Until now, I have given equal credence to two possible scenarios:

1. We
   could have several years of inflation as we do now, and the
   powers-that-be would have a sudden rush of brains to the head, like
   Paul Volcker and Ronald Reagan did in 1980, and stop the “printing
   press,” ending inflation and the gold and silver bull market, for at
   least a few years;

or


2. It
   is too late to stop it. The political forces and the Unfunded
   Liabilities would prevent the powers-that-be from ending the
   money-printing process, and in fact, would grossly accelerate it. This
   would result in a hyper inflation (400 percent inflation or more), and
   the eventual total destruction of the dollar. Suddenly America would
   find its money totally useless. Store shelves would be empty, gas would
   go through the stratosphere, and Americans would suffer through the
   greatest threat since the Great Depression of the ’30s.

So what caused me to settle on number two?

I received John Williams’ recent newsletter “Shadow Government Statistics,” www.shadowstats.com
in which he describes his case for a hyper-inflationary depression. It
was most persuasive. It certainly persuaded me, and is consistent with
what I’ve said for years.

I spent
the ‘70s fending off the media label of “Prophet of Doom,” arguing that
I expected much less than doom. It turned out to be so.

With
my new book in circulation, I’ll face the same accusations, and this
time they are right. The financial world we know and love is facing
genuine doom. You could lose the value of all your assets in the stock
market. You could find yourself unable to buy essential commodities,
when you want them, and gold and silver will be valued, not in the tens
or hundreds of dollars per ounce, but in the thousands!

John Williams’ Shadow Government Statistics
newsletter is most unusual. John is a consulting economist with all of
the academic credentials. Most of his clients are bank officers and
high-ranking corporate officers. He has rearranged the government data
according to historical analysis.

For
example, the government says inflation is under four percent by the
simple expedient of eliminating energy and food from their
calculations. John says inflation is over 11 percent, including energy
and food.

His academic credentials
are way ahead of mine, but at least I know enough to understand his
work. It’s my job to try to reduce such things to terms my subscribers
can grasp.

Here are some brief paragraphs from this 25-page report.

“With
the creation of massive amounts of new fiat (not backed by gold)
dollars will come the eventual complete collapse of the value of the
U.S. dollar and related dollar-denominated paper assets.”

“…a
law professor at Harvard and The University of California, Berkeley,
who experienced the Weimar Republic hyperinflation, said, ‘It was
horrible. Horrible! Like lightning it struck. No one was prepared. You
cannot imagine the rapidity with which the whole thing happened. The
shelves in the grocery stores were empty. You could buy nothing with
your paper money.’”

“…the
still-unfolding banking solvency crisis has confirmed the Fed’s and the
U.S. government’s willingness to spend whatever money they have to
create in order to keep the financial system from imploding.”

“The
circumstance envisioned ahead is not one of double- or triple- digit
annual inflation, but more along the lines of seven- to 10-digit
inflation seen in other circumstances during the last century.”

“The
historical culprit generally has been the use of fiat currencies —
currencies with no asset backing such as gold — and the resulting
massive printing of currency that the issuing authority needed to
support its system, when it did not have the ability, otherwise, to
raise enough money for its perceived needs, through taxes or other
means.”

“The United States is no exception, already having obligated itself to liabilities well beyond its ability ever to pay off.”

“Hyperinflation: Extreme
inflation, minimally in excess of four-digit annual percent change,
where the involved currency becomes worthless. A fairly crude
definition of hyperinflation is a circumstance, where, due to extremely
rapid price increases, the largest pre-hyperinflation bank note ($100)
becomes worth more as functional toilet paper than as currency.”

“The current economic contraction is about halfway towards being classified as a ‘depression.’”

“Official CPI could be running in double-digits by year-end 2008.”

“The
U.S. economy has been in a recession since late-2006, entering the
second down-leg of a multiple-dip economic contraction, where the first
down-leg was the recession of 2001 that really began back in late-1999.
Annual CPI inflation currently is running around 11.6%, again, facing
further upside pressures.”

“The
evolving depression quickly will move to great-depression status, when
the hyperinflation hits. It will be extremely disruptive to the conduct
of normal commerce.”
“Ongoing M3 currently shows a record annual growth rate of 17.3%.”

“In
the near future, dollar selling should build towards an extreme, with
heavy foreign investment in the dollar fleeing the U.S. currency for
safety elsewhere. With the domestic financial markets and U.S.
Treasuries so heavily dependent on foreign capital for liquidity, the
Federal Reserve — now touted as the formal financial market stabilizer
— will be forced increasingly to monetize federal debt. That process
will build over time, given the federal government’s effective
bankruptcy.”

“Again, the
current circumstance will evolve into a hyperinflationary depression,
then a great depression. Although such is not likely much before 2010,
or after 2018, the financial end game for the current markets will tend
to come sooner rather than later and will break with surprising speed
when it hits.”

“2008 will favor an incumbent party loss, i.e. a victory for the Democrats.”

“What
promises hyperinflation this time is the lack of monetary discipline
formerly imposed on the system by the gold standard, and a Fed
dedicated to preventing a collapse in the money supply and the
implosion of the still, extremely over-leveraged domestic financial
system.”

“The limits to the
unlimited abuse of the debt standard are particularly evident in the
GAAP-based financial statements of the U.S. government, which show the
actual federal deficit at $4.0-plus trillion for 2007 alone, with total
federal obligations standing at $62.6 trillion. With no ability to honor these obligations, the government effectively is bankrupt.”

“Although
the U.S, government faces ultimate insolvency, it has the same way out
taken by most countries faced with bankruptcy. It can print whatever
money it needs to create, in order to meet its obligations. The effect
of such action is a runaway inflation — a hyperinflation — with a
resulting, full debasement of the U.S. dollar, the world’s reserve
currency.”

“Oil prices are near
historic highs, the dollar is near historic lows, and money growth is
at an all-time high. The near-term outlook for all three is for new
record levels and for extremely strong upside pressure on U.S.
inflation.… gold prices should continue setting new historic highs.”

“The difference is in accounting … for unfunded Social Security and Medicare liabilities.”

“Put into perspective, if the government were to raise
taxes so as to seize 100% of all wages, salaries and corporate profits,
it still would be showing an annual deficit using GAAP accounting on a
consistent basis. In like manner, given current revenues, if it stopped
spending every penny (including defense and homeland security) other
than Social Security and Medicare obligations, the government still
would show an annual deficit.”

“U.S.
federal obligations are so huge versus the national GDP that the
country’s finances look more like those of a banana republic than the
world’s premiere financial power and home to the world’s primary
reserve currency, the U.S. dollar.”

“The
effect of this structural change has been that most consumers have been
unable to sustain adequate income growth beyond the rate of inflation,
unable to maintain their standard of living. The only way personal
consumption can grow in such a circumstance is for the consumer to take
on new debt or liquidate savings. Both those factors are short-lived
and have reached untenable extremes.”

“From
the Fed’s standpoint, it can neither stimulate the economy nor contain
inflation. Lowering rates has done little to stimulate the
structurally-impaired economy, and raising rates may become necessary
in defense of the dollar.”

“By
the time hyperinflation kicks in, the economy already should be in
depression, and the hyperinflation quickly should pull the economy into
a great depression. Uncontained inflation is likely to bring normal
commercial activity to a halt.”

Hyperinflationary Great Depression

“In
the United States, the printing presses have not been revved up heavily
yet, but the commitments are in place, as seen in the annual GAAP-based
deficit running on average more than $4.0 trillion per year. That
amount is far beyond the ability of the government to tax or the
political willingness of the government to cut entitlement spending.
While the inevitable inflationary collapse, based solely on these
funding needs, could be pushed well into the next decade, actions
already taken likely have set the stage for a much earlier crisis.”

“It
is this environment that leaves the U.S. dollar open to potentially
such a rapid and massive decline, and dumping of U.S. Treasuries, that
the Federal Reserve would be forced to monetize significant sums of
Treasury debt, triggering the early phases of a monetary inflation. In
this environment annual multi-trillion-dollar deficits rapidly would
feed into a vicious, self-feeding cycle of currency debasement and
hyperinflation.”

“Given the
extremely rapid debasement of the larger denomination notes, with
limited physical cash in the system, existing currency would disappear
quickly as a hyperinflation broke. From a practical standpoint,
however, currency would disappear, at least for a period of time in the
early period of a hyperinflation.”

“Barter System.
With standard currency and electronic payment systems non-functional,
commerce quickly would devolve into black markets for goods and
services and a barter system.”

“Gold
and silver both are likely to retain real value and would be
exchangeable for goods and services. Silver would help provide smaller
change for less costly transactions.”

“In
such a circumstance, gold and silver would be primary hedging tools
that would retain real value and also be portable in the event of
possible civil turmoil. Also, at some point, the failure of the world’s
primary reserve currency will lead to the structuring of a new global
currency system. I would not be surprised to find gold as part of the
new system, in an effort to sell the system to the public.”

“I still look for U.S. stocks to take an ultimate 90% hit, peak-to-trough, net of inflation, during this period.”

Ruff Times subscribers who accept John’s scenario have no downside! At
the worst, if Scenario number one occurs, they will make tons of money
in gold and silver, then we will eventually put out a sell order and
the world will return to relatively normal. If I and John Williams are
right, it will literally save your current lifestyle, and perhaps even
your lives.

By Howard Ruff
The Ruff Times