The Big Bank Problem No One Talks About

Consumer credit in the USA is falling, falling, falling. Whatever numbers you pick, there's no massaging the data to make it look innocent. This all is well known, as is the concern that lack of consumer borrowing will be a drag on the consumer portion of the economy.

Something else about this situation seems to be slipping through the cracks of public awareness, however. Once upon a time, maybe twenty years ago, when lenders cared a lot more about credit quality, it was well known that subprime could never work as a profitable lending model. Too many companies had come and gone promising to be profitable lending to high-risk customers. Their seeming profitability was a trick of accounting legerdemain: a growing book makes loss ratios look lower than they actually are since ageing loans are more likely to sour than fresh ones.

In the huge, recent credit bubble when almost everyone (and sometimes their pets) were receiving credit offers, loan books were growing smartly and loss ratios were low. Now that credit is contracting, people who can pay back their loans tend to be doing so. And those who can't (but are not yet to the point of defaulting) are just trying to keep them rolling over. The net result is that the overall quality of bank's loan books is deteriorating rapidly.

Banks are becoming less solvent over time, not more so, in spite of their efforts to improve their condition. Banks efforts to reign in credit by jacking up interest rates and cutting credit lines will actually backfire because better borrowers will simply pay off their loans. Borrowers who accept the barrage of insults are in such poor condition financially they can only subject themselves to usury.

In conclusion, the end state of this process will likely be the Federal Government (having had to bail out the banks and then the FDIC over and over) holding consumer loan portfolios that have little to no value. Cost to taxpayer: something like two trillion dollars, and further debauchment of the Dollar. Banks will be kept in business to keep up appearances, and may even book a nominal profit.

How Likely is Hyperinflation in the USA?

Hyperinflation is certain in Zimbabwe, but can such a thing happen in the USA? Typically, hyperinflation occurs quickly when economies are under extreme stress such as during wartime. The USA had that experience during its Revolution, and many European countries did so during and after the World Wars, and after the collapse of the Soviet Union and its satellites.

Are present economic conditions suitable for the formation of hyperinflation in the USA? The use of paper money creates chronic inflation, but what speeds up inflation to the point where doublings of prices occur not over decades, but weeks?

Typically two factors occur to induce hyperinflation. The first is when governments spend money well beyond their ability to collect taxes. This can occur when spending increases significantly (such as for a war). The second is when tax receipts fall significantly such as during a depression, and the government is unable to borrow money, and yet the government maintains, or even increases, spending.

Clearly, the first factor may come into play since the USA is presently engaged in expensive military campaigns abroad, and is undertaking a nationalisiation of the financial system. More subtly, the federal government has liabilities of over $60,000,000,000,000 (or $200,000 per person) - and growing. There is no way to tax the population sufficiently to honor this commitment in full, so 'printing up' money will be a temptation. Whether debasing the currency will continue at a fairly moderate pace, or will get out-of-control, waits to be seen.

The second factor has come in to play only so far as tax receipts are falling and spending is increasing. The USA still maintains its ability to borrow, at least for a time. Three things may come to pass that may end that privilege. First is the unwillingness of lenders - though at present that seems unlikely since Treasury Debt and Federal Reserve Notes are highly regarded. The second is the incapacity of lenders. As foreign trade crashes, foreign central banks and other corporations will simply have less money to invest in the USA. Increasingly poor domestic investors will be similarly unable to buy. Finally, the knowledge that increasing public borrowing at the expense of private investment (e.g. more money for unemployment benefits and less money to dig new oil wells) would likely make the Depression worse, may prompt the government to 'print' rather than borrow.

We do not care to make specific predictions of how much prices will rise and how quickly. We do believe that hyperinflation in the USA is a definite risk, as the 2008 Depression causes increasing income loss. At the moment, hyperinflation is not imminent, but stand by for further updates.