Tag Archives: Hyperinflation

Why There Won’t be Another Bailout, Courtesy of the Federal Reserve

federal reserve bailout

The 2008 Bailout:  Why it won’t happen one more time.

You  might feel like the problem has passed, but in 2008, the US  experienced only the tremors of a great and forthcoming economic collapse. Since then, Americans have been living in an economic depression the likes of which have not been seen for over 70 years, but which is only an opening tremor in comparison to the coming devastation of a coming huge economic earthquake. Although the major media outlets in cooperation with the federal government continue to report the overall economic situation to be recovering, no such thing is either possible or is really happening at all.

We are actually NOW in the midst of a severe economic depression,  

and the crash has not yet come to a conclusion. 2008 was only the beginning.

The 2008/2009 Bailout of the Major Banks – What happened?

Beginning in 2008, Goldman-Sachs, JP Morgan, Morgan Stanley, Lehmann, Citibank, and Bank of America, among a few others, all suffered conditions of insolvency that would have put them completely out of business were it not for the bailouts that arrived at the last moment from the Federal Reserve, and from a number of other related federal banking agencies. Here’s what happened in a nutshell.

A sudden burst in the real estate bubble caused millions of mortgages to be instantaneously over- valued.  Consequently millions of American mortgages began to go into foreclosure. Foreclosures in large quantities are bad for banks because they create an instant cash shortage. A huge drop in incoming mortgage payments compounded by the problem of needing to shed massive amounts of over evaluated property at a loss, meant that the business of loaning money could not go on unless there were simply more capital on hand.

 Federal Reserve to the rescue?

The Fed stepped in and fixed numerous bank insolvency threats by supplying huge amounts of cash to major banks. The problem was, the Fed itself didn’t really have the money to solve this crisis either. Sure, they had  a few tens of billions of dollars in the reserve, but what they needed was tens of TRILLIONS of dollars! Everyone seems to believe that the Fed always does and always will have cash on hand, but the fact is that Fed had to play some serious games to “create” the money needed to keep these major banks from going under in 2008.

Where the Fed Got the Bailout Money: Borrowing and Printing, Borrowing and Printing, Borrowing and Printing

The bottom line is that the money for the bailouts was created by just playing more dancing around and switcharoo games. The first thing the Fed did was to print about 4 trillion dollars, which make up the reserves that most US banks are still using to operate on. BUT….. that wasn’t nearly enough to handle this emergency!

So, the second thing the Federal Reserve did was to call up the European Central Bank (ECB) and cry “Help!”. Here is what they did with what they had to work with, after having printed as many trillion dollars as they could risk without creating unmanageable inflation.

The European Central Bank had a significant amount of dollar liabilities, owing at that time several trillion dollars to the US money market. So, the Fed effectively asked them to cough up as much of their debt as possible, and to do it immediately!  They came up with around 13 trillion dollars. Of course they didn’t have the dollars on hand to pay out, nor did they have enough Euros lying around in their own reserve to fill the Fed’s need. But since the ECB can print Euros, they did, and then they swapped newly printed Euros for newly printed dollars from the Fed, both of them backed by nothing. That is what was then supplied to fund the Federal Reserve.

Consequently this problem also affected the European money market too. Euros also had to be printed out of thin air. Contrary to popular belief, you can’t just print massive amounts of un-backed currency without inflationary effects. We’re talking about trillions of dollars and trillions of Euros, so it’s hard to imagine that solving the Fed’s problem with fresh crisp currency didn’t also have some negative impact on the value of the Euro.  But it worked, sort of. It was a well calculated risk, and neither the US economy  nor the European economy suffered its final crash as a result.

And what to do when the next emergency arises?

So, will the ECB still be able to continue to prop up the Federal Reserve the next time it has another unsolvable insolvency problem? It’s highly unlikely. Because the Fed continues to do business as usual, and because it has now reached the point of not generating enough revenue to pay even the interest on all of its own debts, an even bigger crash is assuredly coming.

Why  the dollar WILL  crash.

This time the crash will be based upon a sudden and complete loss of world confidence in the dollar. The world is quite aware of the financial perils of the Federal Reserve. It’s credit rating is bad now. When that lack of confidence causes the market for Treasury Bills and bonds to completely die, the Fed will lose its ability to inject any more cash into our system from other systems by just borrowing it. Lacking any other real significant source of income, its only remaining alternative will be to print more and more and more pure counterfeit currency. The result will be hyper-inflation.

Next time they’ll need MORE than mere tens of trillions!

Today the Federal Reserve is falsely looked upon as the hero of 2008 because of its quick thinking that resulted in finding a convenient solution with the European bank. The truth is that the Fed itself caused the very crash they managed to bail us out of with the help of the European Bank.

In the next and probably final crash, it won’t just be tens of trillions that will be needed. The size and volume of the losses that would be caused by hyper-inflation of the dollar would be far more than the ECB could possibly swallow.To implement another solution like that of 2008 would drag the Euro right down with the dollar.

Fasten your seat belts. You may think the ride is smooth now, but the ride ahead will not be. Read more about this topic at Jim Rickards’ blog.

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Hyperinflation in America: When a Loaf of Bread is $3 Billion

hyperinflation and fiat currency

Too few understand just how disruptive hyperinflation in America would be.

Truth is, it would be a nightmare.

In an episode of hyperinflation, money loses value so rapidly that people spend it as quickly as possible, which only feeds the cycle of pushing prices higher and higher at a faster and faster rate.

Imagine prices at the food store and gas pump not just going up a few cents at a time, but doubling in a matter of months, weeks, or even days.

This is exactly the scenario that played out in Germany and many other countries with fiat currency.

In 1922, a loaf of bread cost 163 marks. 

By September 1923, this figure had reached 1,500,000 marks and at the peak of hyperinflation, November 1923, a loaf of bread cost 200,000,000,000 marks.

The impact of hyperinflation was huge :

People were paid by the hour and rushed to pass money to loved ones so that it could be spent before its value meant it was worthless. People had to shop with wheel barrows full of money. 

And now some economists and market experts think many of the ingredients for hyperinflation are brewing in America.

That’s because years of profligate U.S. government borrowing and spending have created trillions of dollars that lurk in the reserves of foreign countries and major financial institutions. The situation escalated after the 2008 financial crisis, with the U.S. Federal Reserve‘s policies of “quantitative easing” creating even more money.

“The U.S. government and the Federal Reserve have committed the system to its ultimate insolvency, through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, gross mismanagement, and a deliberate and ongoing effort to debase the U.S. currency,” said John Williams of Shadow Government Statistics in his annual report on hyperinflation.

Historically, governments that have suffered bouts of hyperinflation – most notoriously Weimar Germany from 1922-1923 – have set the table by printing too much money during a time of economic contraction.

The trouble is, once it starts it’s impossible to stop. Hyperinflation in America isn’t here yet, but we’re edging dangerously close to the point of no return.

“We’re certainly at a flashing yellow alert,” Art Cashin, Director of Floor Operations at UBS Financial Services, told King World News last week. “You have in place a variety of things that could begin to react somewhat domino-like.”

Cashin drew attention last week when he sent out a report detailing the Weimar hyperinflationary disaster, concluding that the episode was why “many express concern about unintended consequences of each new wave of quantitative easing.”

Hyperinflation in America: Where Is It?

fiat currency and hyperinflation Some may point to the moderate inflation in the U.S. now – between 2% and 3% — and reason that hyperinflation in America is a distant possibility, if it could happen at all.

But the seeds of hyperinflation tend to be sown long before the signs of hyperinflation become apparent.

So it could be a while before any evidence of hyperinflation shows up, despite QE1, QE2 andQE3.

“Even when they [Weimar Germany] were actually printing money, literally printing, the inflationary spiral didn’t happen instantly,” Cashin told King World News. “It was delayed a couple of years. But once it started, it could not be taken back.”

The key is that no matter how much of a currency exists, if large amounts of it remain out of circulation, inflation – and hyperinflation in particular – can’t happen.

“The analogy I use is if the Fed flew over your house and dropped a million dollars in brand new bills, and you were so worried you put them in your garage, that’s not inflationary,” Cashin said. “It’s only inflationary when you lend it or spend it.”

For the U.S., the “garage full of money” is the trillions in U.S. Treasurys squirreled away in places like Japan and China, as well as hedge funds and major U.S. and European banks.

Should some sort of financial crisis cause a run on the dollar – a sudden meltdown of the long-simmering Eurozone debt crisis, or if no one blinks in Washington’s game of chicken over budget and debt issues – the situation could unravel quickly.

“The Fed’s initial moves to debase the U.S. dollar worked, impairing the U.S. currency’s exchange rate value and triggering commodity inflation fueled by the weak-dollar policy,” said Williams in his report.

“This also has helped to set the stage for a global dumping of the dollar and dollar-denominated paper assets, a rapid influx of unwanted dollars from abroad that either would collapse the financial markets or would force the Fed to flood the system with the incoming liquidity, monetizing dumped U.S. Treasury securities among other assets.”

RELATED: Four ways to survive the coming market collapse

Warning Signs of Hyperinflation

Cashin noted that hyperinflation can sneak up in that it often appears at first to be only higher-than-normal conventional inflation.

Going back to his Weimar example, Cashin used the price of a loaf of bread to illustrate this.

 

In 1914, before World War I, a loaf of bread in Germany cost the equivalent of 13 cents. Two years later it was 19 cents, and by 1919, after the war, that same loaf was 26 cents – doubling the prewar price in five years. 

Bad, yes — but not alarming. But one year later a German loaf of bread cost $1.20. By mid-1922, it was $3.50. Just six months later, a loaf cost $700, and by the spring of 1923 it was $1,200. As of September, it cost $2 million to buy a loaf of bread. One month later, it cost $670 million, and the month after that $3 billion.

Within weeks it was $100 billion, at which point the German mark completely collapsed.The whole time the German government kept printing more money, so much so that people burned it in their fireplaces because it was cheaper than wood.Why didn’t they just stop and try to stabilize the currency?

“When things began to disintegrate, no one dared to take away the punchbowl,” Cashin wrote in his report. “They feared shutting off the monetary heroin would lead to riots, civil war, and, worst of all, communism. So, realizing that what they were doing was destructive, they kept doing it out of fear that stopping would be even more destructive.”

Cashin advises Americans to keep an eye on M2, a measure of the nation’s money supply, particularly how much money is in circulation. The government reports this number every week. A sudden spike could signal the start of hyperinflation in America.

And once people decide they’d rather spend their money as fast as possible, the so-called “velocity of money” – how quickly money changes hands – takes off. The faster it goes, the higher the rate of inflation.

Preparing for Hyperinflation in America

hyperinflation and fiat dollarNo one can predict precisely when, or even if, an episode of hyperinflation might strike. But because the consequences would be so devastating, it bears watching no matter how slim the possibility.

Hyperinflation in America would create havoc in the markets. Bonds would become toxic and stocks would plummet. But precious metals like gold and silver would soar, as would commodities like oil, copper and corn. Foreign currencies would also skyrocket against the dollar.

“If you begin to see not just the first signs of inflation, but acceleration – it will come very fast – then you have to think about how you are protected,” Cashin said, advising people to make sure they’re invested in hard assets like commodities or real estate.

But most of all, Cashin urges that Americans stay vigilant.

“If [M2] begins to grow rapidly, then the money that the Fed has created will be seen as moving through the system and that will create the high risk of accelerated inflation and, God forbid, runaway inflation,” Cashin told King World News. And if that happens, he said, “get very cautious.”

http://moneymorning.com/2012/10/16/hyperinflation-in-america-when-a-loaf-of-bread-is-3-billion/

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