The following is excerpted from an ongoing debate inside the Diner on the differences in the outcomes between Hyperinflation and Deflation in a Monetary System Collapse. Come join us at the Economics Table in the Diner to chip in your Two Cents on this still nagging and popular question!
Ben Bernanke is waving at the market like a drunk with his dick hanging out that he wants inflation. Serious inflation. And that explains a lot of the asset choice behaviors over the last 18 months. Inflation expectation are extreme. Wouldn’t you know, we just had our first shock in the form of a 25% increase for gas inside of three months.
The only outcome is deflation no matter what. The dynamics of the credit leverage we employ in the economy (30 year home financing, 5 year zero interest financing for automobiles) and the (loss of) velocity of money ensure a deflationary event is in our future. We are facing a global breakdown in trade because of failures in the credit/currency markets and availability of low cost energy. The reasons people freaked and made a lot of people full-time TSHTF about “TSHTF” in 2008 is because it looked like the global markets were imploding and going into a terminal collapse.
Even after hyper inflation comes a deflation where money is practically worthless. Meaningful trade is done in barter or “backed scrip.”
We are stuffing the toilet bowl to avoid the flush. It won’t work. But it can go on a lot longer.
The difference between hyper inflation and deflationary collapse matters to people with cash money and assets. Much depends on the type of assets you have.
True, it DOES matter to people who actually HAVE some “savings” or “assets” which way the Ball Bounces here. However, since about 80% of the population really HAS no assets or significant savings, how it collapses doesn’t really matter to them very much.
The folks who worry about Inflation/Deflation are those who have their Matresses stuffed with FRNs and their Basement Safes stuffed with Gold Eagles to hedge it. They figure if the FRNs go worthless, the Gold will increase in value. They may also buy Land to hedge further, figuring they can grow their own Tomatoes in their raised bed Permaculture Garden either way. Of course, buying Land sticks them with a Tax Liability and since most of the folks with a pile of money would have no clue whatsoever as to what to DO with a piece of land, exactly how good an investment that is for them is an open question.
Let us look at the example of the Average sorta Successful Boomer here who has a Paid Off McMansion, an IRA of say $500K distributed out in Mutual Funds and Stocks and $50K in his FDIC Insured Savings and Checking Accounts. How does Inflation/Deflation affect him?
If it is Deflation ruling the day, his $500K portfolio drops in value tremendously. Stocks drop in value, Bonds are Defaulted on. His $50K in Cash though has more value, assuming of course he gets it out of the Bank before it shuts the doors.
If it is Inflation ruling the day, his Cash money goes about worthless, but in theory he can sell his Stocks and Bonds for higher prices since this is where the newly printed money will flow in some fashion. However, after converting the sale to Cash at the higher prices, it of course still buys less of what he needs, so he burns through the savings there faster.
In neither case can the Boomer Saver really protect himself, the assets he has may stay steady or even rise in nominal value in an inflationary scenario, but upon liquidating them he still cannot buy what he needs because the commodities have also inflated up in nominal cost. In a deflation, his assets are worth less (or in some cases WORTHLESS), so he also is fucked this way.
Definitely Helicopter Ben is trying to Inflate the economy, evidenced by the current $4.35/gal I am paying for Gas now here on the Last Great Frontier. That is even a higher price than I payed right before the crash in 2008-9, I think it maxed then at $4.25/gal. I cannot see how this price can be supported very long. Add to that the around $10/gal price I have read is common in Eurotrashland, WTF can BUY this product anymore in these economies? Either the price collapses or we will quickly be going Lights Out and No Driving here and in Europe. The end consumer isn’t being issued money to buy at these prices. I expect a Price Collapse, because I do not think the Illuminati are quite ready to send the entire industrialized world into Lights Out quite yet. Parts of it like Greece and Spain yes, but not the whole Ball of Wax.
It has an intimate effect on the pace of collapse and the overall social compact. Hyperinflation would truly galvanize the 99% against the 1%. Engulfed in such a horror, no one can really protect papers assets at all. Consider the one difference going for this monetary collapse is that the majority of the denominations are digital ledgers.
It is the limited number of people capable of operating complex mechanical capital that come out holding the wealth in a hyperinflation. Crime would spike during hyperinflation but social order would not collapse. Government could maintain order up to the point of open insurrection. Rioting and “armed looting” would be expected. Basically, you’d see people get tribal in a hurry.
A lot of businesses would end up closing out of the sheer terror of operating in the HI price environment. Mafias fill the void in vulnerable areas, so pretty much every urban periphery becomes a slum area. Rents can’t be paid, real estate owners must collect from their tenants somehow especially b/c physical ejection is risky. The devolution of social order in the exurbs and “working class” suburbs does not signal the end of anything. A new currency can be strung up fast, and it can be fiat. Electronics also allows rapid deployment of a new currency regime. What choice do you have but to use your ATM card for the new red money. Since all the green money got canceled out…
Hyperinflation is not the dirt nap you’re looking for. It is likely the contraction in “Growth” aka consumerism and hedonism is restricted to a smaller group, the ones who float their reconstituted corporations on the new red money stock exchange. Who is rich in the Russian Federation? Putin may end up as the richest man in the world!
Deflation, on the other hand, truly threatens the entire economic paradigm and once deflation begins you scale on the Collapse spectrum. Deflation would essentially mean the abandonment of money and the tyranny of money. Greece is being forced to endure a deflation instead of being allowed to have a hyperinflation, which is what would ultimately occur if they default and then re-denominate all the old debt into the new currency.
In Greece, businesses have been shutting down because people stopped patronizing them and the taxes. People went into survival mode. Hoarding cash and supplies. Making arrangements to flee or go underground. Setting up barter exchanges and going back to the land. Also, as money left the economy, things got relatively more expensive. Gas may be $10 in Athens but what’s a Greek Taxi make per day? The notional feel for him could be what we’d feel like at $20
Deflation is like unplugging a bath tub full of water. It sucks cash out of the economy to settle obligations at once! The extension of credit ceases because projects and enterprises must stand on their own rather than their ability to favorably finance. Time value of money becomes the primal factor. Extension of cash flow credit, for time-sensitive businesses can end suddenly.
Cash flow ends for everyone because people stop getting paid. And businesses close because their not getting customers because people stop getting paid. It is the virtuous circle of credit collapse. It does not happen overnight. It happens in several dislocations. Greece is significantly advanced right now over a few years at this point. Argentina came through a deflationary collapse that had the unfortunate side effect of severe inflation just not hyperinflation.
Crimes and mafias increase. People turn to the underground economy and barter. The underground and barter exchanges are predatory because the deflation is advantaging certain people. The government can begin to lose a grip on certain areas. If the supply of important civilian goods and services has run out, then the government has become a predatory adversary towards the people. Some areas and communities may agree to incorporate the new mafias. Mostly, people who have hoarded supplies specific to life support. Cooking oil. Rice. Condoms… And they trust can get more.
This is getting long. I only mean to illustrate that while that these paths might lead us to the same place, the journey is very different and cannot be approached the same way. Hyperinflation and collapse takes a very different approach than a grinding deflationary collapse.