John Williams of Shadow Stats says the gig is up:

“Atlhough the hyperinflation is going to be limited largely to the U.S., the economic downturn will affect things globally. I can’t tell you how things will go with a hyperinflationary Great Depression, which is where I see things going.

It’s the type of thing that will tend to lead to significant political change. People tend to vote their pocketbooks. You could have the rise of a third party. You could even have rioting in the streets. I’m not formally predicting that — anyone can run these different scenarios. For the individual, what you need to do, from an investment standpoint, look to preserve your wealth and assets. Don’t worry about the day-to-day fluctuations in the markets. What I’m talking about here is over the long haul…

[Gold is] going to be highly volatile, as will the dollar, over the near term, but longer term, physical gold I would look at as a primary hedge for preserving the purchasing power of your wealth and assets. Maybe some physical silver. Get some assets outside the U.S. dollar. I might even look to move some assets physically outside the United States. The key here is to look at a longer range survival package, battening down the hatches, and preserving your wealth and assets during a very difficult time. Once you’re through that, you’ll have some extraordinary investment opportunities, and I can’t tell you what it’s going to be like on the other side of this crisis.”

My Comment

In response to a reader, I added my comment (Dec 28):

This is the way I see it.

1. There is asset price deflation going on (house prices falling), since the prices reflected unrealistic future projections of housing growth driven by derivatives built on the mortgages.
Now that those projections have been called into question, the derivatives have been repriced as junk, and the underlying securities, the homes, have to return to a more appropriate price leve.

2. This means that all artifical economic activity associated with the housing bubble also has to decline. So there´s economic contraction. That has taken down the commodity markets with it (except for gold, which is up as a hedge against the dollar and as a speculative play right now)

3. I don´t pay too much attention to individual figures coming out on the economy that seem to indicate an improvement in things, because

a. Many of the numbers are inaccurate or deliberately misleading.
b. Economics is not a mathematical science.  It´s an art. Static numbers cannot tell you about the social mood, political factors and gestalt that  drive the market.

Now, market prices are bit more reflective of those things because they´re dynamic, so the prices of commodities and stocks can be  good indicators. But there again, which prices -the price of gold, the price of money in the US, the price of commercial borrowing?

c. There´s also market manipulation..very severe manipulation. So again, the market indicators have relevance but its upto individual analysis how to tease out the relationships.

4. That said, and despite the fact that we have a credit contraction going on (a decline in the monetary base) that doesn´t mean that at some point the money pumped into the banks won´t find ways of entering the economy….if it hasn´t already, in some disguised fashion. (I realize the word ´money´ is being used in different ways here, as it is through out the debate, which is the reason for so much confusion..but that´s a long story..)

5. It´s highly probable that as the slowdown shows its true face, governments everywhere are going to be simultaneously devaluing..leading to local inflation.

6. Searching for hard assets, funds are again going to drive prices of certain essentials upward..leading eventually to commodity prices soaring even while there is a general economic contraction

Thus you could have simultaneously a high level of inflation – perhaps not hyperinflation, I would guess around 15%’20% – as well as a depression