The Hyperinflation Trigger and Its Effects

by | Sep 5, 2010 | Commodities, Emergency Preparedness, Precious Metals | 22 comments

Do you LOVE America?


    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, “we’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 into the spit-and-baling wire of the U.S. financial system—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 absurd—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 it’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 Chile’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 well—right? Equities should rise in price—since more money is chasing after the same number of stock. Real estate prices should rise also—and for the same reason. Right?

    Actually, wrong—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 obvious—yes. You would sacrifice anything and everything—instantly—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.

    Recommended Reading:

    What is Money When the System Collapses?

    A Free Falling Economy Makes Bartering Go Boom

    Disruptions to Food Supplies, Normal Flow of Commerce

    The Inflation vs. Deflation Debate Is A Distraction

    Hyperinflationary Depression – No Way of Avoiding Financial Armageddon


    It Took 22 Years to Get to This Point

    Gold has been the right asset with which to save your funds in this millennium that began 23 years ago.

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      1. “people will be willing to literally sell anything that is not critical to survival in order to obtain those goods”

        My question is, who is going to buy this junk?  If something like this happens, which seem very possible, no one is going to be shopping for deals on crap no one needs or wants.  Once foreign “investors” (seems like the wrong word) decide they are not backing our junk paper it will be all over.  I can’t believe they have held it this long.  Once again we are back to PM’s, lead and any other necessity that is needed on a day to day basis.  Toilet paper will have more value than a whole basket full of dollars.

      2. Everybody agrees that SHTF at some point in time,what that time is exactly,is anybodys guess.Given enough time, almost anything can come to pass. The debt issus  we are in wasnt by accident but by design . They can potentially float this system for another 10 years  or crash it in 2 days from now, its in thier power to do  so . Basically that puts us into the mode of its better to have something than nothing. So basic food and water storage should be of importance . Hyperinflation, Deflation or what ever else might happen, even both at the same time but the Truth is the future for America will grim if it cant control its spending, Bring manufacturing back  and stop these needless Wars . The end of the dollar lifespan is closeing as Fiat money based upon a debt systems crashes when the debt ceiling is unpayable because the interest  takes all the money and none to principle .What happens is they switch to another fiat system and do this all over again .When a crash occurs, thier will soon be another system in place to continue .

        It will be interesting as we will be going through this point of history .But the signs im seeing looks like the dismall things talked about are coming . .

      3. Yes, but you can wash dollars.  Things will be bought for pennies on the dollar.

      4. World reserve currencies like the dollar or the UK pound in the 1930’s, don’t usually go the way of ones like Zimbabweeeee or the german mark. This is because like it or not they provide stability to global trade, which every nation depends on.

        The US will probably go the way of all empires and just slowly fade away over the next decade or 2. The US dollar slowly devaluing more and more along with it. Those looking for a fast collapse should look back to 1970. That was when the collapse of the US actually began, when their hegemonic control over oil began to slip.

        Even the old British sterling retained much of its value through WWI and WWII, even though the nation was bankrupt on the eve of WWI

        People cite many reasons for the US dominance over the last century but I never hear the obvious stated. The fact that US oil was the first to be exploited on a massive scale and that all that FREE energy allowed it to build the logistics necessary for world domination.

        Take the early US oil reserves out of the equation and the picture would no doubt have looked very different.

      5. Comments…..This is how it always happens..when money gets too expensive (or cheap) the poor and middle classes suffer horribly. They will sell their jewelry, the extra car, the furnature..anything to feed their kids on $10 a loaf bread..saleries will barely move at all during the critical months of this crisis so just accept that your ability to buy or pay for anything much will be nill..that is when you try to trade..AND that is when the carpetbaggers always appear to trade your family jewels for a little bread or gas or red colored fiat money..whatever.. they buy up what is of real value and ignore the junk…then wait till economic and price stability return. Heck I would trade one of my extra MREs for a nice diamond ring or a late model pickup truck..even a couple MREs if they drive a hard bargin.. Then I just wait till these things have value again..As for the worthless junk…it will always be worthless and I would not waste time on any of it.. Pawn Shops do this too..they offer you perhaps 25 to 50% of the real value of things for a little green fiat money..then they wait, they don’t buy crap..only liquid valuable things like gold, guns and tools. During the coming carpetbagger days, my business model is going to be based on offering 10% of real value or less…I do not need to make a deal every time, all I need to skim is a few deals a week to do just fine.  A relative of mine (by marrage) was a mechanic who bought cars from people along route 66 during the depression. They could not afford any more gas or the thing had broken down and they had no more money to fix it. He paid them a few dollars for an older car, and offered the price of bus tickets to California and a little money for food along the way for the nicer ones. Sadly, it was a better deal than most other roadside businessmen offered the down and out.  A lot of people kept driving…but he got several cars a week..he just parked and covered them out at his worthless land in the desert and waited.  Imagine buying a nice one year old car for the cost of a couple bus tickets…he did that often.. A few years ago when he died, we cleared out the remainder of his inventory that he had kept…amazing stuff. He kept the bills of sale for each of them in their glove boxes..even adjusting for inflation he stole them.  He made enough money, especially during WWII, reselling those cars that he bought a dealership, a couple warehouses, a ranch..  and was retired at age 50…  If American carpetbaggers do not come, then foreign carpetbaggers will..either way, the majority of Americans will trade their valuables, jewels and antiques in for bread, water, medicines ect… it happened during the civil war, it happend during the is coming again..It is the American way.

      6. Its coming folks.  The game can’t continue too much longer. I hope you are all prepared. Food/water storage. weapons for protection.  The greatest paradigm shift in human history is on the horizon.

      7. If this happens prior to the election the Democrats could lose both houses.  So many voters are still not fully aware of the impending crisis.

        As for “who will buy this junk?”  future millionaires.  Millionaires were made during the great depression and even in the worst economic times there are opportunitites.

        As for the U.S. fading away over the next decade or 2; make no mistake as bad as this economic crisis is it will pass one day and there will be another economic boom.  And this will be a worldwide “crisis” so it isn’t likely any other nation will suddenly become a world power overnight.  There will indeed be winners and losers in the short and long term but for the most part we are all in this together.

        The trick is to survive the crash, depression, crisis, whatever and come out the other side of it ready and able to recover and even prosper.  So prepare for the worst and hope for the best, but don’t expect the world to end. 

        Carpet bagger has a particularly bad connotation so I don’t advice you to be a carpet bagger.  Be a cautious investor, buy a small farm or nice home.  Use your excess preps to make friends not to take advantage of people.  This could be the best opportunity in your lifetime to shine.   If you saw the movie Schindler’s list or read about many of the heros of pre or post WW II in Europe you understand how important strong, moral and committed people are in a crisis.  Be that person.  Be careful so that you aren’t taken advantage of but help others get through this crisis.  I truely believe the strong should help the weak and if your strength is in your foresight then you can help those who lacked foresight and did not prepare.  We are all brothers and sisters. 

      8. Preach on  Gonewiththewind.  I agree.  A persons moral character is his greatest asset.  We have heaped up treasures for the last time. What we all do now is for accountability.  Faith, hope and charity.
        Among these three things charity is the greatest.

        He who dies with the most stuff really doesn’t win.

      9. The underlying theme here is :  1.  Of course prepare for the worst .  2. Stock up on things that are of value for trading purposes like : Coffee , Flour , Rice , Beans,  Cigarettes,  Booze,   Ammo Sugar, salt  ,Seeds to grow a garden . You get the picture ?  A gallon of Gas will be worth more than gold !  A bottle of whiskey might get you anything you want !

      10. Where is this inflation? Housing prices down, clothing prices down, electronics down, many foods decreasing…I’m spending less this year than last year. Walmart prices down 10% for most items. Where do you folks get this crap from? Deflation is what is coming. Even the FED is worried about it. Look, we are not that shithole of a country called Zimbagwe. Comparing what is happening there to the USA is for the doom and gloom morons that troll these sites. Oh yeah, the landfills are brimming over with Y2K food that is now turning into shit. Funny, when the survival food is now moldy, the gloom and doomers come up with another bullshit scheme to sell more books,food,ammo and make more commissions on gold trading. Cheers.

      11. You’re right Ed, deflation is the likely near-term outcome. I couldn’t agree more. We are going to see very strong price declines in debt based assets like real estate, cars, luxury goods, non-essential consumer goods, etc.

        As suggested in this article, the inflation, or rather, debasement of our currency, comes once the US treasuries pop. After that, the shit will hit the fan. Will it be a catastrophic collapse leading to a breakdown in society? Hard to say. But it is most definitely going to be prolonged pain for most of the population. The cost of essential goods like food and gas is going to increase, just as it has done over the last 100 years, while real wages have gone down.

        Where is the inflation? if we’re talking short-term, there is no significant price inflation right now, except in maybe food prices. But it’s clear that the U.S. dollar has lost over 95% of it’s value since 1913 against all asset classes. That’s not deflationary in terms of asset prices, and considering that the Federal Reserve has only one weapon left in its arsenal, I am thinking this trend of a depreciating dollar will continue going forward.

      12. Looking at the <a href = “”>federal reserve’s data</a>, I was surprised to see that that the M2 money supply had small declines in a couple of months over the last year. The overall trend, however, is inflationary. We had about 29.7 times more money in circulation at the end of last July than at the end of January 1959. Inflation and deflation really just refer to money supply; the effect on prices depends on the supply of goods and services.

        Raising taxes and cutting expenditures both piss off voters, so our slimey politicians tend to take the easy way out and just conjure more money out of thin air. To pay the Baby Boomers’ Social Security and Medicare benefits, Uncle Sugar will create Monopoly money like it’s going out of style. Uncle can force us to take his Monopoly money, but not the foreigners who supply most of our petroleum. This country is utterly dependent on petroleum, even for food production, so if our foreign suppliers stop taking Uncle’s funny money, TSHTF.

      13. Our past and current white house administrations have been working to put the US  in place to become the North American Union with Canada and Mexico. They WANT a One World Government. They want the US to go to it’s knees so this can be done. And what might this look like for US citizens? Think Russia  or China in their early years ( or worse). The UN plan is for “resources and finances” to be “moved” from user nations and given to 3rd world nations. ( No doubt by way of the elite’s pockets.)  Then there will be the dirt poor workers and the elite and nothing in between.  That is what our elected officials have been working on for decades.  Why? Maybe they feel it is fine as long as they are part of the elites. Maybe they really do believe that a humane, communist society can exist. Who knows what dimension their brains are in when they rationalize this but the bottem line will be money. They will have more and we will have less. So do not expect the government to do what it needs to do to stabilize the ecomony. In fact the Obama administration could not have done a better job of making things worse if they planned it.  Oh wait … they did.

      14. Rawles has this totally wrong.  It doesn’t matter what non-US bond holders do, that’s not how a fiat currency system works, especially the US who issues (a) its own currency and (b) debt denominated in its own currency and (c) is a huge economy and the world reserve currency (the latter not mandatory, but helpful).  But most people have only the background to understand the US economy like their own personal wallet.  Not the same.  Rawles is no better, his logic doesn’t even begin to make sense.  He’d probably do about as well explaining string theory.

      15. @AnotherComment: I believe that I understand how a fiat currency works. When politicians want to give money to somebody, for whatever reason, the politicians just conjure the money out of thin air, as if by magic. Obviously, any fiat currency will be inflated at an ever-increasing rate. As I noted above, the government had about 29.7 times as much money in circulation at the end of July than at the end of January 1959.

        This ever-increasing inflation is not a problem if the nation’s economy is a closed system. The government can always force its own citizens to take its money, however worthless it might be. If the economy depends upon foreign imports, and the foreigners recognize that the government is screwing them (by paying them with money that’s worth less every day), then the government might or might not be able to force the foreigners to continue taking its fiat money.
        Perhaps you’re right in a sense. It’s not what the bond holders do, it’s what the folks who sell us petroleum do. Of course, both will probably abandon our worthless currency at about the same time.

      16. There are those people who are critical of owning gold or silver during times of economic chaos are missing the point of owning precious metals in the first place.  Essential items to live day to day and survive purchased before the storm ARE important, and all prudent people must strive to prepare as best they can.  Precious metals (gold and silver) are there for you when things RETURN TO NORMAL ( years) and investment capital is needed to start again.  The U.S. dollar does not have long to live.  Is this where you want your current wealth to be invested…U.S. dollars?
        Hello, McFly!  Are you listening?

      17. I am grateful for the thinking expressed in most of these commentaries and in the original article as well.
        I assume that wealthy persons with well paid advisors are way ahead of us here having more hard data and better connections but that doesn’t excuse me from doing my best with what I have. I assume that they (perhaps China and India and others) would be entering the futures market for those “hard commodities” with the intent of taking delivery and paying with the worth less dollars locking in the price before paying later. These futures markets would be surprised by actual delivery and the spot prices could move rather quickly. Also in response to Wooba, we have developed a new toxin in the form of derivitives and instilled them into everything financial that would act to shift the past experience of “the fade” into something more trying.

      18. So far the powers-that-be haven’t lost control.
        Granted…things are going south, but the trend is slowly.

        Assuming that continues and we have no mad max scenario, then what we’re faced with is a great depression on steroids.

        Bleak, but not anarchy.
        So… assuming one has some savings now and is intent on protecting it so as to buy hard assets later at fire sale prices…
        that begs the question of where does one allocate those funds now (at this point of the sequence).

        Oh yeah, I know the first thing out of ya’lls mouth is gold and silver. Lets assume that one already has that covered (and there is this thing about too many eggs in one basket).
        So… my question is —– After PMs, what other avenues of stashing ones savings in a liquid manner are there today?

        Let’s assume one has 50 or 80% (whatever) of ones assets in PMs, then what? Swiss francs, MacDonalds stock? Very short term US Treasuries (yeah, I know …treasuries = yuck).

        Suggestions, Comments, thoughts…. I’d love to hear them.
        Please back it up with some reasoned, cognizant thought.

      19. Hi Gringo Malo, You say you understand our system, but you’ve just proved you don’t.  I have seen some good rationale. 

        @Comment:  If you see 1 basket and 1 black hole, I bet you’d choose the basket for all your eggs.

      20. @ Gringo Malo – Meant to say – I have seen some good rationale, I’ll try to post a link back here.  Jittery finger on the submit button.

      21. Reply to ‘AnotherComment’

        I’ve posted something similar on other sites.
        My intent is to tap into the collective knowledge and wisdom that’s out there in the blogsphere. Unfortunately it hasn’t worked out too well.

        The result is invariably the same… some short, meaningless…and let’s call it what it really is  effectively worthless remark. Such as yours.

        If you can’t afford to spend a few minutes composing a coherent reply then why bother? Really, your reply of
        I quote —If you see 1 basket and 1 black hole, I bet you’d choose the basket for all your eggs.  endquote. Is that supposed to convey your accumulated wisdom? I would say it’s better not to rely at all rather than with such a lame response.

        Zerohedge is one of my most favored sites…and yet the quality of replys to (some very good) articles  there has degenerated because there’s all these one sentence “off the cuff” remarks. Worthless as far as I’m concerned. It’s the online equivalent of burping in public.

        Once again, I offer … if anyone has some worthwhile comment to my initial query then I’d be very interested in your opinion.

      22. @ Gringo Malo – Here’s a couple of links, there was a better one I recall that I just can’t find, but I think this guy has it mostly right:

        I disagree with some parts of MMT and two of the lead MMT economists have horrible ideas on other things, but MMT sure has been accurate for framing economic status for quite some time.

        Comment – not sure you’ve added anything either, rambling about how confused you are doesn’t help.  And no one owes you comprehensive planning advice for free online.  Go buy some.  Oh, right, you’re probably not employed.  Which is why you can afford to belch on the boards instead of just burp.

        Personally I’m betting on “deflation with fear” – so gold (fear), cash (watching for a signal to swapping into foreign currencies, got out of those last December), US treasuries (deflation).  I may buy property (I sold it all 3 years ago) soon, but other factors go into that – not expecting inflation any time soon.   There have been some trading opportunities in commodities as the ..flationistas stampede back and forth.

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