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Photo: Church Gate Station, by Sebastiaio Salgado

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We have a couple of models before us, with regard to the fate of the United States and the USDollar. First, there is the post-war experience of the United Kingdom, starting in roughly 1949. Second, there are the inflationary currency collapses of Latin America. More broadly, there are myriad other examples of post-Empire economic decline and other instances of price and systemic instability. Structurally the United States most resembles 20th C Latin American examples of countries that eventually devalued and repudiated their debt. However, as the US is the most recent of all the Empires then its reserve currency status is braking the fall as the rest of world remains bound to the dollar paradigm. The US has now reached the point where no realistic pathway of future economic growth exists to offset our liabilities, but that’s not merely our own problem, it’s everyone else’s too.

Of course, there’s a banality and tedium that often attends any discussion of the irredeemable USDollar, off balance sheet US spending, future entitlement obligations, and the growth of USTreasury supply. There have been warnings about these issues for at least three decades. What I believe has changed, however, is that the United States has lost the ability to leverage…(this article continues for subscribers through the membership gateway, on the right side of this page)

Let’s recall that deflation leads to reflationary policy, which triggers inflationary pressures that then crush the real economy–leading to more deflation. The policy response? More reflationary policy. And so on. This is the doom-trap the United States has fallen into since the year 2000. The problem is that we keep fiddle-diddling with monetary and fiscal policy without putting into place industrial, transport, and energy policy. Adam Smith’s invisible hand which magically organizes the economy and which transitions everything smoothly between different eras does not always work. Unless, of course, one believes the Crash and Rebirth dynamic is also natural, and therefore a good thing. And maybe it is.

A significant stock market rally is a prerequisite, in a collapsed economy, to a bout of hyperinflation. While I’m still not ready to sign on to any hyperinflation call just yet, let me say two things about the phenomenon. One, an economy can easily experience a hyperinflation that is less than the magnitude of the kind unleashed in Wiemar and Zimbabwe. For example, Israel experienced just such a hyperinflation in 1982-1985 and I happened to be there to witness it. So don’t let polemical debaters snooker you with their false dilemma arguments: there is a ton of inflation risk that exists well before one reaches the most extreme historical examples of hyperinflation. The deflationistas will try to bury the discussion of inflation risk by casting everyone as silly, Weimar hyperinflationists. Don’t let them do it. Secondly, the US economy has so much spare capacity, so much unemployment, and so much classical debt deflation that the route to hyperinflation here is rather singular: it would have to come through the currency, and the currency alone. But that should give no comfort.

The model portfolio is currently positioned quite well, for these eventualities. We are now on watch, for example, to track the way in which market fear expresses itself …(this article continues for subscribers through the membership gateway, on the right side of this page)

One wonders that 80.00 dollar oil was indeed the breaking point, to a US economy struggling with collapse, depression, and 17% unemployment. There appears to have been a confluence of events and indicators in October that suggest reflationary policy finally kicked energy prices high enough, to then trigger the next bout of deflation. The question remains, however: how will the US currency behave in each successive round of deflation, as we slide down the descending wedge of the burst credit bubble?

In last week’s MacroTwits show and also in last week’s Macro Note, I allowed myself a rare bit of certitude: I stated unequivocally that US residential housing…(this article continues for subscribers through the membership gateway, on the right side of this page)

The reflationary blast-off continues but note that the model portfolio …(this article continues for subscribers through the membership gateway, on the right side of this page.)

My subscribers know my view on the real economy, especially here in the States: –  …(this article continues for subscribers through the membership gateway, on the right side of this page.)