Still Waiting On Hyperinflation...

[Bryan Hancock]

Well the uber doom-and-gloomers have been decidedly reticent of late. This changed recently in the blog arena. Changes in purchasing patterns of bonds later this year seem to have everyone in a tizzy now.

I renew my stance that all of this HYPERinflation rhetoric is utter nonsense. These positions are generally coupled with someone trying to sell something (commodities, coaching, advice, etc.) so please be skeptical when you see them posted.

Following is a great, level-headed article on the subject for those that are interested:

Why the Pessimists Are Wrong About Inflation

and here are the real inflation rates:

Shadowstats

I renew my request for anyone to provide TANGIBLE evidence that we are headed for hyperinflation.

[Anthony Halstead]

Hyperinflation is different than inflation. If you take the original defination of inflation, (and as currently used by Austrian School Economists) you track inflation as an increase in the money supply, and price increases (commonly referred to as inflation today) are the effect of the money printing. So first defining which inflation, monetary inflation, or price inflation you are talking about is required.

There is no doubt that money supply has been inflated recently. The fed publishes figures and you can see what is going on. Somewhat more difficult to see is price inflation. The CPI is the most common but is skewed to make the govt look good. Looking at prices of common goods one can see price inflation; see gasoline, health care, college tuition, food, silver, oil, etc. The basic commodities are shooting up, which means that all derivative products are also getting more expensive. One way that producers are trying to mask this is by making packages smaller; a "green" package, "effeciency" packages, etc. The net result is maybe only a 10% increase in price, but when you couple that with the 15-20 decrease in product per package, you get 30-40% inflation. And this is happening more and more in the last year or two.

So that was inflation (the two types). Hyperinflation, on the other hand, is a loss in confidence in the currency being printed. It is not like in monopoly, when the more money you get, the more prices go up (remember, at first you dont have much money, so deals are cheap, but as the game progresses and everyone has tons of cash, the bids get higher and higher, hmm, sounds like the housing bubble), but rather that people realise that there is inflation, and that the currency is not a store of value, and they go out to spend (get rid of it, ie exchange it for something of value) it before it is worth less. So hyperinflation is when people do not trust their money anymore and want to buy stuff before the price goes up (ie the value of the paper money declines further).

So hyperinflation is a rare event, but not as rare, nor as impossible as people would like to believe. Argentina is now experiencing inflation in the area of 30% per year, this is very soon going to be hyperinflation if history has any rhyme to it.

The main complication today IMO with the hyperinflation/deflation/inflation debates is that there was such a huge increase in debt (learn how money is issued from banks, they can loan (create, print) 10x the money they have on deposit) money in the last couple bubbles that when the bubbles collapse the debt money disappears, this is monetary deflation (not price deflation) but means that there is less "wealth" on paper, and real losses for many. And debt is spending today what we need to tomorrow pay for, and if the earnings and savings are not there to pay, then money is tight. So the money printing, which is going to the banks to make up for that 10x debt money they created which is evaporating, and not going to the unemployed, underwater, etc, is not having such a big effect on prices yet... But money chases yield. Not going to housing yet, still such debt, and bankers not gonna buy their own shadow inventory, so it goes to stock markets and commodities. That is why the stock market has held up so well, and why commodities are so highly priced. And that is why food, clothes, etc are showing price inflation as well.

I do not see hyperinflation (remember, this a loss in confidence in the currency) happening yet; the US is still the largest producer of food in the world, still dominant in most areas, still no clear alternative (other than gold, etc) so most will cling to the hope that the US will be a safe haven. And remember, most people would rather believe the easy lie than face the hard truth, so they will cling to what has been, rather than look at the facts and accept what is coming.

I think that the situation is unsustainable, but for hyperinflation to come, people need to realize that, accept that, and react accordingly. I do not see the realization on a large scale yet; most would rather believe the easy lie perpetuated by politicians and media and bankers and real estate pros (NAR statistics, sorry for offending any straight shooting real estate people, but so many are clueless and lie) who push housing as the best investment, retirement/'investment managers, etc. They do not yet want to think that something is wrong and take the next step to figure out what and why, which would lead to what to do. When that happens (assuming that the economy and spending continue in this same direction, major deficits, high rate of unemployment, debt overhangs, etc) then you can worry about "hyperinflation", but for now it will be inflation, or stagflation, re the 70's. And look what happened then; gold, oil, etc shot up. Interest rates shot up. Inflation shot up. And then the economy took off, after a long period. Will that happen again this time? who knows, history does not repeat, but is rhymes. Some things are different this time; high debt, low savings, cannot really lower taxes more due to already insane deficit, wars, high oil, lots of jobs have been offshored and not coming back, it is a global economy now, not a US economy, so competion is worldwide for jobs, so many may not come back soon, at least as they were.

My outlook? Things which you "need", ie oil, clothes, food, healthcare, etc, will continue to get more expensive in the near term. Things which were financed/bought with debt will continue to get cheaper in the near term, ie housing, cars, boats, vacation cabins, toys, etc. People have to get rid of the debt items (cant pay for them) and pay for the things they need. And with higher unemployment, and tighter credit (banks not giving money to customers, putting it to "pay off bad debt", investing it in stocks, commodities,etc, remember money chases yield and the bankers have been burnt on housing and consumers, wonder why your HELOC which was unused was cancelled even tho you have 800 credit?), financing is not as big an option as it was.

So what about real estate? No crystal ball, I threw it away a long time ago... but I think that having a part of net worth in real estate or income producing assets is worthwhile. betting on appreciation will be a losing game for a while IMO, but if you can cashflow a decent amount and hang on to what you have even if prices drop another 30% (it can happen...) then you will be positioned well if/when prices increase in the future (10-15 years from now). remember, bottoms take time, recoveries are not instantaneous and even with the money pumping by the fed, this will take a while. but being in place, not too high leverage, and cashflowing allows you to build equity, gain experience, and when the prices start to rise, pull the equity out of your houses and start to buy. Not your own money at that point because renters have paid it.

Those are my thoughts, lol, just lookint that this was "quick reply"

Tony.