Hyperinflation Meltdown: Is It Inevitable?

Seeds of Destruction

The Federal Reserve System was established in 1913 for the express purpose of inflating the money supply. As a result, the dollar has lost more than 95% of its value since the birth of the Fed. This is according to the government’s own Bureau of Labor Statistics, which says that $100 has the same purchasing power that just $4.43 had in 1913.

The Fed system’s artificially low interest rates result in the misallocation of resources and the “boom” phase of a bubble. This sets the stage for the inevitable “bust” which follows shortly thereafter. The government and the Fed have been playing this game for close to 100 years, but in 2008, the system finally started to melt down one last time.

As a result of the “financial crisis” of nearly three years ago, the Federal Reserve unleashed an unprecedented tsunami of money creation. At one point during the crisis, the money supply increased by a greater amount in the span of just a few months than it had in the entire history of the Federal Reserve up to that point. As money-supply expansion is the true definition of inflation, this was hyperinflation—it has already happened. Rising prices, which is how most people now define inflation, are the result of an expanded money supply, and thus, it would seem that that type of hyperinflation is indeed inevitable.

Defining Inflation

Hyperinflation is often defined as an extended period wherein prices rise by more than 10% per year. This is the most liberal definition of hyperinflation, but once inflation reaches those levels, it’s generally inevitable that it will get much worse. Other definitions of hyperinflation say it is “at least 26% per year for at least three years,” or even as much as 50% per month or 5-10% per day. Regardless of the popular definitions, they all focus on prices, rather than money supply. An increase in the supply of money is the true definition of inflation—and unquestionably the cause of hyperinflationary rising prices.

But how are rising prices measured anyway? We might see bread go from $2 per loaf to $4, but comparable computers may fall in price from $900 to $800 over the same period. Is there “inflation” here or not? The government attempts to answer this question with the Consumer Price Index, or CPI, which is the most popular measure of price inflation in the U.S. economy. It takes a “basket” of government-selected (and manipulated) goods, and tracks their prices over time. People have generally come to accept this as the measure of “inflation.”

Measuring the Money Supply

Although they’re technically incorrect, people are almost always talking about runaway prices when they use the term “hyperinflation,” and skyrocketing prices are what we need to be afraid of, anyway. However, the roots of this type of “hyperinflation” are in the expansion of the money supply, which is measured in a variety of ways: M0, M1, M2, and the discontinued M3.

M0 is the strictest measure of the money supply. It counts only money—that is, coins and notes—that is in active circulation, outside of the Federal Reserve. It does include notes and coins that are held by banks, though. Although this is the strictest measure, it is also possibly the least useful, as so much of today’s monetary activity takes place electronically.

M1 includes all of M0, in addition to traveler’s checks, demand deposits, and “other checkable deposits.” Two of these terms require definitions: Demand deposits are deposits in bank accounts that can be drawn upon at any time, without restriction. The most obvious example of demand deposits are the funds in your checking account. “Other checkable deposits” include negotiable order of withdrawal accounts and credit union draft-share accounts. These are obviously less significant than standard checking accounts, in terms of the total dollars held in each.

M2 includes all of M1, as well as savings deposits and time deposits, such as CDs, of less than $100,000.

M3 includes all of the above, in addition to time deposits of greater than $100,000, as well as short-term repurchase agreements and institutional money-market funds. Just as M0 is the strictest and yet least useful measure of the money supply, M3 is the most liberal and probably most instructive measure—which is why it’s very convenient that the Federal Reserve decided to stop publishing M3 data in 2006!

Monitoring Inflation

Not only did the Fed stop reporting M3 in 2006, they began playing with CPI—already a highly manipulated statistic to begin with—much earlier. High CPI combined with high unemployment in the Carter administration helped lead to the electoral victory of Ronald Reagan. After taking office, CPI remained high, so Reagan and his advisors decided to simply alter the statistic. Via a process known as deletion, they took housing out of the equation, thereby taming CPI—and believe it or not, people bought it. Overnight, “inflation” was cured.

Years later, with the Greenspan-fueled Internet bubble taking off, CPI was looking bad once again. So Reagan-appointee Greenspan along with President Clinton and his advisors decided to manipulate CPI again, this time by the process known as substitution. T-bone steak was a staple of the old CPI, but beef prices were soaring. “No problem,” said Greenspan and Clinton, “we’ll just substitute chicken breast for steak!” Of course, chicken breast isn’t of the same quality as steak, but that didn’t matter: they substituted and CPI was tamed once more.

Right now, despite the Fed’s hyperinflating of the money supply over the past three years, the government’s official CPI remains modest. Currently, this measure of “inflation” sits right at 2.5%. However, if you use the old methodology—before Reagan and Clinton—then CPI is actually over 10%! Back in 2008, it reached nearly 15%! People were practically rioting in the streets when CPI reached these levels in the late 1970s and early 80s, but now, thanks to deletion and substitution, no one is the wiser. And yet, by the most liberal definition of hyperinflation—an extended period of 10% per year—we’ve been experiencing hyperinflation since 2005! And once this mild form of hyperinflation sets in, it inevitably gets worse.

The Roots of Price Inflation

Once again, it must be reiterated that price inflation is actually just a symptom of monetary inflation. We’ve had huge monetary inflation over the past several years, and we’re already experiencing a mild form of hyper-price-inflation right now—but if the money supply is any indication, things are going to get a whole lot worse.

Remember the statistic known as M3 we talked about earlier? It is the broadest measure of the money supply, taking into account virtually all forms of money—from coins and notes in circulation all the way up to the funds held by institutional investors in money market accounts—and the Fed stopped publishing this data in 2006. Well, other analysts have continued to track M3, and what they find is utterly shocking: From 2006 to 2008, M3 expansion steadily rose from 8% per year to 17.5% per year!

Now, with the way the fractional-reserve banking system works, a 17.5% increase in the supply of money could result in as much as ten times that amount actually making its way into circulation. That’s because banks are allowed to lend $9 of every $10 they have on hand, which can then result in an additional loan of $8.10, which can then result in yet another loan of $7.29, and so on and so on. Ultimately, for every $1,000 held in a bank, loans of up to $99,000 can be made, so once all of this Fed-created money starts actually making its way through the economy, look out!

The Final Home Mortgage Meltdown

In 2008, the money supply grew by a stunning 17.5%. But even using the original CPI methodology, we haven’t reached that level of price inflation, and we certainly haven’t reached ten times that. Why? Well, banks aren’t making loans—at least not to the people.

While the politicians and even the Fed’s officials publicly chide banks for not making loans, for the first time in its history, the Fed is paying banks interest on their excess reserves. In other words, the Fed is creating money, circulating it to banks, and then paying them interest on this money—for the first time ever—thereby discouraging it from entering into circulation as loans made to consumers. At the same time, they’re publicly complaining that the banks aren’t making loans. What could possibly be the point of all this?

Well, for one, there are still a lot of people with home mortgages. Although banks have foreclosed on millions of homes throughout the U.S., there are still millions more they haven’t gotten their hands on. If hyperinflation were to really kick into high gear, then money would be easier to come by, so all of a sudden your $1,500 monthly mortgage payment wouldn’t be a struggle to pay. In fact, if hyperinflation got bad enough, you might be able to pay off your $300,000 mortgage with one paycheck and still have enough left over for groceries!

The people pulling the strings in the economy—the “political class” as they are known in agorist economic theory—know that the dollar is doomed and hyperinflation is inevitable. Their job, for the time being, is to get their hands on as much real property as they can, because people left holding paper at the end of the dance are going to be the losers. Once the political class has gotten all they reasonably can, the hyperinflationary floodgates are going to break, and millions of working-class Americans are going to drown.

The Federal Government’s Inevitable Default

On April 18, 2011, Standard & Poor’s announced that the U.S. government was in danger of losing its AAA credit rating. In reality, it is an outright joke that U.S. debt securities are anything other than junk bonds. Yes, the government holds the keys to the printing presses, so it can always make its payments, but by printing money to service their debt—which is what they do with the help of the Federal Reserve—the government is effectively reducing the value of the payments they’re making. Inflation is really just a slow-motion form of government default, but the Fed has pressed fast-forward on the monetary remote control.

Some people argue that it is literally impossible for the federal government to pay off its debt. According to those who say so, this is because the only way for new currency to make its way into circulation is through the creation of more debt—this is true. With debt as the only means of creating money, and with roughly $830 billion in circulation, how could we ever pay off the $14 trillion debt? Well, since currency isn’t retired once it’s used, it is technically possible for the debt to be paid off—we could be taxed to pay the debt, the holders of the debt securities could use that money to pay our slave wages, from which we’d be taxed again and again, ad infinitum—but this is really an academic point: we all know that there is no realistic chance that the debt will ever be paid, and default is positively inevitable.

When did we reach this point of no return? It’s hard to say. Up until the 1980s, the debt was definitely small enough that it could realistically be paid off one day. Slowly but surely, it has escalated at an accelerated pace, to the point that no reasonable person could possibly believe that it will ever be paid off—so why is S&P just now “threatening” to lower the U.S.’s credit rating? It’s all politics, of course. But even if you’re a “true believer” or some kind of misguided “patriot” who thinks the U.S. can be saved, once you consider the $107 trillion in unfunded liabilities associated with Social Security and Medicare, you have to face reality: the U.S. is a zombie nation; the walking dead. A better analogy might be to compare it to Norman Bates’ mother, with the whole world playing the role of Psycho and pretending she’s alive.

How the Default Will Take Place

The federal government currently spends $4.5 billion more than it takes in—every day. That’s an annual budget deficit of $1.65 trillion, or if you prefer, $52,321 per second, around the clock, 24/7. Where does the government get all of this extra money? Well, you could say it “prints it,” but that’s not technically true. A government literally printing money to pay its own bills would be too obviously illegitimate, so instead, it does so in a roundabout way.

The deficit turns into the debt through the process of borrowing. The government issues bonds, declares their semiannual yield and at what price they’ll be redeemable at maturity, and holds auctions to set their prices. Big players like China, Saudi Arabia, and multi-billion-dollar institutional investors get in on these auctions, but small-time investors can, too. However, roughly 25% of these bonds are purchased by none other than the Federal Reserve itself, the government’s central bank. And where does the Fed get the money to pay for these bonds? It creates it out of thin air… Only the Fed doesn’t say this money is backed by nothing—it says it is backed by the government debt that it buys with it! Now how’s that for sleight of hand?

As it becomes more and more evident that these government bonds aren’t worth the paper they’re printed on, they’ll start to fetch less and less at auction. For example, a 30-year bond with a $500 annual dividend and a $10,000 maturity would normally sell for around $10,000—this would make it a $10,000 bond with a 5% yield. But when investors are willing to only pay $8,000 or even $5,000 for these bonds, all hell will break lose. This is when the Fed will step in to buy even more bonds, in order to keep the prices up—and yet by doing so, it will create even more money, cause even more price inflation, and lead to even less private-party interest in the bonds. This is the vicious cycle that will inevitably lead to the ultimate death of the dollar: this is the hyperinflation meltdown, and yes, it is inevitable!

Weimar Republic: A Cautionary Tale

We’ve all heard about hyperinflation in the Weimar Republic, where people would have to take wheelbarrows full of paper money to the store just to buy a few common items. Just before the end of World War I, an ounce of gold was worth 100 German marks. Within a year, it took between 1,000 and 2,000 marks to buy that same ounce of gold—that’s an inflation rate of 900-1,900%. Ultimately, the price of gold reached a high of 87 trillion marks—from 100 to 87,000,000,000,000: Now that’s hyperinflation. A pair of shoes went from 12 marks to 30 trillion marks. A loaf of bread went from 0.5 marks to 200 billion. A single egg, worth 0.08 marks before World War I, cost 80 billion marks at the peak of the Weimar Republic’s inflation.

What does hyperinflation do to investments? Well, look at what it did to Weimar’s stock market: Before the War, its composite index closed at 88 points. By the end of the hyperinflation, it reached a high of 26,890,000,000 points—and yet the purchasing power of the exchange had fallen by ninety-seven percent! This is a great example of how hyperinflation is deadly for an economy, because how can someone make investments, priced in dollars (or in this case, marks) when the value of the currency is eroded so quickly? Imagine paying capital gains taxes on your stocks even after they’ve lost 97% of their value. Imagine trying to make money by short-selling, when the nominal price of stocks increased, even as their real value plummeted: there would be no way to win.

Survival Strategy

So what can you do when faced with the inevitability of hyperinflation, the meltdown of the dollar, and the ultimate destruction of the United States as an empire and nation-state? Is there any way to prepare? The good news is that the path to financial security amid the chaos is clear, and it’s not yet too late to make your preparations.

The dollar remains the world’s currency. After the breakdown of the government-manipulated “gold exchange standard” that lasted from World War I to World War II, the Bretton Woods system was introduced. This meant that the U.S. dollar continued to be backed by gold, at an exchange rate of $35 per ounce, but only foreign governments could trade their dollars for gold. Under this system, the U.S. dollar was the only currency backed by any kind of real asset, and all other currencies of the world were explicitly backed by and pegged to the dollar, at fixed exchange rates. Although President Nixon abolished this last remnant of the gold standard in 1971, and currencies now trade at variable exchange rates, the fact remains that all other currencies function as if they are backed by U.S. dollars… so when the dollar inevitably goes bust, all other currencies of the world will too.

What this means is that no currency-denominated paper assets are worth anything, in the long run. You might be able to make money trading stocks, bonds, futures, currencies, and other paper instruments, and you might even be able to make money with “short-term investments” in paper, but ultimately, a day of reckoning will come and these “securities” will show themselves to be anything but secure. That’s why the strategy for surviving, and indeed thriving, amid the coming financial apocalypse is to get out of all currency-denominated paper assets and into hard assets.

You might think that gold and silver are the obvious choices, and you’re right. However, they’re not the first line of defense. I’ve developed a tiered strategy called C.R.E.A.M., which stands for Consumables, Resources, Equipment And Metals/Materials/Money. This is explained in detail below.

Consumables

Anti-gold economists always point out the obvious truth that “you can’t eat gold,” and of course, they’re right. In the initial wake of hyperinflationary meltdown, supplies are going to be tight, and the underground markets that will provide goods and services will not be fully developed. This is why it is wise to make your first investments in consumable goods.

For consumable goods to make good investments, they have to meet two conditions. First, they need to be nonperishable or at least have a very long shelf life. Secondly, they need to be things you would buy in the future anyway—this is not referring to three-month supplies of disaster rations, but things that you are going to buy over the next three, six, or twelve months (or more): why not buy them now when cash is worth more than it will be in the future?

Think of this not as a method of “saving money,” but of making money. If you buy a stock for $10 and it goes up to $11, you’ve made 10%, right? Well, if you buy a consumable good now that you’ll need in a year, and it goes up in price from the $10 that you paid to $11, then you’ve made a 10% gain just as surely as you would have with the stock—only, in this case, you won’t be hit with a capital gains tax! You’ll make (not save!) even more money by buying in bulk, not to mention the time (and time is money!) you’ll save by stocking up on things, rather than making frequent trips to the store whenever you run out of an item.

Resources

Resources is the second level of the C.R.E.A.M. strategy, and it refers to a specific kind of resources: Human resources.

The most important human resource is yourself. Invest time (and again, time is money) in your education—and by this, I absolutely do not mean the university system. You need to build your skills for the post-apocalyptic U.S.: Do you know how to garden? Can you fix your own car? And if your job is likely to be downsized or abolished in the hyperinflationary meltdown, you’ll want to learn a new trade for the new reality.

Secondly, human resources refer to other people. First and foremost, your family: Invest in them just as you do with yourself. Next, you need to develop networks of trust with your neighbors and other likeminded individuals. So you can’t fix your car and you aren’t inclined to learn? No problem—if you have a black-market connection that will trust you, and you have a worthwhile service you can perform for him. You may think you can rely on goods for barter, but you’ll want to hold on to your consumables (these are not for trade), and the demand for monetary goods (such as gold and silver) may be low in the days immediately following the meltdown.

Equipment

Equipment is another way to invest in yourself. It refers to the tools of your trade. If you’re self-employed and have a job that will be marketable even after a hyperinflationary meltdown, then you might already have all the tools you need—although investing in a set or two of backups is not unwise. If you work for an employer but your skills will translate well into the post-dollar marketplace, then you might need more equipment. If you’re learning a new trade to have as a backup, this is also the case. Equipment differs from consumables in that consumables are used for their own sake, whereas equipment is used to create more wealth—i.e., to get more consumables.

Metals/Materials/Money

The “M” of C.R.E.A.M. stands for three things: metals, materials, and money. Firstly, metals refers to gold and silver—these will obviously maintain increase their purchasing power, post-apocalypse. In fact, the purchasing power of gold and silver is bound to rise with the death of the dollar, since they will take on even more added value as exchange commodities than they already have.

With that in mind, you may wonder why I have “M” as the fourth level of C.R.E.A.M. This is because “you can’t eat gold,” and the entire purpose of having gold and silver is to trade them for other things—to trade them for consumables, primarily, and also equipment. Rather than buying gold and silver in order to trade them for consumables and equipment in the future, why not just buy the consumables and equipment first?

You may say that the value of gold and silver is bound to rise faster than the value of other goods, but you’re taking a gamble by investing every last dollar into precious metals when you do not yet have all the C and E that you need. After all, when the dollar finally melts down to $0 or near $0, supply chains are going to be in shock, and no amount of gold or silver will be able to get you all you need. In these early days, consumables will have a much greater value compared to gold and silver than they do now, even if it is only temporary.

The other elements of “M” are materials and money. Materials refers to those ingredients necessary for industrial production that you probably cannot use yourself but could potentially have exchange value. The problem with most of these materials is that they aren’t very value-dense, that is, they tend to take up a lot of space.

Money, in this case, absolutely does not refer to greenbacks or any other fiat currency, but anything you could exchange for other goods and services in a post-dollar economy. Value-dense goods, such as vodka, are a good example of this kind of “money.” Disposable razorblades are another. Brainstorm other items that are nonperishable and pack a lot of value in a small space: these are potentially good barter goods (or “money”) in a post-dollar economy, and the best thing about buying these now is that it doesn’t take a lot of money to begin saving. You don’t need $1,500+ to buy an ounce of gold—you can start small. And that goes for all four levels of the C.R.E.A.M. investment strategy.

Conclusion

Hyperinflation, by some definitions, is already here. Really bad hyperinflation, by whatever definition you choose, is inevitable, and the ultimate result will be the utter destruction of the dollar and the United States government. It doesn’t matter if you like this idea, or if you hate it: it is what it is. The only thing you have to do is begin to prepare.