The prudent see danger and take refuge, but the simple keep going and pay the penalty.  - Proverbs 22:3

The economy is in the toilet and anybody paying attention is aware of it, at least in so far as they allow themselves to see through the daily charade perpetrated by the usual band of Keynesian fools and their willing accomplices in popular culture.  GDP, when correctly adjusted for inflation, has been flat or negative for nearly a decade [1], an indicator which hasn't made the headlines at any point that I can recall.  This indicator alone, which began to slide well ahead of the 2007/2008 financial crisis, is enough to cause serious concern for America's future.

The labor force participation rate has been in decline since January 2009 [2].  Yet, we are repeatedly told that the economy is "in recovery [3]".  The President even coined the term "Recovery Summer" in June 2010 to persuade the country that our economic woes were coming to an end [4].  As of this writing, Recovery Summer - Part IV is just around the corner.

The budget deficit has exploded on an annual basis beyond anything this country has ever seen, despite ongoing rosy delusions from talking heads at every turn.

Reports have recently surfaced from the Bureau of Labor Statistics indicating that in addition to the 2012 Q4 net slide in GDP to -0.1% (which I previously discussed [5]), 2012 Q4 overall business productivity (less farms) decreased by 2% [6].  This is a terrible indicator, as continual growth in business productivity is necessary to sustaining a continual borrow/spend deficit state.  This, combined with the GDP reduction (the two are correlated), will push the outstanding national debt north of nearly 110% of GDP by the end of 2013.  The media, however, has failed to report on this circumstance, preferring instead to focus on the supposed "positives" in the latest monthly unemployment report that showed a net increase to a mere 7.9%, despite the number of employed having continually declined ever since 2009 [7].  This is the governmental definition of "recovery":

Underneath the burgeoning cesspool of economic whoppers lies a far more dangerous truth - the United States is facing serious economic consequences of some sort if we don't correct our borrowing and spending problem, and quickly.  Whether those consequences present as a hyperinflationary systemic collapse is anybody's guess - a deflationary collapse is theoretically possible (although of the crises in the last several decades, deflation was almost never the culprit in the long run and has never been the prime mover behind sovereign collapses worldwide in modern history as far as I am aware), an extended period of stagflation is possible (high interest rates and high unemployment), and a correction is even possible under certain, albeit very limited circumstances, many of which are outside the control of the federal government to influence.

However, given the situation the United States is currently in, namely being highly leveraged among developed countries, the most reasonable end game as far as I can tell is a hyperinflationary collapse.  As the circumstances surrounding such a collapse are constantly moving and changing, it is not possible to predict when or if such an end game will ever appear, although the evidence seems to point in that direction.  Intelligent discussion on this matter is routinely had in more detail at places such as ZeroHedge.

Part of the problem in getting our neighbors to recognize not only the fundamental cracks in the economy (nearly everybody anecdotally understands that government spending and debt are a major concern), but also to recognize the consequences of the problem, is that most people have no idea what hyperinflation entails and have no idea what to keep an eye out for.  Fortunately, of the two dozen or so cases of hyperinflation in recent history, they tended to follow a series of reasonably well defined steps.  I have organized these steps into six distinct stages, with Stage 6 being a complete and total meltdown.  As best as I can tell, the United States is somewhere in the neighborhood of Stage 2.

While these six stages appear to be common among such historical collapses, they have been revised as much as possible to reflect the modern world - fiat currency, deficit spending, the U.S. being the world's reserve bank (essentially), etc.  Additionally, moving from one stage to the next does not necessarily occur in a linear fashion - any number of events could potentially trigger a rapid climb of the staircase from Stage 2 to Stage 4, for example.

It is also important to keep in mind that movement between Stages occurs at an increasingly rapid pace as the process goes on.  For example, the early Stages (1 and 2) tend to occur very slowly and the process speeds up as the floor falls out from beneath the consumer in Stages 3 and 4.  By the time Stages 5 and 6 arrive, many people may not even take notice as their lives have already been so drastically affected that additional changes are simply accepted as commonplace.

So, rather than simply screaming from the rooftops about the risk of inflation and being labeled as just another right-wing nutbag "hyperinflationista," I humbly present the following Bulletproof Guide to the Six Stages of Hyperinflationary Systemic Collapse (with a major hat tip to Vincent Cate, et al., who gathered an enormous amount of data, some of which has been incorporated and reorganized here).

Stage 1 (pre-hyperinflation):  Annual budget deficit exceeds 40% and national debt exceeds 80% of GNP

Current Status:  Budget Deficit – 35% [8], National Debt – 104.6% [9] [10]

Key Features

• Annual budget deficits may fluctuate, but national debt continues to rise.  This continues over the course of a number of years.
• Investors gradually move to shorter term bonds.
• Widespread realization that the national debt and annual deficit will continue to perpetually rise, despite government promises to the contrary.  This realization is unlikely to be acted upon by the masses and tends to be more of an anecdotal conversational tool than anything else.

Impact to the Common Consumer

• Impact to the consumer is minimal at this point, and perhaps even beneficial, as he may be receiving increased governmental benefits (health care, social security, food stamps, etc.) which are being procured at the expense of debt.  For this reason, the common consumer is unlikely to regard his current position as one of pre-hyperinflation.

Stage 2 (pre-hyperinflation):  Central bank begins buying government bonds

Current Status:  The Federal Reserve is purchasing up to 90% of new bonds [11], including risky bonds and garbage mortgages [12].

Key Features

• The primary reason for the central bank to purchase its own governmental bonds is to ensure that bond rates stay low (to enable the government to continue 'borrowing' at 'affordable' rates) and is typically sold to the public as a form of economic "stimulus."  This can also occur if the central bank has become the "lender of last resort" - a precursor to Stage 3, in which private investors are unwilling to take on additional governmental debts due to concern about the ability to be repaid in the future.

Impact to the Common Consumer

• Much as in Stage 1, the common consumer is unlikely to regard his position as precarious, considering that the charade is being papered over by additional piles of borrowed money which he never sees nor has to pay for.

Stage 3 (trigger event):  The Treasury experiences a failed debt auction

Current Status:  The U.S. Treasury has experienced minor failed auctions in recent history [13] [14], but no major failures yet.

Key Features

• When the Treasury is unable to offload a large percentage of its freshly created debt to either the private investor (or perhaps even to the central bank under some circumstances), the debt auction may be deemed as a failure.  The average consumer would experience this in the form of being denied future credit card purchases after having hit the card's credit limit.
• Capital flight begins to move domestic wealth offshore at a pace that becomes noticeable.
• The Federal Reserve can’t allow interest rates on bonds to rise to attract more buyers because doing so would also raise interest rates on government debt, which would make the interest payments on the national debt unaffordable - this phenomenon has recently been observed in the 10 year bonds, wherein the Fed's QE binges have artificially suppressed yields by more than 30% [14a].  At the current 10 year bond rate of approximately 2.04% [15], the annual interest payments on $16.59 trillion in outstanding debt would be $338 billion, which is roughly in line with the Treasury reported interest payments for 2012 of $360 billion [16].  Currently, our interest payments total about 15% of all federal taxes collected.
• If the 10 year bond rates went up to 7%, as has happened in Europe just last year [17] [18], the 2013 annual interest on a projected $17 trillion in national debt would be approximately $1.190 trillion, or 41% of all federal revenues.  There are nowhere near enough "millionaires and billionaires" to cover this cost.
• Every penny spent on increased interest payments represents an equal reduction in the ability of the government to spend on domestic programs – at increased interest rates, additional borrowing to fund the difference is no longer possible under the "realistic" and "investment" terms fantasized about by the Krugmans of the world.  Therefore, every penny spent on debt interest would come directly out of Medicare, Social Security, Defense spending, or any of thousands of other programs (many of which are both unnecessary and unconstitutional to begin with).  This is unavoidable and rather than allowing a systemic collapse to occur by reducing borrowing, the government directly prints and spends even more to cover the gap (100% of this is directly monetized since no external entity will lend money any longer).  This is the beginning of "formal" debt monetization - "formal" only because it is more or less publicly acknowledged as such, even though it has likely been happening in the background for quite some time.

Impact to the Common Consumer

• This is the first stage at which the common consumer begins to feel that something is wrong, although the media and government are likely to continue their propaganda "hail Mary" until the bottom finally drops out.  In all likelihood, a significant percentage of the population would continue to stay asleep at the wheel since their ability to buy the latest $300 Air Jordan sneakers with their welfare check would likely continue unabated, at least for a brief period.

Stage 4 (hyperinflation):  Consumer prices rise and the people spend their money before prices rise further

Current Status:  Consumer prices are already rising dramatically due to inflation and other factors [19].  Fuel prices are also averaging out at historical highs, even when excluding refinery and supply shortages, as well as crude prices [20].  The average consumer has not yet attributed this price increase to inflation.

Key Features

• This is the stage at which the average consumer realizes that hyperinflation is actually occurring and is not simply a fantasy of internet bloggers.  This is also the stage at which hyperinflation can no longer be averted (and whether it could be averted even at Stage 3 is questionable).
• As prices rise, consumers pull their money out of the banks and move to alternative currencies such as barter (trade), foreign cash (Swiss Francs), or gold and silver. When too much money has been withdrawn (remember, the banks are only required to keep a small percentage of deposits on hand in actual cash), the government declares what has popularly been referred to as a “bank holiday,”closing all banks and freezing accounts.  Your debit card suddenly no longer works.
• The government also may attempt to fix food and fuel prices at this stage.  This is currently happening in Argentina [21] and is being billed as an attempt to "constrain inflation [22]."  (Hint:  It won't and historically such attempts have never been successful in the long run.)

Impact to the Common Consumer

• Finally, the common consumer awakens from his decades-long economic slumber when he discovers that his $4.98 grande skinny caramel macchiato suddenly costs $12.50.  A week later, the same latte costs $19.75.  Months in, the latte sells for $476,942,691.17 (a stack of $100 bills a quarter of a mile high), or, ironically, two silver dimes.
• When the common man begins to see his purchasing power finally slide before his very eyes (despite the Fed promising that inflation is perfectly matching the 2% "target"), panic sets in and shelves go bare.

Stage 5 (hyperinflation):  Wages and prices are fixed to a stable foreign currency or to precious metals

Current Status:  The U.S. Dollar is still the world’s reserve currency, so this stage still seems to be rather distant.  Historically, when small countries have stopped hyperinflation by pegging their local currency to a more stable currency, it has almost always been the U.S. Dollar.  If and when hyperinflation occurs in the U.S., we won’t have the same luxury – we will need to peg our currency to either 1) an international “basket of currencies” such as the IMF Special Drawing Right (SDR), which has been previously floated as a replacement to the U.S. Dollar [22], or to some mixture of gold, silver, platinum, copper, diamond, etc.

Key Features

• As consumer spending increases (with consumers immediately spending their earnings to avoid losing purchasing power if earnings are saved), the velocity of money increases, flooding the market even further and driving dollar-denominated product prices even higher.  This positive feedback loop (I'm an electrical engineer and couldn't resist the temptation to use a control system analogy) ensures that the problem worsens even further.  The more prices increase, the faster consumers spend their money, which floods the markets with cash, raising prices even further.
• This is also the stage at which pre-hyperinflation purchases of precious metals potentially become the most valuable.  All debts can be paid off with hyperinflated currency, so long as the currency is still in circulation.  Have a $20,000 line of credit?  Congratulations – before the currency is fixed to metals, you can sell an ounce or two of silver and pay the credit completely off.  Note that the window to do this is limited.  At some point, the banks and government will re-value the currency or intervene to adjust existing contracts to peg them to inflation.  Current debts are not normally pegged to inflation, so you would need to take advantage of this window at the opportune moment while the currency is still accepted for payment and before Stage 5 is fully underway.
• This stage is particularly problematic because our own currency is the world's reserve.  We don't have another, larger currency to peg to in order to cease inflation, which is why the fears behind a U.S. hyperinflationary collapse are becoming more and more widespread - the world has never been in quite this position where the largest economy is teetering on the brink.  In February 2013, if Argentina experiences hyperinflation (as they are), nobody in the U.S. notices because it doesn't affect the dollar.  In February 2014, if the U.S. experiences hyperinflation, the entire world will notice and the whole thing risks being dragged down.  The stakes are potentially much higher in this scenario than ever before.

Impact to the Common Consumer

• Impact at this stage is similar to Stage 4, although potentially more prolonged.  By Stage 5, the store shelves have likely long since gone bare and a barter economy has established itself in earnest.

Stage 6 (collapse):  A black market develops and local currency becomes totally worthless

Current Status:  While there are some very limited circumstances of barter and metals-exchanges beginning to develop, this stage is a long way off.

Key Features

• At the point when a loaf of bread requires a stadium full of cash to purchase, it becomes normal and practical to exchange a single silver dime (worth about $2.30 in 2013 dollars) for the loaf of bread.
• Government revenue completely ceases, as taxes are not paid on black market or barter exchanges.  Government shuts down.
• Hyperinflation has completely taken hold and if an external currency or metals peg is not established or accepted by the populace at the end of Stage 5, a total systemic collapse becomes inevitable.  With the dysfunction and chaos already existing in Washington, making an exit at Stage 5 is questionable.
• Many government employees (including members of the police, military, firefighters, and National Guard) are no longer showing up to work to earn a paycheck in a worthless currency and are busy trying to feed their own families and protect their own neighborhoods from criminals and hoards of the starving.
• The explosive charges for this situation have already been set - there are currently 48 million Americans dependent on Food Stamps ("Electronic Benefit Transfer" cards) in this country [23] and 58 million Americans receiving Social Security [24].  The moment those EBT cards stop functioning and the Social Security checks stop arriving in the mailbox, a full 25% of the population suddenly finds themselves starving to death.  If recent events during Hurricane Sandy and the Carnival cruise ship disaster are any indicator, people start behaving like animals within a matter of a few days.
• If a full-scale societal collapse occurs, the risk of governmental overthrow rises dramatically.  Think it's going to be small government, libertarian types that just want to leave you alone who rise to power?  Ask the Germans of 1933 how that worked out.
• Realistic possibilities for the future after Stage 6 are 1) dictatorship, 2) civil war, and 3) global government.  None of them are good.  A libertarian minded, small government is only likely to emerge as the result of a successfully prosecuted civil war, which are generally unsuccessful in preserving long term liberties (the American Revolution being the notable exception).

Impact to the Common Consumer

• The common consumer is more than likely dead due to starvation, war, or totalitarian government.  Congratulations.  You probably should have been listening in 2013 when your idiot blogger neighbor was whining about false inflation "targets" and Keynesianism.

Future risk

Whether or not the United States will wind up in a hyperinflationary systemic collapse in the foreseeable future is anybody’s guess - the target is constantly moving and our situation is quite fluid.  However, recent trends indicate that the U.S. is currently in Stage 2 of the process and may be approaching the end.  As soon as a failed treasury auction occurs (or any other 'trigger' event, such as China liquidating their dollar-denominated assets rapidly), we move up to Stage 3.  While we could conceivably exit the hyperinflation process, history strongly suggests that this will not happen as the decisions necessary to do so are painful enough that politicians will avoid them at all costs, preferring instead to sink with the ship.  We will, in the most strong sense, become our own worst enemy.

Equally difficult to determine is the timing of the stages.  While we seem to be firmly and perpetually planted in Stage 2, nobody knows how long it will take for the world’s largest economy to crumble at the rate we’re moving, especially when the distraction of Europe is thrown into the mix.  It could be by the end of 2014 as credible others have long predicted [25], or it could be many years off.  A hyperinflationary systemic collapse is not a single event as so many seem to believe – it simply appears as such because so many consumers refuse to see it coming (they don’t recognize the problem until Stage 4), at which point the slide has sped up considerably.  In reality, a hyperinflationary collapse is a drawn out event.  The bottom line is, so long as our debt continues to increase faster than the growth of GDP, the risk of future problems is inevitable.

Reasonable preparation

Watching television shows like “Doomsday Preppers” probably isn’t going to help the average person interested in "reasonable" preparation, because the average person has no interest in living like a caveman lying in wait for an economic collapse, surviving on a diet of Tilapia and Kale grown in his backyard pool that has been converted to closed-system hydroponic greenhouse.  (Seriously, some people are doing this.)  The thought of eating Tilapia six nights a week makes me want to puke all over the keyboard.

Selling everything you own to buy a shack in the woods probably isn’t going to help, either, particularly if you have no resources left, no method of transportation to get there, and nothing to survive on when you arrive.

In other words, don’t stop living life out of fear over hyperinflation.  Plan ahead sensibly in the event that it happens to occur.  If you're doing it right, your preparations should be functional in lesser circumstances as well - layoffs and unemployment, natural disasters, etc.

Remember that there is always a chance that everything will turn out to be fine – don’t stop contributing to your retirement fund out of fear over hyperinflation.  That 5% company match will be invaluable resources lost in case the worst never comes.  But, do consider keeping your money in safer investments such as bond markets and gold funds that are less susceptible to inflation (the irony on bond markets here is duly noted, but many 401(k) accounts don't have any safer options).  Even better, if you don’t have an employer match that is keeping you in a traditional 401(k) or 403(b), consider moving to physical assets – gold and silver have a strong tendency to appreciate with inflation and are unlikely to lose substantial value over time.  Keeping all of this in mind, while retirement investments may still make sense in 2013, come Stage 3 or 4, pulling out of them entirely may be a more wise option.  Only time will tell and all circumstances are unique.  (Word to the wise:  I'm also an engineer, so what the hell do I know about retirement investing?)

In addition to the usual common sense financial advice, good, reasonable preparation should consist of the following specific items at a bare minimum:

• Assemble a nonperishable food storage.  I strongly suggest a six month supply of calories in #10 cans for every member of your family at a minimum (and working up to 12 months over time), which can be obtained from your local LDS cannery at very low cost - I'm also not Mormon and they treat me just fine there, so don't be afraid to walk right in.  Rice, beans, sugar, wheat berries and/or flour, dry milk, and fruit are all commonly available in bulk packaging (a bulk package of six #10 cans of white rice sells for about $20 at our local LDS cannery, for example).  The best part is, a six month supply of food storage is not difficult to build up (it takes up a corner of a basement on a couple of shelves) and generally keeps for 10 – 25 years without maintenance.  Even if no disasters occur and you wind up not using it, in 20 years you have six months of food that you don’t need to put in the budget.  Remember, food storage is a form of saving.

• Buy a method to filter your own water.  Clean water is essential to life and to avoiding disease.  The lowest cost option is to buy 1 lb packages of Pool Shock (you should buy ONLY those containing 68% Calcium Hypochlorite and 32% INERT INGREDIENTS – any other type of pool shock is dangerous to consume).  This sells for about $3 a pound, is available on Amazon, and each pound will treat thousands of gallons of water.  Simply strain water through a cloth into a 5 gallon bucket to remove large debris, treat with the prescribed small amount of pool shock, stir, wait an hour, and drink.  (Note – This method kills most bacteria and parasites but does not necessarily kill viruses, so boiling is always a good idea if at all possible.)  This method is also highly preferable to using chlorine bleach to purify water, as bleach tends to break down into various salts over a period of a few months.  Pool shock packets lose 3-5% of their available chlorine per year of normal storage, so a 68% packet should store for a good five years or so before needing to be rotated out.  (Note:  The exact method to measure and use pool shock for water purification is described in several other places [26] [27].)

• Buy a small supply of nonhybrid vegetable seeds.  These are commonly available pre-packaged in cans with a five year shelf life and will grow in most climates [28].  For a cost of less than $40, you can have seeds on a shelf to grow your own food supply if necessary - cheap insurance if I've ever seen it.  The six month food storage supply is intended to get you through a winter or a period long enough to the point where you can grow your own food in an extended crisis.  This suggestion may sounds nuts now, but it could wind up being the best $40 you've ever spent.

• Buy a firearm.  If a crisis comes to pass, there are bound to be millions of starving people in the streets, not to mention plenty of looters looking to take advantage of the situation as seems to happen after virtually every natural disaster these days.  My strong recommendation is an AR-15 - expect to pay about $850 for a base model when the market recovers from the most recent Obama/Feinstein gun control nonsense.  Contrary to the usual gun control narrative, the AR-15 is ideal for home defense and is particularly suitable for women.  It's light, extremely accurate, and has minimal recoil due to the semi-automatic action and standard .223 caliber charge.  If you can't afford an AR-15, any semi-automatic firearm in a major caliber is better than nothing.  If you're not interested in a rifle or want to go cheaper, consider the Beretta 92fs or 90-two in 9mm caliber (for men - about $600) or the more compact Walther PK380 in .380 ACP caliber (for women or smaller hands - about $350).  I would not suggest going below the .380 ACP caliber and would consider a 9mm to be 'standard.'  I happen to own all three of these firearms and would trust them all to perform reliably.  Oh - and don't forget ammunition and at least three magazines, preferably the evil "high capacity" ones the President wants to ban as a part of his latest delusion.  For the AR-15, this would be 30 round magazines - try to get a hold of magazines made by Magpul.  For the Beretta 92 or 90-two, this would be 18 round magazines - Mec-gar makes great aftermarket magazines which are very reliable.  For the Walther PK380, you're more or less limited to the factory 8 round, so get a few of them.  In addition to all of this, get a good cleaning kit and learn to fire your weapon safely and accurately.

There are any number of websites on the internet which can (and do) suggest additional preparations to those I have listed, but the above list is a good, basic start that all Americans should be making.  Nothing in these four or five items is in the least bit "extreme" and all were at one point considered to be simple common sense.

If only we could return just a sliver of that "common sense" back into our culture, perhaps we wouldn't need to publish guides to identify and survive hyperinflationary collapse.

In love of liberty,

The Bulletproof Patriot

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