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Michael Burry, Mr. Big Short, warns: USA heading for hyperinflation

America is in an extremely precarious situation in terms of finance and debt. It is a development which has taken place over a number of years. Mr. Big Short aka Michael Burry warns that the country is destined for the fate of Weimar Germany, meaning that at a certain point in time, given the current developments, the collapse of the domestic currency – including hyperinflation – must occur.

Michael Burry has become known to a wide audience at least since the release of the Hollywood film The Big Short. Michael Burry’s story was made into a movie because he had once been the first to recognize the imbalance in the American real estate markets before the outbreak of the global financial crisis in order to go short in this area.

Up to that point, there were not even any instruments to bet leveraged against the development in the American housing and subprime markets, which were then created by banks at Burry’s request in order to position themselves accordingly in this area.

Over the weekend, Michael Burry’s fingers seemed to be itching, which was followed by a cascade of Twitter postings, all expressing an assessment: The United States is in for a painful hyperinflation. Earlier, Burry had poked fun at private trading app providers such as Robinhood, expressing an extremely bullish view of the uranium sector.

The fact that someone like Michael Burry is now addressing the topic of hyperinflation in the former Weimar Germany should make people sit up and take notice. According to Burry, this is the very development that is now also facing the United States. In his Twitter postings, Burry called attention to how today’s times were similar to those years before the outbreak of hyperinflation in Weimar Germany.

The measures used by the U.S. government to trigger hyperinflation in the country were based on those dogmas known as Modern Monetary Theory (MMT).

Not only the ratio of outstanding government debt to GDP, but also a massively growing M2 money supply in the face of a reopening of the economy, with helicopter money being dumped on businesses and households, and retail sales rising on that basis, would lay the foundation for a V-shaped recovery in purchasing managers’ indexes (PMIs), Burry said.

Trillions of U.S. dollars are raining down on the U.S. economy as it reopens to boost overall demand, while labor and supply chain costs are shooting through the roof. What is important to note, Burry said, is that the inflationary trend at the time had its own distinct and unmistakable characteristics in its early and mature stages.

On the one hand, there was great wealth among those who had benefited from the boom. Many great fortunes had been made practically overnight in those days, while the urban centers had exerted a pull on young people.

Price trends in the Germany of the time had proved constant, while both the economy and the stock markets had boomed. The exchange rate of the mark against the U.S. dollar and other major paper currencies had even risen over a period of time, and the mark had even been the strongest paper currency in the world for a moment shortly before the outbreak of hyperinflation.

The growing wealth among speculators and economic actors, on the other hand, had been contrasted by indescribable financial poverty among a growing army of have-nots. More and more people would then no longer have had access to the cheap money, which would have led to an explosion in crime rates.

In the course of this, immeasurable exhaustion, demoralization and mental depression had set in among ordinary citizens. Their mental condition had worsened due to the realization that they were in a precarious position themselves, while others had immense wealth.

At that time, there were hardly any companies that complained about not being able to make money. For this reason, bankruptcies and insolvencies were extremely rare in most industries. The boom that preceded the outbreak of hyperinflation temporarily suspended ordinary processes and natural selection among economic agents and made them absurd.

Otherwise, non-essential and inefficient economic actors would have long since been flushed out of competition by then. Speculation, which had made no real and lasting contribution to German prosperity, would have been among the dominant activities at the time, Burry said. Even maids and elevator operators would have participated in these gambles in droves by means of their manageable wages.

And so it was hardly surprising that trading volumes on the Berlin Stock Exchange were so high at one point that banks, brokers and financial institutions could no longer keep up with their paper documentation. As a result, the Berlin Stock Exchange had to suspend trading on some days in order to catch up with the documentation.

All the Mark units in circulation in the summer of 1922 were not enough to buy a single daily newspaper or streetcar ticket in November 1923. Reaching this point, this spectacular bubble, which immediately preceded the outbreak of German hyperinflation, collapsed.

What is striking, however, according to Burry, is that the greatest losses in real purchasing power and declines in perceived (paper) wealth had been felt well before that point. Over the course of several years, a structure had secretly, quietly built up that had a self-destruction mechanism within it.

The entire inflation cycle in Germany at that time spanned a period of nine years – and not just one extreme year of collapse. Burry refers here to the years 1914 to 1923 and draws a comparison from today’s perspective to the U.S. dollar, which would also “burn up and fall from the sky” at a certain point.

Risk management teams of the big banks, brokers and financial service providers used their creativity to take ever higher risks in such a phase. In the course of this, mainly leveraged and thus credit-leveraged financial instruments would be used, which would be sold en masse to speculators and investors.

Michael Burry’s conclusion: As things stand today, we have now reached this point. The only question that remains now, he said, is when we will enter the phase of an exponential currency collapse.

DepthTrade Outlook

I had already drawn your attention last week to the fact that Bank of America has now also warned of a paradigm shift and rising inflation.

The fact that the co-president of JPMorganChase recently stated that his institution will have no choice but to get into Bitcoin proves to be an absolute indictment from the perspective of a bank that has done nothing but warn investors and its own customers of an immense bubble since Bitcoin: $500.

Or might the changing views be related to the realization that numerous customers of the bank are anxiously requesting information about the outbreak of a possible hyperinflation? Time will tell, though I personally prefer an ounce of gold to a digital Bitcoin.

This may sound old-fashioned, but an ounce of gold is something anyone can hold. If, as in Texas, the power grid goes down for days, I have nothing at all in my hands and furthermore I don’t know – if I haven’t at least moved Bitcoin to disk – how I’m going to get hold of it, if I can’t trade it at all.

I’ve been looking at a lot of pictures from Texas via Twitter, and here’s what I’ve seen on them: Stores and stores have “Cash Only” displayed in cardboard signs in their windows. Good luck to those who were fully committed to digital transactions at such a time. This (mental) bubble in people’s heads will probably burst in due course.

Ben Schaack

Mr. Schaack is a financial analyst, specializing in the commodity, foreign exchange, and crypto markets - with more than 10 years of experience. Besides his business analytics studies, Mr. Schaack works as a journalist - covering finance, economy, and geopolitics. His special interests are focused on inflation hedging and exponential (compound interest) growth. He posts and discusses relevant news on his Twitter account.
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