"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Thursday, February 10, 2011

The ENDGAME: Bernanke, Zimbabwe, the US Dollar, and Gold - How It Will Play Out

Recently I wrote about Ben Bernanke's speech to the Press Club where he claimed credit for the stock market's rise yet said other factors - not QE - had contributed to the surge in food prices that have caused political turmoil in developing nations.

And so, according to Ben Bernanke, and much of the main stream media, we should have cause to celebrate.  Yet just 5 years ago, there was a stock market that also rallied - it outperformed every other stock market in the world.  Here it is:

Pretty Impressive huh?  But is that how we should judge an economy?  Purely on the performance of the Stock Market?  During that historic stock market rise in Zimbabwe, this is how people lived their everyday lives:

A multi million Zim Dollar Dinner:

But what if you didn't have a job to pay for things?  After all, whatever money you had in your mattress became worthless as the value of a 10 Zim Dollar bill equaled the value of a million dollar bill, later to be replaced by the billion dollar bill, etc...  So what did you do?  You panned for gold:

I want to be clear:  it is highly unlikely that the US will experience that kind of hyperinflation. Peter Schiff and others have been right about many things, but on this, he is wrong.  I have written about this in my post: Don't Discount the US or the Dollar Just Yet.  In that post I said that the US still has the largest gold reserves in the world, and also hosts what is called "custodial gold."  Custodial gold is gold held under the NY Branch of the Federal Reserve and is gold that belongs to other countries.  And so the US has access to more than enough gold should there be a severe currency crisis, a war, etc...  I would call it the biggest Insurance Policy in the world.  Next to nuclear weapons, gold is the only other type of Insurance that a Superpower can have.

You see, when the US went off the gold standard in 1971, it still held onto its gold.  Frequently, it encouraged other countries to sell theirs.  And why not?  As a superpower, you need to maintain a competitive edge over everybody else.   For example, in England, the Chancellor of the Exchequer, then Gordon Brown, sold off much of England's gold at the worst time.  

China knows this.  So does Russia.  That's why they are scrambling to buy any and all gold they can find - in discreet ways, so as not to cause a severe price shock in the gold market.  But deep down, they all know that eventually, as the interest payments on debts worldwide skyrocket, that ultimately the fiat paper system will collapse.  There is no way the West will be able to grow out of this.  Japan and the US may be able to print away while Europe self imposes austerity, but eventually, the lopsided trade arrangements and lopsided accumulations of debts and surpluses will all even out.  And if such imbalances can't be evened out smoothly, they will even out in a collapse.

But back to Bernanke.  Bernanke will be known as the fool that destroyed the fiat paper system.  He may already know this - that he may one day become a scapegoat.  Recently he criticized Congress for running a fiscal deficit larger than QE2.  What was that about?  Bernanke knows that we live in a fiat money world, and that debts do not finance many national governments the way most people think.  The US Government, you see, prints (electronically) money whenever it buys stuff.  The US Bond market only exists to manipulate interest rates and to pay trading partners that hold a surplus a return on their dollars - and so they want more dollars.  But eventually, the currency will suffer.  And Bernanke wants Congress to get that blame, or at least share in that blame when it happens.

So is the Stock Market's rise an indication of good times ahead?  Not really.  Just look at Zimbabwe. It is the result of QE, not organic, sustainable growth.  Bernanke wants the stock market to rise, and so he pushes down interest rates by buying Treasuries and prints money.  In that process, savers, such as grandmothers that want to live off the interest on their savings, are being robbed.  The interest rate on Grandma's savings account is being artificially suppressed by Bernanke.   The stolen wealth from grandma is then funneled to Wall Street banks that use computerized programs to speculate in the stock markets.  It's theft by clandestine means.  But the market rallies, and the gullible people celebrate that all's well... for now.

But Ben Bernanke can't keep this interest rate rigging game going on forever.  Just look at the interest rates on long term US Government debt.  They have been rising since last October.  Bernanke wants to keep rates below real inflation.  That's how grandma's retirement savings get pilfered.  But he can't do this forever.   As rates rise, as inflation rises, and unemployment stagnates, Bernanke will be stuck.  The only way to push rates down once again will be a catch 22.  Additional QE  programs to buy bonds will be judged as inflationary - so he fails there.  If he tries to get ahead of inflation by raising rates, unemployment will skyrocket as he chokes the economy with higher rates.

So what else can Bernanke do?  Blame Congress.

Our fate will not be like Zimbabwe's.  We will not have hyperinflation, but we will have severe inflation before the currency crisis hits.  The biggest domestic danger the US faces is the collapse of the FIRE (Finance, Insurance, and Real Estate) economy.  When rates rise, the values of real assets can drop, as the monthly payments on the loans used to purchase those assets skyrocket along with rates.  Our economy has been artificially managed to rely on asset value growth and consumption.  Inflation will limit consumption, and higher rates will trigger more loan defaults and increase debt payments.

So I have some bad news for you.  At the end of the day, there is no solution to a fiat paper driven credit bubble that also created massive global trade and debt imbalances.  The system does not slowly morph into something else.  The system will eventually reach a critical state, and collapse.  And that's when gold kicks in to arrest a Zimbabwe-like hyperinflation.  I can see the dollar, once again, becoming backed by gold before hyperinflation could set in.  And at a very high value at that.  


Dave Narby said...

Excellent post Misthos.

When I saw Bernanke say Congress needed to get the Federal budget under control, I thought "Let the finger pointing begin!", lol.

I have also wondered how disorderly the endgame would be. Currently it appears that they are waiting to see if the full court press to re-inflate works. Rickards just tweeted that the IMF is again pushing for SDRs as a solution, but I can't imagine the USA allowing that to happen unless it works towards it's advantage.

I agree that they must be aware of the risk of a hyper-inflationary collapse, and they will "pull the plug" on it before it results in complete chaos. To not do so would risk a revolution in the USA and an even greater loss of power for the Federal government than it's currently facing.

I doubt that this will happen until they are forced to do so though. Victor Sperandeo is the latest addition to those with credentials stating hyperinflation is assured, http://www.youtube.com/watch?v=MSmmFXd4YJo and http://www.goldmoney.com/gold-research/hyperinflation-and-us-bond-crash-real-threat.html

The thing I think he misses is that it's almost certainly in the USA's interest to stop everything before that happens, declare a "bank holiday", then either issue new currency backed by gold.

The key to understanding what is likely to happen is to figure out what the world thinks will be in its best interest, as the Fed is clearly willing to push the entire world to the point of revolution.

I can't see a solution that doesn't involve gold.

Misthos said...


I agree with you 100%!!!!

Let the finger pointing begin! LOL... This makes me think that Bernanke knows there's no smooth endgame. Clearly, he's worried and if he goes down, he wants to take Congress down with him.

It will get chaotic, and they will try everything until they are faced with the final solution:


Gold will be the final endgame, and not one day before they try everything else, dangerously pushing the envelope to just before economic collapse.

Governments hate gold as it constricts their spending. But faced with a hyper-inflationary disaster - gold is the only "silver bullet!"

Anonymous said...

Hello Misthos!

a quite important article that suits exactly to your expectations.
Are we there yet?
China: We will dump the dollar if you push us


Rajiv said...


Please read the following articles

Reasons behind Zimbabwe hyperinflation political

Zimbabwe is the new Weimar Republic. Not! Zimbabwe is the front-line evidence that shows that government deficits will generate hyper-inflation. Not! Zimbabwe is the demonstration of the folly of a fiat monetary system. Not! Zimbabwe is an African country with a dysfunctional government. Yes!

First we should make sure what we are talking about. The right think that when the workers get a pay rise it is inflation. It is not. The left think that when the corporate sector increase the price of a good or service it is inflation. It is not. It is also not inflation when the exchange rate falls pushing the price of imports up a step. It is also not inflation when the government increases a particular tax (say the GST) by x per cent to some new level.

End Quote
Russia another pegged currency victim

Russia is another victim of a pegged currency and the financialisation of its economy.

I took some notes at the time the Russian government defaulted which go like this. After the breakdown of the Soviet Union they made their first major mistake they pegged the ruble within tight range to US dollar – and thereby surrendered their currency sovereignty.

Their second mistake was to allow heavy borrowing in foreign currencies. There was considerable optimism in Russia at the time and all sorts of opportunists were set loose and their foreign currency exposure rose dramatically.

End Quote:
Argentina Inflation due to pegged currency

In April 1991, Argentina adopted a rigid peg of the peso to the dollar and guaranteed convertibility under this arrangement. That is, the central bank stood by to convert pesos into dollars at the hard peg.

The choice was nonsensical from the outset and totally unsuited to the nation’s trade and production structure. In the same way that most of the EMU countries do not share anything like the characteristics that would suggest an optimal currency area, Argentina never looked like a member of an optimal US-dollar area.

For a start the type of external shocks its economy faced were different to those that the US had to deal with. The US predominantly traded with countries whose own currencies fluctuated in line with the US dollar. Given its relative closedness and a large non-traded goods sector, the US economy could thus benefit from nominal exchange rate swings and use them to balance the relative price of tradables and non-tradables.

Argentina was a very open economy with a small non-tradables domestic sector. So it took the brunt of terms of trade swings that made domestic policy management very difficult.

End Quote:

Misthos said...

Fauvi - thank you for the link!

Misthos said...


I want to be clear, I am not saying the US will experience Zimbabwe inflation. I have said that several times in different posts.

The reason I bring up Zimbabwe is to show that they too, had a booming stock market, despite the condition of their productive economy, and overall welfare of their general population. That's the only reason I brought them up.

And Ben Bernanke's recent speech where he took credit for inflating asset values also is something I wanted to tie in with this post.

Rajiv, I intend to write again on MMT, and I think you for the info you post here.

But I do have one question regarding inflation. Can a central bank increase asset prices and not commodity prices?

And by the way, I look at price inflation. Misallocation of capital is something I also look at, which MMT'ers don't always consider. The misallocation of capital has severe effects on prices.

If the speculative segment of an economy faces a deflationary collapse due to their irresponsible speculation (as they did in 2008), and they are not only saved, but given free money as a result, what do you call it when commodities rise as the speculative segment (Wall Street) of the economy once again speculate on commodities?

I call it inflation due to government misallocation of capital. And that, to me, will ultimately have a greater negative affect on the world than either Russia, Zimbabwe, or Argentina. Those countries' economic crises were pebbles being dropped in a pond. The US is creating the circumstances for a massive tsunami that will engulf the financial world.

Dave Narby said...

Another thing to consider is that government adds to inflation directly through deficit spending (they print it and then spend it).

Government seems to grow with debt, and I think the Minsky Moment ultimately applies to both.