5 ms·

For a blueprint as to what will happen, there's really 2 scenarios: 1) hyperinflation 2) deflation. If hyperinflation is the possibility, which the Fed will fav

For a blueprint as to what will happen, there's really 2 scenarios: 1) hyperinflation 2) deflation. If hyperinflation is the possibility, which the Fed will favor much more than deflation, then you want to own as much debt as possible, in the form of property. Then your debt will hyper-inflate away and you'll be left with a ton of property. If the Fed loses control and we end up with deflation, you want to own as little debt as possible and as much cash as possible. If you are lucky enough to be with a life partner, you can arrange all your debt to be with one person, and all your assets to the other person, and then get a divorce if need be. Then the person holding the debt can claim bankruptcy in the case of global deflation, which would then wipe the slate clean.

voisin 7y ago
Usually assets and liabilities are linked in the form of specific collateral. Lenders have no upside but repayment and interest and are pretty wise to bad faith structures on the part of borrowers.
QuesnayJr 7y ago
There's a more likely third scenario, which is 3) neither hyperinflation nor deflation. The US hasn't seen serious deflation since the Great Depression, and has never seen hyperinflation. Hyperinflations tend to go along with some sort of political or military disaster. A big wave of defaults is only a serious threat to the US economy if it leads to a banking crisis. That's why the global financial crisis was so much worse than the deflation of the NASDAQ bubble.
- onlyrealcuzzo 7y ago
  I think when most people say hyperinflation they just mean unusually high inflation. That did exist at least once in the US (around Volker's time), but it's probably safest to bet on the status quo.
- ksec 7y ago
  Yes. The possibility of Hyperinflation in US, EU, or even China, as much as I wanted it to happen is practically zero. Deflation isn't likely to happen either because money supply and actual value dont seems to be balanced well at the moment, not to mention money supply continues to increase. I am betting we will continue to see the current trend of ultra low growth, ( but still growth ) in the next few years before another stupid thing come along. That may be geopolitics and multiple smaller counties default triggering chain reaction.
- IgniteTheSun 7y ago
  I've seen the current national debt situation compared to the U.S. national debt situation following WW2 a number of times (e.g., national debt to GDP ratios), but there is a key difference between now and the past: past episodes of rapid national debt increases were limited to only a very few years and the government then moved to reduce debt. For example, most of the expenses related to WW2 occurred in under a decade and the national government immediately started taking measures to start paying it off. Instead of taking measures to reduce our national debt, the federal government currently is actually increasing it to the tune of a trillion dollars a year in an economy that's only approximately 20 trillion (GDP). People hear the word "deficit" and they think that means "national debt" when in fact the deficit is how much is being added to the national debt each year. Politicians never talk about reducing debt - only reducing the deficit. Do you think Congress or either party has the self discipline to eliminate the deficit entirely and to actually meaningfully reduce the actual debt? It will be a lot more painful if they do that during an inflationary crisis than today. (If you aren't familiar with it, look up the Misery Index and talk to someone who dealt with the inflation in the 1970s.) What's actually happening currently is that the Fed is monetizing a larger and larger part of the debt as (1) other nations are reaching the limit of how much they will put into US gov bond purchases and/or even starting to plan to scale back their purchases in future years, and (2) the deficit continues to grow. As Milton Friedman pointed out, inflation is always a monetary phenomenon. There are a number of deflationary forces at play as well, but these types of inflationary forces seem to be stronger - and hyperinflation doesn't seem as far fetched as it used to.
nradov 7y ago
If we ever reach the point that the US federal government can no longer service its debt then they will certainly choose deflation (default) rather than hyperinflation. Recent history in other countries shows that default can be managed with much less disruption. The most likely scenario is that they would force bondholders to exchange short term bonds for longer term bonds with artificially low coupon rates.
- yxhuvud 7y ago
  The only way that can happen would be for Congress to willfully choose not to pay. You literally can't run out of money as long as you lend in the same currency you control the supply of.
  - nradov 7y ago
    Yes Congress would choose not to pay, just like Russia and other countries have done in that situation. It's the least bad option.
    - AstralStorm 7y ago
      Worldwide debt forgiveness? That'd be a first. Interesting to see. However, every country will try to eke out some advantage in this. War, economic and otherwise, is not out of question. But if taxpayers say no...
      - nradov 7y ago
        There would be no debt forgiveness involved. It would be a forced cram down imposed on bondholders against their will.
        AstralStorm 7y ago
        Sure, but this would only work on private debt. Countries tend to shrug it off or get involved if said massive debt is related to their economy - e.g. China.
tmpz22 7y ago
I wonder if there is some seedy group of people in power actively driving us towards one of these outcomes.
seibelj 7y ago
One reason to have not only property, but more liquid assets such as gold and bitcoin. Both are globally recognized as valuable and will increase in value as governments inflate their currencies. Putting 5% of your wealth split between gold and bitcoin may save you if total financial disaster occurs.
- ping_pong 7y ago
  In a true deflationary environment, then only thing that is going to do well are US Treasuries. Gold and Bitcoin will plummet just like every other asset class because by definition, prices for assets will drop. Then people will try to sell things as quickly as possible, causing the prices to drop even faster.
  - deleted 7y ago
    [deleted]
smt1 7y ago
Or, as the original article pointed out, hyperinflation nd/or deflation happens in emerging economies where there have been the largest surges in debt, but developed countries like the US need more muted intervention by central banks because the debt increase has been relatively muted.
deleted 7y ago
[deleted]
moralsupply 7y ago
Hyperinflation will be preceded by deflation, so the Fed can get the best of both worlds...

voisin 7y ago

Usually assets and liabilities are linked in the form of specific collateral. Lenders have no upside but repayment and interest and are pretty wise to bad faith structures on the part of borrowers.

QuesnayJr 7y ago

There's a more likely third scenario, which is 3) neither hyperinflation nor deflation. The US hasn't seen serious deflation since the Great Depression, and has never seen hyperinflation. Hyperinflations tend to go along with some sort of political or military disaster. A big wave of defaults is only a serious threat to the US economy if it leads to a banking crisis. That's why the global financial crisis was so much worse than the deflation of the NASDAQ bubble.

onlyrealcuzzo 7y ago
I think when most people say hyperinflation they just mean unusually high inflation. That did exist at least once in the US (around Volker's time), but it's probably safest to bet on the status quo.
ksec 7y ago
Yes. The possibility of Hyperinflation in US, EU, or even China, as much as I wanted it to happen is practically zero. Deflation isn't likely to happen either because money supply and actual value dont seems to be balanced well at the moment, not to mention money supply continues to increase. I am betting we will continue to see the current trend of ultra low growth, ( but still growth ) in the next few years before another stupid thing come along. That may be geopolitics and multiple smaller counties default triggering chain reaction.
IgniteTheSun 7y ago
I've seen the current national debt situation compared to the U.S. national debt situation following WW2 a number of times (e.g., national debt to GDP ratios), but there is a key difference between now and the past: past episodes of rapid national debt increases were limited to only a very few years and the government then moved to reduce debt. For example, most of the expenses related to WW2 occurred in under a decade and the national government immediately started taking measures to start paying it off. Instead of taking measures to reduce our national debt, the federal government currently is actually increasing it to the tune of a trillion dollars a year in an economy that's only approximately 20 trillion (GDP). People hear the word "deficit" and they think that means "national debt" when in fact the deficit is how much is being added to the national debt each year. Politicians never talk about reducing debt - only reducing the deficit. Do you think Congress or either party has the self discipline to eliminate the deficit entirely and to actually meaningfully reduce the actual debt? It will be a lot more painful if they do that during an inflationary crisis than today. (If you aren't familiar with it, look up the Misery Index and talk to someone who dealt with the inflation in the 1970s.) What's actually happening currently is that the Fed is monetizing a larger and larger part of the debt as (1) other nations are reaching the limit of how much they will put into US gov bond purchases and/or even starting to plan to scale back their purchases in future years, and (2) the deficit continues to grow. As Milton Friedman pointed out, inflation is always a monetary phenomenon. There are a number of deflationary forces at play as well, but these types of inflationary forces seem to be stronger - and hyperinflation doesn't seem as far fetched as it used to.

nradov 7y ago

If we ever reach the point that the US federal government can no longer service its debt then they will certainly choose deflation (default) rather than hyperinflation. Recent history in other countries shows that default can be managed with much less disruption. The most likely scenario is that they would force bondholders to exchange short term bonds for longer term bonds with artificially low coupon rates.

yxhuvud 7y ago
The only way that can happen would be for Congress to willfully choose not to pay. You literally can't run out of money as long as you lend in the same currency you control the supply of.
- nradov 7y ago
  Yes Congress would choose not to pay, just like Russia and other countries have done in that situation. It's the least bad option.
  - AstralStorm 7y ago
    Worldwide debt forgiveness? That'd be a first. Interesting to see. However, every country will try to eke out some advantage in this. War, economic and otherwise, is not out of question. But if taxpayers say no...
    - nradov 7y ago
      There would be no debt forgiveness involved. It would be a forced cram down imposed on bondholders against their will.
      - AstralStorm 7y ago
        Sure, but this would only work on private debt. Countries tend to shrug it off or get involved if said massive debt is related to their economy - e.g. China.

tmpz22 7y ago

I wonder if there is some seedy group of people in power actively driving us towards one of these outcomes.

seibelj 7y ago

One reason to have not only property, but more liquid assets such as gold and bitcoin. Both are globally recognized as valuable and will increase in value as governments inflate their currencies. Putting 5% of your wealth split between gold and bitcoin may save you if total financial disaster occurs.

ping_pong 7y ago
In a true deflationary environment, then only thing that is going to do well are US Treasuries. Gold and Bitcoin will plummet just like every other asset class because by definition, prices for assets will drop. Then people will try to sell things as quickly as possible, causing the prices to drop even faster.
- deleted 7y ago
  [deleted]

smt1 7y ago

Or, as the original article pointed out, hyperinflation nd/or deflation happens in emerging economies where there have been the largest surges in debt, but developed countries like the US need more muted intervention by central banks because the debt increase has been relatively muted.

deleted 7y ago

[deleted]

moralsupply 7y ago

Hyperinflation will be preceded by deflation, so the Fed can get the best of both worlds...