My Nightmare of Hyperstagflation

This is the first compact and concise article that in three stages (Problem, Impact, Measures) aims to take the reader to action. This information is necessary to know for these times.

PROBLEM

The most important bank in the world, the United States Federal Reserve (the "Fed") is bankrupt and no one has officially announced it yet. 

The issuer of the US dollar owes nearly $200 billion to its creditors since September 2022.

The dollar was backed by gold until 1971 and was the commercial requirement for the purchase of Saudi oil until mid-2024 when the petrodollar agreement expired. 

Today the dollar is a fiat currency (a promise to pay) whose only source of credibility is the political and economic reputation of the United States and its institutions, such as the Fed.

The US Federal Reserve has been fighting a potential financial collapse since the Subprime crisis of 2007-2008. Trillions of dollars have since been printed by all the world's central banks to cover a financial hole that seems increasingly uncontrollable. 

This new debt event, this time within the Fed itself, is just another chapter in the secret economic war being waged by the world's central banks to avoid another Subprime moment. 

The following graph produced by the Saint Louis Federal Reserve indicates the Fed's monthly liabilities and payments to its creditors, mostly large banks, and shows a marked and constant decline due to non-payments since September 2022.

Source: https://fred.stlouisfed.org/series/RESPPLLOPNWW

IMPACT

The United States is the issuer of the world's reserve currency and at the same time the most indebted country on the planet and any irresponsible action on the part of the Fed would lead to the generation of debt levels at even higher levels.

If the situation at the Fed is not fixed internally and quietly, the great global debt bubble could burst, which would generate greater inflation, but not only because of the greater issuance of currency, but also because people and global institutions would lose confidence on paper bills and would hastily exchange their dollars for anything else that holds some value.

Given the high debt rates facing the United States, the necessary tax and inflation increases would be rapid and shocking, something like what happened in the Weimar hyperinflation of the years 1921-1923. (https://es.wikipedia.org/wiki/Hiperinflaci%C3%B3n_en_la_Rep%C3%BAblica_de_Weimar) 

This would produce a marked fall in stock markets and a slowdown in global economic activity, as people and companies would be pushed to spend less on luxury goods (everything that is not necessary to live or function).

Outside the United States, inflation would be of the greatest concern, mainly because, like the dollar, all currencies in the world are fiduciary and would be faced with the same paradigm of printing more currency while rapidly losing their credibility.

MEASURES

The following points do not constitute financial advice but rather suggestions to make you think at least briefly about your personal situation.

• It would be practical for every employee to secure the accreditations or certifications required for their work now, in addition to considering offering freelance work or establishing a small service company, in case hiring becomes more unstable.
• It is important to affiliate with people who allow you to generate references or presentations with potential clients. You can start now by offering some free or low-cost service in your network that allows others to understand your capabilities for work.
• It would be prudent to have a capital investment plan in goods that can rise in price, such as commodities (gold, silver, oil, wheat, rice), depending on financial capacity. 
• It would also be wise to get rid of things that may drop in price, such as luxury goods (from the bicycle you no longer use to the family's second car or a property that does not generate income).
• Personal debt can take two paths, depending on whether it is in currency at a fixed price, which with inflation would tend to alleviate its burden due to devaluation. 
• On the contrary, inflation-adjustable debts (such as the case of the UF in Chile) can become unsustainable if the situation does not stabilize in the short term.
• Holding cash during high inflation can become a bleeding wound, as money can lose much of its purchasing power in a short time. If quick action is not taken you may be left with a pile of worthless paper (or digits in the bank).
• It will always be prudent to have a food pantry that serves as a cushion against possible price increases and eventual shortages of essential goods, at least for a time, until the economy finds its own balance.
• In the face of discouraging news, it would be healthy to cultivate your spiritual health starting today, because it is easy to appear calm and composed when times are good, but when things get difficult, the true being of each person emerges and it is better to have enough moral fiber to endure, whatever we face.

CONCLUSION

We do not know if the failure in the US financial system will be resolved soon and silently or if sooner rather than later it will burst as a large debt bubble affecting the entire world. 

What we can do is understand these issues and prepare ourselves within each person's possibilities, at least to sleep peacefully if the scenario proposed here develops.

Blessings,

Luis Leighton