In a recent interview, James Rawles of Survival Blog suggested that one of the possible triggers for a hyperinflationary meltdown of our economic and financial systems would be foreign investors repudiating U.S. Treasury debt. According to Rawles, once foreign investors say, “weâ€™re going to take our ball and bat and go home,” the game is over and, “that very well could trigger an economic meltdown starting with a collapse in confidence of the United States dollar and it could very quickly click over into a mass inflation.”
This is a view we share with Mr. Rawles, and is one that many analysts also have about the fate of the dollar. In How Hyperinflation Will Happen, Gonzalo Lira makes a similar observation:
They [The Fed and the government] have undermined Treasuries. These policies have turned Treasuries intoÂ the spit-and-baling wire of the U.S. financial systemâ€”they are literally the only things holding the whole economy together.
In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurdâ€”yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.
Lira provides a detailed version of future events which he believes will ultimately lead to a hyperinflationary collapse of the US dollar – and it all starts with a breakdown in the Treasury markets.
Once foreign investors pull out, it’s all downhill from there, and as described in the opening chapters of Rawles’ book Patriots, the subsequent effects of this collapse may play out very quickly as the entire world, including investors here at home, lose total confidence in the United States.
The effects of the collapse of US Treasuries on the velocity of money and sentiment of everyday Americans, though completely theoretical and speculative at this point, suggest that every asset – save necessary commodities – will crash. We opined in What about the gold?, that there is the potential for a stock market crash even while the US dollar is collapsing:
Though itâ€™s not necessarily imminent, it is possible that we may see an event that actually collapses stock market prices, hyper-inflates the US currency, bankrupts local governments and sends commodities through the roof.
While our conclusion as to the reasoning behind such an effect is somewhat different from Mr. Lira’s, the fact is that there are a variety of reasons for why such a thing could happen, including the excellent analysis put forth by Lira in his follow-up article Hyperinflation: What It Will Look Like, where he discusses the anatomy of the Chilean hyperinflation of the early 1970’s. And though we are talking about a completely different animal from a causal standpoint, the subsequent effects on asset prices stemming from a hyperinflationary meltdown in the USA would be very similar:
One of the effects of Chileâ€™s hyperinflation was the collapse in asset prices.
This would seem counterintuitive. After all, if the prices of consumer goods and basic staples are rising in a hyperinflationary environment, then asset prices should rise as wellâ€”right? Equities should rise in priceâ€”since more money is chasing after the same number of stock. Real estate prices should rise alsoâ€”and for the same reason. Right?
Actually, wrongâ€”and for a simple reason: Once basic necessities are unmet, and remain unmet for a sustained period of time, any asset will be willingly and instantly sacrificed, in order to meet that basic need.
To put it in simple terms: If you were dying of thirst in the middle of the desert, would you give up your family heirloom diamonds, in exchange for a gallon of water? The answer is obviousâ€”yes. You would sacrifice anything and everythingâ€”instantlyâ€”in order to meet your basic needs, or those of your family.
Lira argues that as prices of essential goods like food, gas, and heating oil increase and supply of those commodities decreases, people will be willing to literally sell anything that is not critical to survival in order to obtain those goods. Thus, stocks, real estate, cars – whatever is perceived to be ‘unnecessary’ – will be sacrificed in order for people to obtain the most basic of hard commodities.
No discussion of hyperinflation would be complete without touching on precious metals like gold and silver – commodities that are perceived to be important, but not necessarily essential to survival like food and water. If people are selling anything and everything in order to buy necessities, wouldn’t gold and silver be sacrificed as well?
It seems that there is a special exception for precious metals. And though the argument that “you can’t eat gold” is valid, it is clear that during times of distress, especially when the currencies of nations are collapsing, precious metals have always benefited. Precious metals, it seems, become the de facto medium of exchange when traditional currencies are no longer trusted.
It’s not necessary to go back too far in history to obtain proof of this. This is happening in Zimbabwe right now, where food production is not something available to most of the population. As a result, many spend their days in the river, panning for granules of gold that they can exchange for food.
As Lira points out, gold and silver will likely remain, even while pretty much every other asset is collapsing, ” where there is a human society, there is a need to exchange. Where there is a need to exchange, a medium of exchange will soon appear. Gold and silver (and copper and brass and other metals) have served that purpose for literally millennia, but then they were replaced by paper. ”
How likely is hyperinflation in the United States? We can’t say for sure, of course, but we can look at our national debt and future liabilities to give us an idea. Official estimates suggest the United States is about $150 trillion in debt, with some unofficial analysis suggesting that we’ve exceeded the $200 trillion mark. With most contrarian thinkers opining that we are no where near recovering from the current economic mess, it is our view that the government and the Fed will continue to print more money and further increase the national debt. Deficits are the norm, not the exception.
Whether hyperinflation occurs in the United States or not is going to depend on whether or not the trigger, as described above, is pulled. Will foreign investors like the Chinese, Russians, Japanese, and Europeans continue to fund our debt? A recent report indicates that China’s US treasury investments are down 10% over the last 12 months, suggesting that the Chinese may already be moving to diversify their assets out of the dollar. If the rest of the world starts pulling out of US Treasuries en masse, there will not be a whole lot that the US government can do to stem the devaluation of the dollar.
Only two choices would remain. Either the U.S. flat out defaults on our debt. Or, The Federal Reserve prints more money to pay what we owe, effectively debasing the dollar.
The signs point to an eventual breakdown in US Treasuries – be it in a year or five years from now.
One thing we can suggest to those concerned with protecting assets and surviving such a scenario, would be to prepare now, before your currency and other assets become worthless.