6 Scary Charts On The Hyperinflationary Cliff

Includes: DBC, EFA, GLD, SLV, SPY
by: Plan B Economics

In a nutshell the 'fiscal cliff' debate is made of two high level arguments:

1. Automatic budget cuts that begin in 2013 will thrust the US economy into recession.

2. Budgets are out of control and will drive the economy towards an economic abyss.

Both arguments are unfortunately correct. Forget the fiscal cliff - the current budget quagmire is precisely what could eventually lead to a hyperinflationary cliff.

You see, hyperinflation is almost always a political problem. Decisions are made over a number of years (or decades) that benefit the immediate ruling class but put off tough choices to a future administration. As tough choices are delayed, the tradeoff becomes increasingly painful as society adapts to an unrealistic status quo. As the tradeoff becomes increasingly painful, the incentive to delay the day of reckoning grows stronger. Nobody wants to be known as the guy that brought the US economy to its knees...even if it was for its own good.

Talk about hyperinflation may sound like the ravings of an extremist. However, this is precisely why hyperinflations are so devastating. The masses (including main stream media) simply aren't built to foresee extreme events (aka black swans) and can't adequately prepare. Of course, when such an extreme event does occur the main stream media claims that it came out of nowhere and that nobody could foresee it. In reality, the pressure that leads to black swan events - such as hyperinflations - often builds over years and years.

The six charts below illustrate why the hyperinflationary pressure in America is growing. This is not necessarily a forecast for hyperinflation - this is simply a demonstration that some of the precursors to a hyperinflationary cliff are building.

The first chart below shows how the growth in US nominal GDP has clearly been driven by growth in US government debt. In recent years the amount of debt growth needed to sustain fairly moderate nominal GDP growth has risen. In other words, the effectiveness of debt growth is diminishing and in the future it may take even faster debt growth to maintain moderate levels of economic activity.

(Note: all graphs created by Plan B Economics using data from St. Louis Fed and USDA.)

This next chart shows the results of the above relationship between US government debt growth and US GDP growth. Debt has grown very rapidly over the past several years and is now 100%+ of GDP. Again, this shows that the US economy is becoming increasingly dependent on borrowed money to keep moving forward.

When governments borrow money it means they are spending more than they take in. It is often this overspending that keeps the economy afloat. However, the extra money needs to come from somewhere. As you can see in the chart below, for every dollar spent by the US government about $0.30 must be borrowed. While this is a slight improvement from the depths of the Great Recession the dependence on the generosity of creditors is still scary. If creditors ever stopped lending to the US, greater money printing would have to take their place.

The next chart summarizes why the American government is forced to spend more than it takes in. If it didn't there would be riots in the streets. The US government is providing the basic needs for a large proportion of its population. 15% of the US population is on food stamps!

While the food stamp program isn't the only evidence of social dependency, it is probably the most acute. Take the food away and we'll see riots in the street within 3 days. Perhaps even revolution within a couple weeks. The US government simply cannot take away some of these benefits.

As it turns out, almost 2/3rds of government spending is going to social benefits to persons (green line in chart below). So, not only is the government unable to withdraw food stamp support, it is unable to withdraw from hundreds of support programs that make up the majority of government spending. Again, withdraw the support and at best you don't get re-elected...at worst, citizens overthrow the government.

It's not just the special interest groups that will suffer if spending on social programs is cut. The entire US economy will suffer. The chart below shows that social benefit spending makes up about 15% of US GDP. The entire economy is being propped up by spending on social programs. Take away the support and the economy tanks.

The Link to Hyperinflation

At this point, it almost doesn't matter what the 'right' thing to do is. There is no right or wrong anymore. The time for the altruistic decisions was years ago before the US chose a path of dependence.

Today, it is almost impossible to cut spending because the population and economy is dependent on it. Worse, as the effects of spending shrink more spending is needed to maintain the status quo.

Today the US government can borrow at ultra low rates - tomorrow, creditors may withdraw and interest rates may skyrocket. If that were to happen the government could choose to print (more) money to pay for social lubrication and keep the population sanguine for a few more months. It is this sort of trapping that can eventually lead to a hyperinflationary cliff.

While many investors have turned to gold (NYSEARCA:GLD), silver (NYSEARCA:SLV) and commodities (NYSEARCA:DBC) as a potential hedge against currency collapse, there are other ways to potentially protect. Nobody really knows what will work until after the fact, but some investors believe that US stocks (NYSEARCA:SPY) - particularly ones with pricing power - could fare well. Other US investors might want to consider investing in non-US assets such as the iShares MSCI EAFE Index Fund (NYSEARCA:EFA).

Personally, I'll stick with gold as my insurance policy against currency collapse.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Data Source: St Louis Fed, USDA. This is not advice. While the author makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.