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Mr. Rawles-
In response to “More predictions for 2009”, reader Jeff K writes, “There has never, ever been hyperinflation with deflating real estate prices.”. This is simply false, and a surprisingly common misperception. Zimbabwe is hardly a ‘red hot’ market for residential (or commercial) real estate, yet that country is an example of extreme hyperinflation. When Turkey went through its period of massive inflation it too suffered declining real estate values. South America, plagued with inflation during much of the past century was also a black hole for real estate investment. Ditto for [much of] Africa. Weimar Germany, a famous example of hyperinflation in a modern, western state was, similarly, anything but an appreciating property market.

What one may observe during a hyperinflationary event is the dramatically increasing cost of assets denominated in the hyperinflating currency. The real value of the domestic assets (such as real estate), however, is not increasing but rather decreasing as assets are constantly being revalued in terms of the inflating currency’s loss of value. This loss, counterintuitively, manifests as a “gain” in the form of more zeros on the notes. Similarly, real estate deflates in periods of hyperinflation even as its price “rises”. This is why super- or hyperinflation fails to attract real estate investors in states suffering such economic mismanagement. – Steven L

Dear J.R.,
A recent article from Bloomberg “Attali Warns of a’ Worldwide Weimar’ as Governments Print Money” will explain to your readers of how inflation and even hyperinflation can develop from a deflationary collapse.

As shortages of goods/supplies/services begin happening after manufacturing, transportation and supply systems break down in deflation; and with the abnormally increased money supply suddenly thrust into our economy working it’s out into the broader economy- the conditions for inflation begin. – M.M.

Hello Jim,
With regard to Jeff K.’s reply, calling Roger Wiegand a “huckster”, I’d like to point out some issues I have with his claims. Wiegand did correctly call the crash of the US Equity Markets, as Jeff states, but I could not readily locate anything about Wiegand being wrong on hyperinflation, since he isn’t calling for it until late 2009. As for a decoupling, Wiegand, again to the best of my knowledge, has spoken only (or at least, primarily) of a decoupling of gold from the Dow. No other decoupling mentioned. Foreign equities? Show me where Wiegand has suffered a “big flop” here. Same with commodities, where he continues to support gold, which is a long-term position and one with which I wholeheartedly concur as having huge upside potential, even more so for silver. And is Jeff K. investing in the S & P? He’s a braver soul than me, since I wouldn’t touch the S & P with a
26 1/2 ft. pole, nor any other Dollar-denominated asset.

Jeff K. says “FYI, there has never, ever been hyperinflation with deflating real estate prices. There has never, ever been hyperinflation when one’s debt is denominated in their own currency” Again, Wiegand hasn’t called for price hyperinflation until later and I think perhaps Wiegand’s timing could be off, but only the timing, not the inevitable event, since there is no example in recorded human history of a continually successful fiat currency, as they all eventually end, some catastrophically. Monetary supply increases are [presently] in full swing.

How did Jeff K. determine that Rodgers, Schiff and Wiegand have been wrong for thirty years? How can anyone be wrong for thirty years and maintain a growing number of satisfied clients? (Sure, some got burned, no one is perfect).Is he basing this on the fact that hyperinflation hasn’t arrived yet? While it may not be hyper, is a 98% loss in the purchasing power of the Dollar and Wiegand’s claim that it will get much worse, not enough to satisfy Jeff? Congressman Ron Paul, probably the most educated Congressman on the economy, with several related books written on the subject, also claims that inflation is all but guaranteed in our future and I cannot rationally consider Paul a “huckster”. The [same] amount of money that the Fed created from 1913 to Sept. 2008 has been created in the last 16 weeks. This is off-the-hook, unprecedented (at least in the US) monetary inflation
and will potentially have a devastating effect on price inflation within 1-2 years’ time. Worse, there are no plans to slow down and, in fact, the Fed continues to smoke the bearings off the presses like there’s no tomorrow. (And there may not be, for the Dollar!).

The bottom line and the lesson I feel we should take away from these so-called “hucksters” is that government intervention in the markets is the root of almost all our economic woes. Inflation is real and growing, regardless of timing, and is likely to get much worse. (The exact call on dates means very little to me) and that bickering over these details of who is wrong and who is right is absurdly pointless in light of what is unfolding. Understanding the degree of manipulation, the vulnerability of our JIT infrastructure, the fact that we import most of our food, fuel and goods…it doesn’t take a rocket scientist to realize the potential for a very dangerous situation to unfold unnervingly quickly and for which a staggering number are, sadly, completely unprepared, thanks to an ignorant / complicit mainstream media and a breathtakingly corrupt Fractional Reserve Banking System.

Additional note: I contacted Euro Pacific Capital in the wake of the related Shedlock article and received the following reply on Monday, January 26, 2009:

“Thanks for your e-mail. Yes we are aware of the Shedlock article, and we are disappointed that he would choose to market his firm by bashing ours. On many
levels his critique is distortive and unfair. We will address this in upcoming podcasts.
Thanks,

Andrew Schiff
Euro Pacific Capital, Inc.”

Lastly, who does Jeff K. suggest we should entrust with economic insight? Bernanke? Geithner? If he says Larry Kudlow, my opinion of his observations will have been thoroughly confirmed. Some people will stand square in the tracks and argue over a loose railroad spike, even as the speeding train bears down on them. Sincerely and God Bless, – H.H.

Hi Jim,
Jeff K. slams Jim Rodgers, Peter Schiff, and Roger Wiegand in error as he does not appreciate the long term and conservative (read safe) old fashioned investment strategies, strategies safe enough for “widows and orphan” as they say. One should keep their eyes on the big picture, the macro economics and think in terms of years, and not in terms of a day trader and more nimble risk taking ‘investors’ who can make money in the short term and yet loose in the end. Few gamblers always call it right and most eventually loose. One cannot compare these two very different classes of investing on the success or failure of a chosen year or two.

This appears be the greatest financial meltdown in history, and as you say, we are in “terra incognita”. The fundamentals continue to justify a conservative approach and playing the macro trends while ignoring the market noise. While Schiff did missed this nasty deflationary phase, he may yet prove to be a winner and Rodgers always mentions that he has the worst timing. Clearly they have gotten the big picture right, it is now a matter of whether it becomes be a deflationary scenario, some level of high inflation or the worst, hyper inflationary. IMHO, hyper inflation is likely. Unfortunately I can’t speak about Wiegand. Fortunately I believe I’ve followed the best advice, the most conservative of all and invested in tangibles, lots and lots of tangibles. – E.L.

Wednesday’s news of passage of the “supplementary” TARP II $900 billion stimulus and bailout legislative package in the House of Representatives is noteworthy. The fact that it passed with hardly a whimper is evidence that Congress cannot be trusted to show any fiscal restraint. According to the Wall Street Journal only about 12 cents of every dollar appropriated in that legislation will go for something that can be considered a growth stimulus, yet there was no lengthy or substantive debate on the bill. The floodgates of the Treasury have been opened! The Mother of All Bailouts (MOAB) is now sure to further expand, to heretofore unimagined proportions. Henceforth, each time that there is a new “crisis” or “emergency”, or a “threat” to a vital industry, Uncle Sugar will dump veritable truckloads of magically-created money on the problem. What will be deemed a “vital” industry? Car makers have already been deemed vital. So why not truck and heavy equipment manufacturers? And the steel mills? And the airlines? And the aircraft makers? Ship builders? Why not yacht builders? The newspapers? (“They’re really hurting, so let’s just print more money!) Despite the fact that every Republican congressman voted against it, the bill was passed by the Democratic majority.

The passage of this bill is an ominous sign, and it is a dangerous precedent, especially when we consider the other legislation that the Obama-Reid-Pelosi cabal may have in mind. I suspect that they have plans for a panoply of socialist programs including universal (taxpayer-funded) health coverage, the so-called Fairness Doctrine, expatriation controls, enormous welfare and public works programs, and, of course new civilian disarmament (“gun control”) legislation. Perhaps our only hope on the latter is expansion of the Heller and Lopez Supreme Court precedents, in new court decisions that affirm the Second Amendment as both and individual right and a collective right, and that further constrain Federal jurisdiction on firearms manufacture and sales. In light of Heller, any law, agency directive (or “interpretation”), or executive order that infringes on the Second Amendment will quickly be stricken down. (But then there is the nagging issue of Federal court packing by the BHO administration. This is possible, depending on how many SCOTUS justices retire in the next four to eight years.)

Getting back to the economic morass, the key point again is that the floodgates have been opened. There is now no limit to the MOAB. Rather than allow the natural market cycle to work malinvestment out of the economy, the Federal government and the Federal Reserve banking cartel will do their best to reliquify and and re-inflate the Big Bubble. What will come of this is anyone’s guess, since this is truly Terra Incognita. A liquidity crisis this enormous is without precedent. Will the deflationary spiral be unstoppable? Will mass inflation emerge? Stay tuned. But don’t look to me for answers. I didn’t write the script. Or then again, maybe I did.

Business Week recently reported: “New Treasury Secretary Timothy F. Geithner is exploring the creation of a government-funded ‘bad bank’ to buy up mortgage-backed securities and other troubled assets from banks in hopes of boosting their capital levels…” This is all aimed at breaking banks out of their fear of lending. Bankers are currently so petrified that the credit market has essentially dried up. Even ostensibly credit-worthy companies can’t get loans. So the MOAB expands, yet again, using taxpayer dollars to buy up the toxic debt. Talk about a losing proposition! Only a government would embark on such a venture. Of course, they’ll be doing what governments do best: spending other people’s money.

The government’s response to the credit collapse could best be described as a “horrible spasm”. (I mean that in the McNamara sense of the term.) The Feds and the Fed are flailing about, throwing money around in gargantuan quantities, hoping that something, anything works to get credit flowing and the economy jump started. They won’t dare admit that they have no idea what they are doing. Parenthetically, do you remember Jim Cramer shouting “He has no idea!”, back in August of ’07? Perhaps that public meltdown on CNBC was a foreshadowing that The Powers That Be still have no idea. Again, we’ve entered Terra Incognita. As I warned in July of ’07 and again in March of ’08, things could get very, very bad before they ge any t better.

To monitor the economic situation, I recommend watching some key figures:

The first is the US Dollar Index. (After testing the critical 72 level, the Dollar has gained strength in foreign exchange. (Not because of any inherent strength, but rather because European banking is even more badly broken than American banking, and the Euro and Pound have taken a beating)

Next is the spot price of gold. (Can you spell “suppression”?)

This Adjusted Monetary Base chart released by the St. Louis regional Federal Reserve Bank sheds further light on the “Big Picture”. (Look closely: Don’t miss the upright spike that is hidden behind the gray bar at the right end of the chart, showing the enormous growth of the monetary base in 2008.)

And lets not forget the bank reserves statistics published by the Federal Reserve.(These show a banking system that was until recently starving for reserves, but is now gorged with reserves that the bankers refuse to lend, out of fear.)

For even greater detail, see Dr. Gary North’s “Charts to Monitor” links.

In conclusion, I must repeat my long-standing advice to SurvivalBlog readers: Get prepared to ride out a lengthy economic depression with accompanying civil strife, massive economic dislocation, and the destruction of the dollar as a currency unit. Self-sufficiency, self-defense, and charity may very well be the bywords of the coming decade.