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Rose-colored Glasses, Red-colored Bills
Commentary on the News
Tuesday, May 25, 2010
Ed DeShields

Seventy six percent of the American public thinks the economy is still in a recession.  Why?  Because, it feels like one.

Personal income is down.  Unemployment is up.  Inflation has eaten away at your buying power – not by price increases but by deflation of your assets.  Now a debt crisis threatens America’s very existence.

Now, I don’t want you dear readers to peg me as a doom and gloom writer.  I want you to be knowledgeable about the news and what it is telling us.   In the last several weeks, we’ve been around the world examining the hot spots of contagion that will eventually arrive at your doorstep. 

Unfortunately, almost all news reports coming from the mainstream media seem to desperately search for any sign of an economic recovery as if to ignore the storm ahead.  Contrary to what you might hear, a debt crisis, which the Congressional Budget Office says is on the way to the U.S., will not be pretty. 

A debt crisis is caused when a government is so out of touch with reality that it spends itself in oblivion until it has to start printing money just to pay its bills.  Then, after printing money it realizes that it has unintentionally spun a vortex of hyperinflation.  At first prices fall.   But then things change rapidly.  

Friends, history is repeating itself.

The hyperinflation in Germany’s Weimar Republic in the 1920’s is along the lines of what likely will unfold in the United States. It was not the first hyperinflation, nor was it the only one in early 1920s Europe or even the most extreme inflation in history. But the story told by Friedrich Kessler, a law professor whose university affiliations included, among others, Harvard and University of California Berkeley, is worth repeating.  Dr. Kessler lived through the Weimar Republic hyperinflation and explained it this way:

"It was horrible. Horrible! Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery stores were empty.  You could buy nothing with your paper money."

In the early stages of hyperinflation, money disappears because people dash for their money.  But, the Federal Reserve does not hold a lot of cash on hand.  In fact, one-half of the U.S. cash isn’t even in America – but overseas.   So as prices rise rapidly people hoard.  A can of beans might cost 50 cents today, but 70 cents next week so owning beans is a hedge against inflation because you have no cash. 

While the hyperinflation did hit rapidly in Germany, annual inflation in January 1922 already was more than 200%, up from as low as 6% in April 1921. The existing currency was abandoned at the end of 1923 as worthless.

Conspiracy theorists have suggested the U.S. Government has printed a new currency of red-colored bills, intended for some dual internal and external U.S. dollar system.  If such indeed were the case, then there might be a store of "new dollars" that could be released at a 1-to-1,000,000 ratio, or whatever ratio was needed to make the new currency meaningful, but such would not resolve any long-term problems unless it was part of an overall restructuring of the domestic and global financial and currency systems and unless the U.S. government could put its fiscal house in order.

From a practical standpoint, however, currency would disappear, at least for a period of time in the early period of a hyperinflation.  Unlike the hyperinflation periods of the 1920’s, the vast bulk of today’s money is not physical, but electronic.  Hence the chances of the system adapting are virtually nil.

And, remember this could be going on all over world because we’re all connected.  Perhaps the new red-colored bills would be the world’s new currency.   

Most of the news comes from five corporations.  Each day these corporations examine all the news and run it through a media and state-friendly production facility so that there will be sufficient "good news" and "evidence" that the "nascent economy recovery is taking hold."  Whatever cannot be refashioned is simply buried or suppressed.  

Kyle Bass, of Hayman Capital fame jumped in this week about Japan’s pending debt implosion.  You’ll remember it was Bass who famously predicted the housing crisis and bet against it earning the firm not only a fortune, but economic prominence for their foresight.   Bass predicted this week that, “the Keynesian end arrives at many of the world’s countries sooner than is popularly believed”.  Like this year or next to be exact.

It’s not only Japan.  It’s the U.S., UK, the EU and the rest of the developed world.  Bass is so sure of his bet against Japan that he has mortgaged his home in the Yen so when it collapses, his home mortgage will be worth nothing and his home will be paid for courtesy of the Japanese taxpayer. 

Tiny stories appear here and there and if you know what you’re reading you’ll pick up on the real story.  Today, for instance, German and Italy both announced massive austerity programs slashing government spending to the bone that will surely cause their citizens pain.  Dallas, Texas did the same thing by slashing twenty percent of its budget.   Greece and Spain followed suit within hours. 

Then came the obscure notice that the corporate bond markets were without many bidders.  Bonds are where money is created to grow our economy.  

The U.S. economy is undergoing structural change that has resulted from U.S. trade, social and regulatory policies driving a good portion of the U.S. manufacturing and technology base offshore.  A large number of related, high paying jobs have disappeared for U.S. workers.   Accordingly, U.S. consumers have found increasingly that their household incomes fail to keep up with inflation. 

Our politicians are not skilled to recognize the issue.  They continue to load us up with healthcare reform, cap and trade and other programs that we’ll never see implemented.  In every presidential race since 1908, in which consistent, real (inflation-adjusted) annual disposable income growth was above 3.3%, the incumbent party holding the White House won every time.

When income growth was below 3.3%, the incumbent party lost every time.  Again, with redefinitions to the national income accounts in the last two decades, a consistent measure of disposable income as reported by the government has disappeared. Yet, even with official reporting, 2008 annual growth in real disposable income was 0.5%, well below the traditional 3.3% limit.  As was suggested would be the case, the Republicans lost the White House in 2008. 

A wide variety of possibilities would follow or coincide politically with a hyperinflationary great depression, but the political status quo likely would not continue.  Times would be financially painful enough to encourage the development of a third party that could move the Republicans or Democrats to third-party status in the 2012 presidential and congressional elections. Present economic conditions are bleak enough to impair re-election prospects severely for incumbents in the 2010 mid-term election.

And that would be the first step in shedding the rose-colored glasses.

About Ed DeShields

Last week: Secret Russian Report Reveals World Plan

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