Bailout Mania: We Are Cleared for Takeoff!

Suddenly, the media is tossing the word "Trillion" around a lot. This may be the start of the ramp-up:

Wall St. Bailout Could Cost Taxpayers as Much as $1 Trillion

Paulson plan could cost $1 trillion

Analysis: Washington's Trillion Dollar Wall Street Bailout

If this is indeed the ramp-up phase, we appear to be right on schedule for the short-duration hyperinflation scenario, which would actually be the best of a set of bad options.

I often wonder how much this was all planned out ahead of time.

Hyperinflation Scenarios

I'm projecting three possible scenarios for hyperinflation, based on reading the different historical accounts.

1. Short Duration: This is the soonest that hyperinflation could realistically hit.

2. Middle Duration: The "average" time scale scenario

3. Long Duration: Hyperinflation that is years away, but still based on current conditions.

This is not any kind of statistical analysis, just a range of values for planning purposes:

                 DURATION ESTIMATE
PHASE           SHORT     MID     LONG
Slow climb:     6mo       1y       2y
Ramp-up:        2mo       6mo      1y
Crazy:          1mo       2mo      5mo
Dollar Nuked:   1 day     1 day    1 day
Recovery        6mo       1y       2y

I wrote this in March, so taking these numbers and laying them out on the calendar, here's my predictions with March 2008 as a starting point:

SHORT-DURATION SCENARIO:
Slow climb:     (already happening)
Ramp up:        Sep 2008
Crazy:          Nov 2008
Dollar Nuked:   Dec 2008
Recovery:       Dec 2009 - May 2010

MEDIUM-DURATION SCENARIO:
Slow climb:     (already happening)
Ramp up:        Mar 2009
Crazy:          Sep 2009
Dollar Nuked:   Nov 2009
Recovery:       Nov 2009-Nov 2010

LONG-DURATION SCENARIO:
Slow climb:    (already happening)
Ramp up:       Mar 2010
Crazy:         Mar 2011
Dollar Nuked:  Aug 2011
Recovery:      Aug 2011 - Aug 2013

See previous post for more explanation. Mileage may vary. Feedback is welcome.

Sources:
http://en.wikipedia.org/wiki/Hyperinflation
http://www.sjsu.edu/faculty/watkins/hyper.htm

Discerning the Pattern

Hyperinflation has happened before, quite a few times. For that matter it's happening in Zimbabwe right now. Given that this is not a unique phenomenon, we should be able to learn from past data.

Looking at the historical record, there does seem to be a pattern to hyperinflation:

1. Slow Climb: 6 months to 2 years
2. Ramp-Up: 2 months to 1 year
3. Crazy: 1 month to a year
4. Currency Nuked: 1 day
5. Recovery: 6 months to years

In more detail:

1. Slow Climb: This is arguably "normal" inflation, but with a noticable upturn. By itself it doesn't guarantee hyperinflation, as inflation typically fluctuates anyway, but I have not found a case of hyperinflation that started with deflation. So an uptick in "normal" inflation may be a red flag that something bigger is on the way. Approximate time scale is 6 months to 2 years.

2. Ramp-up: This is the transition from "normal" inflation to something unusual. In this phase, the majority of people start changing their spending patterns due to inflation. It starts significantly affecting economic behavior. Approximate time scale is 2 months to 1 year.

3. Crazy: Full-fledged hyperinflation is truly crazy. This is the Weimar Republic, wheelbarrow full of money to buy a loaf of bread phase. There is no mistaking this one. The primary economic effort will be getting rid of your cash as fast as possible. Got money in your bank account? Wrong! Get rid of it now! Buy stuff as soon as you get paid, otherwise your paycheck is worthless by next week. Better hope your employer starts making COLA increases for each paycheck. This could last perhaps 1 month to a year.

4. Currency Nuked: Inevitably, hyperinflation is halted by revaluing the currency. There is no time scale to this, you just wake up one morning and bam! The Central Bank (The Fed in our case) puts the hammer down and says "The value of the currency is now [whatever]." It's that [whatever] that is critical. Often they will simply issue new currency at, say, 1000 times the value of the previous currency, and call it "New!". The "New Peso", the "Rentenmark", the "New Dollar", whatever. This is not a revaluation, it's just shifting the decimal point and it doesn't solve the underlying problem. Argentina tried this several times. The key to nuking the currency is to tie it down to something of real value. In the Weimar Germany, with typical German efficiency, the currency was revalued only once by tying it to a mortgage on all the land in Germany.

5. Recovery: Nuking the currency doesn't necessarily solve everything. There will be instabilities and hyperinflation could even start over again. Or you can get a recession. In the end, the solution is always for the government to maintain a sound, stable, and sustainable monetary policy while the economy sorts itself out. Recovery can happen fairly quickly (6 months), or could go on for years.

At this point, I'm not sure if we're in phase 1 or 2. Feedback is welcome.


Sources:

http://en.wikipedia.org/wiki/Hyperinflation
http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999-2002)
http://www.sjsu.edu/faculty/watkins/hyper.htm

Fasten Your Seat Belts

Place your seat backs and tray tables in the full upright and locked position:

Global warming rage lets global hunger grow

Rice, death and the dollar

Notice this is about prices, not shortages. This is inflation, not scarcity.

Another factor here is that the real estate bubble is collapsing, and money is now flowing to commodities, raising their prices. Same thing happened when the dot-com bubble collapsed and all the money flowed into real estate. Only food commodities are more critical, and countries are clamping down on exports to ensure food security.

A Series of Unfortunate Events

In aviation safety, there is a phenomenon called the "Accident Chain". The idea is that aviation accidents do not just happen spontaneously, they are almost always caused by the convergence of several factors in a chain of events. The key for pilots is to percieve the chain forming and then break it before it's too late. When two or three things in a row start going sour on you, such as bad weather, followed by a malfunctioning instrument, followed by whatever else, you'd better get really alert and land, like now. Too many people have died because the kept pressing on until they got to the last link in the chain.

I've found the accident chain is a useful concept for any disaster, small or large. It's how history repeats itself, and then we look back and say "Why didn't we see it coming?!" "Why didn't we stop Hitler at the Rhineland?" "Why didn't we evacuate New Orleans sooner?" "Why did we launch the Space Shuttle when the o-rings were frozen?" etc. We need to always be looking for the accident chain.


Here it is:

1. Deficit Spending: Your unpaid credit cards are really nothing to worry about. The US Government is in hock to the tune of $9,444,399,908,743.20, as of April 15 (tax day!). Massive as it is, it hasn't sunk us all by itself. It's just the concrete block around our necks as we try to keep our head above water.

2. September 11, 2001: As horrific as that day was, it did not sink us. In fact we recovered brilliantly in the short term, which is cause for future optimism. But the consequences that followed have piled on the pressure.

3. Afghanistan war: A necessary evil, and another financial pressure on the US economy.

4. Iraq War: Regardless of your opinion on this war, you have to agree it is very expensive.

5. Oil Prices: This is very big, in the sense that rising oil prices push everything else up.

6. Ethanol debacle: A self-compounding problem, of breathtaking stupidity by really smart people, especially if you look into the physics of it. And remember: Ultimately it's all physics.

7. Food Prices: Oil prices + Ethanol stupidity + Low crop yields + Increased demand + Hey, we're talking about a "chain", right?

8. Credit/Mortgage crisis: There's more to come in this department. Where do you think the government getting the money for these bailouts? I mean, besides from China and you?

9. Some Random Future Event: We don't know what's the last link in the chain. Perhaps we're already there.

It's not too late to break the chain. It won't be easy, but hyperinflation isn't easy either, now is it? Here's what to do: Land the plane before it "lands" for you. Stop creating money out of thin air. Suck it up, you can fly another day.


Sources:

Accident Chain
AOPA
The Debt to the Penny and Who Holds It
Fuel Choices, Food Crises and Finger-Pointing
Global warming rage lets global hunger grow
Energy Fundamentals
Drought slashes Australian wheat crop
A Worsening Food Crisis
We Didn't Bail Anyone Out -- You Did

Nothing to see here. Move along.

It's painful watching a train wreck, especially when you're in the train.

Governments will often try to disguise the true rate of inflation through a variety of techniques. These can include the following:

* Outright lying as to official statistics such as money supply, inflation or reserves.
* Suppression of publication of money supply statistics, or inflation indices.
* Price and wage controls.
* Forced savings schemes, designed to suck up excess liquidity. These savings schemes may be described as pensions schemes, emergency funds, war funds, or similar.
* Adjusting the components of the Consumer Price Index, to remove those items whose prices are rising the fastest.

Let's look at this:

1. Outright lying as to official statistics: Our government is blatantly obfuscating the CPI.

2. Suppression of publication of money supply statistics: M3 is no longer published.

3. Price and wage controls: Help me out here, I'm sure I'm missing a number of possibilities. Would the minimum wage count? What else?

4. Forced savings schemes, designed to suck up excess liquidity: Again, I don't know. How about Social Security? What do you think?

5. Adjusting the components of the Consumer Price Index: Clearly being done right now.

This is The Big Lie. Our own government, elected by us, is blatantly, brazenly, lying right to our faces. It is withholding basic, simple data. They don't want us to know what's really going on.

Now, I am definitely not a conspiracy theorist. I don't think any group, much less the government, is capable of successfully pulling off a secret plan more complex than digging a small hole in the ground. But there is no secret here. This is a conspiracy being done right out in the open, for all to see, and nobody's raising the BS flag.

I'm raising the BS flag.


Sources:

http://en.wikipedia.org/wiki/Hyperinflation
http://www.bls.gov/news.release/cpi.nr0.htm
http://www.federalreserve.gov/releases/h6/discm3.htm

Another Big Lie: The Money Supply

One of the big dumb statistics that economists mull over is the money supply. The money supply is what it sounds like it is: how much money is running around out there. Actually, some of that money is not running around, it's just stuffed under mattresses or behind the cushions of your sofa. Go take a look. But the vast majority of money is circulating around out there doing useful stuff. Even sitting in your bank account it's being loaned out to do stuff.

The money supply is one of those really big numbers, the kind of number they like to amaze people with. "If you stacked that many dollar bills on top of each other, it would reach Mars", etc. The relevant issue here is that the amount of dollars running around out there is the main determinant of inflation. When the government spews more money into the system, inflation is guaranteed to go up. There will be a slight lag between the actual spewing and a measurable increase in inflation, since it takes a bit of time for the stuff to diffuse out into the system. But that's a good thing because it gives us a little bit of warning ahead of time.

But there is no warning if they don't tell us about it. Read on.

There are several components that are used to describe the US money supply, labeled "M0" to "M3". Briefly, M0 is cash, M1 is M0 plus checking accounts, M2 is M1 plus savings accounts and smaller money-market accounts, and M3 is M2 plus the really big institutional accounts. M3 is the broadest measure of the number of US dollars in existence right now. As such, it is directly related to the inflation level.

Here's the Big Lie: The government has stopped publishing M3 data.

Discontinuance of M3

So in this day and age of virtually zero-cost collection and distribution of vast amounts of financial information, it has become too expensive to publish *a number*?!

Sources:

http://en.wikipedia.org/wiki/Money_supply
http://www.federalreserve.gov/releases/h6/discm3.htm
http://www.newyorkfed.org/aboutthefed/fedpoint/fed49.html
http://en.wikipedia.org/wiki/Big_Lie