That said, Nicole Foss posted an essay today on her Automatic Earth blog in which she makes a compelling case that dispels (in my opinion) many of the hyperinflationistas arguments - particularly the popular Gonzalo Lira who is often cited on ZeroHedge - along with his rabid followers posting creative ideas of what the post fiat monetary armageddon looks like. I don't mean to make light of it - I share in many of their concerns. And then there are the hardcore Euro-centric FOFOA fans - and don't get me wrong, I read FOFOA too, but I don't daydream about happily driving a 7 series BMW in a post apocalyptic world because I held onto some gold. And although I admire European views on quality life, I have my doubts on the Euro. Things will get ugly for everyone - even the "winners" if that's what one wants to call them. Maybe I'm just suffering a bout of doom fatigue... and need to take a deep breath, and re-analyze everything. That things will get ugly is beyond doubt, in my view. I just happen to be the type that wants to understand as much as I can before confidently re-sounding off the alarm bells. And so, I will approach these apocalyptic preachings with an open and objective mind.
Nicole Foss is firmly in the deflationista camp. Things will get ugly, and when they do, it will be breathtaking. Weimar Germany is not her posterchild example, the South Sea Bubble is. Her view is focused on the role of credit in a credit based system. But she also focuses on the "herd mentality" of the markets, and the trends that develop, and ultimately, reverse. She sees the Euro failing before the US Dollar, and as a result, the US Dollar will get a temporary boost. Not because the US is any better, but because it is less worse. She also makes a distinction between holding physical dollars and electronic dollars - very similar to the physical/paper gold argument. If you think about it, what other currencies do US citizens have access to?
In Nicole Foss, I see John Exter's example. His pyramid is not one of hyperinflation, but of a deflationary collapse. It makes sense to me, but the only contention I have is the secret weapon of double entry book-keeping. As this deflationary event transpires - and it has been - the Federal Reserve can credit any account it wants with money. It can buy whatever it wants... and then thoughts of hyperinflation enter my mind. But what of the hoards of unemployed people? If their purchasing power is rendered impotent, aggregate demand suffers, and thus, so too prices.... It's a violent seesaw that whips up and down. And therein lies my reason for not firmly abiding to any of the two camps. Fiat collapse, in whatever form, is the one conclusion I feel confident about. That destination, to me is obvious. It is the road taken that I am not so sure of.
Here are some portions of her essay:
Naturally the dollar, like all fiat currencies, will eventually die, but I would argue that the time for that is not now. A dollar rally could be measured in years, although not many by any means. My best guess is that we would see perhaps a year or two of dollar rally in a world going increasingly haywire. After that I expect an end to the system of floating currencies, with all manner of attempts at competitive devaluation, currency pegs established and rapidly blown away, and beggar-thy-neighbour policies all round. The risk of currency reissue will rise over time, and be highly locational. I think the risk of reissue in the US is not imminent, but in Europe it should be a much larger concern, especially in peripheral countries...
In my view, by the time we see a commodity price spike, the value of people's financial assets will already have evaporated, they will already have unloaded hard assets, and the dash for cash will already be in the past. I think at that point we will be well into a state of economic seizure, where credit will have disappeared, unemployment will have spiked, incomes will be very precarious, scarce cash will be being hoarded and it will be exceptionally difficult to connect buyers and sellers. Consequently, I do not see most people being in a position to engage in panic buying.
Some may be able to do this, but I think the resource grab is more likely to be a phenomenon operating at the level of the state than at the level of the individual, as most individuals will already have lost almost all their purchasing power. In my opinion, states will certainly engage in a resource grab, and will take supplies off the market, either by sending the tanks or the bilateral contract negotiators into resource-rich regions. States know perfectly well that oil is liquid hegemonic power, and they will be trying to secure their supply in whatever way they can...Her Conclusion:
I do not see this as a transitory problem leading back to business as usual, and I mean NEVER returning to what we would now regard as business as usual, let alone doing so in only a couple of years.
Deflation and depression are mutually reinforcing. This is a persistent dynamic that should last at least as long as the last depression, and likely longer as every parameter is worse going into depression this time. We have more debt, far more structural dependencies (on cheap energy and cheap credit primarily), looming resource limitations, far higher expectations, a much larger population, a far smaller skill base etc.
I think we are looking at an economic catastrophe of unprecedented proportions, not a bump in the road that can be quickly consigned to history, if only we face our problems head on. In my view we are going to have to live through deflationary deleveraging, a long and grinding depression, and then quite possibly hyperinflation once the international debt financing model is broken, and with it the power of the bond market to constrain currency printing.
This could easily take twenty years to play out, and even then the upheaval is very unlikely to be over. The last time a major bubble burst - the South Sea Bubble of the 1720s - the aftermath lasted for several decades and culminated in a series of revolutions. This bubble is much larger, and the aftermath is likely to be proportional to the excesses of the preceding bubble. This is why I call the presentation I travel to deliver A Century of Challenges.
Moreover, I do not see a return to what we consider to be business as usual at any point, because our business as usual scenario is critically dependent on cheap energy, and the energy subsidy inherent in fossil fuels has been a once in a planet's lifetime deal. We are going to be living on an energy income instead of an energy inheritance, and this will mean living a life none of us in the developed world will recognize.I highly recommend a read of her essay in its entirety, link HERE.