Potential Future Hyperinflation

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By Stephen Lendman (about the author) Page 3 of 4 page(s)

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Williams believes the current US contraction is about halfway to becoming a "depression," but before it ends it may become "Great Depression II" to distinguish it from the earlier one. We're now in an "inflationary recession," and available data confirm it - soaring food and oil prices, a weakened dollar, true unemployment over 12%, real inflation nearly as high, weak industrial production, and more. In his judgment, expect worse ahead when added "inflationary effects of soaring broad money growth....start" surfacing later in the year. In his judgment, by year-end 2008, "official CPI" figures should begin showing it.

Current computations cook the books, and not just for inflation. According to Williams, the economy has been in recession since late 2006 when it entered the "second down-leg" of a multiple dip contraction. It began in 1999, then showed up officially in 2001. His current outlook takes account of "further bounces and dips in economic activity." We may now be in an upward swing before reheading down. It happened during the Great Depression, only to fall to new lows.

Conditions today are hazardous. A major financial crisis precipitated them. Reckless policies caused it. It threatens the solvency of major banks and other financial institutions. It also hurts the greater economy. Solutions - massive liquidity injections, interest rate cuts and reckless deficit spending. Result - financial malpractice for a short-term fix. Consequences - "financial Armageddon" according to Williams.

M3 (the broadest money supply measure) growth is so high that the Fed no longer reports it. Economists like Williams do because it's crucial to know, and the data he reveals are disturbing - record M3 growth at a near 18% annual pace. Hyperinflationary seeds are now sown. Dollar valuation is falling, and at some point may accelerate when investors flee it for safer havens. The Fed again will respond. More debt will be monetized. It will build over time. Things will get worse and then be exacerbated when the government is less able to meet its obligations. "Therein lies the ultimate basis for the pending hyperinflation," in Williams' judgment.

He believes it will morph into a hyperinflationary depression, then a "great depression." And when it hits, it will be with "surprising speed." Already disposable income is falling in a weakened economy in crisis. As things worsen, politicians get blamed, and Williams raises an interesting possibility. If conditions get bad enough, voters may respond with their feet, declare a pox on both major parties, and turn to a third alternative around 2010 or 2012. It happened before in our history. The Republican Party is Exhibit A. It was created in 1854 at a time Democrats and Whigs were the two dominant parties. Exit Whigs, and enter Republicans with Abraham Lincoln its first elected president in 1860.

Williams shows US inflation data going back to 1665. It was fairly stable up to the Fed's 1913 creation. It then began rising and accelerated post-WW II. Government calculations mask it. Alternative ones are more revealing and accurate. Except for minor price declines in 1944 and 1955, the US hasn't had a deflationary period since the 1930s. Abandoning the gold standard is why. It imposed monetary discipline. Roosevelt went off it in 1933. He had to. The banking system collapsed, money supply imploded, and economic stimulus was needed. It released the Fed to create money freely. Therein lies the problem, and it shows up in the numbers.

Current Fed Chairman Bernanke and Alan Greenspan are students of the Great Depression. "Helicopter Ben" especially vowed never again, and his actions prove it to a fault. He knows the risks and stated them in an earlier speech. He said:

"Like gold, US dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology called a printing press (now its electronic equivalent), that allows it to produce as many US dollars as it wishes." By doing so, it "reduce(s) the value of a dollar in terms of goods and services" which raises their prices...."under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

So it has, according to Williams, and it caused a "slow-motion destruction of the US dollar's purchasing power" since 1933. It shows up in GAAP-based 2007 federal deficit figures - $4 trillion for the fiscal year, not the official $163 fiction reported. Williams estimates total outstanding federal obligations at $62.6 trillion. At least one other economist puts it over $80 trillion. There's no way to honor this debt level, so the "government effectively is bankrupt." At that point, it has three choices - default, declare a moratorium, or repudiate the entire amount.

Sooner or later, markets will react. Holders of US debt already are balking, but so far modestly and quietly. Ahead, that may change if dollar valuations plunge. It will force the Fed's hand. Greater debt monetization will follow. Dollar valuations will sink further, and so forth in a progressive downward cycle to oblivion if Williams is right.

If conditions get severe enough, the Fed can create huge amounts of currency in a few days or weeks - enough to match the dollar's lost purchasing power in the last 75 years. Combine it with fiscal irresponsibility and imagine the consequences.

Official data alone today are reason for concern - soaring food and oil prices, the dollar near historic lows, money growth at an all-time high, and off-the-charts federal deficits and debt. The trend continues, and it shows up in gold prices - topping $1000, then retreating, but nearly certain to soar way above previous highs on its way to numbers not discussed in the mainstream - $2000 an ounce, $3000? Who knows. Williams sees it "setting new historic highs."

In 1980, its price hit $850 an ounce. In CPI inflation-adjusted terms, around $2300 an ounce would match it today. But if the government hadn't cooked the CPI calculation, the number would be about $6250 an ounce. By that standard, gold today is cheap. It's way below its real 1980 top, and if inflation accelerates as Williams predicts, expect much higher prices as dollars keep deflating.

Under this scenario, the "US government cannot cover (its) existing obligations." Annual federal deficits are "careening wildly out of control, averaging $4.6 trillion per year for the six years through 2007." That's with all unfunded liabilities included like Social Security, Medicare, Medicaid, other social services, debt service and more.

Williams says things are so out of control that "if the government (raised taxes) to seize 100% of all wages, salaries and corporate profits, it still would (show) an annual deficit using GAAP accounting" methods. At the same time, "given current revenues, if it stopped (all) spending (including defense and homeland security) other than Social Security and Medicare obligations, the government still would (show) an annual deficit." The hole is so deep, it's impossible to dig out, according to Williams.

But given political realities, officials spend whatever it takes to get elected and keep their jobs. That's besides foreign wars, limitless corporate subsidies and more. Things, however, won't improve. They'll worsen, and that for Williams spells hyperinflation ahead. It's happening "with the full knowledge of political Washington and the Federal Reserve." It it weren't for the US's "special position," our debt would likely be rated "below investment grade instead of triple-A." Longer term bonds are especially risky. At some point, they'll lose their full value. They also risk default, and that's besides their loss in dollar terms.

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I am a 72 year old, retired, progressive small businessman concerned about all the major national and world issues, committed to speak out and write about them.

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