Hyperinflation and Depression
by James Cook, President of Investment Rarities. May 22, 2009Print
Years ago I had a partner. He went to bed one night and never woke up. At age 48 his heart stopped. Bernie and I had started Investment Rarities in 1973. In 1975 we split up, but stayed friends. Bernie was a first class economic thinker. I remember he would often say, “Jimmy, someday bread will be a dollar a loaf.” I would giggle at such an outlandish claim. More seriously, he would intone a forecast for the future of the country. “Jimmy, we’re going to hit the gutter.”
I have often wrestled with that thought, hoping that it wouldn’t be so. Now I wake in the night and see it clearly. We are going to hit the gutter. The nation is nearly ruined, well on it’s way to bankruptcy and there is no possibility of changing directions. We are going to go broke. Make that a guiding thought for your future. It you suspect your country is going bankrupt, you can at least play some defense. Let me say it again; this nation, the greatest country in the world, the United States of America, is going to go broke. It’s not treason, it’s not heresy, it’s not malevolence or wishful thinking. It’s a sad but inevitable conclusion predicated on the sorry economic events of our time.
Last week the newspaper chronicled further erosion in the financial condition of Social Security and Medicare. Expenditures for the latter are running wild. Free health care is a financial back-breaker. The numbers only worsen, they never improve. Virtually all subsidies, entitlements and social programs are running away. There’s no way to stop these soaring costs, short of national bankruptcy. If a politician had the guts to curb or abolish a single program he’d be lynched. Rather, our current leaders want more entitlements and fatter budgets for existing social programs. Throw in wars and stimulus and you have an unmanageable deficit that must be covered by currency debasement.
Last week I got a check from the government for $250. This handout went to millions of people of retirement age. It basically adds to the government deficit. No country has ever done anything like this before, and there’s much more free money to come. This is the economic school of hocus-pocus and legerdemain. Make up a bunch of checks, send them out and borrow the money to cover them, or just print it up. When your government has to create billions for economic stimulus or to cover out of control spending on open-ended military and social programs you eventually ruin the integrity of your currency.
The dollar is the world’s reserve currency. It gives us special privileges. It’s value has held up no matter how much of it we printed and exchanged for foreign goods. That’s going to change. As we inflate the world with dollars, they are going to lose popularity. There’s too many of them. Eventually, the dollar’s reserve status will end. When it does, we’ll be unable sell our bonds to foreigners to finance the government’s debt and all the dollars out there in in the world will come back to us, either sold off or exchanged. As the dollar sinks, inflation will roar. In a flash hyperinflation will set in and the dollar will be doomed. It could happen now, or it could happen after the next credit-induced boom and bust. Inevitably it will happen. Remember this, no country has ever been privileged to have a paper reserve currency. Reserves were always gold and silver. We’ve abused this privilege. So much of our paper exists outside the U.S., it adds to the certainty of runaway inflation when the dollars reserve status ends and dollar holders dump. As its role as the world’s reserve currency once helped the dollar, so it will reinforce the doom of the dollar.
First comes runaway inflation, then inevitably a depression. There is no defense against depression when your currency fails. A worthless dollar can no longer be used to bail out failing banks and bankrupt businesses. There’s no stimulus left. The government is out of bullets, the treasury broke, and the Federal Reserve impotent. All the economic sins of the past come home to roost. For awhile, it will be far worse than the dirty thirties. In effect we will have hit the gutter. But, life goes on. What happens next is the subject of a book I’m planning to write. Watch a couple of horror films so you can handle it.
James Cook is the President of Investment Rarities.
Copyright © 2009 James Cook