Crash, Depression, Hyperinflation – the Triple Crown of Financial Catastrophes

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What a great time to be an economist!

Yesterday was another dull day in the markets. The Dow was steady. Oil rose a buck. Gold went up $3.

But there’s nothing dull about the economic news. Already, we’ve been able to see things we never thought we’d see. It is as if our strange neighbors had invited friends, and even some animals, over for a night of fun – and left their curtains open.

So far, we’ve seen a stock market crash and what looks like the beginning of another depression, already marked by the biggest bailouts and nationalizations in history. We’re getting an eyeful! And with a little luck we’ll probably see a bout of hyperinflation too. Crash, Depression, Hyperinflation – this is the Triple Crown of Financial Catastrophes!

It is remarkable enough that we have been able to witness a genuine market crash. The crash of ’87 barely counts. It sent prices down as much as a third all around the world. But it was a very short-lived affair. Bread put in the oven at the beginning of it was still doughy when it was over. Then, it kept rising for the next 20 years.

The last real crash in America occurred 80 years ago. We never thought we have the privilege of seeing another one. Especially since nearly three generations of economists and financial authorities have been working to prevent them. They set up their safety nets and perfected their formulae… Fed monetary policy was thought to be such a finely tooled instrument that it was widely believed that the feds had mastered the business cycle – thereby eliminating the need for crashes or recessions. When the economy heated up, the feds turned on the air conditioning – higher rates, stricter credit standards, and even higher taxes. When it cooled down, the switches were thrown in the opposite direction and on came the heat. The economy was supposed to maintain a constant temperature all year round.

With such perfect climate control systems in place, many thought the cold shivers and hot sweats were over. But something seems to have gone wrong….

And now we’re enjoying the show. From one spectacle to the next…you can’t say it isn’t entertaining. But what might keep us from realizing our goal – and seeing all three major catastrophes that give economists the willies?

Uh-oh…what’s this?

“US banks to repay $68 billion to Treasury,” says the lead headline in today’s Financial Times. “Move marks turning point in economic crisis.”

The banks are now feeling healthy enough to give the feds back their money. All is well, we guess.

And what’s this…?

“OECD says statistics point to recovery,” begins an item in the Financial Times. The organization says most advanced economies are indeed past the worst part of the downturn. The “possible trough” was reached in April, it says.

OECD is looking at the same data as everyone else. They say it points to growth and prosperity. We wonder; how could that be? What about all those investments that still haven’t been written off…written down…and restructured? What about all that debt that is still carried on tired shoulders? What about all those homeowners still yearning to sell – as soon as they can catch a break? What about all that debt that the feds are adding to the system? What about the credit contraction? What about the de-leveraging? What about all those balance sheets – household and corporate – that need to be cleaned up? What about those falling corporate earnings? What about…what about…

Richard Russell tells us that the Transport Index has still not confirmed a new bull market – well, that’s a good sign – but that the usually reliable Coppock Index is signaling an end to the recession and rising stock prices ahead.

Oh my…what if we’re dead wrong? What if something is going on that we don’t understand at all? What if there is no depression…no hyperinflation…no Triple Crown of Catastrophes that we were yearning to see?

“There’s more under heaven and earth than is contained in your philosophy,” wrote Shakespeare. No matter you think, things are always more complex than you imagine…with interpretations very different from those you impose.

But what really could go wrong on the road to the Triple Crown? Will we go to our graves without ever having seen a real depression or a real hyperinflation?

What if we are wrong?

For example, we believe stocks are getting ready for another big fall. As we wrote yesterday, the smart money is short the stock market.

“If you think that, how come you’re not 100% short the stock market?” asked a friend.

In fact, we’ve still got about a quarter of our family wealth in stocks. Why?

Well, the simple answer is: we may be opinionated, but we’re not crazy. It’s one thing to have an idea about what will happen. It’s another thing to stake your whole financial future on it. Also, we treat our family money differently from our own, personal money.

Why do we own stocks, even though we think the stock market will probably go down?

1) We know someone who is at least as smart as we are who believes that buying stocks – at bargain prices – is the safest, surest way to wealth over the long term. He and his team spend all day, every day looking for extremely undervalued companies. He operates a private, family office…not available to the public…and only buys when they’re priced so cheap that even if they had to be broken up and sold off in parts the shareholders would still come out ahead. We figure our children’s money is at least as safe with him as it is with us.

2) While we expect a downturn in stocks, we’re not sure how this downturn will be expressed. A big increase in inflation could send stocks’ nominal prices up.

As we explained yesterday, you can deleverage in one of two ways…the old-fashioned honest way…by repaying your debts. Or, you can inflate your debts away. If the feds succeed in causing substantially higher rates of inflation, stocks could go up as investors buy them in order to escape inflation.

Of course, the best defense against inflation is gold. But gold doesn’t pay dividends. And gold has no earnings. And gold doesn’t send you quarterly reports that you can use to light a fire.

However, our intrepid correspondent, Byron King, has recently released a report on how to turn a tidy profit with gold – and all you have to do is take one simple action this month.

We think there will be no recovery…that the feds WON’T succeed in causing inflation soon…and that stock prices will fall. Still…we hedge our bets in some very cheap stocks…just in case.

While the private sector deflates and deleverages…the public sector is building the biggest debt bomb the world has ever seen. Here are the numbers we promised yesterday:

US private debt is at a record high, about $44 trillion.

Compared to that, the federal government’s $11 trillion of official national debt doesn’t seem so bad.

And, the states have about $2 trillion more – which, in round numbers, doesn’t seem like a cause for worry.

But last week, Gov. Schwarzenegger said California’s ‘day of reckoning’ had come. He’s looking at a $24 billion hole in the Golden State’s finances. And at least he’s proposing to close the gap honestly – by cutting back on services and raising taxes.

What else can he do?

The federal government has options…and a little “technology called a printing press,” as Ben Bernanke famously put it. But California can’t counterfeit the money to pay its expenses; instead, it has to borrow it from willing lenders or steal it from unwilling taxpayers…there’s no other way.

The feds are convinced that they can spend as much as they want. This week alone, for example, they’re selling $65 billion in Treasury bonds. And this year, a total of about $2 trillion are to be auctioned off. Who’s going to buy these things? Beats us.

And consider this: in addition to the fed’s ‘official’ debt, there’s some $100 trillion more of unfunded liabilities, commitments and obligations. Those are mostly things such as Social Security and health care commitments that the government has sworn to honor. If all those “debts” are put together…well, it comes to one helluva number – about $157 trillion of debt in America, or more than 10 times total annual GDP.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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