I am getting increasingly worried about the amount of warning signals that are flashing red for hyperinflation- I believe the process has already begun, as I will lay out in this paper. The first stages of hyperinflation begin slowly, and as this is an exponential process, most people will not grasp the true extent of it until it is too late. I know I’m going to gloss over a lot of stuff going over this, sorry about this but I need to fit it all into four posts without giving everyone a 400 page treatise on macro-economics to read. Counter-DDs and opinions welcome. This is going to be a lot longer than a normal DD, but I promise the pay-off is worth it, knowing the history is key to understanding where we are today.

SERIES (Parts 1-4) TL/DR: We are at the end of a MASSIVE debt supercycle. This 80-100 year pattern always ends in one of two scenarios- default/restructuring (deflation a la Great Depression) or inflation (hyperinflation in severe cases (a la Weimar Republic). The United States has been abusing it’s privilege as the World Reserve Currency holder to enforce its political and economic hegemony onto the Third World, specifically by creating massive artificial demand for treasuries/US Dollars, allowing the US to borrow extraordinary amounts of money at extremely low rates for decades, creating a Sword of Damocles that hangs over the global financial system.

The massive debt loads have been transferred worldwide, and sovereigns are starting to call our bluff. Governments papered over the 2008 money crisis with debt, but never fixed the underlying issues, ensuring that the crisis would return, but with greater ferocity next time. Systemic hazard (from derivatives) within the US financial system has built up to the point that collapse is all but inevitable, and the Federal Reserve has demonstrated it will do whatever it takes to defend legacy financial (banks, broker/dealers, etc) and government solvency, even at the expense of everything else (The US Dollar).

I’ll break this down into four parts. ALL of this is interconnected, so please read these in order:

Updated Complete Table of Contents:

“Enter the Dragon”

The Inflation Dragon

PART 5.0 “The Monster & the Simulacrum”

“In the 1985 work “Simulacra and Simulation” French philosopher Jean Baudrillard recalls the Borges fable about the cartographers of a great Empire who drew a map of its territories so detailed it was as vast as the Empire itself.

According to Baudrillard as the actual Empire collapses the inhabitants begin to live their lives within the abstraction believing the map to be real (his work inspired the classic film "The Matrix" and the book is prominently displayed in one scene).

The map is accepted as truth and people ignorantly live within a mechanism of their own design and the reality of the Empire is forgotten. This fable is a fitting allegory for our modern financial markets.

Our fiscal well being is now prisoner to financial and monetary engineering of our own design. Central banking approach does not hide this fact with the goal of creating the optional illusion of economic prosperity through artificially higher asset prices to stimulate the real economy.

While it may be natural to conclude that the real economy is slave to the shadow banking system this is not a correct interpretation of the Baudrillard philosophy-

The higher concept is that our economy IS the shadow banking system… the Empire is gone and we are living ignorantly within the abstraction. The Fed must support the shadow banking oligarchy because without it, the abstraction would fail.” (Artemis Capital)

The Inflation Serpent

To most citizens living in the West, the concept of a collapsing fiat currency seems alien, unfathomable even. They regard it as an unfortunate event reserved only for those wretched souls unlucky enough to reside in third world countries or under brutal dictatorships.

Monetary mismanagement was seen to be a symptom only of the most corrupt countries like Venezuela- those where the elites gained control of the Treasury and printing press and used this lever to steal unimaginable wealth while impoverishing their constituents.

However, the annals of history spin a different tale- in fact, an eventual collapse of fiat currency is the norm, not the exception.

In a study of 775 fiat currencies created over the last 500 years, researchers found that approximately 599 have failed, leaving only 176 remaining in circulation. Approximately 20% of the 775 fiat currencies examined failed due to hyperinflation, 21% were destroyed in war, and 24% percent were reformed through centralized monetary policy. The remainder were either phased out, converted into another currency, or are still around today.

The average lifespan for a pure fiat currency is only 27 years- significantly shorter than a human life.

Double-digit inflation, once deemed an “impossible” event for the United States, is now within a stone’s throw. Powell, desperate to maintain credibility, has embarked on the most aggressive hiking schedule the Fed has ever undertaken. The cracks are starting to widen in the system.

One has to look no further than a simple graph of the M2 Money Supply, a measure that most economists agree best estimates the total money supply of the United States, to see a worrying trend:

M2 Money Supply

The trend is exponential. Through recessions, wars, presidential elections, cultural shifts, and even the Internet age- M2 keeps increasing non-linearly, with a positive second derivative- money supply development is accelerating.

This hyperbolic development is indicative of a key underlying feature of the fiat money system: virtually all money is loan. Under a fractional reserve banking system, most money that circulates is loaned into existence, and doesn't exist as real cash- in fact, around 97% of all “money” counted within the banking system is debt, in one form or another. (See Dollar Endgame Part 3)

Debt virtually always has a yield- that yield is called finance charge, and that finance charge demands payment. Thus, any fiat money banking system MUST grow money supply at a compounding finance charge rate, forever, in order to remain stable.

Debt defaulting is thus quite literally the destruction of money- which is why the deflation is widespread, and also why M2 Money Supply shrank by 30% during the Great Depression.

finance charge in Fractional Reserve Fiat Systems

This process repeats ad infinitum, perpetually compounding debt creation and thus money supply, in order to prevent systemic defaults. The system is BUILT for constant inflation.

In the last 50 years, only about 12 quarters have seen reductions in commercial lender loan. That’s less than 5% of the time. The other 95% has seen increases, per data from the St. Louis Fed.

Commercial lender loan

Even without accounting for debt crises, wars, and government defaults, money supply must therefore grow exponentially forever- solely in order to keep the wheels on the bus.

The question is where that money supply goes- and herein lies the key to hyperinflation.

In the aftermath of 2008, the Fed and Treasury worked together to purchase billions of dollars of troubled holdings, property loan backed securities, and Treasury securities- all in a bid to halt the vicious deleveraging cycle that had frozen loan markets and already sunk two large capital banks.

These programs were the most widespread and ambitious ever- and resulted in trillions of dollars of new money flowing into the financial system. Libertarian candidates and gold bugs such as Peter Schiff, who had rightly forecasted the Great money crisis, now began to call for hyperinflation.

The trillions of printed money, he claimed, would create massive inflation that the government would not be able to tame. U.S. debt would be downgraded and sold, and with the Fed coming to the rescue with trillions more of QE, extreme money supply increases would ensue. An exponential development curve in inflation was right around the corner.

Gold prices rallied hard, moving from $855 at the start of 2008 to a record high of $1,970 by the end of 2011. The end of the world was upon us, many decried. Occupy Wall Street came out in force.

However, to his great surprise, nothing happened. Inflation remained incredibly tame, and gold retreated from its euphoric highs. Armageddon was averted, or so it seemed.

The issue that was not understood well at the time was that there existed two economies- the financial and the real. The Fed had pumped trillions into the financial economy, and with a global macroeconomic downturn plus foreign central banks buying Treasuries via dollar recycling, all this new money wasn’t entering the real economy.

Financial vs Real Economy

Instead, it was trapped, circulating in the hands of money industry funds, equities traders, bond investors and hedge funds. The S&P 500, which had hit a record low in March of 2009, began a steady rally that would prove to be the strongest and most pronounced bull industry in history.

The Fed in the end did achieve extreme inflation- but only in holdings.

Without the Treasury incurring significant fiscal deficits this money did not flow out into the markets for goods and services but instead almost exclusively into equity and bond markets.

QE Stimulus of financial holdings

The great inflationary catastrophe touted by the libertarians and the gold bugs alike never came to pass- their doomsday predictions appeared frenetic, neurotic.

Instead of re-evaluating their arguments under this new framework, the neo-Keynesians, who held the key positions of power with Treasury, the Federal Reserve, and most American Universities (including my own) dismissed their ideas as economic drivel.

The Fed had succeeded in averting disaster- or so they claimed. Bernanke, in all his infinite wisdom, had unleashed the “Wealth Effect”- a crucial behavioral economic theory suggesting that people spend more as the value of their holdings rise.

An even more extreme school of thought emerged- the Modern Monetary Theorists%20is,Federal%20Reserve%20Bank%20of%20Richmond.)- who claimed that Central Banks had essentially discovered a ‘perpetual motion machine’- a tool for unlimited economic development as a result of zero bound finance charge rates and infinite QE.

The government could borrow money indefinitely, and traditional metrics like Debt/GDP no longer mattered. Since each respective government could print money in their own currency- they could never default.

The bill would never be paid.

Or so they thought.

The American Reckoning

This theory helped justify massive US government borrowing and spending- from Afghanistan, to the War on Drugs, to Entitlement Programs, the Treasury indulged in fiscal largesse never before seen in our nation’s history.

America's Finances

The debt continued to accumulate and compound. With rates pegged at the zero bound, the Treasury could justify rolling the debt continually as the finance charge costs were minimal.

Politicians now pushed for more and more deficit spending- if it's free to bailout the banks, or start a war- why not build more bridges? What about social programs? New Army bases? duty cuts for corporations? Subsidies for businesses?

There was no longer any “accepted” economic argument against this- and thus government spending grew and grew, and the deficits continued to expand year after year.

The Treasury would roll the debt by issuing new securities to pay off maturing ones- a approach reminiscent of Ponzi schemes.

This debt binge is accelerating- as spending increases, (and duty revenues are constant) the deficit grows, and this deficit is paid by more borrowing. This incurs more finance charge, and thus more spending to pay that finance charge, in a deadly feedback loop- what is called a debt spiral.

Gross Govt finance charge Payments

The shadow threat here that is rarely discussed is Unfunded obligations- these are payments the Federal government has promised to make, but has not yet set aside the money for. This includes Social Security, Medicaid, Medicare, Veteran’s benefits, and other funding that is non-discretionary, or in other words, basically non-optional.

Cato Institute estimates that these obligations sum up to $163 Trillion. Other estimates from the Mercatus Center put the figure at between $87T as the lower bound and $222T on the high end.

YES. That is TRILLION with a T.

A Dragon lurks in these shadows.

Unfunded obligations

What makes it worse is that these figures are from 2012- the problem is significantly worse now. The fact of the matter is, no one knows the exact figure- just that it is so large it defies comprehension.

These payments are what is called non-discretionary, or mandatory spending– each Federal agency is obligated to spend the money. They don’t have a choice.

Approximately 70% of all Federal Spending is mandatory.

And the amount of mandatory spending is increasing each year as the Boomers, the second largest generation in US history, retire. Approximately 10,000 of them retire each day- increasing the deficits by hundreds of billions a year.

Furthermore, the only way to cut these programs (via a bill introduced in the House and passed in the Senate) is basically political suicide. AARP and other senior groups are some of the most powerful and wealthy lobbying groups in the US.

If politicians don’t have the stomach to legalize marijuana- an issue that Pew research finds an overwhelming majority of Americans supporting– then why would they nuke their own careers via cutting funding to seniors right as inflation spikes?

Thus, although these obligations are not technically debt, they act as debt instruments in all other respects. The bill must be paid.

In the Fiscal Report for 2022 released by the White House, they estimated that in 2021 and 2022 the Federal deficits would be $3.669T and $1.837T respectively. This amounts to 16.7% and 7.8% of GDP (pg 42).

US Federal spending plan

Astonishingly, they project substantially decreasing deficits for the next decade. Meanwhile the U.S. is slowly grinding towards a severe recession (and then likely depression) as the Fed begins their tightening experiment into 132% Federal Debt to GDP.

Deficits have basically never gone down in a recession, only up- unemployment coverage, food stamp programs, government initiatives; all drive the Treasury to pump out more money into the economy in order to stimulate demand and dampen any deflation.

To add insult to injury, duty receipts collapse during recession- so the earnings side of the equation is negatively impacted as well. The spending plan will blow out.

The U.S. 1 yr Treasury Bond is already trading at 4.7%- if we have to refinance our current debt loads at that rate (which we WILL since they have to roll the debt over), the Treasury will be paying $1.46 Trillion in finance charge ALONE YEARLY on the debt.

That is equivalent to 40% of all Federal duty receipts in 2021!

In my post Dollar Endgame 4.2, I have tried to make the case that the United States is headed towards an “event horizon”- a point of no return, where the financial gravity of the supermassive debt is so crushing that nothing they do, short of Infinite QE, will allow us to escape.

The terrifying truth is that we are not headed towards this event horizon.

We’re already past it.

True finance charge Expense ABOVE duty Receipts

As brilliant macro analyst Luke Gromen pointed out in several interviews late last year, if you combine Gross finance charge Expense and Entitlements, on a base case, we are already at 110% of duty receipts.

True finance charge Expense is now more than total Federal earnings. The Federal Government is already bankrupt- the industry just doesn't know it yet.

Luke Gromen Interview Transcript (Oct 2021, Macrovoices)

The black hole of debt, financed by the Federal Reserve, has now trapped the largest spending institution in the world- the United States Treasury.

The unholy capture of the Money Printer and the Spender is catastrophic – the final key ingredient for monetary collapse.

This is How Money Dies.

The Underwater State

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(I had to split this post into two part due to reddit's limits, see the second half of the post HERE)

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Nothing on this Post constitutes capital advice, performance data or any recommendation that any security, investment mix of securities, capital product, transaction or capital approach is suitable for any specific person. From reading my Post I cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you, so any opinions or information contained on this Post are just that – an opinion or information. Please consult a financial professional if you seek advice.

*If you would like to learn more, check out my recommended reading list here. This is a dummy google account, so feel free to share with friends- none of my personal information is attached. You can also check out a Google docs version of my Endgame Series here.

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