10/4/09 Why HyperInflation Is Inevitable

Precious Metals Market Analysis, By Michael Pennington (Copyright 2010 Pennco Coins)

Virtually without exception, hyperinflation arises as a result of a collapse of the currency. It does not stem from demand pull or costs running out of control. The prerequisites for hyperinflation are a deflationary or non-inflationary recession/depression leading to major government deficits. The government issues debt paper to finance the deficits. Initially investors continue to buy the government bonds especially as in the case of the US with the dollar being a reserve currency. This is the first stage of the money printing cycle.

Then foreign investors stop buying the bonds and the government has to buy their own paper. This is the second stage of the money printing cycle which is called quantitative easing (a nonsensical fancy word for money printing). As the money printing accelerates due to growing deficits, foreigners start buying less of the worthless paper and the currency begins to fall. This leads to a vicious circle of a falling currency, more money printing, inflation and finally hyperinflation. I realize that this is a simplified version of the course of events leading to hyperinflation but I try to explain things so most people can understand them.

This is where we are right now in the U.S. economy. In my view the quantitative easing will now accelerate both in the UK and the US. Unemployment is going up in both countries. Real unemployment in the US is over 20% which is 30 million people. With dependents there are now 100 million people in the US affected by unemployment. In the UK real unemployment including benefit seekers is 17% or 6.4 million. Including dependents there are 20 million people affected by unemployment. That means that both in the US and in the UK there around 1/3 of the population is affected by unemployment and the numbers are getting bigger daily. This is an untenable situation.

The next area which will necessitate acceleration in money printing this winter is the financial system. None of the problems in the banks or the financial system have been solved in the last 12-18 months. They have just been swept under the carpet. The toxic debt situation is still critical. A big percentage of the $1 quadrillion derivatives is worthless. The lower figure, circa $500 trillion, of outstanding derivatives published by the BIS is just another “adjustment” in order to massage the figures. Other major problem areas in the US are Option A and Alt A mortgages. This could be a bigger problem than sub-prime. Then we have commercial real estate, personal credit, car loans, etc. Most of these loans were raised in good times and there is no chance whatsoever that they will be repaid in bad times. The average American is one pay check from bankruptcy. The UK is in a similar position.

My strong opinion is that the US dollar and the UK pound are going to significantly weaken this winter. This is the beginning of the hyperinflationary stage which will later spread to many countries around the globe. The U.S. is exporting one commodity right now – inflation.

The US, UK and some other countries will have a hyperinflationary depression, but most other countries in the world will have at least severe recessions but many also depressions. There is total interdependence in the world today both in the financial system and trade. The cause of the problems in the US and UK is the credit bubble and the leveraged financial system. So far almost 100 banks in the US have collapsed this year. The FDIC has run out of money and the government will have to print massive amounts in coming months to fund the FDIC. But until now only small banks have gone under, except for Lehman, but as I’ve been saying for weeks now I would expect bigger banks to have major problems again in the next 6-12 months.

I believe that there is a high risk that more than one major US bank will come under severe pressure during this period. The US Government might be able to save one major bank but not two. And since the problem is across the board in virtually all banks it will not stop with one. Take JP Morgan Chase which has almost $100 trillion in derivatives. In case of default it is the gross amount of derivatives that is exposed. A lot of their derivatives are in the gold and silver markets.

When the world’s biggest economy collapses, this will have a major effect on the rest of the world. US imports and world trade in general will drop dramatically and a worldwide depression would be a virtual certainty. There is also a high probability that the world financial system does not survive in its present form.

There is a limit to money printing and we have practically reached that limit. Greenspan was totally incompetent as Chairman of the Fed and so is Bernanke. There was only one solution to every problem – flood the market with liquidity and make money free. The bankers prospered, politicians loved it since their voters thought that they were prosperous. Little did the people understand that their prosperity was false and based on credit. There has been collusive back scratching between politicians and bankers with both sides benefiting enormously from the credit bubble and money printing. Power and greed runs the US economy and many others.
When will politicians ever learn that money printing only serves the purpose of keeping them in power for a short while whilst it totally destroys the economy and money?  Voltaire said already in 1729 that “Paper money eventually returns to its intrinsic value – ZERO”. History has shown us that no paper money has ever survived in its original form, and the dollar as well as most other currencies will not survive this time either.

It would be a lot better for the world in the long term that we have a proper forest fire so that all the weak growth disappeared and that the forest or the world financial system started again from a sound base. No politician would be so brave as to let the banks fail because with the massively inflated financial system we have today, the consequences would be catastrophic. But sadly it is likely to happen anyway and an uncontrollable collapse of the world financial system is likely to take place within the next few years and change the world as we know it today.

As regards the US empire, it is already finished. Very few nations have any respect for the US financially or politically. The US is conducting its affairs just like the Emperor who had no clothes. They are bankrupt financially and intellectually but they still believe that they are ruling the world. Don’t get me wrong, I love America and the American people but our country is in dire straits once the current crisis has settled, and it could take at least 20 years or more to remove the incredible corruption throughout our financial and political systems.


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