As I wrote on the last blog, I said that Fed seems to be the only source for US government of borrowing trillions of new debt since Japan and China (biggest and 2nd biggest buyer of US treasury) won't buy any more treasury.
I also said that US government may force American citizen to buy the treasury since nobody wants to buy them, while US debt obligation is becoming bigger and bigger. After writing last blog, I am thinking what possible action government may implement in the process of hyper inflationary depression. By understanding historical perspective of government action during past similar event, I quickly noticed that desperate government would do the desperate thing in order to stay the status quo. In this section, I would like to list possible desperate government action in the process of hyperinflation.
1. Require citizen to buy treasury bond
In my opinion, it is very possible for the government to raise the money to pay its debt obligation. As I discussed in the last blog, I can't think anybody else but Fed is willing to support the US government and economy by purchasing sufficient amount of treasury. Two biggest buyers of US treasury, China and Japan, most likely won't buy the US Treasury. As China saw declining in the value of the dollar due to money printing and deterioration of US economy, China already stopped buying the treasury. Moreover, China is currently planning to reduce US dollar holding by $2 trillion that consist of 2/3 of their holding. How about Japan? Due to recent catastrophic disaster, Japan definitely will focus on rebuild their own country and they won't have any more money to support US economy (Japanese government is currently discussing how to raise the money to rebuild its economy. In my opinion, Japan definitely should sell its treasury position to raise money. Anyway, this topic is another time). These two biggest buyers are consist of significant percentage. However, if they won't buy its treasury any more, then where US government will borrow the money from? My ultimate conclusion is either by the Fed or US citizen themselves.
2. Nationalization of retirement fund (401K, IRA etc)
What next possible action government may possibly do to raise their own money to pay its obligation during hyperinflation is nationalizing a retirement system, such as 401K or IRA etc. If government does not have anybody to get the money from, then, this could be a very possible choice for the government. By nationalizing the people's retirement by convening these to social securities, US government can take all of the fund from the people's retirement fund. They may take this plan along with financial crisis by saying that we need to protect average hard working American people so they need to be protected. After they take the money, we probably can guess where money will go to...
3. Bank account freeze
During the hyper inflationary situation, many people are afraid to lose the value of the currency day by day and they try to get out the currency and rush into obtaining the real assets, such as gold and silver. At the same time, country (US is the example in this time) carries so much debt so what they possibly would do is freezing citizen's bank account by requiring each depositor to withdraw only fraction of what they have in the bank account (to buy food etc). By doing this, government can seize all the citizen's deposits in the banking system in order to prevent the country from default. On the other hands, it will definitely bad for the normal citizen because value of their currency will become less and less value as the even day goes by during hyper inflationary environment.
As far as I am thinking, these three government actions can be happening in the midst of hyperinflation and currency crisis. Many people might think that it is impossible to happen in the country like United States. However, please think that these government actions above were already happened in many countries in the past, including the country like Argentina so it is not beyond the imagination. Desperate government can implement desperate policy in order to save the country (or themselves?). As I said on the past blog, I will prepare for the worst situation as Robert Kiyosaki well quoted "If you always prepare for bad times, you will only know good times". In next blog, I would like to explain the possible impact of hyperinflation so stay tune!
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Published: 16 May 2011