Mish reports on musings from Thomas M. Hoenig, President, Federal Reserve Bank of Kansas City. As a reminder, there are 12 regional banks in the federal reserve system so you can roughly think of Hoenig as 1/12 the leadership of the fed. In other words, he is not just some average Joe. The fact that these guys are speaking up tells me that they are worried because they want it on the record that they are concerned. This is generally what the oligarchs do when they sense the serfs are about at their limit of abuse. They know a witch hunt always occurs after a major collapse and so they want to be able to point to the fact that they voiced concern early on.
While deflation is the more immediate concern, I thought that this quote from Hoenig was especially worth thinking about:
“Someone recently wrote that I evoked “hyperinflation” for effect. Many say it could never happen here in the U.S. To them I ask, “Would anyone have believed three years ago that the Federal Reserve would have $1¼ trillion in mortgage back securities on its books today?” Not likely. So I ask your indulgence in reminding all that the unthinkable becomes possible when the economy is under severe stress. ... “
I don’t think we are going to see a clearer warning about the possibility of future hyperinflation. The currency is already worthless because it is backed by nothing. In fact, it’s a bit insane that we still treat it as if it had any value given that we defaulted on gold convertibility in 1971. Crazy as this may sound, I view hyperinflation as a return to sanity. It would mean that people finally woke up and figured out the true value of the currency is zero.
Because of this, I don’t care how conservative your 401k investment allocation is, if we get hyperinflation you will lose most of the buying power of your account. Even if the dollar value of your money market fund goes up in locked step with the hyperinflation you will still lose big time because government will treat all hyperinflation gains as capital gains. Let’s say you have 200k today and let’s say it takes 200k to buy a house. That means your 401k is worth 1 house. Now let’s say that hyperinflation over the next 10 years moves housing prices up to $2,000,000. Let’s say that the investments you chose also inflated in locked step with housing prices so now the dollar value of your 401k is also $2,000,000. While it would seem that you have broken even, the government is going to claim that you made 1.8 million in cap gains. Assuming that tax rates don’t go up (yeah sure), you will only have 1.4 million of real after tax value in your 401k after government takes 1/3 of your cap gains in the form of taxes. So whereas you used to be able to buy a house with your 401k today, you could only buy ~70% of a house after the hyperinflation. And that is best case. If your investments do not keep step with they hyperinflation then they could lose far more real value than the example. The difference in the real buying power of your savings represents sneaky government theft of your wealth. 401ks are a trap and corporate matches and tax deferrals are the bait.
One more thing: someone has to pay for all the excesses and crony capitalism corruption of the past 40+ years. It all will be paid for by someone somehow. The lunch only seems to have been free but that’s because we have been charging it. Future Hyperinflation seems the most likely mechanism for doing this IMO.
