Philip Haslam: When Money Destroys Nations

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The global debt glut, plus the related money printing efforts by the world's central banks to try to stimulate further credit growth at all costs, leads us to conclude that a major currency crisis -- actually, multiple major currency crises -- are practically inevitable at this point.

To understand better the anatomy of a currency collapse, we talk this week with Philip Haslam, author of the book When Money Destroys Nations. Haslam is an authority on monetary history, and more recently, has spent much time in Zimbabwe collecting dozens of accounts of the experiences real people had as the currency there failed. 

This week, he and Chris discuss the process by which a hyperinflationary currency collapse occurs:

In South Africa, there's a river called Suicide Gorge where you can jump off from the top of a series of waterfalls. You jump off each waterfall, and you can then go down to the next. But the problem is, once you jump off each waterfall, you can’t get back up again. So we used this analogy to describe the process of hyperinflation.

Typically, as a government prints money, you get levels of inflation. But that’s inflation based on historic money printing. Every year, when you get your salary increase, you base it on historic processes. You take the latest consumer price index and then build it into your wage increases. If you're a business, you'll build it into rent increases and price increases of your products. But it's all based on historic inflation.

But then the time comes when a cultural shift occurs and people begin to say "Hang on a second, my salary increase was based on historic inflation, but I'm beginning to lose purchasing power -- I'm getting poorer and poorer. Stop giving me increases based on last year, and give me increases based on next year." So the inflation becomes based on a future money printing, rather than historic money printing. That's what we call our first 'gorge moment'.

That leads very quickly then into our second gorge moment, which is where the rate of price increases actually outstrips the amount of money in the economy and you get money shortages. In 2003, the economy in Zimbabwe experiences fierce money shortages. You had massive queues at the banks, real shortages, everyone trying to take their money out of the banking system. It became a real problem as people began to distrust the banks more and more. They actually wanted to hold their money directly, concerned that the banks actually did not have it.

Gorge moment three is when that pressure begins to work its way into the real economy and margins begin to decrease to the point where stores begin to close. That is a real cultural shift. Before, stores were open; goods were expensive but you could still get food and you could still get goods and services. But at gorge moment three, the formal supply sector shuts down.

Gorge moment four is when the banking system begin to stop lending. If you are lending money to someone and, a day later, that money you lent has lost value, you no longer want to make loans. You're going to use that money to go speculating and buy things that will hold value. So gorge moment four is very close to gorge moment three. Stores close and credit dries up. People stop lending.

Following this stage is gorge moment five: a curious consumption hysteria develops that we call 'scorched money'. It's when people try to take their money and get rid of it as fast as they can because if you hold it instead, it's going to lose value by the next day and you can buy less and less with it as time goes on. People will do anything to get rid of their money and find anything that will hold some value of some sort. It’s a crazy, consumption hysteria where everyone’s buying everything. There is huge amount of demand, but in reality, production has stopped. So you have this entire consumption of the economy where all goods and services get consumed.

Finally comes the sixth gorge moment which is the death of the currency and the final collapse of the money-based system.

Click the play button below to listen to Chris' interview with Philip Haslam (52m:19s)

This is a companion discussion topic for the original entry at https://peakprosperity.com/philip-haslam-when-money-destroys-nations/

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Excellent podcast!  The book is on my 'immediate buy' list.  
I've recently found a local organization that's managing a 'time bank' as a form of barter for folks who are either forced out of the monetary economy or who want to participate in community building.   It's an interesting concept but when the chips are down and you need to put food on the table, such as in Zimbabwe, could the time bank get you what you need or is that secondary to real barter?

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I miss the smell of the place. Memories invoke smells, and vice versa.
Investors did suffer. Pensions were wiped out.

My Dad died on a stretcher on the floor, surrounded by other dying men. There was  no room between them.I am grateful to the nurses for doing the best they could with the little they had.

This is economics with it's boots on. You have to look at the main street of the town where you live and get a feel for where you are in the picture. It is a Right Brain thing.

Of course there will be spacial variation, geographical variation. I down play the role of the nation state, and up play the nature of your local economy and culture. The Zimbabweans coveted petrol and Russians vodka. What can your culture not live without? Develop a supply chain of contacts .

 

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I have found this Australian debt clock.
 http://www.australiandebtclock.com.au/

Dividing total private debt by head of population I get a figure of $999 184 per person.

$1 million/per person average?  "Surely you jest Mr Holmes?"

Edit: Silly me, I left a digit out of the denominator.  Only $99,915 .  Round that out to $ 100 000, average. Not too bad, a far as bad things go.

 

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I really enjoyed the six waypoints of hyperinflation.
From my understanding, hyperinflation starts from the inability of the government to fund itself via debt, and the unwillingness of the government to default on that debt.

So far, the US and Europe (most of it anyway) are able to fund themselves via debt.  In fact, the interest rates are absurdly low.  Money printing is just an attempt to spur lending, not a replacement for a lost funding source.

Once that changes, it would seem to be the key danger sign.  The start to hyperinflation.

 

 

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I've been saying for some time that hyperinflation is not a monetary condition but a psychological, or more specifically, a sociological condition. The time will come when "the people" say,  "Hang on a second, my salary increase was based on historic inflation, but I'm beginning to lose purchasing power -- I'm getting poorer and poorer. Stop giving me increases based on last year, and give me increases based on next year."
 
No one can predict when exactly this point in time will come. Frankly, in the US I'm surprised it hasn't happened already. Never underestimate the stupidity of the average American. Until this point happens, though,  you have inflation, high inflation, or you can call it super inflation. It is only when the collective masses wake up and realize that they're losing money and simultaneously losing faith in their currency that hyperinflation begins. As long as the masses remain ignorant and keep going about their day to day activities as if they expect tomorrow to be just like yesterday, then things essentially will remain that way, no matter how much inflation we get.
 
But eventually, they WILL wake up. People eventually get smart when it comes to their money. Everyday I wake up and feel like it's Sept. 10, 2011. On that day, everything was normal. No one could predict what would happen the next time they woke up and what they would wake up to or how their world was going to change the very next day. Sept. 10 seemed like a normal day. That's what today feels like for me and every day I wake up. This time, I know another life changing day is coming right around the corner and what it is going to mean. One of these days we're all going to wake up and realize that our world and our way of life has changed forever. 
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About that first hyperinflation waypoint: wage inflation.
We're not seeing any real dramatic wage inflation in the US.  Looks like 2.08% annual average hourly earnings increase (for private sector workers) right now.  And its not accelerating.

Here's a chart of "wages per sector".   Its a bit of a jumbled mess…but it does sort of center around 2%.

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As many already know Catherine Austin Fitts is a former White House insider and investment banker who sees an organized process afoot to shift wealth from the working (and unemployed!) masses into the control of small number of oligarchs who run everything for their own power and profit.  The Fed serves this overall goal while pretending to serve the greater society.
She offers the following translation of the recent Fed meeting.

What the Fed is Really Saying: English Translation 

“Information received since the Federal Open Market Committee meeting in January suggests that economic growth has moderated somewhat.”

The global economy is slowing. The domestic economy is not doing as well as the Fed had expected
"Labor market conditions have improved further, with strong job gains and a lower unemployment rate."
U.S. employment has increased. Many people have temp positions, minimum wage services jobs, or they have dropped out of the job market entirely. The goal is a strong corporate economy without growth in wages
“A range of labor market indicators suggests that underutilization of labor resources continues to diminish.”
The Fed seeks higher levels of employment without labor inflation. All productivity increases in recent decades have accrued to investors; not labor. Fed policies will help this to continue
“Household spending is rising moderately;”
Higher food prices and mandated health insurance mean that we spend more on necessities.
“Business fixed investment is advancing…”
Banks and business can borrow at 0.1-4% and access equity markets. Consequently, they are reinvesting in plant and equipment, including the planet and equipment that will help them automate and reduce employment.

 

Small businesses, students and taxpayers must pay many multiples more; small businesses are not allowed to access or create equity and currency markets.

This engineered divergence in cost of capital between insiders and outsiders is centralizing power and wealth

“The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced.”
We want to grow the economy with cheap labor! We want full employment with low wages!
CAF calls this whole process the "slow burn."

 

 

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The difference between the situation in Zimbabwe and the developed world is that the printed money in Zimbabwe was handed out to  the "War veterans" . It was released onto the the ground floor, whereas in the West it has been released to the Big end of town.
Any real manufacturing will become automated with this extra cash, as CAF says.

I am not certain of the role of humans in the future. 

However nothing moves without energy,  hence the importance of the Cold Fusion experiments. If we get their bulk energy above three-to-one now being produced then it is onward and upward.

But not for you, unfortunately. We have other plans for you.

Once we have moved outside this thin envelope of gas, then we will be able to start to expand our numbers again. I should imagine that we will be fairly selective about who get an invitation. 

Everything is predicated on improving that 3 to 1 ratio. Unless someone has other salient information that that I am unaware of?

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Didn't Rossi claim yields as high as 10 :1 based on increasing the hydrogen pressure in the reactor cell? I'm pretty sure I read that somewhere a year or so ago.  I don't think CERN tested the cells at high pressure though.
Can someone who has been following LENR development closely jump in here.  Even 3:1 doesn't seem too bad to me.  Do the economics not make sense at that yield?

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Rossi is playing his cards close to his chest. Perhaps he has, perhaps not.  We will know when he has a marketable product.
The open experiments that are an attempt to replicate Rossi's by Parkamov et al yields 3 to 1.  Thermodynamic principles apparently imply that 3 to1 is a lower threshold for the practical production of energy.

More here.              http://coldfusionnow.org/a-new-kind-of-nuclear-reactor/

Searchable news here.              http://www.lenr-forum.com/forum/index.php/SearchResult/26135/

Our own thread here:      https://peakprosperity.com/forum/cold-fusion/51623

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[quote=davefairtex]
From my understanding, hyperinflation starts from the inability of the government to fund itself via debt, and the unwillingness of the government to default on that debt.

So far, the US and Europe (most of it anyway) are able to fund themselves via debt.  In fact, the interest rates are absurdly low.  Money printing is just an attempt to spur lending, not a replacement for a lost funding source.

Once that changes, it would seem to be the key danger sign.  The start to hyperinflation. [/quote]

This is perhaps the most succinct and accessible description of the hyperinflation phenomenon (and why it hasn't happened yet) that I have heard. Its not simply the printing, but the reasons and contexts for printing. What a great hanger on which to put all the other details.

The two-fold question then follows: 1) Who is counterparty to US/EU debt and what will cause their demand to wane? and 2) Can the six waypoints be arrived upon out of the order Mr. Haslam suggests? For example, can institutional lending dry up before wages switch their gaze from past to future? What effect would that have?

Do you Dave, or anyone else have any more thoughts on this point? It seems to me like a weird circularity where the Fed buys US debt and parks it on its balance sheet where it sits until…?

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Hi Philip-
   I really enjoyed your podcast with Chris, and your description of the phases of hyperinflation (using the waterfall analogy).  I've never heard it explained quite that way, and it really did help make it easier for me to grasp that it is a phased process, not just an on-off switch from "not hyperinflation" to "hyperinflation".  So I think that is a really useful concept.

   Because the material you and Chris covered was so interesting, I checked out your book on Amazon, and decided I'd like to buy a copy.  But the only form available for purchase there is the kindle version.  I guess I'm old-school; I still prefer paper books.:)  I did a search to see if I could find a hardcopy somewhere else, and it looks like a paperback version is available in South Africa on Kalahari.com.  But I'm not finding a seller of the paperback version in the US (or in USD).  Do you have plans on making a paperback version available in the US? 

   Thanks!

   

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Cgolias, such a great question:

From my understanding, almost everyone is on the counter party side. Retirement funds seeking safety in T-bonds, Bank balance sheets loaded up with bonds, Corporations holding their cash in T-bills. Isn't the sovereign debt market the biggest asset class by market cap?

I don't see how you could get a critical mass to defect from the biggest market available. Where would everyone go to?!

(I'm sure Dave would have some insightful ideas.)

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me too. as with Pinecarr
I'm a paper preferred reader.

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Whenever I've brought up the future of hyperinflation with those who argue it can't happen, they point out that it has always historically come along with major upsets like wars, etc. I then point out that when it is time for our own hyperinflation to happen, a war will be started. This then leads me to believe that many historical wars were started to shift blame away from monetary problems. It certainly seems possible and likely, considering how I've seen the last 20 years of our history be officially rewritten, completely wrong. Before the internet, who had any recourse to question the official version of history?

As to who is the counterparty to US debt, I think the big issue now is that most new money has no counterparty (except for the central bank issuing it); it is simply from the Fed printing it up out of nothing and assuming that the recipients will continue to accept it. Interestingly, I have been debating on Youtube with a status quo-defending Keynesian economist and he actually argues that this is a good thing because it means we are transitioning towards a debt-free monetary system!!! Of course, only the countries engaging in trade deficits are allowed to do this money for nothing scheme, and the only reason this monopoly money is still accepted by the trade surplus nations as payments for real goods is because… it is still accepted by the trade surplus nations as payments for real goods!!!

Once this ends and those nations decide to reject their unfair trade surplus situations, then the dollar will die. Since the US is a very strong adversary, they aren't willing to do this until they can be sure that the ramifications of rejecting the dollar won't be worse than continuing their trade surpluses!!

As to the comment above that the US dollar is global and that there is no other alternative, that explains why it has been able to continue on for so long. BUT, there is an alternative, and that is gold. There is currently a 2000 t/yr annual deficit and based on the amount of known gold out there, it won't last long. When that market explodes, then the dollar will die and everything will be reset. You can be sure that the elites have a plan for how this will go down so that they can maintain, and strengthen, their power. What they have failed to achieve, however, over the last 10 years, is pull the wool over everyone's eyes. I see more and more people opening up to the corruption inherent to the system, and we have the internet to thank for that. I don't think people will stand for major restrictions on the internet, after the reset happens, without revolt.

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This was a fascinating podcast. I loved the 6 waterfalls analogy and was interested in the 4 key areas to benefit from hyperinflation when it occurs in a single country. There were some quite enterprising ways discussed: for example petrol vouchers and the old petrol from across the border trick.
What I'm concerned about is a global collapse where the infrastructure next door is in no better condition than our own. Surplus food production on a local scale still seems like a pretty good target to aim for.

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I'm from the UK and I think in the US people forget how powerful the reserve currency status is. It has allowed your politicians to do things ours can't and that will be fine for a while longer. However if the BRICS are successful in establishing a new reserve option I think the game will be up. Watch the geo political manoeuvres over the next decades. I noticed that there have been reactions against us as our City guys announced links to a new development bank in China. Watch out World Bank! The game is on.
 

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People have commonly written the history of other countries and thus would have exercised a different perspective than a resident. Argentine dissidents moved to Uruguay to write the histories they wanted to write. People traveled and talked before the internet. Not all books could be burned. Not to say that they are objective, and your point that true history is unknowable is well-taken, but this argument reminds me of the inability of all of us to prove that we are awake and not dreaming. How far does it get us? Let's deal in what we know.

[quote=Mark_BC]

As to who is the counterparty to US debt, I think the big issue now is that most new money has no counterparty (except for the central bank issuing it); it is simply from the Fed printing it up out of nothing [/quote]

In a debt-system all money has a counterparty; one man's asset is another's liability (that gold has no counterparty is its value). In Crash Course chapter 8, a simplified version of money "printing" is outlined. Congress needs money so it requests it from the Treasury. The Treasury (not the Fed) issues government debt to raise funds. Banks and other sovereign nations buy it at auctions. In QE the Fed buys US debt from the banks with money that didn't exist prior. That's how US debt ends up on the Fed's balance sheet. On the other hand, the money ends up in the cash reserves of the big banks who either, like Philip said, keep it, invest it, or speculate. So to my question, I am asking what might cause demand for US debt from banks and sovereign nations to wane? Perhaps a preference for other safer havens (e.g. equities?) at a certain point? You simply say "once this ends" and of course it will, but I am interested what the particulars of the "bond market revolt" might be.

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It could be a while…but then it will happen all at once.

The basic issue is that all debts are held with the expectation of repayment.  Hidden within that is the multi-decade trend of simply issuing more and more debt.

And contained within that is the certain "knowledge" that the future will always be bigger than the past.  exponentially bigger.

That is, the basic assumptions and "knowledge" sets of the bond market are severely flawed, but not enough bond market participants know that yet.  When they do, look out!  

To make this simple, just look at this chart of the CBO's projections of US GDP growth.  Everything hinges on this being right.

But we might wonder how the US will be able to consume 100% of the world's current GDP in 2078 when oil is more than 50 years in the Peak Oil mirror?  

And if it turns out to be impossible for the US alone to consume the equivalent of 100% of the world's current economic output, then none of the assumptions of the bond market are currently correct and they will have to be amended rather vigorously to the downside.