Monday, December 08, 2008

Bailout could ignite hyperinflation timebomb.

The $7 trillion question
Do expansive federal bailout plans doom Americans to an inflationary future?
By Colin Barr, senior writer
December 8, 2008: 12:45 PM ET

NEW YORK (Fortune) -- A billion dollars here, $7 trillion there: How long till Uncle Sam has to cry "uncle?"

For now, frightened investors worldwide continue to gobble up U.S. Treasury bonds, and they aren't much concerned about the impact of all the obligations the U.S. government is taking on to try and head off economic catastrophe.

But the government printing money, lending money to shaky corporations and guaranteeing debt that may never be repaid all could have troubling consequences in the not-too-distant future.

The No. 1 concern: Even if actions taken by the Federal Reserve and the U.S. Treasury succeeds at stabilizing the global financial system, and an economic recovery takes hold, a brutal inflationary spike will be right around the corner.

"Inflation is the 8,000-pound gorilla in the room," said Gary Hager, president of Integrated Wealth Management in New Jersey. "We're sitting in the room with the coffee cups vibrating."

In that environment, long-term interest rates would soar, the value of the U.S. dollar would plummet, policy makers would face a whole new set of challenges.

"Everyone is going to lose something," said Will Hepburn, president and chief investment officer of Hepburn Capital Management in Prescott, Ariz. "The winners will be those who end up losing the least..."

We do not have any more national assets than we did two years ago, and the value of those assets we do have (federal lands, buildings, etc.) are falling like a rock due to the real estate deflationary spiral. Ultimately, the value of our money is only the asset value we have that we can trade for it - in spite of all those economists who have, since the elimination of the gold standard, declared otherwise. The "full faith and credit of the US government" is comprised of its 1) ability to tax or 2) value of federal assets.

Government has reached the end of its ability to tax and there's not a balanced budget in sight. What's left is the value of assets to back US dollars abroad. We have an asset-backed currency, whether we admit it or not. In real life, there is no such thing as a true "fiat" currency, because if you don't have money that is accepted as something with value, you have property your creditors can and will seize. Holders of US Treasury notes and US bonds will, when they realize the currency is hopelessly devalued, demand assets instead of dollar bills.

That, or the IMF will be called in to "restructure" our debts against our will, eliminating all social services and citizen safety nets until our debt is repaid in full. After all, we've done that to many other countries. They have every right to do the same to us.

But that's a post for another day.

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