The Inevitability of Dramatic Inflation

By Jeff Thomas

No one is very concerned about inflation right now and that’s understandable. Although inflation exists in some sectors of the economy, the present subject of discussion is deflation. Any depression is inherently deflationary since spending is curtailed, which drives prices down.

Since 2008, despite all the fudged reports emanating from governments, much of the world has been in a depression since 2008 and remains in one. This will continue until such time as there is a true cleansing of the system – a step the leaders of each jurisdiction have avoided as much as possible, choosing instead to extend the party as long as possible before the inevitable collapse occurs.

Since deflation is the problem that’s staring us in the face now, most economic discussion deals with it. But, historically, when deflation occurs, governments do everything they can do reverse the problem and return to inflation.

To the average person, one type of ‘flation is as bad as another type of ‘flation – he merely hopes for economic stability. And so the effort by governments to not only accept inflation but to recommend its existence as policy seems odd. But then, governments (and banks) benefit from inflation. People can only be taxed so much before they rebel, but inflation acts as a hidden tax and most people don’t recognise that it’s not the number of currency units one possesses that matters, but what level of purchasing power they have. Inflation allows the individual to retain his currency notes, but devalues them so they buy him less in goods and services. Inflation is the unperceived tax.

The US Federal Reserve has done a sterling job of exacting wealth from US citizens. Since it was created in 1913, it has devalued the dollar by roughly 97% and the dollar is now due for replacement. Through the creation of tremendous debt, the US, EU, and many other countries have created a condition that will result in deflation – the very condition that they most dread. There can be no question that they will do whatever it takes to reverse this trend and return to inflation. Indeed, this is their stated policy.

Former Fed Chairman Ben Bernanke is famous for his 2002 speech in which he said he would dump currency from helicopters if necessary when deflation occurred. Since that date, he has reconfirmed his commitment nearly every year, as has his successor, so there can be little doubt as to what the Fed will do to address deflation. Add to this the fact that the stock and bond markets are in bubbles of historic proportions, assuring the inevitability of crashes in the near future – events that will contribute greatly to deflation.

But, given the choice, wouldn’t we all prefer a bit of inflation to deflation? Yes, in this we would agree with the Fed and the ECB, but worse than either of these possibilities is that green eyed monster – hyperinflation. At present, we feel we’re so far away from this possibility that, for most people, it’s not even a question. Trouble is, hyperinflation, when it comes, comes very fast and is uncontrollable.

So, how does it happen?
Hyperinflation never occurs spontaneously. It always happens in essentially the same way when governments attempt to artificially manipulate currency. It has occurred on more than twenty occasions around the world in the last hundred years. The most recent occurrence is currently underway in Venezuela.

But a textbook example was the Weimar hyperinflation of 1922–1923. In that instance, the government, along with the central bank of Germany, was facing a collapsing economy, so they did the worst thing possible – they expanded the creation of currency in the belief that if people had more of the stuff, they would spend more and the economy would boom. Unfortunately, the money creation only resulted in rising prices, not greater wealth (True wealth is only created through the creation of more goods and services). 

So, they printed more. Then more again, and again, and again. With each printing, the problem worsened and the bankers and political leaders reasoned that if they could only print enough, the problem would be solved. It’s important to note that at no time did anyone (not the government, nor the banks, nor private industry, nor the unions) suggest that the printing itself was the problem.

Eventually, inflation became so dramatic that the German people realised that they were better off dumping reichsmarks in favour of goods. As soon as workers were paid, they’d buy anything – food, clothing, anything that wasn’t going up in price as rapidly as the reichsmark was going down.

It is at this point that inflation becomes hyperinflation. It’s never intended by anyone (least of all, governments) to occur but, once the population begins to think of money as something to get rid of instead of something to possess, the monster is born and it happens so quickly that a hamburger that costs $5 today may cost $50 three months later, $500 after a further month, and $5,000 the following week. Soon, a hamburger costs (quite literally) millions.

As hard as this is to imagine, this is what occurs in every case. And in every case, it culminates in a collapse of the monetary system. It’s generally accompanied by a collapse in commerce, riots, food shortages, and famine.

And so, of course, we hope that this time around the leaders of the US, EU, et al, will do the right thing and avoid this eventuality at all costs. Surely, the highly educated folks at the Fed and the ECB will learn from the mistakes of past leaders and not repeat the disastrous mistakes. Hopefully, this time it will be different.

And actually, this time it will be different, but not in the way we would hope. Rather than wait for the crashes and subsequent significant deflation to occur, the Fed and the ECB have already announced a plan to introduce negative interest rates. They describe this plan as being intended to discourage saving and force people to buy goods, causing the economy to boom...just as in Weimar Germany almost one hundred years ago.

But, as discussed above, this is never the outcome. Once a population discovers that dumping currency is preferable to holding it, the green-eyed monster comes knocking. So, are we around the corner from hyperinflation? No, I believe we have a little breathing time before that, but we’ll be spending that time dealing with the market crashes and deflation that generally come first (unless the leaders decide to pre-empt them by introducing negative interest rates very soon, which they may well do).

Well then, if hyperinflation is not yet a certainty, nor is it necessarily right around the corner, why bother thinking about it? The reason is that the triggering mechanism of hyperinflation is to be presented to us on a platter in the relatively near future. Its likelihood is now great enough that if we don’t prepare our lives for its eventuality, we’ll be amongst the casualties.

If the German people could have known in 1922 what was coming in 1923, many could have saved their skins. Today, those who choose to internationalise their wealth (however large or small) and even themselves in anticipation of events will have the greatest insulation against the effects of hyperinflation. They have the greatest likelihood to not only survive, but thrive, as the world changes. Editor’s Note: Negative interest rates are an obvious sign of desperation. Central bankers are playing with fire and inviting a currency catastrophe, just like they have done so many times in the past.

The sad truth is most people have no idea what really happens when a currency collapses, let alone how to prepare…How will you protect your savings in the event of a currency crisis? Doug Casey just released video that will show you exactly how. Click here to watch it now.

The article The Inevitability of Dramatic Inflation was originally published at caseyresearch.com.

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When All You Have Left Is the Cost of Breakfast at McDonald’s

By Dennis Miller

When I was 20 years old, I sat through my first day of a business law course at Northwestern University. The professor began by writing two words on the blackboard (in the prehistoric days of blackboards and chalk): Caveat emptor. He raised his voice and said, “Let the buyer beware!” I’m here to echo his warning, but this time it’s about annuities.


Annuities are at the top of the list of complicated products that often profit insurance companies without adequately compensating the buyer in return. Put plainly, sometimes you don’t get what you thought you paid for.

And, while annuities are often described as a “transfer of risk,” which is basically correct, owning an annuity will not transfer the risk of one of the greatest hazard’s to a retiree’s financial security: inflation. Inflation isn’t the only risk to worry about—lack of liquidity and insurance company default should also top your list of concerns—but it can be the most treacherous for someone with an annuity heavy portfolio.

Will an annuity protect your lifestyle? In the short term, it might. If you believe the Federal Reserve when it says it will keep inflation at 2% or less, perhaps it will for a period of time. Even then, inflation will eat away at the buying power of your annuity payout fairly quickly. You are contractually guaranteed income; however, that does not guarantee your lifestyle.

To see the effect, my analysts and I charted the purchasing power of a single premium immediate lifetime annuity with installment refund, which pays $583.33 per month. We’ve compared several inflation scenarios: the currently tame 2% inflation rate; the long run average of about 3%; and the possibility of things getting considerably worse at 7% inflation. We’re not even talking about hyperinflation—just reasonable estimates.

Even at the low 2% inflation rate, your $583.33 benefit would only have the purchasing power of $392.56 after 20 years. In the 7% inflation scenario, the purchasing power would be down to $150.74. Let’s put this into context.

The average U.S. electricity bill is around $103.67. The average cellphone bill is $111. According to the USDA, an elderly household of two that’s being extremely thrifty could get its monthly grocery bill down to as low as $357.30 per month. In total, that’s $571.97 – leaving just enough for a McDonald’s breakfast.

Right off the bat, that isn’t so bad. The annuity takes care of the cellphones, the electricity, the groceries, and leaves a little extra. However, after 20 years at 2% inflation and a purchasing power of $392.56, the benefit would only be enough to pay for the thrifty grocery budget, leaving only $35.26 left over. Though your annuity benefits are the same, prices have risen, so now you have less purchasing power.

After 20 years of 3% inflation, it gets even worse. With $219.85 in purchasing power, you’ll have to weigh either purchasing 2/3 of your usual groceries against paying the electricity and phones. You won’t be able to do it all. By the third year, you will need to add funds to your annuity payment to cover those expenses.

And under the 7% scenario, you’ll only be able to pay for the electricity bill with less than $50 in purchasing power left over. That’s hardly the lifetime income most annuity buyers had in mind.

Furthermore, consider that our assumptions are a little optimistic. In all likelihood, your electricity and grocery bills will probably rise faster than the rate of inflation. If that’s the case, then you’d be in real trouble.
So, while annuities promise guaranteed income, they certainly do not guarantee what that income will afford you in the future.

Annuity policies can be structured with inflation protection, but those options are expensive in terms of the lower initial payments. With benefits starting so much lower, you would have to live an exceptionally long time to make them work out.

Depending on your circumstances, an annuity might play a useful role in your long-term financial plans. There is much to be said for transferring some risk to a quality insurance company. However, transfering one risk without planning for another could be catastrophic. Even something like a 5% inflation rider might not protect you if higher inflation rates become a reality. If a considerable portion of your portfolio is in annuities, then another portion needs to be balanced to fight inflation, with holdings such as precious metals.

While it’s impossible to make the risk of inflation go away, there are a few simple things you can do to minimize it:

• Never hold a very large portion of your portfolio in annuities. If high inflation picks up you could be entirely cleaned out.
• If you’re holding annuities, make sure that another part of your portfolio is geared to hedge against inflation.

Now, I’m not shouting caveat emptor just for the heck of it. As a retirement advocate and senior editor at Miller’s Money Forever my mandate is transparent financial education for seniors, conservative investors and anyone serious about building a rich retirement. That’s why my team of analysts and I have put together a free, comprehensive special report called Annuities De-Mystified—Three Simple Tools for Choosing the Right Annuity.

Get the full truth on annuities by downloading your complimentary copy of Annuities De-Mystified today.

The article When All You Have Left Is the Cost of Breakfast at McDonald’s was originally published at Millers Money

Another must read from Adam J. Crawford....The Rise of Africa… and How To Play It
 

Good Reason for Doom and Gloom

By Doug French, Contributing Editor

Predicting the future, like getting old, ain’t for sissies. Questioning the bull market is even more treacherous.
Howard Gold, writing for MarketWatch, makes fun of seers who made what he calls “the four worst predictions to gain traction over the past few years.”

Gold says the last six years have been a disaster for those who stayed out of the stock market. He claims there’s a bull market in doom and gloom, referring to a column by his colleague Chuck Jaffe, who points out, “The fortune-tellers … know that the more outrageous the prediction, the more attention they get. They can highlight any forecasts they get right, knowing that their misfires are forgotten quickly. Thus, calamity and catastrophe sells. Right now, it’s a bull market for bearish forecasts.”

If such a bull market in doom were really happening, the market wouldn’t be hitting all-time highs. Besides, no one ever went broke being out of the market.

But more importantly, there is a very good reason people respond to gloomy forecasts. Behavioral economics pioneer and 2002 Nobel Prize winner Daniel Kahneman explains in his bestseller Thinking, Fast and Slow that when people compare losses and gains, they weigh losses more heavily. There’s an evolutionary reason for this: “Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce,” Kahneman explains.

Most people, when given the opportunity to win $150 or lose $100 on a coin flip, decline the bet because the fear of losing $100 is more intense than the hope of gaining $150. Kahneman writes that the typical loss aversion ratio seen in most experiments is 1.5 to 2.5. Professional stock traders have much higher tolerance for risk, but most people investing their retirement accounts are not pros and have little fortitude for losses.

The average Joe can’t just sit tight while his retirement account drops 40%. He’s not wired that way. His retirement savings represent safety, and a market crash is the modern equivalent of a flood, a bear, or a warring tribe. When stocks start falling, survival mode kicks in. He or she sells and runs for cover.
So when someone makes a compelling case that stocks might crash, the average person rightly listens. Otherwise they don’t get any sleep.

Gloomy Forecasts

Economist and financial newsletter writer Harry Dent predicted the DJIA would crash to 3,000 and told investors to bail out between early 2012 and late 2013. Some people likely took him up on it. In July 2010, Robert Prechter of Elliott Wave fame predicted the DJIA would fall to well below 1,000 over the ensuing five or six years.

“I’m saying: ‘Winter is coming. Buy a coat,’” Prechter told the New York Times. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”

While Prechter sees massive deflation on the horizon, Marc Faber, editor of the Gloom, Boom & Doom Report, says Zimbabwe-style hyperinflation is on the way. Gold calls this “the single worst prediction of the past five years.” Gold calls Faber wacky for telling Bloomberg in 2009:

I am 100% sure that the U.S. will go into hyperinflation. Not tomorrow, but the problem with the government debt growing so much is that when the time will come and the Fed should increase interest rates, they’ll be very reluctant to do so and so inflation will start to accelerate.

Peter Schiff’s call for $5,000/oz gold also has Mr. Gold laughing. Schiff sees the Fed printing more to stimulate the economy, which will send the yellow metal soaring.

“Back in the real world,” sneers Gold, “new Fed Chairwoman Janet Yellen is actually winding down the Fed’s extra bond buying (quantitative easing, or QE), and she’s on pace to finish by fall.”

Europe’s economic problems had establishment news outlets like The Economist saying in November 2011, the euro “could break up within weeks.” President Obama’s former chief economist, Austan Goolsbee, said “there probably isn’t” any way to hold the eurozone together.

And the ultimate establishment voice, Alan Greenspan, told CNBC the divergent cultures using one currency “simply can’t continue to work.”

So it’s not just wackadoodles wearing tinfoil hats missing the mark, as Mr. Gold implies. He writes, “But too many people have lost precious time and a chance to make real money by listening to these fear mongers. They’re probably kicking themselves now, or should be.”

However, nearly all of the gloomy prognostications Gold makes fun of are in response to the actions of central bankers, who have been at least as wrong as anyone else in their predictions.

Big financial-services companies should be kicking themselves for paying Greenspan $100,000 a speech these days. The Maestro reportedly hauled in an $8.5 million advance for his book, The Age of Turbulence. That’s a lot to pay for someone who whiffed on the housing bubble. In 2002, Greenspan said, “Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole.”

Ben Bernanke, who used to make $200,000 a year, now makes “that in just a few hours speaking to bankers, hedge fund billionaires and leaders of industry,” the New York Times reports. “This year alone, he is poised to make millions of dollars from speaking engagements.”

He hasn’t exactly been an accurate predictor either. In 2005, Ben Bernanke was asked if the housing market was overheated. “Well, I guess I don’t buy your premise,” he replied. “It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis.”

Even former Treasury Secretary and ex-New York Fed President Tim Geithner is getting in on the action, receiving $100,000 to $200,000 per talk. Plus he likely received a large advance for his book Stress Test.
Geithner admits he didn’t see the financial crisis coming. In his review of Geithner’s book, Flash Boys author Michael Lewis writes, “The story Geithner goes on to tell blames everyone and no one. The crisis he describes might just as well have been an act of God.”

They Warn for a Reason

Mr. Gold believes that economic catastrophes have natural causes. “Bad things happen in life,” he writes. “Hurricanes and tornadoes destroy communities. Nuclear war and climate change are big long-term dangers. And there will be bear markets and deep recessions in the years ahead.”

Inflation to any degree is not an act of God. Neither are currency nor stock market crashes. Central bankers create these calamities and then ride off into the sunset, earning six-figure speaking fees and multimillion-dollar book deals. The positive reinforcement they receive ensures they’ll repeat the same mistakes over and over again.

Thus, warnings must be issued constantly. Bad things are going to happen to the finances of individuals who aren’t prepared.

It’s not a matter of if, but when. Better scared than sorry.

(Editor’s Note: How quickly a crisis can creep up on you is demonstrated in our Casey Research documentary, Meltdown America. If you haven’t watched it yet, you should. Click here to watch this free video.)

The article Good Reason for Doom and Gloom was originally published at Casey Research

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