Eurodystopia: A Future Divided


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    Image: This is a rerun of an article I wrote on August 10, 2012. It seems to have regained quite a bit of relevance in recent
    [See the full post at: Eurodystopia: A Future Divided]


    Kind of off subject, but here ya go, for all the “Deflationists” out there,,,

    Keep stacking those FRN’s at your own risk.


    @Prof. LnL,

    That’s a garbage article written by a shameless gold / money management service promoter – a quick glance at the commentary section suggests even the worst of the moronic sub-human gold stacking trolls of ZeroHedge recognize that fact.

    The author seems to have no comprehension of the difference between money & credit, or how a collapse of the credit supply would have horrible liquidity ramifications for financial markets and global trade (which anyone who’s eyes were open in 2008 would have realized was the case and would happen again if the same policies were pursued – which they have been since then). The author also seems to need to resort to ad hominem attacks on anyone who argues deflation is the clear & present danger rather than providing any factual information or cohesive argument as to why their views may be wrong.

    As for you Prof. – I can’t imagine you are so obtuse that you cannot comprehend the position of TAE / Nicole Foss by now; it’s not one that suggests hyper-inflation is unavoidable, rather, it is one that suggests deflation is what we’re about to face and individuals should avoid putting themselves under additional financial/economic stress by using what little liquidity they have on solutions to a hyper-inflationary future that may be decades away.

    Seriously. take a break from being the hyper-inflationary town crier. Get some new material – preferably an argument for how a hyper-inflationary collapse would actually transpire that has at least half of the lucidity the deflationary articles written by Nicole possess. Don’t just throw crap at the wall and hope it will stick, as it’s getting quite tiresome.

    If that’s too much to ask, then just go troll in the dregs of the ZH dungeon and feel better about yourself until the hyper-inflationary Rapture arrives instead.


    Variable81, I think you should not be so dismissive. A few things to consider:

    1. Many hyperinflationists believe that the deflationary death plunge is likely, if not necessary, before the collapse of confidence. Deflation is the theme of Act 5 of our five act play, but hyperinflation is the final scene of Act 5. In other words, deflation and hyperinflation are often presented as either-or, when in fact it can be both, in rapid succession.

    2. As any student of monetary history knows, the actual hyperinflation, the printing, takes place long before the loss of confidence. We often think of hyperinflation as “will they print in the future” when in fact they already have. Base money has increased dramatically. It is sitting in bank reserves. It is dangerous, which is why the Fed does not want any more QE if it can avoid it.

    3. Even though the printing has already happened, look at the chart in the article and ask yourself this question: When the deflationary spiral comes upon us, what will the response of the authorities be? Will they sit back and say “We have tried everything, and nothing worked, so we now give up”???? Do you think this is a politically viable solution? The public will be demanding that the government “do something” and the banks holding all the bad debt will be using their political connections to pressure the Fed to pay them 100 cents on the dollar . . . just like in 2008. All to save “the system”. So there is damn good chance, I’d say a near 100% chance, that the chart in the article is a prelude of what’s to come. So, more dry tinder.

    4. The chart that is missing from the article is overall bank assets. To understand the danger, you need to consider that base money as a percentage of overall bank assets. That percentage rose dramatically after 2008.

    5. TAE rightfully emphasizes the importance of velocity, or lack thereof. As long as nobody is spending all that base money, it does not flow into the economy and so the deflationary spiral continues as we keep throwing more dry tinder on the pile. Here is the quadrillion dollar question: How fast do you think velocity can change? If you think of velocity as the Titanic, you probably think that this can only gradually change direction. But that is because you think of the economy as a huge, stable, machine. But if you think of the economy as human and psychological and prone to emotion, even mass hysteria, then you must at least acknowledge the possibility that velocity can stop on a dime and change direction faster than you can have time to react, faster than the Fed and other Central Banks have time to react. You might consider this to be a low risk event, but I think it is a feature of most, if not all, historical hyperinflations. And I submit that the massive imbalances that have built up have left the entire global and monetary system unstable. One of Nicole’s theme’s has been that the trip down the slope on the other side will not be gradual and stable. It will be characterized by sudden shifts. I think that is right on. What seems inconceivable now, including the possibility of hyperinflation, may seem more obvious decades down the road with the benefit of hindsight.

    I think TAE has seen the future. Those of us claiming that hyperinflation is the end of the line does not reject TAE’s argument. Rather, we think it’s what comes after all TAE has predicted comes to pass. It will be the end result after factoring in the human element, the political element, the crony capitalist element.

    Dr. Diablo

    Boogaloo, couldn’t have said it better myself.

    That said, although all these things may happen, turns out it’s not a lot of good without knowing “when”. Or which first, which next, and how fast those changes fall upon us.

    The last time we were in a deflation with no velocity was in 1930. And what did they do? Well the money was gold, so they “devalued” gold, or rather re-pegged the US$:Gold ratio down 40%. That’s not “hyperinflation”, but it’s a good example of how they will have to “do something”, politically. Devaluing the US$ again vs. something would probably have the same effect today, and I would expect they will try it. In fact, this seems to be exactly what China, Japan, and Europe are all trying. But everyone cannot devalue against everybody else and live at everyone else’s expense. In addition, it overwhemingly, hilariously, doesn’t work. Didn’t work in Japan, and it didn’t work in 1933 either, as the Depression went on 10 more years. Didn’t matter to them then and probably won’t matter now. It’s in the textbooks, and they will “do something.”

    That said, this controlled devaluation of Deflation is different from a sudden loss of confidence in government and their currency. Not completely different, but different enough.

    My bet is that the world will get pretty sick of a renegade U.S. and throw them off by creating an alternative system (as China and the BRICS bank just did), then dump Treasuries (as China did 2 days before Tainjing), then devalue vs the US$ by demanding trade in Yuan and associated notes (Rubles, Real, or gold-backed trade notes). This would force the US$ up and up (as it has been), until the U.S. can’t function and the nations tied to the US$ can’t function. The U.S. will then lose the Reserve Currency status, and devalue the currency and/or create an internal/external two-currency US$ system to survive, devaluing the US$ back to a level more appropriate to their Greece-like bankruptcy. Like 50%? Although by the numbers the U.S. is gawd-terrible, they still have the military, the food, vast resources, huge reach, hard-working people, and relatively easy problems to solve if they could find anyone with enough intelligence/wisdom to apply them. That’s not an outright fallen, non-functional state (hyperinflation) but one needing a “Washington Agreement” devaluation. Besides, the U.S. is so enormous they cannot just filter in adequate Pesos, CA$, or Yuan in time to have any reasonable replacement at all. Sound possible?



    Considered many of those things over the past 5+ years of frequenting TAE as well as other inflationary/deflationary intellectual ghettos. During that time I’ve come see the same sad/weak arguments dragged out by inflationists over and over. To respond to each of your points:

    1) Absolutely agree; but if you took at look at what Prof. LnL has been pushing in his commentary over the last several months (years?) it’s not an acceptance of deflation prior to hyperinflation, it is a (dangerous) argument that any deflationary impacts can be ignored in favour of focusing solely on the hyperinflationary future we face.

    As Nicole as aptly put it so many times, it’s like running a relay race and if you don’t overcome the various hurdles as you encounter them, you won’t be situated to deal with the next hurdle when it arrives.

    Personally, as a hedge against a hyperinflationary future I look to modest solutions such as physical gold/silver and objects/things that will hold their value if/when the monetary system collapses, but the vast majority of my time/effort/concern/resources are focused on the first hurdle coming our way – crushing deflation.

    2) “As any student of monetary history knows…” – you fancy yourself as that, do you? Then perhaps every student of monetary history should educate themselves on the difference of credit vs. physical money, and recognize that no actual money has been “printed” at all. Credit has been extended to monetize financial instruments and toxic assets, nothing more. Someone, somewhere, is still on the hook for those over-valued assets and when price discovery occurs, vast amounts of ethereal wealth with be vaporized.

    The analogy that has been throw around several times that always amused me is that when the tide goes out we’ll see who’s been swimming naked.

    3) The “printing” hasn’t happened despite your insistence to the contrary. And the typical argument of a person who does not comprehend the magnitude of the problem and the dynamics of potential solutions (see Nicole’s writings on viable solution space) is one of “the people will demand the government do something!”. This sort of argument is, at best, misguided and at worst, infantile.

    To illustrate the point I’ll use the exact same argument for a host of far greater predicaments – e.g. the implosion of the Sun, a large space object colliding with Earth to cause an Extinction Level Event (ELE), or catastrophic climate change… take your pick. I’m pretty sure we all know that the people could clamour all they want for the government to “do something”, but that doesn’t necessarily mean anything can or will be done whatsoever. I’d like to assume any rational-minded adult would accept this as truth, yet unfortunately I see this argument cropping up again and again – it’s a scary indicator of how misinformed people are to believe the governments of the world are so omnipotent that they can do anything to stop these sorts of things (e.g. financial, climatological, interstellar disasters) from occurring.

    Furthermore, the political viability of our future options has no real bearing on what will happen. From my short time on this planet I have witnessed politicians lie and kick the can down the road as much as possible – not necessarily because they are bad people but because it is the only viable way to stay elected in our democratic failure-of-a-society. Eventually some group of politicians are going to be unlucky and get stuck with a can they can no longer kick, and at that point all hell will break loose.

    4) If you care to, please elaborate on this point as I’m not entirely clear what you are suggesting, thanks.

    5) No disagreement here that velocity of money could increase rapidly, but I think the onus is on (hyper)inflationists to provide the context in which that would happen and to explain how the counter-balancing effect of the total collapse of outstanding credit would not have a hugely deflationary impact on the system despite increasing velocity of money.

    The bottom line is that before runaway inflation can occur, a great deal of the debt within the system has to be purged. Even if for some crazy reason the governments of the world started printing (physical!) money en mass, it would still have a deflationary effect in the short term when people who gained access to that increased amount of physical cash in the system would repudiate their debts (i.e. destroying the “assets” of Rentiers who live off the interest generated off those so-called assets).

    And while I don’t want to put words in your mouth, what it sounds like to me is that you’re concerned we could see massive price increases in the things we need to survive (food, water, shelter. etc.) and are mistaking that for inflation. If that is the case I don’t have much to offer you in terms of a panacea for the future (the truth is that it’s far worse that it seems as rising prices mean nothing in comparison to collapsing purchasing power), but I do suggest you revisit the definition of inflation/deflation that is generally accepted here at TAE as price changes, regardless of how volatile they are or for what assets/commodities they impact, do not qualify for inflationary/deflationary events (and please don’t get into “price inflation/deflation”… ugh).

    Lastly, I am “one of you” so to speak in that I absolutely see inflationary (perhaps hyperinflationary) pressures in the future. But not the near future. Not even in the mid-term future. My rant against Prof. LnL is because I’ve grown weary at seeing his continued attempts to disregard any argument that deflation is staring us in the face and should be our primary concern at this time. To continue to focus on (hyper)inflation at the expense of what must be done now to address deflationary collapse would seem to me to be both irresponsible and dangerous.




    Just an aside, but pretending/appearing to “do something” is completely different from actually doing something to solve a problem / mitigate a predicament.

    In the case of the Great Depression, the only thing that really helped do anything was the onset of one of the worst acts of human violence/inhumanity the world has ever witnessed – WW2. This was followed by decades of careless extraction and gluttonous consumption of the world’s highest concentrated liquid fuel source, which now looks to be on the verge of depletion (at least at affordable prices anyway).

    It would probably be our best interest to remember those two points when thinking about how/if we’ll ever get out of the deflationary future we’ve built for ourselves.



    Thank goodness we have a focus around which to pivot. Send a few of those oversized dollars to Nicole and Ilargi, that they update their wardrobe. I suspect they will begin to receive invitations to classy dinners with the hoity toity. They should represent us as we would hope to deserve.


    I would just like to add, in regard to Zero Hedge, that many of the commenters there appear to be mentally ill and/or delusional, people enamored of preposterous conspiracy theories and given to lurid fantasies about the world around them. Many of them, for example, cling to the notion that Barack Obama is a foreign-born/Communist/Muslim/Marxist/Atheist/Terrorist threat to the very survival of humanity.


    Variable81, in addition to credit money and physical currency, there is another category, which is base money. Base money is not created by credit expansion and does not disappear in a credit contraction. Although it does not yet exist in physical form, the government has an obligation to print it in physical form on demand. In that sense physical cash is what backs the system today (instead of gold, for example). The reason for all the new zeros on the currency during a hyperinflation is because the government has already “printed” as base money. When there is not enough physical cash out there to handle a run on physical cash, the government simply adds more zeros. Although we think of hyperinflations as too much worthless paper money, the reality while its happening is that there is always a shortage of cash, hence the additional zeros.



    Provide your source on your definition of “base money”.
    I haven’t been able to find anything that describes it the way you do – in fact, the definitions I’ve come across make it sound exactly like a combination of “credit money” and “physical money”, despite your suggestion otherwise.

    DEFINITION of ‘Monetary Base’
    The total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank’s reserves. This measure of the money supply typically only includes the most liquid currencies.

    Also known as the “money base”.

    Read more: Monetary Base Definition | Investopedia


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