Letter Re: When the Economic SHTF, Which Way Will it Go?

I’ve been trying to figure out whether we’re going to go hyper-inflationary or depressionary when the ESHTF (Economic Schumer Hits the Fan). We’ve all been watching the .5 to 1 trillion in ARMs that are going to reset in 2007. Will this be what topples our economy? My money says yes.
Here’s the housing bubble as I currently understand it.
1) 20% (more in California) of mortgages are adjustable rate mortgages (ARMs)
2) 50% of people lie on the mortgages applications overstating their income
3) Many brokers lie to the borrowers about how fast the payment will go up and to what extent
4) Interest rate only ARM mortgages were originally reserved for highly paid individuals who could afford the payment penalties
5) Banks can show future profits as current profits, but if the loans aren’t repaid, these paper profits will disappear and they will go negative in a hurry (read the Enron school of accounting)
6) These iffy debts have been bought up by hedge funds
7) $500 Billion to $ 1 trillion in ARMs come up for reset to higher (2x?) mortgage rates next year. If it collapses the market, and given the slump now, imagine what the reset will do, then it will spill over into the banks and the hedge funds.
8) New mortgages make borrowers responsible to make up the difference between mortgage and foreclosure cost
9) New bankruptcy laws make it harder to walk from the debt
10) The IRS considers the difference between foreclosure and mortgage as profit to be taxed
11) Many people bought houses with the only intention of flipping them, the sign of a bubble
12) Personal savings as a percentage of disposable income went from went from -0.7% in June to -0.9% in July, so when these mortgage rates on the ARMs reset, there is very little wiggle room…If we go inflationary, we want to be in silver and gold and as deep in debt for tangibles as possible so the inflation makes the debt meaningless. If we go deflationary, we want cash on hand to buy at the bottom. Real estate is my choice.

So, which way? Inflationary or deflationary? If we go into a deflation/depression what stops the government from just printing up huge amounts of money? Isn’t that what got us out of the the depression last time? In this way we would go from a depression to hyper-inflation. Since hyper-inflation only lasts 3 or 4 years as opposed to depressions which last ~10, wouldn’t this be a better option? The only reason the government would not want to do this is because it would essentially transfer the debt bubble loss from the debtors (the have not’s) to the lenders (the haves). A person with money in the bank and who was holding the debts of others would suffer under inflation as the money in the bank and the debts were inflated to worthlessness. Those with tangible assets (a house) and huge debt but no cash would have nothing in the bank to be devalued, and their debts would disappear and their houses and farms would be theirs again as inflation made their debt meaningless. Perhaps what was engineered in the great depression was keeping the money at low levels ([deflationary]depression) just long enough for everyone to be forced into foreclosure, then print up more money and bring us out again. I think that the ‘haves’ won’t let hyper-inflation happen as it will wipe out their assets. They will demand a depression for the correction (transfer of wealth). So, my bet is for depression over inflation. Another dark side of this is that much of the ‘haves’ are now foreign interests. Thus, we could end up with China, a country holding enormous amounts of our debt and cash, owning most of our country in terms of real estate and stocks. – SF in Hawaii