Asset Stripping and Hyperinflation- Is the US Heading Down the Same Path as Belarus?

With so much attention being given to the economic problems of Portugal, Ireland, Greece and Spain, the media has overlooked one of the most important economic stories of the past month. The greatly overlooked story comes out of Belarus. Belarus is a former Soviet Nation which borders on Russia, Ukraine, Poland, Lithuania and Latvia. Recently, the economy of Belarus has completely imploded. On May 24th, The National Bank of Belarus devalued the Belarusian Ruble by 56%. Overnight, Belarusians who held the national currency saw prices for everything from food to diapers soar higher. The average monthly wage in Belarus was 1.6 million Rubles in April. In dollar terms, Belarusians saw their real wage fall from $507 to $325 in one day. The situation is so dire that the government had to step in and freeze prices for fish, tea, coffee, cheese and a number of fruits and vegetables, some of which already had doubled over the past two months. The situation could quickly descend into chaos as citizens sweep store shelves for toasters, canned goods or even Dollars or Euros- basically anything that will not lose value as quickly against the national currency. In the capital of Minsk, people have been hoarding basic staples such as sugar and salt.

To most Americans, the situation in Belarus seems like a distant event that is happening in a third world country. The message we have been trying to convey on this blog over the past two years is that not only is a Belarus-type hyperinflationary crisis possible in the United States, but it is becoming more and more likely with every passing day unless we stop pretending and face up to our financial realities.

To understand how hyperinflation works, one must look at who stands to gain from it. Going back to the example of Belarus, the majority of the citizens of this country were the biggest losers from the devaluation, with many people having gone bankrupt overnight as they watched their savings lose half of its relative value. However, those who were lucky enough to be holding their savings in the form of gold and/or silver saw their wealth gain an instantaneous 56% relative boost in their purchasing power. Most importantly, any and all indebted parties, such as the Belarus government, gain from currency devaluation as their relative debt was just cut by more than half.

Now that we have set up the economic environment and the players, (the government, the people, the banks, and outside investors), it’s time to watch as a borrowing country is stripped of many of its valuable assets by lenders. Both sides have basically overextended themselves or taken on too much risk, but only the borrowing country ends up really losing its shirt when it is forced to sell its most valuable assets first in order to pay its debt. For purposes of this blog, we will call this “asset stripping”.

The first thing that needs to happen for asset stripping to take place is the entity to be stripped must be willing to borrow endless amounts of money from outside sources (a la the US government). Naturally, at some point the creditors begin to wonder if they will ever be repaid and start to either lend less money or continue lending at higher interest rates. In a situation of asset stripping, out of control or spiking interest rates are one of the most telling signs of the endgame. In the case of Belarus, the central bank raised the rate it pays out to creditors twice since April 20th, leaving it with the highest refinancing rate in Europe at just over 16%. Interest rates are currently being manipulated to extraordinarily low levels in the United States, however, given our analogy of borrowing like Belarus, we have no doubt that interest rates will spike and we will see some form of a hyperinflationary environment, followed by a complete economic collapse, if the US Government continues to allow the Fed to print money. All you have to do is look at the current prices of gold, crude oil, gas prices, and agriculture. If the Fed continues to print, these will shoot up to levels that will further hurt the economy. If you think $4 is a high price for a gallon gasoline, think of what is going to feel like at $6 or $10 per gallon.

As funding dries up and the economy implodes, the solutions are always the same: the borrowing country is told that its policies were not “free market” enough so it had better sell off the nations assets to its creditors. Meanwhile, the people of the borrowing country are told that the country must cut back on government programs through “austerity measures” while the wealthy speculator gets bailed out again (a la Greece, Portugal, and the United States- if you are listening to what the Republicans are proposing). It’s very easy to see how this environment can end up in a war or a complete breakdown of the host country’s society (examples include Greece, Portugal and many other countries where the citizens are revolting).

Our asset stripping tale ends with the lender receiving yet another bail out, this time in the form of forcing distressed asset sales by the host country. The host country is left in chaos, with parts of the nation having been sold off in order to secure more loans. For example, we have recently seen Greece try to sell as much as $30 billion of public property including high value assets ranging from the government’s stake in the Mont Parnes Casino resort in Athens. If the asset sales don’t satisfy the bankers’ demands for collateral, the next step of course is that the host countries’ government is replaced if they don’t comply with the subsequent demands for more and more asset sales to satisfy loan commitments.

If the Federal Reserve and other Western Nations continue to print and borrow money for the sake of short term growth, we have no doubt that asset stripping is a term that will become very familiar to the citizens of developed nations, including the United States.