Good Interview Puts It Into Simple Terms

[Jonnybegood]

Here we go second leg down, the US government is bankrupt and the only way is hyper inflation.

Although real estate, metals, Australian and Canadian dollars seem to be the best bet...

When Fed Chairman Ben Bernanke admits to seeing an "unusually uncertain" economy ahead, it's pretty terrifying to imagine what he's really thinking. What John Williams envisions—and he's by no means looking to the far horizon—is a systemic collapse, a hyperinflationary great depression and the cessation of normal commerce. Despite that bleak outlook, however, when the economist and editor of ShadowStats.com sat down for this exclusive Energy Report interview, he also had some good news.

Unemployment will be a lot worse than most people expect. Housing will continue to suffer in terms of weak demand. But in this crazy, almost perverse circumstance, the renewed weakness to a large extent will help push us into higher inflation. Real estate tends to do better with higher inflation, but it's not going to be a happy circumstance for anyone.

The government is effectively bankrupt. Using GAAP accounting principles, the annual deficit is running in the range of $4 trillion to $5 trillion. That's beyond containment. The government can't cover it with taxes. They'd still be in deficit if they took 100% of personal income and corporate profits. They'd also still be in deficit if they cut every penny of government spending except for Social Security and Medicare. Washington lacks the will to slash its social programs severely, to change its approach to ever bigger government. The only option left going forward is for the government eventually to print the money for the obligations it cannot otherwise cover, which sets up a hyperinflation.

All of what I just described was already in place when the systemic solvency crisis broke. Before this crisis the government was effectively bankrupt. In response to the crisis, the government may have gone beyond what it had to do, but you err on the side of conservatism when you're trying to prevent a systemic collapse. That was a real risk. It still is. Irrespective of the politics of big government spending, quantitative easing, renewed bailing out of banks, whatever is involved, I'd argue that the government still will do whatever it takes to prevent a systemic collapse. That last series of actions had the effect of rapidly exploding the deficit. In just a year, we went from something under $500 billion in official reporting, on a cash basis as opposed to GAAP basis, to something close to $1.5 trillion.

The energy report - 05/08/2010

Edited August 14, 2010 by Jonnybegood

[tomwatkins]

Here we go second leg down, the fed is bankrupt and the only way is hyper inflation.

Although real estate, metals, Australian and Canadian dollars seem to be the best bet...

The energy report - 05/08/2010

"Fed is bankrupt"-daftest statement ever. I didn't read anything after that.

[Mish Mash]

"Fed is bankrupt"-daftest statement ever. I didn't read anything after that.

Can the Fed Go Bankrupt?

Meanwhile, central banks are still trying to convince markets that the financial system is merely experiencing "liquidity" problems. But if liquidity were the only issue, all the pumping the Fed and other central banks have been doing already should have cleared up this problem.

The problem isn't one of liquidity. It's one of solvency: loans banks made (especially through the derivatives market) are worth less now than when they made the loans. Because they made way (100 ways) too many of them, banks in general have no capital left. You can't make loans if you don't have capital.

So the Fed has to give the banks capital. This latest scheme is extremely troubling, especially for the already-battered dollar. The Fed is taking on "AAA mortgages" from the banks in exchange for Treasury Bills to give banks the capital. Of course we don't know the price they are taking on these mortgages at and that is the crux of the matter. Everything is price.

So now the Fed has mortgages on its balance sheet instead of T-bills. Why is this so troubling? It is a slippery slope to more currency debasement.

Let's say the mortgages continue to deteriorate in price (which is highly likely given the nature of our rating system to make them AAA) and then the banks are in no shape to take them back. If the Fed is stuck with declining assets it too will have a capital problem. But if the Fed loses capital it won't go bankrupt like a regular company: It will just print the money to make up the difference. Literally.

If the Fed loses $50 billion, it can physically print (tell the Treasury to print) the currency to make up this difference. If there currently is $700 billion of physical currency in circulation, printing $50 billion new money would immediately devalue the dollar by 7%.

If the Fed takes on riskier and riskier loans, it becomes more and more negative for the dollar. A collapse in the dollar is a de-facto bankruptcy by the Federal Reserve and the U.S. in general.

LINK

[soldintime]

Load of rubbish. After massive credit explosion Deflation is the only likely outcome. Only once deflation has run its course can we get hyper inflation.

[Confounded]

Load of rubbish. After massive credit explosion Deflation is the only likely outcome. Only once deflation has run its course can we get hyper inflation.

You are wrong, you are thinking like a sheeple according to ringledman. Every man and their dog is expecting deflation followed by hyperinflation.

[soldintime]

You are wrong, you are thinking like a sheeple according to ringledman. Every man and their dog is expecting deflation followed by hyperinflation.

As we are already on that traject. House prices, shares and all commodities are still below their all time highs. US treasury yields are going down day by day, not the sign of inflation there. What did the credit crunch do in 2008, it deflated things. So what will credit crunch part II do......

[Confounded]

As we are already on that traject. House prices, shares and all commodities are still below their all time highs. US treasury yields are going down day by day, not the sign of inflation there. What did the credit crunch do in 2008, it deflated things. So what will credit crunch part II do......

Exactly.

Buy into hyperinflation (which had people done in 08 with a basket of inflation hedges they would still be looking to recover losses) or position yourself for deflation, given it is the dominant force, then react if and when they push the nuclear button.