Default, not Hyperinflation

[madfranks]

Here's an interesting perspective, mainly that because the unfunded obligations of the government (social security, medicare, etc) extend 75 years into the future and cannot be paid off via hyperinflation, that eventually the government and the fed will openly default rather than inflate the dollar to death. The reasoning is that if we have hyperinflation, the gov't will still owe social security and medicare decades into the future, so they don't benefit (they can't pay off their debts) from hyperinflation. Also, since hyperinflation wipes out the creditors and benefits debtors, who are the biggest creditors outside the government? The big banks, so again, the fed will try to avoid hyperinflation as it does their banking cartel no good.

http://lewrockwell.com/north/north1186.html


Hyperinflation is always a possibility for any national government or central bank. If a national government is running massive deficits, it can call upon the central bank to buy treasury bills or treasury bonds with newly created money. This digital money is transferred to the treasury, which then spends the money into circulation.

There have been cases of hyperinflation in the past which have become legendary. The most famous of all of these hyperinflations is Germany from 1921 through 1923. Simultaneously with that hyperinflation was a hyperinflation in Austria. These were not the worst cases of hyperinflation in history, but they were the worst cases in industrial societies. The worst case was Hungary for two years immediately after World War II. The second worst case took place a few years ago in Zimbabwe. Both were agricultural nations.

No other nations in Western Europe have ever experienced anything like the hyperinflations of Germany and Austria in the early 1920s. Their currency systems were completely destroyed. Farmers were able to pay off debts that had been accumulated prior to World War I by selling one egg and handing the money over to the creditor. This of course destroyed the creditors. It is generally believed that the middle class in both Germany and Austria suffered enormous losses. They had been creditors.

There have been hyperinflations in Latin America after World War II. One of the worst ones was in Brazil in the 1980s and 1990s. The statistics of catastrophic inflation are available here. This went on for two decades. I know of no other case of hyperinflation that lasted more than three years. This is why I regard Brazil's inflation as the worst hyperinflation in modern history. The political authorities did nothing to stop it, and the central bank inflated. The devastation to the middle class was almost total. If people did not get their money into gold and silver and foreign currencies, they were wiped out. The country went to barter.

If this form of hyperinflation ever comes to the United States or any other Western industrial nation, it will lead to the complete destruction of creditors. It will mean the complete destruction of long-term creditors. Anyone who bought long-term bonds of any kind, anyone who invested in mortgages of any kind, anyone who is the recipient of a government pension, or anybody who is dependent upon Social Security and Medicare could not survive this kind of hyperinflation. It would always be paid off in money that is worth far less than when the debt was contracted. When we think of the delay in payments that already exists with respect to Medicare reimbursements to physicians, we get some idea of what it would do to the healthcare industry. The delay of 90 days would basically eliminate the debt.

DESTROYING CREDITORS

When we think of the traditional arguments in favor of hyperinflation from the government's point of view, we think about the ability of the government to pay off creditors. As I will show, this argument no longer is valid.

It is valid for private corporations. Some large business that has issued a 30-year bond is in a position to pay off those bonds with money that is essentially worthless. The person who extended credit to the company did so when the currency had far higher purchasing power. Then comes hyperinflation. Most bonds allow the debtor to pay off early. This will destroy the creditors.

Wherever creditors exist, debtors are happy to repay their loans with money that has depreciated ever since the time that the loan was established. This is especially true if the loan had a fixed interest rate. If the rate of interest cannot be hiked by the lender, he is trapped in his debt. Long-term interest rates begin to skyrocket because of the effect of hyperinflation on consumer prices. New creditors demand a higher rate of interest in order to compensate them for the expected decline of purchasing power. But when hyperinflation speeds up the process of depreciation even faster, creditors who demanded higher interest rates find that the interest rate was not sufficient to compensate them for the decline of purchasing power. So, the next time around, creditors demand even higher rates of interest.

Every time the rate of long-term interest rises, the market value of the existing bonds declines. So, the creditor class, which had faithfully extended credit to businesses finds that it gave up money which was of considerable value, and now gets back money that is essentially worthless. This destroys the creditor class, which then proves unable to supply new rounds of credit to borrowers.

In the case of central banks that adopt policies that produce hyperinflation, there is no doubt that creditors are ruined if the lenders have the right to pay off the loan with the newly issued currency. If there are no gold contracts or silver contracts governing the payment of the loans, the creditor is helpless in the face of lenders who use the depreciated money to get out of their obligations.

More at link, read the rest!!! (http://lewrockwell.com/north/north1186.html)

[vacuum]

What we're learning is that default = austerity and submitting to greater authority.

[Gaillo]

What we're learning is that default = austerity and submitting to greater authority.

Same as it always was. :(

[mamboni]

We need to understand in detail how Kotlikoff's $222 trillions in future obligations to SSI and Medicare are structured before Gary North's assertion can be tested. If these programs are backed by long term unmarketable bonds at fixed interest rates and denominated in dollars, I don't see why hyperinflation of the dollar wouldn't virtually erase these bond principals. And even if the bonds are indexed to CPI or inflation, we all know that it is standard fair for the federal government to under-report CPI/inflation by 2-5 percentage points. Over a period of years with this degree of discounting, the government would save $trillions on bond principal and interest payments. Gary North's a smart guy - So I must assume that I'm missing something here in his explanation.

[madfranks]

We need to understand in detail how Kotlikoff's $222 trillions in future obligations to SSI and Medicare are structured before Gary North's assertion can be tested. If these programs are backed by long term unmarketable bonds at fixed interest rates and denominated in dollars, I don't see why hyperinflation of the dollar wouldn't virtually erase these bond principals. And even if the bonds are indexed to CPI or inflation, we all know that it is standard fair for the federal government to under-report CPI/inflation by 2-5 percentage points. Over a period of years with this degree of discounting, the government would save $trillions on bond principal and interest payments. Gary North's a smart guy - So I must assume that I'm missing something here in his explanation.

It took me a while to digest it, but here's how I understand it. In a typical hyperinflation (if there can be called such a thing), debtors will pay off their debts with depreciated money. The gov't cannot do this, because it's debts (medicare and social security, etc.) cannot just be "paid off" in a lump sum of hyperinflated dollars to the people to which the money is due, because it is not due for decades to come. For instance, for all the Americans who are not yet retired and are not eligible for SS, if the dollar hyperinflates, the economy collapses and a new currency is introduced, the laws are still on the books that guarantee SS and medicare benefits 10, 20, 75 years down the road. Of course, it's kind of silly to imagine this occurring without a default of those obligations as part of the collapse, but is there a possibility that the gov't would choose to outright default on those obligations to spare the hyperinflation that would destroy them anyway? Two points: since the gov't cannot avoid a default and since the gov't doesn't benefit from hyperinflation, I think this is why Dr. North is arguing for default without the hyperinflation. Of course, he assumes that hyperinflation is a policy choice that can be controlled by the central bank, an assumption I'm not yet sold on.

[Neuro]

It took me a while to digest it, but here's how I understand it. In a typical hyperinflation (if there can be called such a thing), debtors will pay off their debts with depreciated money. The gov't cannot do this, because it's debts (medicare and social security, etc.) cannot just be "paid off" in a lump sum of hyperinflated dollars to the people to which the money is due, because it is not due for decades to come. For instance, for all the Americans who are not yet retired and are not eligible for SS, if the dollar hyperinflates, the economy collapses and a new currency is introduced, the laws are still on the books that guarantee SS and medicare benefits 10, 20, 75 years down the road. Of course, it's kind of silly to imagine this occurring without a default of those obligations as part of the collapse, but is there a possibility that the gov't would choose to outright default on those obligations to spare the hyperinflation that would destroy them anyway? Two points: since the gov't cannot avoid a default and since the gov't doesn't benefit from hyperinflation, I think this is why Dr. North is arguing for default without the hyperinflation. Of course, he assumes that hyperinflation is a policy choice that can be controlled by the central bank, an assumption I'm not yet sold on.
Hyperinflation is not primarily a monetary phenomena, it is a psychological phenomena, which occurs once a critical mass of holders of the fiat currency opens their eyes and fully realizes its complete worthlessness. This usually occur after prolonged periods of gross economic mismanagement, or if the entity that issues the money seizes to exist (by loss of war, or revolution), or a combination of above...

[Libertytree]

What we're learning is that default = austerity and submitting to greater authority.

Nail on head! Greater authority. New gold backed currency or some such with all the power given to an even more global and sinister level of elite.

[Sparky]

This thread is confusing without some definition of hyperinflation.

The government can "solve" all of it's debt problems with inflation, meaning a silent robbery of people over 20 years. I don't see where hyperinflation is even on the table. But before I make that argument, I need to know what it is.

[Hatha Sunahara]

One thing I have learned is that as the complexity of a subject increases, the number of people who understand it decreases exponentially. Our money system is a nexus of economics, politics, psychology, law, and social engineering. Anyone who claims to understand it is a charlatan or a fool. I do understand one thing only about money. Fiat paper money always reverts to its intrinsic value which is nothing. The only real money is gold and silver. If you have real money, you don't have to worry about either hyperinflation or default.

My parents taught me that if I wanted something to save my money and then buy it. I have always had an aversion to being in debt. And I always had a reverence for Benjamin Franklin who said A penny saved is a penny earned, and Neither a Borrower nor a lender be. And today I think everyone else has that all ass backward. All the slaves tell me I live in the land of the free and the home of the brave. And I laugh when I hear that. How can it be the land of the free when the national debt is the size of the entire money supply? And the government has promised so many people so many benefits that the national debt has to increase and the money supply has to increase along with it. So, Gary North is full of crap. Until the government gets its spending under control, we will be licking the heels of hyperinflation. It really doesn't matter one iota if we have hyperinflation or default. The money will either become worthless, or unavailable. So who the eff cares? It won't affect you if you own real money.

Hatha

[Carl]

Gold and silver are not "money", they are commodities that you can buy with money, sell for money or trade on an individual basis.

They will never circulate or attain velocity as money and stamping them into the shape of a coin does not change that fact.

Government credit/debt is money, has been for over 600 years and will probably remain so for as many more, regardless of the script or the government that is used to represent it.

[Uncle Salty]

There is one reason default will not happen. Politicians want first and foremost to keep their jobs. If they default, they end up on lamp posts. That is why hyperinflation wins the day.

[Uncle Salty]

Gold and silver are not "money", they are commodities that you can buy with money, sell for money or trade on an individual basis.

They will never circulate or attain velocity as money and stamping them into the shape of a coin does not change that fact.

Government credit/debt is money, has been for over 600 years and will probably remain so for as many more, regardless of the script or the government that is used to represent it.

Carl, you are correct that they will never likely see the day in the primary means of exchange function of money. Artwork does not either. But like artwork, gold and silver store value, and that is why most people buy it, to protect against the loss of purchasing power of fiat. And you can trade a painting for a cottage, or ten goats, or how much for your daughter?

[Hatha Sunahara]

"Government credit' is a delusion. Credit means 'belief' or 'trust'. As long as you (or the government) can pay its bills, you and the government have credit. If you can't pay your bills, you have no credit. The government set up a central bank (the Fed) so that it can give the government unlimited credit. The Fed creates paper or digital 'money' that has no intrinsic value whatsoever other than the fact that the government says it is money. If you trust the government, it has value. If you do not trust the govenment it is just paper or digits. When there is mass erosion of faith in the government, people will find a different form of money. Something that has intrinisic value that the government cannot corrupt. That something is gold or silver. If someone pays you in gold or silver, you do not have to worry if they have credit, or if the money has value. Maybe the metals themselves won't circulate as money, but a piece of paper that is interchangeable with the metal is far better 'money' than just a piece of paper.


Hatha

[Golden]

"Government credit' is a delusion. Credit means 'belief' or 'trust'. As long as you (or the government) can pay its bills, you and the government have credit. If you can't pay your bills, you have no credit. The government set up a central bank (the Fed) so that it can give the government unlimited credit. The Fed creates paper or digital 'money' that has no intrinsic value whatsoever other than the fact that the government says it is money. If you trust the government, it has value. If you do not trust the govenment it is just paper or digits. When there is mass erosion of faith in the government, people will find a different form of money. Something that has intrinisic value that the government cannot corrupt. That something is gold or silver. If someone pays you in gold or silver, you do not have to worry if they have credit, or if the money has value. Maybe the metals themselves won't circulate as money, but a piece of paper that is interchangeable with the metal is far better 'money' than just a piece of paper.


Hatha


Is it that all money/credit collapses and reverts to its intrinsic value which is position, title, occupation? Humans are inherently corrupt. One can choose what to believe.

[Libertarian_Guard]

http://i47.tinypic.com/25041uq.jpg

[madfranks]

Gold and silver are not "money", they are commodities that you can buy with money, sell for money or trade on an individual basis.

They will never circulate or attain velocity as money and stamping them into the shape of a coin does not change that fact.

Government credit/debt is money, has been for over 600 years and will probably remain so for as many more, regardless of the script or the government that is used to represent it.

Money is simply a medium of exchange, so if you use gold/silver coins to facilitate an exchange, they are indeed money. Just like tobacco, salt, and other commodities were used as money in the past. You are correct in that they aren't commonly used as money any more, but gold/silver are so liquid that anyone who has them can easily use them to facilitate exchange, so I would argue that gold/silver are still money.

[madfranks]

There is one reason default will not happen. Politicians want first and foremost to keep their jobs. If they default, they end up on lamp posts. That is why hyperinflation wins the day.

So you're saying that even though the default is unavoidable, that the politicians would rather keep the game going as long as possible, right into a hyperinflationary collapse of the dollar? If so, watch for Congress to nationalize the fed in order to force them to hyperinflate, because I don't think they will on their own. Hyperinflation will destroy the banks, and as the leader of the banking cartel, I think the fed's loyalty is more to the bankers than the politicians.

Of course, this is assuming that this hyperinflation will not be primarily a psychological event, like Neuro suggests. If the world dumps the dollar and the economy floods with money, it is possible that neither the fed nor the government may be able to quell the flames.

[Sparky]

Madfranks, in what way do you see a default? In some sense, insidious inflation over 100 years is default, but a "new currency" default is as unlikely as hyperinflation. They have the best possible setup imaginable with global devotion to the existing currency. Why would they give that up?

[Uncle Salty]

So you're saying that even though the default is unavoidable, that the politicians would rather keep the game going as long as possible, right into a hyperinflationary collapse of the dollar? If so, watch for Congress to nationalize the fed in order to force them to hyperinflate, because I don't think they will on their own. Hyperinflation will destroy the banks, and as the leader of the banking cartel, I think the fed's loyalty is more to the bankers than the politicians.

Of course, this is assuming that this hyperinflation will not be primarily a psychological event, like Neuro suggests. If the world dumps the dollar and the economy floods with money, it is possible that neither the fed nor the government may be able to quell the flames.

They just hyperinflate and then a new Bretton Woods happens with some sort of gold backing. That is what is going to happen. No doubt about it. Banks stay alive, politicians stay in power, we get fucked. Rinse and repeat.

[Hatha Sunahara]

Is it that all money/credit collapses and reverts to its intrinsic value which is position, title, occupation? Humans are inherently corrupt. One can choose what to believe.

Yes, belief is subject to choice. But how hard is it to believe paper money is worthless when you can't buy anything with it? Belief is also subject to reality. Reality, by choice, could be a figment of your imagination. I appreciate your point about humans (although not all humans) are inherently corrupt. I have a simple definition for corruption. It is the lack of honesty.


Hatha

[palani]

Gold and silver are not "money"
Nice to have an opinion even if it is wrong. Here is a cite


Specie is the only constitutional money in this country. See 4 Monr. 483.



Government credit/debt is money
Money is separated into money of account and money of exchange. It is also separated into lawful money and legal tender.

Now there is not enough gold or silver circulating (or hoarded for that matter) to keep the government owned and operated economy active. I don't see how that would matter to you or I one way or another. The economy belongs to the politicians and not you or I.

Gold and silver may still have an active involvement in contracts but you only need to have $1 of either to meet the requirements of law.... aka substance. Without this $1 substance there is no remedy available at law and your only remedy is to apply to EQUITY. EQUITY is a system of law that would rather see the baby divided in half rather than let either side have the whole baby to the entire exclusion of the other party.

[Carl]

Money is simply a medium of exchange, so if you use gold/silver coins to facilitate an exchange, they are indeed money. Just like tobacco, salt, and other commodities were used as money in the past. You are correct in that they aren't commonly used as money any more, but gold/silver are so liquid that anyone who has them can easily use them to facilitate exchange, so I would argue that gold/silver are still money. you're conflating barter exchange with medium of exchange.

[Carl]

NOISE

E.S.A.D. Fuktard...

[Mouse]

E.S.A.D. Fuktard...

Teacher, Teacher! Carl poked Palani with a stick.

To the DOME

[solidus]

I think the author is wrong about SS and right about Medicare. SS obligations, which are a financial obligation (and pensions, etc.) could and probably will be inflated away. Medicare is a promise for service, not a financial obligation, so, yes, it is impossible to inflate away. Government still would have a substantial incentive for inflation.

[palani]

Carl poked Palani with a stick.
You sure palani didn't poke Carl first?

First you bait the hook. Then you wait for a nibble.

[madfranks]

Madfranks, in what way do you see a default? In some sense, insidious inflation over 100 years is default, but a "new currency" default is as unlikely as hyperinflation. They have the best possible setup imaginable with global devotion to the existing currency. Why would they give that up?

I'm not sure I buy the "default, not hyperinflation" premise myself, but I shared the story to try and analyze it and have a discussion about it. Default could come in many forms, inflating away the debt is certainly default, or raising the retirement age, reducing the benefits, or any combination thereof. They may slice it and dice it a dozen different ways to make it look as good as possible, but it would still be default.