into society as banks tried to get rid of it.

Banks began to speculate heavily, and move away from their fundamental role of facilitating deposits to speculating in markets. So I think, if you’re looking at Japan and some of the other countries that are printing money, first of all, you see a lot of money going into the banking system and staying there.

Second thing is that it’s not only staying there, banks are certainly speculating significantly in property markets, in stock markets, and particularly in debt markets. And you see the asset price inflation and everyone doesn’t include that in their inflation figures, and won’t include that in their inflation figures because that would certainly skew the inflation statistics. When you see the asset price inflation and what you typically have is this rise in asset prices that facilitates a bubble. And a time comes when that bubble is burst, and then you need more increased rounds of money printing.

What we’re seeing at the moment in current world economies is vast amounts of asset speculation and increased bubbles fueled by debt and money printing. And that’s just one step in the process. If we were to take the longer-term view, we certainly would not be as confident in the process.

Chris Martenson: Then the process is sort of a stylized or extractable process that we can compare? Like here are the steps Zimbabwe took, here is how it ended. It took them eleven years there. Note that... Zimbabwe being... I think it is easier to note an inflation or hyperinflation within a single country where you have borders because then the currency can be in relation to something. But here’s my question: Is it possible for all currencies to die at once? How would that happen? So when you have the Yen, the Euro, and the Dollar all being printed like mad, how do we keep track of the process?

Philip Haslam: That is obviously the critical question that everyone has. "Tell me, when is this going to happen and what are the key statistics that we should be looking at?"

I think it is important to get away from quantitative measures. Everyone is like, "what is the key amount of debt that a country goes into that will lead it into hyperinflation when they start printing money?" And they _____ [00:25:33] key figures.

They are much more qualitative aspects of the economics that lead us into this. So we have taken Zimbabwe as a case study, and we have developed six what we call gorge moments. You know like in South Africa there is a river called Suicide Gorge where you can jump off from the top of the waterfalls, and you jump off each waterfall and you can go down. But the problem is once you jump off each waterfall, you can’t get back up again. so we’ve used this analogy to describe the process of hyperinflation.

So typically what you get is, as a government prints money, you get levels of inflation. But that’s inflation based on historic money printing. Every year, when you get your salary increase, you base it on historic processes. You take the latest consumer price index, you then build it into your wage increases. If you are a business owner, you will build it into rent increases and the increases of your products, but it is all based on historic inflation.

A time comes, when people... it is a cultural shift when people begin to say "hang on a second, I have got my increase based on historic inflation, but as soon as I got my increase, I am beginning to lose purchasing power and I am getting poorer and poorer. Stop giving me increases based on last year, and give me increases based on next year." So the inflation becomes based on a future money printing, rather than historic money printing. So that is what we call our first gorge moment.

That leads very quickly then into our second gorge moment, which is where the rate of price increases actually outstrips the amount of money in the economy and you get money shortages. The weird thing is that money printing—this scenario leads to money shortages. In 2003, the economy in Zimbabwe experiences fierce money shortages. You have massive queues at the banks, real shortages, everyone trying to take their money out of the banking system, and it became a real problem as people began to distrust the banks more and more because they actually wanted to hold their money directly, concerned that the banks actually did not have it. So that was gorge moment two where money printing led to money shortages.

Gorge moment three was when that pressure began to work its way into the real economy and margins began to decrease to the point where stores began to close. That is a real cultural shift. Before, stores were open, goods were expensive, prices were increasing, but you could still get food and you could still get goods and services. But at gorge moment three, the formal supply sector shuts down.

Gorge moment four was when the banking system generally began to stop lending. If you are lending money to someone and a day later, that money you lent someone has lost value, you are no longer wanting to make loans. You are going to use that money to go speculating and buy things that will hold value. So gorge moment four was very close to gorge moment three. Stores closed and credit dried up. People stopped lending. By that stage, they developed this curious consumption hysteria that we call "scorched money." People tried to take their money and get rid of it as fast as they could because if you held money, it was going to lose value by the next day and you could buy less and less. Everyone realized "if I want to hold money, I would actually rather buy something and get anything, milk, a game of golf with friends. I'll do anything to get rid of the money and find something that would at least give some value of some sort." And it’s a crazy, consumption hysteria where everyone’s buying everything. There is huge amount of demand, but in reality, production has stopped and you have this entire consumption of the economy and all goods and services get consumed.

So that’s the fifth gorge moment that finally leads to the sixth gorge moment which is the death of the currency, and final collapse of the money based system. Obviously, the last two, or the last four gorge moments would be typically experienced in hyperinflation. But all six are moments of cultural changes that lead an economy into currency collapse.

Chris Martenson: If we look at Venezuela today, let’s think... they are at least at gorge moment three, probably four at this point. I am not clear on what is happening with bank lending down there. But it certainly seems like they’re close. And so you would say that given where Venezuela is in this sequence, they are going to go to gorge moment six, which is death of their currency.

Philip Haslam: Well, their currently moving into the scorched money phase where people are trying to get rid of the currency as fast as they can, and as you said, they’ve been through the moment where it’s difficult to get goods from stores. Stores have emptied and there are significant queues and they are going through a significant credit crisis as we speak in terms of the ability to access capital and get loans—very difficult at the moment. They are not quite at the stage of entering the true hyperinflationary price increases, but they are certainly on their way.

Chris Martenson: Wow, interesting. Let’s imagine that you were in Zimbabwe, or you’re in Venezuela now, or you’re somewhere else where this hasn’t started and you can see that it’s going to start. How do you protect yourself in these... is there anything you can do? And here’s... let me tell you that some of our framing at Peak Prosperity is that these always get sold to the retail level. People are out there at middle class and down, this will be sold as like an act of God that happened, and it just happened to destroy a lot of wealth, and gosh, isn’t that terrible. When the truth is, if you watch carefully, wealth gets transferred extraordinarily from party A to party B, and that when the dust settles, often you find that the ownership structure of the country has changed a lot. Sometimes not all that surprisingly, but generally it changes quite a bit because some people saw it coming and managed to hold on to their wealth. The apocryphal story about the bellhop in Weimar, Germany buying the hotel he worked at for a gold coin or something like that. That people who had the wherewithal to see this coming, some of them actually do relatively well. I will put it that way. Is that accurate? And if it is, how would people... how would you counsel somebody in 1997 Zimbabwe what they should do?

Philip Haslam: It is a very good question and it is a question I get a lot. People say "okay, okay, I am concerned that there may be a risk of hyperinflation, just tell me where to invest. Tell me what must I do with my money and I will do this." But it’s not as easy to answer. There certainly are many stories of people that I interviewed who could see that hyperinflation was coming and they positioned themselves in such a way to do quite well, and they were very profitable.

But the first thing I would say to people is you need to educate yourself around how does printing the money effect you personally? The reality is that we all engage with prices on a day-to-day basis. Everything we do engages with prices. When we purchase fuel, you pay for the prices. When you have your salary pay, it is a price. When you pay rent, it is a price. And you need to ask yourself, "well, how exposed am I to significant price increases?" And obviously, everyone is exposed in various ways, but the reality is this matter is very personal. You are exposed in very intimate ways.

I will give you a practical example. When the stores emptied in Zimbabwe, one of the ladies I interviewed said she couldn’t get hold of any sanitary products. There were no tampons, and so she had to actually connect to her relational network to source these things when she needed them. She said it was a very vulnerable time. So the first thing to learn then is that those who are relationally connected to key sources of supply do very well. If you’re concerned that your country is going into hyperinflation and you are committed to staying in your country, then the best thing you can do is to develop relationships with people who can supply you with goods.

Where would you get fuel if you could not buy fuel? A lot of people say, well maybe we should go and invest in a whole lot of fuel. Well, that is fine, but what happens when your fuel runs out after two months, three months? Maybe you can survive off it for a year, but what happens once you have done that? So developing key relational supplies is very important.

The second thing would be to invest in hard assets. Invest in— it is a changing of the _____ [00:36:03] of thinking, to invest in asset-based investments rather than income-based investments. All income-based investments lost their value. Pensioners who invested in bonds expecting a regular rate of return, that invested in all forms of pension products, lost everything. Pensioners throughout Zimbabwe became significantly impoverished. They based the investments on income producing assets, which lost their value in...

Chris Martenson: I heard that the stock market—theoretically you should have been completely happy, because from '97 to 2008 or somewhere in that zone, I think it went up six hundred thousand percent. Who wouldn’t like that, you know. But I guess inflation went up fifteen million percent, or some other number that just totally made that six hundred thousand percent a complete loss almost.

Philip Haslam: Correct, yes. I have spoken to countless numbers of pensioners and it is tragic. Their stories are tragic. Some of them were enticed. Bank lending rates went up a thousand percent. So you could invest your money and get an eight thousand percent return, and yet it was a trick, because you... the pensioners who did that, and people who invested in the deposits at banks, ultimately lost the purchasing power of the money.
 

That is part of why educating yourself in what happens in hyperinflation is important because all your standard metrics that you use to gage day-to-day life change, and you need to understand, "well hang on a second, this is what actually happens in hyperinflationary society. This is how governments respond fairly standard across the board. This is how the supply chain changes and morphs and this is how I can actually profit from it." We look at this as both a risk aspect and a profitability aspect. There’s opportunity embedded in the money printing, and yet it all flows out of understanding how the system, how hyperinflation works, and being able to position yourself from being able to profit from it.

Chris Martenson: Absolutely, it is just a game, the rules change in the game. Some people figure out the rule changes earlier than others, but boy, it’s hard to keep your bearings when everything you’ve been conditioned for includes things like faith in the system, faith in authority, investments that are going up, "I must be doing well." But it’s keeping... it must be very hard for people to keep their wits about them because our money is one of the largest social contract’s we’ve got. It defines a lot of our narrative about who we are, how we function, what kind of social trust we have; it is really the glue that holds the society together. So when that’s fraying, shredding, that’s a really emotionally difficult moment to navigate. I would think, more than intellectually difficult.

Philip Haslam: Correct. It’s a tremendously personal event and has impacts on relationships, on the way that you do life, on jobs, on all of the things that you rely on. All of these things change as money printing becomes endemic.

Chris Martenson: As you look at where the developed nations are, so Japan, Europe, U.S., what is your assessment on all this? Is it baked in the cake? A lot of people look at this and go "well, there’s a lot of deflationary signs out there that could still overwhelm all of this." My position is that once real deflation actually starts, should it start, our central banks are not out of ammo yet. I have not yet received my check from the Federal Reserve that says I have to spend it by next Tuesday. There are things that they could do. Where do you think the developed countries are on this timeline? Have they already gone off one of the gorge steps?

Philip Haslam: Yeah, it is a great question and it is effectively a timing question. Tell me, when is this going to happen? And I think... we as economists... my coauthor and I have taken the view that we are confident to make bold statements about debt and money printing, and how they are intertwined. And how that leads to hyperinflation. We are not confident to put times on it. There have been many notable economists who will predict how "this year gold is going to go up to this, and this is what is going to happen." The reality is there are some very clever people doing whatever they can to delay the consequences of excessive debt and money printing.

What we can say very clearly is that if governments continue to spend excessively in debt, and if they continue to look to printing money to finance their debt expenses, then they will go down an inflationary spiral that can lead to hyperinflation if governments don’t decide to change and allow their economies to experience some pain.

When people talk about deflation, what they are really talking about is the consequences of debt and allowing the economy to experience contraction and experience debt defaults and all of the negative things that come with that. That is the one alternative.

The other alternative is they can print money and go down an extremely painful and much more destructive event called inflation and hyperinflation.

Chris Martenson: To me it is always once you are too far over the tips of your skis, as we say up here in New England, that means it is irrecoverable. So a government has over promised, over levered itself. In fact, the whole society might have over levered itself. In Japan, the total credit market debt adds up to about a million dollars per household, and there is just no way any average household in Japan is good for that. So, when you get too far out, the question always comes down to: Who is going to eat the losses?

And here’s how I see this breaking down, Philip, is that when you go down the hyperinflationary path, what you’re basically saying is we’re going to spread this pain across the whole population and take purchasing power from everybody who’s got it, and that’s how we’re going to burn the system out. A deflation on the other hand, concentrates losses into the holders of the assets that are deflating. So that tends to be banks, large institutions, very well connected people. You look at the fact that one percent of the people now apparently own half of all the outstanding—I’m putting air quotes up—"wealth" in the world, but much of that is paper wealth.

Deflations ruin them preferentially, and by the way, they hold the reins of power. So, mathematically I can tell you when things are supposed to break, but I can tell you, like you said, lots of very clever people are working very hard not to have this happen. And they’re the ones I think who lose the most in a deflation, which is why I weight my personal probability for outcomes—deflation could swamp the system, but my personal weighting is that you get inflation for human reasons that I can understand, that are more about greed and preservation of self than anything more noble than that.

Philip Haslam: Yes, absolutely. You know if you look at what Mario Draghi  has said, that they will do whatever it takes to stop deflation. Ben Bernanke, in his time at the helm, said similar things, as they have said in Japan. They are openly stating that they will respond to debt crises with money printing. There is no secret about it. The major risk that you will see across the newspapers, et cetera, is deflation. And yet, very few people are talking about the consequences of inflation. It is why I have written this book, When Money Destroys Nations—we wanted to paint the personal picture of how hyperinflation affects individuals on the ground, and how it is not such a great alternative. And we are faced with the very difficult choice of pain now, or extreme pain later. And it looks like the authorities are choosing to go the money printing, extreme-pain-later route.

Chris Martenson: I agree and to me it is as simple as this. If I just look at the United States, and you add up its total credit market debt, and look at everything, here is the interesting part: You wander over to the Congressional Budget Office and they come out with these seventy-five year projections of where the economy is going to go, because that is the input to all of the calculations that say how underfunded are our pension programs, our entitlement programs, social security, Medicare. And you look at this and they just have the economy growing at some three percent rate forever. And so you go up to the year 2070, and you discover that the United States, after compounding at three percent per year for the next fifty-five years, is basically supposed to have an economy that’s five times as large as the entire world at this point. Or something close. It is just this ridiculous number.

But even by the time the United States allegedly has an economy that’s one hundred percent of the world’s, it means that it’s consuming one hundred percent of the oil, coal, steel, other things that are being consumed in the world. It’s clearly not possible, but every number that we’ve got that tells us what kind of a future we can expect in terms of our pensions, our payouts, our entitlements, our investments... all of those are going to pay out if, and only if, we can continually expand the economy at three percent per year going forward.

If we cannot, then there is a gigantic mismatch. That is the thing that mathematically, I can just look at it and say "yeah, there is a problem." The timing—that is the hard part.

Philip Haslam: Correct, yes. If you look at most statistical projections and statistical analyses, they are mostly based on GDP. Those numbers are useful in looking at total trade in an economy, et cetera, but they’re not useful—in our view—at assessing whether an economy can repay debt.

If you are a banker or private equity investor,  and you lend money to someone, you are looking at their ability to repay their debts. You look at their cash flows and their assets, and those things. What you would typically look at, if you were investing with a goal to see a return on your investment, is whether there are tax returns that are equal to the debt that is being consumed.

Debts relative to taxes in most of the developed economies is very significant, and it would exceed most private equity or banking metrics around. So certainly, it is not a sustainable thing.

Chris Martenson: It is just astonishing. So there’s a math problem built in there, but I love what you’ve done in your book is talk about the very real human impact, which is, of course, what it really all comes down to.

Before we close up, I am just wondering, did we make it through all of the steps? I might have cut you off there. You were talking about those who were relationally connected did rather well, so they had ways of sourcing things out. People have thought through, how does printing money really affect me, and then investing in assets versus income-based investments. Is there anything else on that list?

Philip Haslam: There are a few other things. Because money printing breaks down the monetary system, if you can provide alternatives to money and banking, you will do very, very well.

Chris Martenson: Such as?

Philip Haslam: There are four characteristics of money that people need out of money. So, the first is to store a value. The second is it is a medium of exchange. The third is it is a mechanism of capital investment, and finally, you use money as your metric to measure how your trade is doing in your business.

Now, if you break each of those down and provide services to people, for instance in the store of value category; people will just buy cars. Significant investment in cars, just to keep value. There was not any fuel in the economy, so people were not driving those cars, but there was a huge demand for imported cars, just to be able to store value.

In the medium of exchange category, someone came up with a unique alternative to funding and general payments on a day-to-day basis. During the barter times, typically, people would price things in liters of fuel, because that became the most needed commodity. And one of the fuel stations then began to say to people, "look, you pay me up front, you can pay me in foreign currency, I’ll go across the border and get a whole lot of fuel, and issue you with an IOU to say that when I return, you can get a lot of fuel." Those became known as fuel vouchers, and those fuel vouchers literally began to trade as an alternative currency. People used to use it as a medium of exchange. So literally, people would pay for legal fees in wads of fuel vouchers. And by the end of the hyperinflation, the economy was pretty much denominated in fuel vouchers. So that was a great example of people who positioned themselves in payment services.

If you could provide capital of any sort, which was actually very difficult to do, you would do well. If you provide relational bartering services, which would be in the medium of exchange field, you would do well. If you... you can check it out in our book, we do cover that quite a bit, but if you can look predominantly at providing alternatives to money, you will do exceptionally well in hyperinflation.

Chris Martenson: So the true liquidity was provided in that circumstance. So we went to a fuel economy. I heard in Russia after the breakup of the USSR, they had a vodka economy. Pints of vodka were traded around quite constantly before they were consumed. So yeah, those sorts of things pop up. People will always have an economy; they will find a way to get the job done. It may not be with the money system that they used to have.

With that, Philip, your book it is almost out, or is it out?

Philip Haslam: It will be out by March 20, 2015 and you can get it on Amazon, and you can download it as eBook, or you can purchase a hard copy.

Chris Martenson: Fantastic, and I understand you’re getting married shortly thereafter.

Philip Haslam: Yeah, we are very excited; we are getting married on the twenty-first.

Chris Martenson: Book out on the twentieth, married on the twenty-first. Congratulations on both fronts.

Philip Haslam: It is a big moment for us.

Chris Martenson: Fantastic. Well, have an absolutely fantastic time with that. We will provide links to your site, and also to the book, and we’ll get this out because people do need to understand where we are in the story. And I think bringing it home with real stories of what happened to the people in Zimbabwe is a very crucial way to help people understand and internalize and get through the emotional part of saying, "oh that could happen." And that’s what it looks like. So thank you for writing the book, and thank you for your time today.

Philip Haslam: Thanks Chris. Just to reiterate, it's When Money Destroys Nations and I would encourage all our listeners to read it.  

Chris Martenson: Fantastic. And you have a website you want people to know about?

Philip Haslam: Yes—people can go to WhenMoneyDestroys.com. There, we give regular updates. You can sign up for our emailer, which deals with money printing around the world and where the different countries are, relative to our experiences in Zimbabwe, and you can find further details there.

Chris Martenson: Fantastic. WhenMoneyDestroys.com. Thank you so much, again, for your time today.  

Philip Haslam: Thanks Chris.

About the guest

Philip Haslam

Philip Haslam is an economic advisor, writer and speaker. Trained as a Chartered Accountant in South Africa, he furthered his career in finance and economics. He regularly presents to a variety of audiences on money, banking and the international financial system. His latest research into the Zimbabwe hyperinflation provides critical clues to the consequences of money printing. His main goal is to influence multinational monetary policy with sound economic reform. He has lived in both Europe and America, and currently reside in Johannesburg, South Africa.

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24 Comments

Phaedrus the younger's picture
Phaedrus the younger
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Fresh and practical!

Excellent podcast!  The book is on my 'immediate buy' list.  

I've recently found a local organization that's managing a 'time bank' as a form of barter for folks who are either forced out of the monetary economy or who want to participate in community building.   It's an interesting concept but when the chips are down and you need to put food on the table, such as in Zimbabwe, could the time bank get you what you need or is that secondary to real barter?

Arthur Robey's picture
Arthur Robey
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Random thoughts.

I miss the smell of the place. Memories invoke smells, and vice versa.

Investors did suffer. Pensions were wiped out.

My Dad died on a stretcher on the floor, surrounded by other dying men. There was  no room between them.I am grateful to the nurses for doing the best they could with the little they had.

This is economics with it's boots on. You have to look at the main street of the town where you live and get a feel for where you are in the picture. It is a Right Brain thing.

Of course there will be spacial variation, geographical variation. I down play the role of the nation state, and up play the nature of your local economy and culture. The Zimbabweans coveted petrol and Russians vodka. What can your culture not live without? Develop a supply chain of contacts .

 

Arthur Robey's picture
Arthur Robey
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Joke.

I have found this Australian debt clock.

 http://www.australiandebtclock.com.au/

Dividing total private debt by head of population I get a figure of $999 184 per person.

$1 million/per person average?  "Surely you jest Mr Holmes?"

Edit: Silly me, I left a digit out of the denominator.  Only $99,915 .  Round that out to $ 100 000, average. Not too bad, a far as bad things go.

 

davefairtex's picture
davefairtex
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great resource

I really enjoyed the six waypoints of hyperinflation.

From my understanding, hyperinflation starts from the inability of the government to fund itself via debt, and the unwillingness of the government to default on that debt.

So far, the US and Europe (most of it anyway) are able to fund themselves via debt.  In fact, the interest rates are absurdly low.  Money printing is just an attempt to spur lending, not a replacement for a lost funding source.

Once that changes, it would seem to be the key danger sign.  The start to hyperinflation.

 

 

keelba's picture
keelba
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September 10, 2011
I've been saying for some time that hyperinflation is not a monetary condition but a psychological, or more specifically, a sociological condition. The time will come when "the people" say,  "Hang on a second, my salary increase was based on historic inflation, but I'm beginning to lose purchasing power -- I'm getting poorer and poorer. Stop giving me increases based on last year, and give me increases based on next year."
 
No one can predict when exactly this point in time will come. Frankly, in the US I'm surprised it hasn't happened already. Never underestimate the stupidity of the average American. Until this point happens, though,  you have inflation, high inflation, or you can call it super inflation. It is only when the collective masses wake up and realize that they're losing money and simultaneously losing faith in their currency that hyperinflation begins. As long as the masses remain ignorant and keep going about their day to day activities as if they expect tomorrow to be just like yesterday, then things essentially will remain that way, no matter how much inflation we get.
 
But eventually, they WILL wake up. People eventually get smart when it comes to their money. Everyday I wake up and feel like it's Sept. 10, 2011. On that day, everything was normal. No one could predict what would happen the next time they woke up and what they would wake up to or how their world was going to change the very next day. Sept. 10 seemed like a normal day. That's what today feels like for me and every day I wake up. This time, I know another life changing day is coming right around the corner and what it is going to mean. One of these days we're all going to wake up and realize that our world and our way of life has changed forever. 
davefairtex's picture
davefairtex
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wage inflation

About that first hyperinflation waypoint: wage inflation.

We're not seeing any real dramatic wage inflation in the US.  Looks like 2.08% annual average hourly earnings increase (for private sector workers) right now.  And its not accelerating.

Here's a chart of "wages per sector".   Its a bit of a jumbled mess...but it does sort of center around 2%.

sand_puppy's picture
sand_puppy
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CAF Translates the Fed into English

As many already know Catherine Austin Fitts is a former White House insider and investment banker who sees an organized process afoot to shift wealth from the working (and unemployed!) masses into the control of small number of oligarchs who run everything for their own power and profit.  The Fed serves this overall goal while pretending to serve the greater society.

She offers the following translation of the recent Fed meeting.

What the Fed is Really Saying: English Translation 

“Information received since the Federal Open Market Committee meeting in January suggests that economic growth has moderated somewhat.”

The global economy is slowing. The domestic economy is not doing as well as the Fed had expected

"Labor market conditions have improved further, with strong job gains and a lower unemployment rate."

U.S. employment has increased. Many people have temp positions, minimum wage services jobs, or they have dropped out of the job market entirely. The goal is a strong corporate economy without growth in wages

“A range of labor market indicators suggests that underutilization of labor resources continues to diminish.”

The Fed seeks higher levels of employment without labor inflation. All productivity increases in recent decades have accrued to investors; not labor. Fed policies will help this to continue

“Household spending is rising moderately;”

Higher food prices and mandated health insurance mean that we spend more on necessities.

“Business fixed investment is advancing…”

Banks and business can borrow at 0.1-4% and access equity markets. Consequently, they are reinvesting in plant and equipment, including the planet and equipment that will help them automate and reduce employment.

 

Small businesses, students and taxpayers must pay many multiples more; small businesses are not allowed to access or create equity and currency markets.

This engineered divergence in cost of capital between insiders and outsiders is centralizing power and wealth

“The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced.”

We want to grow the economy with cheap labor! We want full employment with low wages!

CAF calls this whole process the "slow burn."

 

 

Arthur Robey's picture
Arthur Robey
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And Moving Right Along.

The difference between the situation in Zimbabwe and the developed world is that the printed money in Zimbabwe was handed out to  the "War veterans" . It was released onto the the ground floor, whereas in the West it has been released to the Big end of town.

Any real manufacturing will become automated with this extra cash, as CAF says.

I am not certain of the role of humans in the future. 

However nothing moves without energy,  hence the importance of the Cold Fusion experiments. If we get their bulk energy above three-to-one now being produced then it is onward and upward.

But not for you, unfortunately. We have other plans for you.

Once we have moved outside this thin envelope of gas, then we will be able to start to expand our numbers again. I should imagine that we will be fairly selective about who get an invitation. 

Everything is predicated on improving that 3 to 1 ratio. Unless someone has other salient information that that I am unaware of?

jzakariasen's picture
jzakariasen
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Cold Fusion Energy yields

Didn't Rossi claim yields as high as 10 :1 based on increasing the hydrogen pressure in the reactor cell? I'm pretty sure I read that somewhere a year or so ago.  I don't think CERN tested the cells at high pressure though.

Can someone who has been following LENR development closely jump in here.  Even 3:1 doesn't seem too bad to me.  Do the economics not make sense at that yield?

Arthur Robey's picture
Arthur Robey
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CF stuff.

Rossi is playing his cards close to his chest. Perhaps he has, perhaps not.  We will know when he has a marketable product.

The open experiments that are an attempt to replicate Rossi's by Parkamov et al yields 3 to 1.  Thermodynamic principles apparently imply that 3 to1 is a lower threshold for the practical production of energy.

More here.              http://coldfusionnow.org/a-new-kind-of-nuclear-reactor/

Searchable news here.              http://www.lenr-forum.com/forum/index.php/SearchResult/26135/

Our own thread here:      http://www.peakprosperity.com/forum/cold-fusion/51623

cgolias's picture
cgolias
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Able vs Unable to Fund via Debt = Touchstone
davefairtex wrote:

From my understanding, hyperinflation starts from the inability of the government to fund itself via debt, and the unwillingness of the government to default on that debt.

So far, the US and Europe (most of it anyway) are able to fund themselves via debt.  In fact, the interest rates are absurdly low.  Money printing is just an attempt to spur lending, not a replacement for a lost funding source.

Once that changes, it would seem to be the key danger sign.  The start to hyperinflation. 

This is perhaps the most succinct and accessible description of the hyperinflation phenomenon (and why it hasn't happened yet) that I have heard. Its not simply the printing, but the reasons and contexts for printing. What a great hanger on which to put all the other details.

The two-fold question then follows: 1) Who is counterparty to US/EU debt and what will cause their demand to wane? and 2) Can the six waypoints be arrived upon out of the order Mr. Haslam suggests? For example, can institutional lending dry up before wages switch their gaze from past to future? What effect would that have?

Do you Dave, or anyone else have any more thoughts on this point? It seems to me like a weird circularity where the Fed buys US debt and parks it on its balance sheet where it sits until...?

pinecarr's picture
pinecarr
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Paperback version of book available in US (in USD)?

Hi Philip-

   I really enjoyed your podcast with Chris, and your description of the phases of hyperinflation (using the waterfall analogy).  I've never heard it explained quite that way, and it really did help make it easier for me to grasp that it is a phased process, not just an on-off switch from "not hyperinflation" to "hyperinflation".  So I think that is a really useful concept.

   Because the material you and Chris covered was so interesting, I checked out your book on Amazon, and decided I'd like to buy a copy.  But the only form available for purchase there is the kindle version.  I guess I'm old-school; I still prefer paper books.:)  I did a search to see if I could find a hardcopy somewhere else, and it looks like a paperback version is available in South Africa on Kalahari.com.  But I'm not finding a seller of the paperback version in the US (or in USD).  Do you have plans on making a paperback version available in the US? 

   Thanks!

   

Dlumb77's picture
Dlumb77
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Escape sovereign debt. But where to?

Cgolias, such a great question:

cgolias wrote:

The two-fold question then follows: 1) Who is counterparty to US/EU debt and what will cause their demand to wane?

From my understanding, almost everyone is on the counter party side. Retirement funds seeking safety in T-bonds, Bank balance sheets loaded up with bonds, Corporations holding their cash in T-bills. Isn't the sovereign debt market the biggest asset class by market cap?

I don't see how you could get a critical mass to defect from the biggest market available. Where would everyone go to?!

(I'm sure Dave would have some insightful ideas.)

robie robinson's picture
robie robinson
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Philip?

me too. as with Pinecarr

I'm a paper preferred reader.

Mark_BC's picture
Mark_BC
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cgolias wrote: The two-fold
cgolias wrote:

The two-fold question then follows: 1) Who is counterparty to US/EU debt and what will cause their demand to wane? and 2) Can the six waypoints be arrived upon out of the order Mr. Haslam suggests? For example, can institutional lending dry up before wages switch their gaze from past to future? What effect would that have?

Whenever I've brought up the future of hyperinflation with those who argue it can't happen, they point out that it has always historically come along with major upsets like wars, etc. I then point out that when it is time for our own hyperinflation to happen, a war will be started. This then leads me to believe that many historical wars were started to shift blame away from monetary problems. It certainly seems possible and likely, considering how I've seen the last 20 years of our history be officially rewritten, completely wrong. Before the internet, who had any recourse to question the official version of history?

As to who is the counterparty to US debt, I think the big issue now is that most new money has no counterparty (except for the central bank issuing it); it is simply from the Fed printing it up out of nothing and assuming that the recipients will continue to accept it. Interestingly, I have been debating on Youtube with a status quo-defending Keynesian economist and he actually argues that this is a good thing because it means we are transitioning towards a debt-free monetary system!!! Of course, only the countries engaging in trade deficits are allowed to do this money for nothing scheme, and the only reason this monopoly money is still accepted by the trade surplus nations as payments for real goods is because... it is still accepted by the trade surplus nations as payments for real goods!!!

Once this ends and those nations decide to reject their unfair trade surplus situations, then the dollar will die. Since the US is a very strong adversary, they aren't willing to do this until they can be sure that the ramifications of rejecting the dollar won't be worse than continuing their trade surpluses!!

As to the comment above that the US dollar is global and that there is no other alternative, that explains why it has been able to continue on for so long. BUT, there is an alternative, and that is gold. There is currently a 2000 t/yr annual deficit and based on the amount of known gold out there, it won't last long. When that market explodes, then the dollar will die and everything will be reset. You can be sure that the elites have a plan for how this will go down so that they can maintain, and strengthen, their power. What they have failed to achieve, however, over the last 10 years, is pull the wool over everyone's eyes. I see more and more people opening up to the corruption inherent to the system, and we have the internet to thank for that. I don't think people will stand for major restrictions on the internet, after the reset happens, without revolt.

David Allan's picture
David Allan
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In a global context

This was a fascinating podcast. I loved the 6 waterfalls analogy and was interested in the 4 key areas to benefit from hyperinflation when it occurs in a single country. There were some quite enterprising ways discussed: for example petrol vouchers and the old petrol from across the border trick.

What I'm concerned about is a global collapse where the infrastructure next door is in no better condition than our own. Surplus food production on a local scale still seems like a pretty good target to aim for.

Michael B's picture
Michael B
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Dollar as reserve currency

I'm from the UK and I think in the US people forget how powerful the reserve currency status is. It has allowed your politicians to do things ours can't and that will be fine for a while longer. However if the BRICS are successful in establishing a new reserve option I think the game will be up. Watch the geo political manoeuvres over the next decades. I noticed that there have been reactions against us as our City guys announced links to a new development bank in China. Watch out World Bank! The game is on.

 

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cgolias
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Always a Counterparty
Mark_BC wrote:

It certainly seems possible and likely, considering how I've seen the last 20 years of our history be officially rewritten, completely wrong. Before the internet, who had any recourse to question the official version of history?

People have commonly written the history of other countries and thus would have exercised a different perspective than a resident. Argentine dissidents moved to Uruguay to write the histories they wanted to write. People traveled and talked before the internet. Not all books could be burned. Not to say that they are objective, and your point that true history is unknowable is well-taken, but this argument reminds me of the inability of all of us to prove that we are awake and not dreaming. How far does it get us? Let's deal in what we know.

Mark_BC wrote:

As to who is the counterparty to US debt, I think the big issue now is that most new money has no counterparty (except for the central bank issuing it); it is simply from the Fed printing it up out of nothing

In a debt-system all money has a counterparty; one man's asset is another's liability (that gold has no counterparty is its value). In Crash Course chapter 8, a simplified version of money "printing" is outlined. Congress needs money so it requests it from the Treasury. The Treasury (not the Fed) issues government debt to raise funds. Banks and other sovereign nations buy it at auctions. In QE the Fed buys US debt from the banks with money that didn't exist prior. That's how US debt ends up on the Fed's balance sheet. On the other hand, the money ends up in the cash reserves of the big banks who either, like Philip said, keep it, invest it, or speculate. So to my question, I am asking what might cause demand for US debt from banks and sovereign nations to wane? Perhaps a preference for other safer havens (e.g. equities?) at a certain point? You simply say "once this ends" and of course it will, but I am interested what the particulars of the "bond market revolt" might be.

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cmartenson
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It could be a while...
cgolias wrote:

culate. So to my question, I am asking what might cause demand for US debt from banks and sovereign nations to wane? Perhaps a preference for other safer havens (e.g. equities?) at a certain point? You simply say "once this ends" and of course it will, but I am interested what the particulars of the "bond market revolt" might be.

It could be a while...but then it will happen all at once.

The basic issue is that all debts are held with the expectation of repayment.  Hidden within that is the multi-decade trend of simply issuing more and more debt.

And contained within that is the certain "knowledge" that the future will always be bigger than the past.  exponentially bigger.

That is, the basic assumptions and "knowledge" sets of the bond market are severely flawed, but not enough bond market participants know that yet.  When they do, look out!  

To make this simple, just look at this chart of the CBO's projections of US GDP growth.  Everything hinges on this being right.

But we might wonder how the US will be able to consume 100% of the world's current GDP in 2078 when oil is more than 50 years in the Peak Oil mirror?  

And if it turns out to be impossible for the US alone to consume the equivalent of 100% of the world's current economic output, then none of the assumptions of the bond market are currently correct and they will have to be amended rather vigorously to the downside.

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cgolias
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Thanks, Chris. It still

Thanks, Chris. It still amazes me that people who buy 30-year debt make so little effort to envision the world in 30 years. It truly seems like they envision simple trading instruments rather than claims on the future world.

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money, counterparties

All-

First, the Fed owns a small fraction of the outstanding public & private debt.  Its less than 10%.

TCMDO (total debt, all sorts, US) = 58.7 trillion

WALCL (Fed balance sheet) = 4.5 trillion

Hyperinflation is ultimately about confidence, not about money supply.  That was the common thread all the way through the podcast.  Hyperinflation is an accelerating lack of confidence by the participants in the economy in the perceived ability of the money to hold value.  That drives various behaviors - each waypoint marks a new behavior, whose root cause is yet another drop in confidence.

So what is that first cause of a drop in confidence?  Rising price levels.  Costs increasing in the general economy.

So there are some pre-conditions for our 6 steps to hyperinflation:

  1. new money is spent in such as way as to result in a rise in the overall price levels
  2. then, wages must rise too - and for wages to rise, workers must have pricing power - in other words, there must be relatively full employment.
  3. new money must be enough to overwhelm any countervailing forces - such as debt deflation.

So - 3 new requirements.  Full(ish) employment.  General price levels rising.  And things have to be running hot enough to overwhelm any debt deflation.

 

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Mark_BC
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cgolias wrote: The Treasury
cgolias wrote:

The Treasury (not the Fed) issues government debt to raise funds. Banks and other sovereign nations buy it at auctions. In QE the Fed buys US debt from the banks with money that didn't exist prior. That's how US debt ends up on the Fed's balance sheet. On the other hand, the money ends up in the cash reserves of the big banks who either, like Philip said, keep it, invest it, or speculate. So to my question, I am asking what might cause demand for US debt from banks and sovereign nations to wane? Perhaps a preference for other safer havens (e.g. equities?) at a certain point? You simply say "once this ends" and of course it will, but I am interested what the particulars of the "bond market revolt" might be.

Yes I guess that 's technically correct, the Treasury issues the debt, the Fed buys it with nothing, so the government is the counterparty to the Fed. That's like Bert being Ernie's counterparty. The Fed isn't going to revolt against the government and demand that the debts be paid back. It's a revolving door between government and the Fed and Wall Street, the idea that any of them act independently of each other is merely theater.

It seems that demand for US debt already is waning but it makes little difference; interest rates are not determined by demand for bonds. Here you see that demand for Treasuries by foreign countries dropped from $4.9 billion net selling in Nov 2014 to $54 billion net selling in Jan 2015. Over the same period foreign demand for total US long term securities dropped from $59 billion buying to $39 billion selling. That's huge. We're having a bond revolt yet inflation has been negative over the last few months and interest rates remain rock bottom. Demand for the dollar is high.

All the authorities have to do to combat inflation from banks speculating on the money printing is allow a little bit of deflation to happen, and simultaneously juice the sensitive derivatives markets to keep them from blowing up in the process. Despite demand for bonds dropping over the years, and exponentially more bonds being issued, the dollar has actually strengthened, it's all very complicated and involves carry trades unwinding, Europe's NIRP and who knows what else, beyond my understanding.

The whole world could sell their treasuries and I doubt it would blow up the bond market, the Fed can just take them. The only thing that's going to blow up the system is if foreign countries cease accepting dollars for trade and confidence is lost and money velocity subsequently increases, or if America intentionally blows it up first. I guess IMHO I don't think any of this is going to (be allowed to) follow a classic hyperinflation because control would be lost in that scenario. Some other cataclysmic event will be brought forward to bring the whole system down overnight. It will be an official reset or destruction, this isn't Zimbabwe. But what do I know.

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Mark_BC
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I did a little more digging

I did a little more digging regarding my numbers above. I found this page which lists Treasury sales and purchases by foreigners all the way back to 1977. It shows net sales in Jan 2015 of $55b which agrees with the other table linked previously. As a percentage of total purchases by foreigners that is only 4.2%, so not a major bond revolt yet. Sales go negative like this every once in a while and the last time they rose like this was in Nov of 2008 when net sales reached 3.7% for only 1 month, so this is fairly unusual. We will have to see what happens in the next few months. Of course what this table doesn't show is how much more of the government debt is being funded by QE, which would show an interesting trend over the last few years. Also, we are taking their word for these numbers, which could be cooked.

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rlmrdl
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100% agreement DaveF

My first thought as well, the wage part is irrelevant, not only have actual increases been trivial, in real terms they have been falling behind. The fact is that, despite all this so-called money "creation", practically none of that money is in circulation. There is no pathway for that money to flow into the real economy so it doesn't matter whether the bottom 90% wants to spend now before its income loses more value, they don't have the money so they can't spend it, let alone chase prices higher by bidding more than they are worth.

The Chinese have finally woken up to that fact which is why public servants are being given 60% pay increases as the fastest way to inject new money into circulation.

I disagree totally with keelba's assertion that inflation is psychological, unless you have the cash in circulation there is no chance of any inflation, let alone hyperinflation. Its why people like Steve Keen or Nicole Foss etc have been predicting the deflation that central banks are struggling with right now throughout, including the mockery from the hyperinflation people. We have been lined up in the crosshairs of deflation for over a decade and it is now rolling out; any strategy designed to deal with inflation is going to have its ass kicked.

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