Thursday, March 3, 2011

Everything you wanted to know about Economics

 (But were sorry you asked.)

Just before Christmas, I did a "guest" piece here at Rural Revolution called "A Sermon." I got a lot of great feed-back on it. Most folks seemed to agree with my belief that we have already gone past the tipping point here in the U.S. (and by default, in the rest of the world too).

One of the comments on the piece was written by "Anonymous Patriot," one of our regular readers, frequent commentators, and part of the RR family. She asked me for some amplification on my thoughts on what's coming. I waited a while before addressing her questions, mainly so I could figure out just what I really thought about them.

Let's do the disclaimer thing first. One, I'm the last guy in the world to ask for advice or prognostication. Once, as a kid in the more "relevant" public educational system of the 70's, my whole class was given an ESP test. Lots of cards were held up by the teacher facing away from us and we had to guess what she was looking at; wavy lines, stars, circles, etc. This was a full blown test, three sets of cards, our answers marked on test cards. I don't place a lot of truck with such things, but I'll tell you one thing. I scored lowest on the test. Not just lowest, but statistically way below even just chance. Apparently I am blessed with a powerful anti-ESP.

But fortunately I don't need to use eldric mind powers or "The Force" to be able to read the writing on the wall. I spend a fair amount of my on-line reading at sites with bonafide economic experts. While I don't always get all the acronyms, I do okay on the graphs and pie charts. And I'm a full believer in simplicity. Finance and economics is really very easy to understand once you strip away the manure that all professionals add to justify larger salaries. I know all about this, I was once a geotechnical engineer and engineering geologist. We would never use a fifty cent word when a twenty dollar word would do.

So to start here are some simple economic truths:

1) You can not forever spend more than you are capable of generating.

2) Currency (paper money and conveyances such as stocks, bonds, notes, etc.) are only commonly shared fantasies. They only work so long as people believe they represent real value.

3) Ponzi schemes will always fail in the end. And it doesn't matter if they are being run by a con man or a government.

So now to AP's questions.

1) Do you have any specific ideas about what we can expect? For example, hyperinflation leading to riots or perhaps union strikes which lead to food and gasoline shortages.

2) Do you envision widespread violence or peaceful protests or neither? How do you think the majority of the people will react to a sustained shortage of gasoline, for example?

3) When do you think a definitive and eye-opening SHTF scenario will unfold? Has it already begun (and most people missed it)? Will it happen in 2011 or 2012 or later?

4) If the government were to collapse, what would you suggest to take its place? Would you return to the Constitution or scrap it and start anew?

Given that economics can put even those with tooth picks jammed under their eyelids to sleep, I'll answer only the hyperinflation question today. Trust me, it will be too much even at that.

But first I have to define a few terms in my own long-winded style.

Right now the big argument amongst the SHTF financial gurus is the deflation/inflation debate. Both sides have respected experts with lots of acronyms after their names, essentially calling the other side a bunch of blithering idiots. My acronym supply is considerably more modest than theirs, but I have one thing they currently don't have: a PhD in poverty. So I make my predictions not on the basis of REMIC's, LTV's, CPI's or GDP's. I use YWHM. (“You want how much??!!”)


Deflation essentially means that no one is spending any money. Consequently prices are forced down because it's better to sell something cheap and pay the bills rather than have it sit on the shelf. The big worry with deflation is that once you (and the million other you's) sell your product for less than you hoped to make, then you too will be reluctant to part with your diminished cash, forcing more deflation.


Inflation means the prices on things go up. The money you have doesn't go as far. It's harder to pay the bills, buy the food and purchase the gas you need to get to work. The real mechanism here isn't that things have gone up in value; it's that the value of your currency has gone down. How does that happen? Someone (legally this would have to be a government, otherwise it's a crime [irony alert]) decides that there just isn't enough money out there so they print and distribute a lot more money. But here's the important part: that money is not attached to a real or existing value. It's created just by turning the proverbial crank on the printing press. But why does a government do this? Oh I don't know....suppose it decides that it simply MUST spend more than it takes in.

Whew!! That was starting to get to the point where I could charge big bucks for it. So let's cut to kitchen counter economics. The eggheads who argue deflation-inflation don't seem to see a simple reality. In times of monetization , inflation is what you get for the things you have to have. Deflation occurs for those things you might want, but can do without.


Housing right now is deflationary. "But Don," you say, "Everyone needs housing." True. Except for one thing. Everyone HAS housing. With the exception of the relatively few truly "homeless," everyone on this snowy night is indoors, even those who've lost their homes to foreclosure and have had to move back in with Mom and Dad. Go out shopping and look at all the items for sale. Automobiles are selling cheaper right now. You can get a great deal on a room in Vegas. The latest whiz-bang electronics are going down in price. Why? Well if you might lose your job tomorrow you'll probably decide to hold off buying the latest big screen/computer/cell phone. But the folks who make or provide these things have to eat too. So down goes the price even at the expense of profit.

Now head off to the grocery store. But first fill your tank with fuel. Don't forget your doctor appointment to check that suspicious lump. Prices up? There's the inflation. You’ve got to eat. You’ve got to drive. You’ve got to take care of yourself. To be fair, Inflation hit those manufacturers of the big screen TV and the pet rocks too. But they are in a bind. They have to lower their price or you won't buy. You don't NEED what they’ve got.


Hyperinflation is a whole different category of fish. You'd think that hyperinflation is just inflation on steroids. And they do appear to operate on the same basic principles: too much money chasing too few things. But that isn't really the story on hyperinflation. Hyperinflation is actually a mental condition rather than a financial problem. Remember rule Number (2) above? Money is only a shared fantasy. So long as we all agree that a small piece of linen with the face of a dead president on it actually represents a value, then money works much better than hauling a side of beef around to trade for a new MP3 player. But if that fantasy is damaged or destroyed, then the natural inclination is to get rid of those miniscule engraved portraits as quickly as possible. This fantasy is hard to shake. After all, we've lived with it all of our lives. So how does this failure of shared belief occur? Well there can be a number of flash points. And none of them are a sure trigger for hyperinflation. Hyperinflation may happen as a result of wars, political or social upheavals, aggressive monetization (meaning too much money being created without any underlying value) or ...a sudden loss of confidence in government securities backed by nothing. (Any of these sound familiar?)

No matter what the flash point, what it means is a sudden and massive desire on the parts of financial institutions (and later the public) to get rid of money and buy essentials (i.e commodities: food, fuel, etc.)

An example?

Suppose that a few large banks suddenly get the silly notion that all of those U.S. treasury bonds they were forced to buy by the Fed in exchange for a bailout are actually not worth much. Maybe this occurs because nobody comes out to play at a treasury auction. So the banks begin to sell their stockpiled treasuries off...hard. The money they get will be shoveled into commodities because by that point there's nowhere else for it to go. The Federal Reserve is forced to buy those treasuries back to keep them from crashing. They will do that by creating even more money to pay for the treasuries. So let's see. We have massive buying of commodities (food, fuel, metals) creating rising prices because of demand. And lots of paper money going down in value rapidly in relationship to the hard assets. About this time, those of us who weren't already leery of cash (and that's most of us) are going to realize that we'd better get rid of our cash quickly for the same reasons. So...the minute you get your paycheck, it's off to the store or the gas station. The owners of those businesses need to move that cash fast as well because the commodities they sell are going up in cost as well. And so on. Hyperinflation quickly becomes self-perpetuating.

Whew! Sorry it took so long to get to this point. What was the question again?

Oh right. The answer is: Yes.

I anticipate hyperinflation. When? I don't know. Why? Because we are insanely continuing our currency devaluation policies. Hyperinflation is like a forest fire. And right now the economic woods are dry. The air is hot. The breeze is strong. All it wants is a spark. Will the unions riot? Sure they will. They are already doing so. All over the world. So will everyone else.

Fuel shortages - yes.

Food shortages – yes.

Next time I'll take on question number 2. One good thing though. Pretty sure it won't require any toothpicks.

- Don Lewis


  1. i truly believe that tshtf day has already come and the velocity of the fan slinging the doodoo is just speeding up a little more each week. there are alot of folks out there who just are not gonna see or accept what is happening until everything that makes their lives comfortable comes to a complete standstill....

  2. Typically inflation is also beneficial to the rich in so far as it increases their overall net worth due to inflated asset prices. It is not beneficial to the middle class and below however as salaries and pensions do not adjust fast enough.

    Deflation on the other hand is beneficial to the middle class and below and can sometimes be devastating to the large business and the rich.

    The lag we are getting right now, and counter indicators between the two, is because of the disconnect in money flow between the rich and the lower classes. The funny money needs to flow down to create real inflation and since it is staying at the top it is creating the stock market boom and the commodities inflation.

    Eventually enough will trickle down to set off the inflationary explosion. The trouble in MENA right now and rising oil prices, already part of the commodity inflation, will hurry this scenario along.

  3. Great post on a terrible topic! We have a federal government who refuses to rein in spending, the weak kneed GOP party lacks a backbone to stop the runaway train of spending that the democrats are driving. It is a recipe for disaster. We have so many people here in the country in a state of denial that it will never happen here. The money will never run out, it will just be worthless. The key to riding out this terrible storm is to prepare for all contingencies, always better to have it and not need it than need it and not have it! This economic tsunami is a world wide occurrence, already breaking out in Egypt, Greece, Libya, and many more nations. They are the opening local bands on this stage, we will be Led Zeppelin.

    Had Enuff

  4. Awesome post! Simple concepts of our awry financial system and spinning out of control economics are described with haughty wit.
    It's the first time I've been able to chuckle as a result of reading an article describing our present convoluted economic situation.
    And that's hard to do, smile that is, at this horrid conundrum we're living with and through.


  5. Whew!

    I anxiously await the next installment.

  6. Thanks for taking the time to post this. I am not an economics major and much of the "talk" confuses me, to be honest. :) But it doesn't take an economics major to get the fact that things are bad and gonna get worse. Knowing what it all means helps a bit...scary as it is. I'd rather have a little bit of an idea of how things truly are than be blindsided because I didn't "get it" early on.

  7. BTW, Don, don't you want to sign this post? I'm fairly new here so it took me awhile to realize who was the "guest blogger."

  8. Don, thank you for taking the time to post this meaningful reply to my question(s). You are doing all of the readers here a great service by explaining things in ways we can all absorb and use to our financial advantage and for our survival preparations.

    Your comment about money in the bank versus tangible assets is quite important. I try to get this point across to family and friends and am met with questioning looks and sympathetic pats on the hand, as if I'm totally bonkers. I may be bonkers, but not about this subject. We need to get our stuff together, and quickly.

    The train has already left the station.

    With much gratitude and fondness,
    Anonymous Patriot

  9. Husband of the BossMarch 4, 2011 at 9:00 AM

    Right on PioneerPreppy. If I have to disagree with any thing you said, it's the part where deflation hurts the rich. Not because you're wrong in the theoretical case but because, as we've seen with auto companies, financial institutions and "too big to fail" banks, the Govt. comes right in and bails them out with cash when things go bad. Then the executives award themselves big bonuses and immediately convert the cash to commodities.

    Maria: Sorry about that. Since I'm usually the only "guest blogger" here (mostly when Patrice is under the weather or too busy chasing cows to get to a post), I forget that not everyone knows it's me. On the other hand, it it turns out that folks say a particular piece is full of manure, it gives me a handy deniability.

  10. Excellent post Don! Pre-kids I spent my time getting edu-ma-cated and working in financial analysis. Love the bit about the anti-esp. I did well in my field because I had the ability to ferret out the "big picture" from the minutia, but my thinking process scattered in the process so it was hard to explain. Just think of it as scanning through a bunch of data and coming up for air with an "Aw Cr@p! We're in for it!"

    Hardest part has been convincing hubby that it's not delusional. He's always humored me, but when my first few "Aww..." conclusions came to reality, now he listens. I absolutely agree with your assessment of inflation/hyperinflation.

    We're living with the inflation now no matter what the offishul gov't reports say. They don't like to include food & fuel (the NEEDS) in their product basket. And when needs are included in the full basket, feds use the substitution principal - substituting ground beef for a T-bone when prices go up. If THAT doesn't help, then there's an adjustment factor where the gov't economist skew the basket by assuming that if food prices are going up and car prices are going down, you'll buy more cars and less food. Huh, that sounds a bit crazy to me.

    Oh, and the 8.9% unemployment number out today from the gov't bean counters? Don't even get me started on that fantasy....


  11. Apropos of nothing, I just noticed that Sam's Club now stocks Augason Farms (whoever that is) emergency supplies, which can be delivered. They have 55-gallon emergency water barrels with siphon hose for $68.88, and a 1-year food kit to supply 4 people with 1340 calories per day (not much) at a cost of $2942 delivered. I think it's interesting. Also this was a suggested search when I was searching for sugar and cooking oil, nothing too preppy so I don't know what tipped the search engine off that I'm interested in such things.

  12. Ditto A-Pat's thanks and gratitude. A lot of it still goes over my head, but you two keep me motivated to continue slogging along.

    BTW, I am homeschooling my 16yo daughter, and was wondering if there are any books you'd recommend on the subject of economics, or do you just teach your girls what you've learned from blog-reading, etc.? I did have someone suggest Whatever Happened To Penny Candy, so we have that at least.


  13. I think your comments are very much on point.

    One way to look at money is as a lien against future production/services. Production of what does not matter so long as people want it.

    The producing part of our economy is getting older. We will have more and more non-productive (retired) people as time goes on. It is also very possible that resource restraints (oil) will further limit production of some items (food, legos, etc).

    So regardless of how many dollars are attached to each item of production/service, we are going to have less of these things that we want.

    To the extent that we may come to want some items (food) more than other items (legos) it is possible to have deflation in some items (housing) while you have inflation in others (oil, food).

    To the extent that we inport people to balance the retirement ratio, but do not increase our overall producitivity to match the larger population, you may be smoothing out your immediate problem but at the price of future Malthusian-Population problems.

    It gets a little complicated. But real interest rates (interest-rate minus inflation-rate) tend to be very low in malthusian type economy. No growth to invest in. This means that you cannot invest your way to retirement; you have to save your way to retirement.

    For slightly different way to look at it:

  14. My, goodness...Thank you for taking the time for this post. It's hard to make a difficult subject easy without condescending. The whole concept of hyperinflation, as you've explained it, compares in my mind to a crowd of people that seems to move as one without explanation.

    (I remember once many years ago being in a huge crowd of people waiting to get into an arena for an event. I was at the front. The doors to the event were locked and every so often, the crowd would surge as one entity, towards the door, tightening the spaces between us each time. After a while I was pinned up against the door with no where to go. I started to panic, feeling that I would be crushed. The doors were finally opened when the impending disaster was acknowledged by event staff.

    (The surges seemed to happen on their own, without warning or provocation, and were completely uncontrollable. Each time, I was carried against my will in a wave of unstoppable humanity. I've never allowed myself to be in that situation again. I thought of this while I read your description of hyperinflation: Unpredictability and certainty all at once.)

    Just Me.

  15. Don you're spending too much time with the cattle and in the wood shop. There's nothing wrong with the economy that isn't just temporary and there's not gonna be some kind of SHTF meltdown.

    See, I know this because my parents-in-law have assured my husband and me that we're just silly. Their generous military and public sector retirement checks always arrive on time and their next annual cruise, this time to Hawaii because China was pretty strenuous, is scheduled to leave right on time. So there you have it. You can quit worryin'. I knew y'all would be glad to know this. Now go feed the cows.


    In using my parents-in-law as an example of the grasshopper of this story, I realize it may appear I'm being disrespectful. This is not my intent. I love and respect them very much. They both worked hard for what they have and I'm very happy for them. But they truly don't believe we're on the verge of anything...or at least he doesn't...she has privately expressed sincere relief to know we have a rescue plan to get them out here to the country and safety in a SHTF scenario. They live in the city, we struggle in the country. Anyway, I guess the point is they've lived through a lot and truly don't appear to believe anything can bring America to her knees. I do pray they're right, but I'll still stock up on whatever I can, all the same, thank you very much.

    God bless America. And thanks, Don, for the good stuff you've shared here. I look forward to the next round.

  16. The timing of this is almost eerie -- my wife and I were just discussing this subject after listening to This American Life's radio show from January 9th: The Invention of Money. So much of the virtual wealth has now been distributed to the neo-royalty that is the super-rich heads of Corporation.

    Rather than seeking balance, we have spent way too much time milking the economy for all it's worth. It seems to me the era of American Imperialism may have passed the tipping point.

    Thanks for the post!

  17. Birdy, there's a clever book called Ump's Fwat (sorry - don't know how to make italics or underlines in the comment box) that, by example of a caveman inventing a great baseball bat, illustrates some basic principles of economics. It's light, humorous, engaging — er, and written for nine-year-olds, I think, but as a young adult teacher I liked it a lot, and learned concepts I hadn't ever pondered. There's one used copy at amazon and I saw some at alibris. I'm looking up Jelly Bean Economics, trying to remember whether that would be appropriate, but even as I search I think that for the kids' sake we may change that to granola-chunk economics.

  18. Birdy, we really love the book called The Adventures of Jonathan Gullible: A Free Market Odyssey, the Commentary edition, by Ken Schoolland. AbeBooks has low-priced copies. Even if you don't get the commentary edition, the original is enlightening and entertaining. The stories that illustrate the economic concepts are clever, and the explanations are concise but thorough, making for a solid background for anyone just jumping in. Like me. Better late than never. Ump's Fwat was the last economics book I braved before finding this one a couple of years ago. I think it's perfect for a thinking 16yo, by the way.

  19. Has he had a chance to write the next installment yet?