Tuesday, June 25, 2013

The Great Debate: Hangman's Body Count

****Disclaimer: Before reading this... I strongly recommend you go back and read some other debate posts.  Its been months since our last post, and even if you did read it, you probably don't remember what I said.  Starting here today... much of this will likely make little sense, and it will certainly lack impact if you are not already familiar with the rest of the theory and case behind it. I am currently working on formatting an e-book of the whole debate.  We will make it available for download as soon as we can.***

So at long last we understand how hyper-inflation works.  It is caused by hyper-velocity.  Meaning folks are spending their money as soon as they get it.  I'm not going to go much into the differences in Weimar and today... because honestly the differences are actually smaller than Vox indicates.  See we have the worlds leading reserve currency.   Companies and governments have enormous amounts of cash on hand ready to dump.  As I showed previously... the Fed has no idea how much cash is actually out there in the international market.  We know that there is roughly 2 trillion in corporate cash reserves in the domestic market... but we're told its actually as much as 5 or 6 trillion in the international market.. and that's on the low end.  Kids... that isn't even counting what the governments around the world are hording.  Remember one of the benefits of being the foremost reserve currency is that oil is priced in dollars...  so to buy oil you first have to buy dollars. That's important  Its a big deal.  So there is a lot of demand for dollars out there.  And a lot of dollars horded up.

 And thus we see that the engine is certainly sufficient to put the train in motion.  In fact there is probably enough cash out there to blow it to hell and gone.  No.. its not like Wiemar.  Its different.  Its very different.  But history doesn't repeat.  It rhymes.

A common, but often ignored, phenomenon is that even during hyper-inflation the central bankers think that there isn't enough money to go around.  Why?  Because I have explained it is velocity driving the problem.  Not an increased supply in money.  Remember that central bankers are all worshipers of John Maynard Keynes.  Damn his eyes.  So they see complex economic situations as simplistic equations that can be manipulated with god-like precision.  They have equations that they really believe accurately can describe something as complex as an economy.  To much X?  Add a little Y.  To much V?  take away some Q.  I know this sounds insane... because well... it is... insane.  Keynesianism is far more idiotic than you probably think it is.

In their Exchange Equation... velocity, the money supply, GDP, and Price are all stuffed in together in some insane ratio.   It is so incredibly wrong... that  as velocity ramps up and starts the Hyper Inflation... through their keynesian glasses it appears that there is a money shortage, because price is going up faster than the supply is increasing.  They respond to this by doing what they always do.  Trying to increase supply.   Which is like putting out a forest fire with gasoline.

As people dump their money prices are driven up.   These prices actually go up at a rate that is significantly greater than the rate that new money is introduced into the system.  For example... according to that same Keynesian Exchange Equation... if we double the amount of money in the system, even at standard normal velocity we would expect to see prices increase by about 3X.  If Velocity is already spiking... you will see prices sky rocketing while the money supply is, in comparison, barely moving.

 I need to point out the hyper-inflation hasn't happened yet.  Hyper-inflation isn't a forest fire.  It doesn't start small and ramp up over time.  Its more like a mega-tsunami.  Think about that.  In a mega-tsunami you see the giant flood of water... and all the damage that is done.  What you don't see is the massive rock slide 4000 miles away that caused it.  One looks at the mountain and says, "That could fall into the ocean and cause a Tsunami!"  or... one never bothers to look at the mountain... because Tsunamis are oceanic phenomenon, and mountains are not oceans.  If one only looks at monetary phenomena... then one will miss the critical cause.

How then can I predict it?  Because I look at mountains.

Remember the fiat nature of money?  We have to gauge the perception of the government from the point of view of those holding the money.  As long as there is faith in that government, people will continue to have faith in the money of that government.   I am looking at the mountain.  I see the cracks.  It hasn't slipped yet.. but it clearly is going to.  Its only a matter of time.  Soon a large chunk will fall into the ocean and cause that mega tsunami.

But what will it look like when it does?

My prediction is simple.  As the United States continues to pile on debt it becomes more and more obvious to everyone that the debt can never be paid, and in fact, it will not even be serviced.  Some time in 2015 the US will reach a debt to income ratio where such a large percentage of its income is being used to service the debt lenders simply will refuse to expose themselves further.  At that point even the pretense of borrowing money will be gone.   The only choice the US will have is outright counterfeiting via the Fed.  This will result in devaluing the currency to such a degree that the major holders of dollars will dump them.  This sets off the chain reaction of hyper-velocity.

Those paying no attention will first realize that prices are higher at wal-mart and they will complain.  Then the next day they will realize that prices are even higher.  This will cause a bit of a panic and people will rush to buy what they need while they can still afford it.  This will drive prices even higher and will start to create shortages.  As the shortage and velocity work together to drive prices even  higher people will totally lose faith in the purchasing power of their dollars and will simply spend them as fast as they can to get anything they can get for them.

The government will not recognize this.  The Fed will see it... but will not understand it.  As explained earlier they will see this as an actual shortage of money.   Being idiot neo-keynsians they will probably even see it as a sign that the economy has finally woken up and call it good news.   It will look to them like they finally have a chance to go from a stimulus driven economy back to a normal credit model.  They will respond by doing exactly the wrong thing... dumping more money into the system.  Injecting it into the system won't be a problem at this point because the dollar will be so devalued and the prices will be so high people will in fact be borrowing money again.  The Economist Steve Keen will be proven right, for even as the deposits disappear through hyper-velocity, new credit money will pour into the system.  This is key.  The flood gates that had been closed to the Fed... will suddenly be thrown open.  People will borrow again.  Vox pointed to Weimar... and so shall I.  Even as they rejected their currency... the people borrowed and borrowed.  And why wouldn't they?

This will continue until the system is totally destroyed an a new system is created to replace it.

But what will it look like while its going on?  What will it mean to you?

You need to prepare for shortages.  You need to prepare to be able to do without.  Hyper-inflation is not a time of plenty.  Look at what's going on in the ammo market right now.  All of the important markets will look like that.  You aren't going to starve to death.  But you likely will be changing your diet.  Its entirely likely that at some point imports will simply stop.  If they don't stop completely the prices of such things will be astronomical.  Look around you.  See anything that's imported?  Yeah.  Its going to be a problem.  Almost everything is imported.  So almost everything is going to be almost impossible to get.  Look if you need a generator or a car or a tractor or tools or anything like that... you need to get it now.  Electronics?  Get them now.

You need to stock up on the things you need the most.  I can't tell you what those things are.  That's up to you.  If you have little ones, buy diapers.  Lots of diapers.  Make sure you have means to make your own baby food.  For the love of all that is holy, start a garden.   Stock up on canned goods and water.   You need skills.  You need to know how to can...  how to preserve food... how to produce food.  You need to learn how to fix things and mend clothes.  You need friends.  You need a small community that can aid and support its members.  And I recommend a healthy dose of prayer.  Lots and lots of prayer.

This is not the end of the world.  Remember that.  There have been worse times before.  There will be worse times in the future.  Rome fell but there stands Italy.  The families alive there today can trace their roots back through the centuries to the days of Nero.  They survived.  So will we.  It will be in a different form.  But we will survive.  We will not forget how to make electricity.  We will not lose our technology.  This is not the zombie apocalypse.

Suck it up.  In the next few years we will find ourselves facing a wall of fire.  We have no choice in the matter.  We will meet it as men.  We will stare it down.  We will walk right through it. But we will not be walking alone.  We never walk alone.

And if I am wrong?   If I am wrong it is death by Ice... and I will concede to Vox in 2016.  If it is to be ice you need to prepare for largely the same things.. and do the same things you would to prepare for hyper-inflation.   In deflationary collapse you will deal with shortages just like you would during hyper-inflation.  You need to be prepared for that either way.  You need skills and a means to produce things that are not going to be easy to get.  In short... just look at the Great Depression... then imagine its a lot worse.

Either way we will emerge.  We will be burned and battered.  And in our old age, we will complain bitterly about all of our wounds and scars, and our children's children will roll their eyes, before they hear the same  tired story... yet again.  The world does not end this way people.  There have been worse times.  Its just hard to see from our limited perspective.

At this time I would like to thank Vox publicly for the time and work he put into this debate.   He did a fantastic job, and was an honorable opponent.   The success of this exercise was never going to be judged by the score card, but instead by the education it could provide, and the questions it may inspire.

Thank you for reading.   And may God have mercy on us.

Now for the love of God...  Do something.


Cool Hand said...

Excellent post. Let me know if you need any help on the epub.

Keep your blade sharp and oiled.

jack said...

Thank You for the upcoming ebook of it all.

Why not do an ebook pamphlet on how to do an ebook? I would pay for that.

Toby Temple said...

So the faith in the money is the mountain. And that mountain has shown bigger cracks since 2008.

Maybe the mountain is actually a volcano waiting to explode?

Josh said...

Nicely done, Nate.

RL said...

I would like to express my thanks to both Vox and Nate. It has been very informative.

mina smith said...

Since we are on the topic of "debate" I wanted to tell you I finally got to use mindhurt, feedbad giving = I am cruel in a fun debate with female liberal about "pit bulls" (whatever they are.) Just brilliant. So simple, yet it says so much. Thanks again!! side note: I hate debating chicks. man, they are dumb.

Raggededge said...

I've really enjoyed this debate. My main issue is how does the money get into the economy? With 70% of people having less than $800 in savings, how does the velocity increase to begin with? People are already spending every dime that they earn now, I would argue that velocity is already at close to max. I guess lending regulations could be completely relaxed and people given unsecured loans, but why would the banks do this?

Flannel Avenger said...

Excellent job.

But what about Cicero? LOL

Nate said...

raggededge... the velocity won't start with them.

It will start with the corporations and foreign governments dumping there cash.

James Dixon said...

> With 70% of people having less than $800 in savings, how does the velocity increase to begin with?

They may not have savings, but they do have credit cards.

Raggededge said...

@James Dixon: Right, because people that live paycheck to paycheck have credit cards that are not already maxed to the hilt. Hell, 20% of people that shop at Walmart don't even have a checking account.

Nate: raggededge... the velocity won't start with them.

It will start with the corporations and foreign governments dumping there cash.

Into what do you think foreign governments will dump dollars into? Or corporations for that matter?

Res Ipsa said...

What makes you think that the velocity of money is speeding up throughout the entire economy? I ask because I think that to get to a true hyperinflation scenario all sectors of the economy have to increase the turnover rate. Right now it would seem that Vox is correct in that individual households are decreasing spending. IF (and I admit I don’t know either) one or more major sections of the economy decrease while other sections (government spending etc) increase isn’t it possible that we end up with some sort of economic hybrid cluster flip that we couldn’t possibly predict? An example would be stagflation. Theoretically stagflation was an impossibility but it happened anyway. Who knows what Frankenstein economic scenarios are in store when we attempt a command economy that is manipulated by several competing players?

Carlotta said...

I am just wondering if you both would include strategies to thrive for each position taken and real world markers for knowing which way we are tanking?

GAHCindy said...

Yep. You win. ('Course, I don't know much about anything, so my thinking so might mean you lose.)

Scott said...

Ha! If we heed your advice and buy buy buy right now, we will stave off inflation... or perhaps catalyze it?

In any case, as smart as Vox says he is, he's probably equally as stubborn. My guess is many more people are convinced by your arguments, thus you've clearly won this debate. Cheers.

allyn71 said...

Well done Nate. We are gonna have to agree to disagree on this one as I have to side with Vox on this and don't think the WZ scenario will be able to overcome the nature of credit money and leverage to offset the "Great Deflate".

That said, you made a strong case and make me think about it damn hard and from a perspective I hadn't previously. Not to many folks can achieve that and even fewer can sustain it like you have in this effort.

I am also glad you pointed out the real world consequences regardless of how it all goes down. Whether it evaporates or is inflated to nothing. To normal folks it will all be the same and it will all be about community, preparedness, and faith.

Thanks for picking up the gauntlet thrown down for the WZ side. I would say that damn few could have done as well as you did.

allyn71 said...

I mentioned it over at Vox's place but thought I would throw it in here. One of the things I struggled with was at times I think Vox and yourself were talking about different spatial context. I feel that his timelines were longer than yours and that could be a source of confusion.

I do feel there could be a short-lived WZ mini-scenario inside a larger credit default crackup that happens just as you have described. As the default starts, people will try and get what they can while they can. The difference I guess is I just see that as a very short term anomally that couldn't be sustained inside the larger and longer deflationary period where default and collapse are nuking everything.

Anyways well done and hope you had a nice trip and glad to see you made it back relatively well and sound.

Nate said...

Thanks to all. It was an enormous amount of time and work... but it was extremely satisfying to see people challenged and responding.

I wish we could've figured out a way to dumb it down more. I wish we could've poured even more time into and dug even deeper... its just not practical.

anyway... thanks again.

Nate said...

I don't think velocity is speeding up. Like said... its not a forest fire that you can see start and grow.

One second the mountain is there. The next... the mountain falls into the ocean.

Rollory said...

I can't be bothered to read any of this until you learn to use apostrophes correctly, like you should have done in grade school

WaterBoy said...

The series was exceptionally well done, by both sides. I can't say that I've been firmly swayed one way or the other...guess it's like y'all said: we'll just have to wait and see.

But it was highly informative nonetheless.

Raggededge said...

Nate swayed me to the inflationist camp. I think his timing is off though. Probably 5 or 6 years till TSHTF.