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Big Gap in Logic Weakens Hyperinflation Argument

RickAckerman's picture




 

 

I awakened Sunday morning on three hours of sleep, lucid of mind and filled with dread from an essay linked below that I’d read before going to sleep. Amidst the desiccated hell of Colorado’s, and the entire Southwest’s, pine-forest die-off and a disturbingly winterless winter, even my wife still doesn’t get it.  She seems to think that because peak real estate valuations have held up so far in our Rock Creek neighborhood, that they will continue to hold or even rise. It’s difficult to say why prices have stayed aloft in here in Superior, Colorado, which lies just south of Boulder, about 20 minute from downtown Denver. Most likely is that it involves a combination of factors. For one, in comparison to Boulder real estate, where downtown condos with a view of the Flatirons are listing for as much as $3 million, you can buy twice as much house in Rock Creek for half the money.  Second, the supply of homes in the development is very tight, since only a few new dwellings were built in recent years. Third, the schools nearby are rated among the best in Colorado, And fourth, there is the planned Conoco-Phillips campus for research into alternative sources of energy.  The company has yet to break ground, but once this project is completed the facility will be a beehive for an estimated 7000 scientists, engineers, consultants and other white-collar workers. 

 

Germany Hyperinflation

 

Even so, I don’t believe for a minute that Rock Creek will somehow avoid the deflationary juggernaut that has already crushed real estate valuations across the U.S. by more than 30 percent.  I predicted here years ago that home prices would eventually fall by at least 70 percent before deflation has run its course, and I am sticking with that forecast.  It implies that even after the wholesale price destruction that has occurred over the last three years, the worst is yet to come.

 

And yet, for the moment, it is understandable that the hyperinflation argument has been enjoying (if you’ll pardon that word) a bold resurgence – one that has caused even me, a hard-core deflationist who has been writing on the topic since the mid-1990s, to second-guess myself. After all, fuel and grocery prices are rising steeply, and Federal debt — $14.270 trillion and counting –  has entered a vertical parabola. While this appears to buttress the hyperinflationists’ arguments, and although Peter Schiff’s scenario – hyperinflation triggered by all-out monetization of T-Bonds – remains plausible in theory,  it became quite clear to me, lying awake Sunday morning before dawn, why deflation will prevail – will in all likelihood smother an incipient hyperinflation before it even gets off the launching pad.

 

 

 

Total Collapse in Mere Hours

Let me explain.  To begin with, we cannot have a Weimar-style hyperinflation for reasons that will be obvious to anyone who has read Adam Fergusson’s classic on the 1921-23 Weimar hyperinflation, When Money Dies.  As Fergusson makes clear, this panic fed off a cash economy, not credit; and it required close collusion between the government and trade unions. In contrast, the U.S. economy is cashless and the unions are widely reviled.  That said, let me cut to the chase:  Hyperinflation occurs when people, fearing their money is about to become worthless, panic out of currency and into physical goods.  This is highly unlikely to happen in the U.S. for several reasons, to wit: 1) Whereas Germany’s hyperinflation took several years to ramp up, today’s financial markets are primed for a catastrophic collapse that could conceivably run its course in a week, if not mere hours; 2) under the circumstances, there would be no shifting of financial assets into hard goods simply because any financial assets one holds at the time of the collapse would become worthless before one could sell them; and, 3) at that point, there would be insufficient currency available to drive a hyperinflation, since mattress money is likely to be scarce and because branch banks keep only about $25,000-$50,000 in cash on hand. All of which implies we will go straight to deflation without the emancipating, hyperinflationary interlude that some mortgage debtors might be hoping for.

 

Until now, I have been reluctant to air the simplistic argument, used by economists when they are at their most condescending, that inflation implies nothing more than an increase in the money supply.  Although that’s a truism that we would not argue with, it holds little value for anyone attempting to predict how a drastic increase or decrease in the money supply might play out symptomatically. While the textbook theory of it could account for the gas-and-groceries inflation that QE1 and QE2 have produced so far, it fails to explain logically how we would go from grocery-store inflation to systemic and pervasive hyperinflation. To repeat: Hyperinflation would require the shifting of cash money into physical goods and assets. But other than mattress money and the relatively paltry sums of cash on hand at branch banks, there would be precious little cash to shift.  And if the panicked money is assumed to come out of Treasurys and other paper assets, it begs the question of how much the paper assets will fetch on the day when there are no buyers other than the Federal Reserve?

 

Flat-Earth Optimists

 

My argument is simple, and I will not yield ground to any hyperinflationist who fails to explain, if the system collapses, where the money will come from to bid tangible assets skyward. Nor will I even print comments from the flat-earthers who see the financial system somehow muddling along, avoiding a collapse indefinitely. In any event, I would urge you to click here for Jim Quinn’s powerfully persuasive essay if you want to know why a financial collapse is not just likely, but inevitable.

 

I invite readers to attempt to rebut my argument in the Rick’s Picks forum – to tell me exactly where the cash will come from that would allow Americans to bid the price of hard assets into the ionosphere. In the meantime, I plan to run a guest commentary later this week concerning one asset class that seems likely to outperform all others.  Hint:  it is not bullion. And, this investment category could conceivably increase in absolute value for the same reason that the pine forests of the Southwest are dying.  Under the circumstances, the asset appears to be very undervalued at the moment. It will be out of reach once the system crashes.

 

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Tue, 04/05/2011 - 21:09 | 1139359 Vincent Cate
Vincent Cate's picture

Where will the money come from?   The common charactaristics for hyperinflation cases are government debt of over 80% of GNP and deficit over 40% of government spending.   So the cash comes from printing for the deficit and printing to cover the debt coming due when people stop buying bonds.   Much of the US debt is now short term.  So in the next 12 months something like $7 trillion in debt comes due.  If nobody but the Fed is buying bonds, it is just like they are printing to pay off the bonds.   There will be $7 trillion new dollars in circulation.   Hyperinflation conditions for sure. 

http://pair.offshore.ai/38yearcycle/#hyperinflation

Tue, 04/05/2011 - 09:27 | 1136377 Chappaquiddick
Chappaquiddick's picture

This arguement is based on a false premise - namely a sudden virtually instantaneous collaspe - this is a non-event outside of a blanket global coordinated bank run.  The last big drop lasted 18 months, no crash in history has been a sudden vertical drop.

Now as for where the money would come from, well 2/3rds of global currency is dollars and a 2/3rds of these are overseas.  If the dollar tanks there is plenty of money overseas that will be looking to be repatriated and the Fed is aware of this as they have initiated extensive capital flow controls both into and out of the States.  It'll be these controls more than anything else that prevents a hyperinflation from dollar repatriation, but they don't protect the commodity markets (all traded in dollars) and that is one reason (amongst many) that the commodities are going vertical at the moment.  So the capital flows can be deflected but they merely bypass one control and flood in elsewhere.

IMO we're headed for a USA HYPERINFLATIONARY DEPRESSION.

Look at gold and silver, watch bonds - enough said.

 

Tue, 04/05/2011 - 02:53 | 1135855 boiltherich
boiltherich's picture

Time out boys and girls.  Some of you, well all of you have gotten into a bit of a bitch kitty over economics and money.  Keynesian economics, Chicago School, Austrian, gold standards, international politics...  when what matters is what I can buy with what I have in my wallet, how much you make each year, the value of your house or how you can plan the future of yourself and your kids, theirs, the foreclosure on my my house and how the bank engineered it, how they now want to dun me for the most expensive insurance in the world.  Notice that in none of that included government?  Or central banking? 

There is something very rotten in Denmark, and we all know that, we who are trained and educated in finance and economics, we know it best and yet we still can't agree that what is going on makes no sense, it is more fun to argue or point to a chart in the hope it proves our personal superiority.  No wonder the general population can't understand us or trust us, we do nothing but argue, but as of today I am here to say that I know what is wrong and I plan to do something about it. 

This is all at it's most basic root about accounting.  Accounting is about money and money is nothing more than an agreed upon unit of of account.  What is going on is that we no longer agree upon the units of account, who wields the power, or what it means for most of us.  It does not matter if you are into cash, gold, or barter.  Hyperinflation/deflation is not really a matter of who printed what when or even who lent and what subprime was collateralized, it is not even about how much cash is in my checking account, when economies get as out of balance as all the world is now witnessing there has been really terrible frauds, and the only way the world has ever been able to balance out these frauds has been war.  Double entry bookkeeping seems to make a lot of sense, but it also has killed more people than AIDS, bubonic plague, TB, and cancer combined.  FASB has 126 accounting rules and anyone can learn them, but they have one rule you can't do anything about, he with the money wins.  And just like Rhodesia which became Zimbabwe, we will change.  By the way, even with hyperinflation Zimbabwe has a better increase in real GDP than any G7 nation, the people have a better increase in living standards than the USA.  Over 10 years the economy and real wages have grown by over eight and a half percent.  That is why it is cited as a perfect example of hyperinflation, and yet there is no revolt, because the people are better off in spite of hyperinflation.  I wish for the same in the USA.  A real increase per capita in wealth of over 8 percent adjusted for inflation, it would be the first time such has happened since Clinton was in office. 

Tue, 04/05/2011 - 02:50 | 1135852 malek
malek's picture

Aren't you contradicting yourself within two consecutive sentences?

"And if the panicked money is assumed to come out of Treasurys and other paper assets, it begs the question of how much the paper assets will fetch on the day when there are no buyers other than the Federal Reserve?

My argument is simple, and I will not yield ground to any hyperinflationist who fails to explain, if the system collapses, where the money will come from to bid tangible assets skyward"

If Treasuries and other paper assets will fetch very little, you might still find someone to pay you 1 cent on the dollar, but in tangible assets, which then in effect means the bid for those went skyward.
The pure electronic existence of today's "paper assets" might hamper such trades, but you can always write a contract on paper "X will transfer assets Y to Z as payment for ... within ... days"

Tue, 04/05/2011 - 01:19 | 1135629 RoRoTrader
RoRoTrader's picture

Selling into tops and range tops with reasonable stops.

Mon, 04/04/2011 - 19:17 | 1134841 lookma
lookma's picture

Rick sez:

In contrast, the U.S. economy is cashless and the unions are widely reviled.  That said, let me cut to the chase:  Hyperinflation occurs when people, fearing their money is about to become worthless, panic out of currency and into physical goods.  This is highly unlikely to happen in the U.S. for several reasons, to wit: 1) Whereas Germany’s hyperinflation took several years to ramp up, today’s financial markets are primed for a catastrophic collapse that could conceivably run its course in a week, if not mere hours; 2) under the circumstances, there would be no shifting of financial assets into hard goods simply because any financial assets one holds at the time of the collapse would become worthless before one could sell them; and, 3) at that point, there would be insufficient currency available to drive a hyperinflation, since mattress money is likely to be scarce and because branch banks keep only about $25,000-$50,000 in cash on hand.

The NY Federal Reserve's website, in explaining the basics of "How Currency Gets into Circulation," provides (see http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html)"

Because banks pay the Fed for cash by having their reserve accounts debited, the level of reserves in the nation's banking system drops when the public's demand for cash rises; similarly, the level rises again when the public's demand for cash subsides and banks ship cash back to the Fed.

 

OMG, who could have be aware of such a shockingly fundamental concept to our current monetary system.  Obviously not Rick, he was too busy telling everyone about stuff he doesn't understand to take the time to recognize his own ignorance.

But OMG, what happens when the excess resrves run out!?!.  Lucky, the NRFRB primer has info about that one too:

The Fed offsets variations in the public's demand for cash that could introduce volatility into credit markets by implementing open market operations.

Yup, Rick doesn't understand that despite the appearance we have a "cashless" credit economy, bank issued credit is largely backed by the FED's promise to print physical cash.  Yes, we still have a "cash economy" underlying our ostensibly "cashless" credit economy.

Who couldda knowed!?!?  OMG I bet you would have "knowed" if you had read this: http://fofoa.blogspot.com/2010/04/21st-century-bank-run.html

Mon, 04/04/2011 - 15:13 | 1133748 ddtuttle
ddtuttle's picture

I appreciate the calm approach where others are running in circles screaming.  However, this whole area is very poorly understood by all of us, economists included.  To paraphrase Nixon: we're all economists now.

It's clear that hyperinflation is best understood as a flight away from the currency into assets, which drives up assets prices and gives the phenomenon its name.  However, hyperinflation environment is terrible for the economy. Credit dries up completely, which let's deleveraging happen quickly.  But many businesses just go under without access to credit.  The key is that hyperinflation is not INFLATIONARY its DEFLATIONARY.

Inflation is a natural part of the credit boom part of the cycle; whereas hyperinflation begins in the deflationary aftermath when the money printing authority decides to print its way out of deleveraging.  It appears their thinking is the inflationary period was goodl so lets recreate it.  Of course it can't work, in fact massive money printing into a serious debt deflation leads to stagflation and then hyperinflation.  Indeed, stagflation is just incipient hyperinflation.

Of course the USA is nothing like Weimar Germany, Zimbabwe or Argentina.  Ther reserve currency status of the US dollar means that our dollars are actually the base money from which all other currencies multiply-up their money supply.  The amount of dollar denominated debt being used as collateral in other currencies means that NOONE will willingly hyperinflate the dollar because it will bring the entire world down with it.  

The fact that those hyperinflations we paper money based and we have almost obolished paper transactions is an illusion.  If credit dries up, it will become very expensive, and merchants will STOP taking credit cards almost overnight.  This will cause the banks to convert most of their customers to a fully-funded debit based system.  Your credit card will still work at Safeway, but it will be a debit card.  Cash will become preferred in this world.  This system could easily hyperinflate from there requiring $1000  $10,000 $100000 denominations to handle big transactions that can no longer go by credit. If the Fed issues a $1000 bill, gird your loins.

So dollar hypernflation can happen, but there are vast forces arrayed against it.  What is not generally appreciated is that the vast increase in dollars has essentially funded the last 30 years of global growth.  It is kind of like a giant Marshall Plan for the whole world. And it has worked for the most part.  But this is the context in which Bernanke operates: the dollar is really the world's currency and to keep the American economy on track we have to keep the world's economy on track.  That means flooding not the just the US with liquidity, but the whole world.  

This view makes America's economic imperialism appear somewhat more benign.  Regardless, we may be at the point where simply can't afford to fund to whole world's credit system.  We have the choice to pull back, and promote an alternative to the dollar reserve status, or just try to eat the whole thing: print like there's no tomorrow and hope the USA can handle it.  This second approach of extending the status quo into infinity is very risky, but it looks like that's the way we are going.

 

So who should they put on the $1,000 bill? Clinton, Greenspan, Obama, Madoff, Lady Gaga?

 

Mon, 04/04/2011 - 13:30 | 1133168 gringo28
gringo28's picture

"...I will not yield ground to any hyperinflationist who fails to explain, if the system collapses, where the money will come from to bid tangible assets skyward."

Who let this whiney bitch out if its cage?

Mon, 04/04/2011 - 13:15 | 1133096 PulauHantu29
PulauHantu29's picture

There is serious inflation already ...and serious inflation will continue. Maybe not "hyperinflation" but serious enough to drive gold to $5,000 and oil to $300 imo.

Good luck!

Mon, 04/04/2011 - 12:44 | 1132944 cantabrian
cantabrian's picture

 

Rick you are spot on.  I have been in the deflationary mind camp since at least 2002.  We have had benign core inflation primarily because wages have not moved up.  But the deflation in financial assets and home values just adds fuel to the deflationary argument.  We are clearly heading toward a 1930s style economy, not a 1970s style stagflation.

 

For those of you who keep pointing to skyrocketing commodity prices, those of you who keep robotically shouting that higher wheat prices = hyperinflation, tell me where all the cash will come from to buy all the other goods and services in the CPI basket?  If gasoline goes to $10 and wages are the same (or lower), where will we get the cash to buy pants, a college education, cable/internet a car?  The price of all those things will fall.  Higher oil prices and higher food prices are a tax - they make a bad economy worse and send the prices of all other goods down.  We're headed for the 1930s all over again.  

 

For all of you who say we will have hyperinflation because the Fed endlessly prints cash to buy treasuries and other financial instruments, tell me how that translates into a higher CPI in the short, medium (and even long) term?  If the Fed prints $100 trillion dollars and buries it under a mattress, how can we have inflation?  How does that cash get into consumer's pockets?  It has to get in our pockets before we have inflation.  They are taking all this cash and buying treasuries with it (and mortgaged backed securities).  And the U.S. won't default anytime soon because there is a ready buyer for all those treasuries (the Fed).  It can't go on forever, but it can last a very very long time, and taxes will go up to help pay for the $50 trillion in Federal debt we'll have one day, but the rates will be low (because the Fed can endlessly buy long treasuries).  Higher taxes, lower Medicare/Medicaid and Social Security benefits are all deflationary.  We will all be cash poor, as Rick Ackerman alludes.

 

I agree with Zerohedgers that we're headed for bad times (a financial collapse), but it will be accompanied with serious deflation. I own no silver or gold and have completely missed the PM bubble.  For those of you who own silver and gold and have profited handsomely, I would consider locking in the gains.  Precious metals is where the bubble has moved to, and who knows where it goes after that. 

 

To give gold/silver investors some credit, there IS a scenario that would result in hyperinflation, but I see no evidence of it.  As I stated, we can't have serious inflation unless wages move up.  The only way we'll have a significant increase in inflation is if U.S. citizens collectively "rebel" and demand, perhaps in a violent way, to receive more in "wages" (whether in the form of lower taxes or more food stamps) so they can feed their families.  If the Federal government gives in, as appears to have happened in Yemen and Weimar Germany, then we'll have inflation.  What I see happening in the U.S. is, commodity prices rise for a short period, we all have empty pockets because we can barely fill our tanks and feed ourselves, overall demand drops, then prices everywhere fall.  I don't think commodities stay up for long enough to have riots here in the U.S.

 

I would love to hear from the PM bulls where they expect American citizens to  end up with all this cash that is needed to cause hyperinflation.  Nobody talks about that mechanism - you all just say "higher corn = hyperinflation" or "higher money supply = hyperinflation."  We need to all think about the mechanism that gets cash into consumers pockets.  I outlined the only scenario for hyperinflation I'm aware of (outright anarchy coupled with the government giving in and dropping cash from helicopters so we can buy tangible goods).  Is there any other possible scenario?

Mon, 04/04/2011 - 20:19 | 1135043 boiltherich
boiltherich's picture

You touched upon wheat prices and it triggered me to note that a loaf of whole wheat bread weighing one pound eight ounces has in it at todays spot price ($7.90/bu) 19.75 cents worth of grain, so why has it gone up by more than a dollar a loaf?  Trucking costs?  The truck uses the same fuel it always has, and that fuel is higher, but the increase in fuel is divided by thousands of loaves trucked so the per loaf fuel increase is almost not worth calculating, probably close to a penny.  The total increase in production costs of bread as well as a lot of other goods is higher, but absolutely a tiny fraction of actual price increases experienced.  Given that household wealth has gone down on average (understatement of the week yes?) and wages are now lower both in real and nominal terms than they were in 2000, it simply is not a case of too many dollars chasing too few goods, there are plenty of goods, the shelves are filled to overflowing, the silos are at capacity, in Oklahoma the storage tanks at Cushing are at record repository levels.  I highly suspect that a lot of what is going on is just greed, companies cashing in on higher inflation expectations, as well as many other companies raising prices even at the cost of their market shares in order to service the vast debts they accumulated in the past that are now reaching maturity and which can't be rolled over.  In this town one of the largest employers is in that very boat, Harry & David, they were bought out by private equity which immediately mortgaged the company to the tune of half a billion several years ago, now it is due and can't be rolled over, they can't get credit.  Result is that unemployment is about to go over 20% for the county. 

Mon, 04/04/2011 - 13:39 | 1133231 Azwethinkweiz
Azwethinkweiz's picture

Even if wages do increase, those who receive higher wages will be no better off as the cost of living continues to outpace any gain one might see in their paycheck. The wheels are already in motion to bring about hyperinflation and it'll take one heck of a hail mary to stop the speeding train from barreling off the cliff and slowing to an only-inflationary stop.

Higher corn does not equal hyperinflation. It equals a higher price in consumer staples which in turn leads to a lower standard of living. Excess money to make up for the higher cost leads to higher prices elsewhere as all subsidies do. This 'extra money' continuously being pumped into circulation is what triggers hyperinflation.

Each dollar printed will most likely have to be collected through taxation. Even the slightest increase in wages will be cancelled out by higher taxes---mixed with higher prices for food, energy, utilities, rent, etc. This will lead to anarchy and it won't be coupled with the government dropping MORE cash but by dropping chemicals which makes the eyes of the hungry citizens burn and tear to stop them from revolting against the situation which was brought on by our very own caretakers.

Mon, 04/04/2011 - 12:16 | 1132804 Hook Line and S...
Hook Line and Sphincter's picture

Rick has his feet mired in the mud of demand pull inflation.

And to think... I had forgotten that push cost input inflation was a figment of my imagination.

Mon, 04/04/2011 - 12:12 | 1132782 bbq on whitehou...
bbq on whitehouse lawn's picture

Deflation and hyperinflation are the same exact thing. Its running out of money.
When people run out of money they sell things for money. When a government runs out of money they print what they need. Then force the population to take the freshly printed money as payment. So the population takes that money and turns it into real things.
That's your cycle. That's hyperinflation.
The more money the government needs the more they will print, until sellers no longer accept it as payment.

Or do you think the government will start selling off assets to foreign interests, so they can collect US dollars.

The government will not have the ability to tax the amount that it will need, people will not have the money. If people had the money the government wouldn't be forced to print it.

The "hyper" only shows up at the end, and only for those who have access to the freely printed money. Everyone else will be broke. No money, no property, and no hope.

Mon, 04/04/2011 - 11:56 | 1132686 Yancey Ward
Yancey Ward's picture

There would be a hyperinflation if the central bank decided to "print" to cover all losses and to cover all government spending.  I have always expected that the bank, with the history known, would eventually walk back from this brink rather than destroy their primary asset, the dollar.  I think debt deflation eventually wins out, but since nearly everyone owns financial assets of one kind or another, we are all much poorer than we believe today.

Mon, 04/04/2011 - 11:48 | 1132636 HariMichaelson
HariMichaelson's picture

Where is the cash going to come from?  The cash will come from the same place it always comes from...the FED.  With a $500 trillion derivative market deflation may come, but its the follow up activity that will result in hyperinflation.  The US govt. cannot allow interest rates to rise to as that will result in a complete sovereign default.  If you believe that the USG, Goldman Sachs, and JP Morgan are going to simply throw in the towel and go bankrupt then we could avoid hyperinflation.  But if that's the case...I have some property in Japan that's right on the coast...  Far more likely, as the deflation unfolds, the FED pumps trilllions of dollars into the system.  It doesn't require cash just additional zeros.  As this occurs, all of the foreign holders of dollars will send them back to the US.  We really don't know how many dollars are out there.  The FED may not have to print any for hyperinflation to set in.  Regardless, money printing is the only possible mechanism that allows the powers that be to kick the can further down the road instead of facing the consequences of ~90 years of economic insanity.

Mon, 04/04/2011 - 11:50 | 1132613 HariMichaelson
HariMichaelson's picture

...

Mon, 04/04/2011 - 11:45 | 1132611 MrBoompi
MrBoompi's picture

Although I'm no expert, I think the biggest fear the Fed or the banking cartel would have when it comes to deflation is the reduction of asset values in relation to the amount of leverage they carry. When you are leveraged to the max, a small devaluation could cause insolvency and like we saw with Lehman it could spread like wildfire. We also have to remember the country is in even worse financial shape now than before the last crisis, so any Keynesian rescue will be more difficult to stomach.

When most of the money you create is going to yourself or your buddies, inflation is not an issue. At least it's not an issue until the guillotines come out.

Mon, 04/04/2011 - 11:50 | 1132608 boiltherich
boiltherich's picture

Inflation, the gas and grocery variety, is happening because the few who have benefited from what is now grotesque over-concentration of wealth, are looking for yields in commodities which they cannot get in debt markets, and will not try for in equities because the risk reward ratio is not high enough.  True, risk is higher in commodities than stocks, but the rewards are far higher making them more attractive once you accept risk.  It is not happening because of supply and demand issues, as OPEC says the market is well supplied.  It certainly is not happening because there are too many dollars chasing too few goods.  And it most certainly is not due to an economic upturn which we all know is a falsehood based on data distorted by greatly under-reported price inflation.  That is, nearly all the positive economic news like same store sales or factory orders is due to increasing dollars paid and not units sold, if dollars paid at stores is up 2% in a given reporting period it does not reflect improvement in consumer activity, from what I see (anecdotally to be sure) sales and traffic are way down but that 2% increase is due to 8% inflation in prices.

The only argument I see for hyper inflation with any legitimacy is that the Fed/federal government are creating money so fast that vast inflation has to be the only result.  I can sympathize with the point of view because it is the easy (I did not say lazy) logical conclusion to the debate when so much money creation seems to be going on.  But, too often advocates of inflation or hyper inflation forget that money is created when it is borrowed/spent not when "printed."  And it is true that the Fed is doling out hundreds of billions to a very few bankers even if these are electronic billions they are still monetization and not creation, they are bookkeeping entries and nothing more, so they never get into the hands of the public which is an absolute requirement for hyper inflation.

It is also true that the government is borrowing a lot of money to run daily operations and some of that does get into the hands of the public, but even with deficits as high as they are they are miniscule next to the wealth destruction that has happened in the last few years for John Q. Public, household wealth has dropped by more than 10 trillion dollars and is still going down.  It would take a decade of deficit spending at the current rate to equal that with compounding losses.

And the last most important trump card of deflationists is that even if hyper inflation could be engineered it too always ends with a deflationary depression.  But until you see the M1, and M2 rising at double digits and more there will not be hyper inflation but merely a really huge and fast transfer of wealth from the hoi polloi to the uber rich.

My own personal final trump card in the argument is the same as the Fed and government, WHAT INFLATION?  WHAT UNEMPLOYMENT?  You have a whole range of skewed data and phony accounting that allows you to simply deny there is any inflation at all.  Or, people out of work.  In this sense the dollar is no longer either a store of value or more importantly a unit of account.  It is only a matter of time before it also ceases to be a medium of exchange, at that point there will be very little economic activity and what little is done may well be at prices you would call hyper inflation, but for people like me the deflationary depression will already have happened.  (disabled vet on a fixed income with no COLA for the third year in a row because there is "no inflation").

 

EDIT:  I almost forgot my most important point, inflation is bad for the rich/bankers and deflation is good for them, therefore inflation beyond the gas and grocery type will not be allowed, they will dump the dollar as legal tender and adopt the Bancor or the SDR or even Amero before they would allow their dynastic wealth to be soiled by depreciated dollars.  And, if you are not personally worth billions you really have no say in the matter anyway so we might as well all be blowing smoke up a clowns ass.

Mon, 04/04/2011 - 12:06 | 1132762 oldmanagain
oldmanagain's picture

The CNBC premise that resource price inflation is the result of speculation is baloney.  The hoarding has barely begun.

In the commodity markets, every long contract has a short.

We have more people wanting resources than we can supply. Therefore the price goes up.  The deflationary part is that fewer and fewer can afford the resources.  You might notice that many countries are beginning to riot and otherwise becoming more beligerent.  Thus, resources  will not price out like the models predict, as they will be supplied by fiat payments.  This is the inflationary part.

 

Mon, 04/04/2011 - 11:38 | 1132579 oldmanagain
oldmanagain's picture

The arguments are by definition flawed by reality.  The contructs of inflation and deflation have as many meanings as those who would define such.  Once defined, the result is born.

What is seen as wealth by some is seen by others as inflation. Loss of wealth is seen as deflation.  For others wages that fail to maintain a standard of living is seen as inflation and by Austrians as the perfect world.

The major economic factor operational today is declining resources facing increasing demand. This is not a temporary famine, but the new dynamic.  Add in a more capricious mother nature, uncertain methods of coping, and you get the hyperinflated deflation.

Mon, 04/04/2011 - 11:31 | 1132538 NotApplicable
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I find it funny that Ackerman answers his own question to the "Flat Earthers" with a question that he doesn't bother to answer,.

And if the panicked money is assumed to come out of Treasurys and other paper assets, it begs the question of how much the paper assets will fetch on the day when there are no buyers other than the Federal Reserve?

Why at that point, the price will be any amount that Ben wants them to be. He will print dollars ad infinitum, just as long as people will accept them. It is this mechanism that will create the inevitable hyper-inflationary loss of confidence in the currency. But Ackerman doesn't even address (or understand?) the reality that only physical dollars are scarce. Instead, he uses it as a straw-man. Bank dollars will be created at any level needed to provide liqudity.

Then, after it all breaks, the IMF moves in for the kill.

 

Mon, 04/04/2011 - 19:32 | 1134880 Geoff-UK
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My money is on "(or understand)".

Mon, 04/04/2011 - 11:15 | 1132437 r101958
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Yes, how about he discusses the reality of the current stagflation which encompasses the wonderworld of both deflation and inflation. Afterwhich we can discuss the fuzzy manipulated numbers released each month by the gov.

Mon, 04/04/2011 - 11:17 | 1132434 dexter_morgan
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I don't pretend to be able to read the tea leaves as to what the future holds, though that doesn't stop me from taking some educated guesses. But, they are really just guesses because as far as I am aware, the conditions that exist today have never really existed before. There are some similarities to the Weimar and Zimbabe, but some very different conditions also, primary one being we are (at least for now) the worlds reserve currency.

It just seems like our markets have become ponzi schemes, and ponzi schemes don't generally end well.

Mon, 04/04/2011 - 11:12 | 1132421 lookma
lookma's picture

Hi Rick,

FOFOA has been driving trucks through the gaping logical holes in your logic for over two years.  See e.g. http://fofoa.blogspot.com/2009/01/calling-all-inflationists.html.

It sure is easier to just ignore these valid criticisms and contiune espousing nonsense, but IMO it doesn't do much for your credibility.

Thankfully, not all of us Coloradoans are clueless monetary nutjubs.  Stop giving us a bad name.

 

 

Mon, 04/04/2011 - 11:10 | 1132412 DonutBoy
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This is nonsensical.  I use cash in perhaps 1 in 10 transactions today.  There is no rule requiring cash to be present in large quantities to accompany the devaluation of the dollar.  As Lira has written on this site, there is also no requirement that real-estate values rise in a hyper-inflation.  Assets purchased with debt do not rise, things used to survive the day rise dramatically.

Mon, 04/04/2011 - 10:51 | 1132333 ApeMilesHigh
ApeMilesHigh's picture

Stagflation, you know, that's the ticket. Necessities go up, housing (valuation

down,rent up);most wants, but don't have to haves go down (except when

foreign produced); no jobs that pay anything. Where would all the cash come from

for a hyperinflationary episode, why from all those pallets of cash foreigners hold

outside the US.

Mon, 04/04/2011 - 10:42 | 1132301 Buckaroo Banzai
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Hyperinflation is the loss of faith in a currency. Rick, you seem to be confusing the symptoms with the disease. I'm sure we'll see a very different set of symptoms this time around... We are a million miles removed from Weimar.

Mon, 04/04/2011 - 10:41 | 1132284 Sparrowhawk
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As a perfectly ordinary person, I myself am buying things I think I will need in the future NOW, because I do think the expansion of the monetary base will cause my dollars to be worth less in the future.  That's where consumer spending is coming from.  I am basically a frugal person, but I can see the writing on the wall.

Mon, 04/04/2011 - 10:39 | 1132273 Mark of Zerro
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RickAkerman,

I see two big gaps in your logic.

1.  You say "we cannot have a Weimar-style hyperinflation for reasons that will be obvious to anyone who has read Adam Fergusson’s classic on the 1921-23 Weimar hyperinflation......" 

That, sir, is Hubris. 

2.  "Flat Earthers" are what you call people who don't agree with your Hubris? 

That smacks of intelletual dishonesty and arrogance. 

I have no gap in logic as I /dev/null this article.

 

 

Mon, 04/04/2011 - 13:00 | 1133029 XitSam
XitSam's picture

Yes.  I have read When Money Dies and I disagree with Mr. Ackerman.

Mon, 04/04/2011 - 10:35 | 1132267 Abby Normal
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It seems to me that inflation will come not only from dollars, but from competing foreign currencies.

There are two classes of assets, mobile (like food, oil, metals) and immobile (like most real estate).   Mobile assets can be bid up from growth overseas regardless of the decline of American demand.  The dollar is in competition with all other currencies and many foreign countries with young demographics will continue to grow and others, like Japan, may just flood the world with currency.   

So, in the short term, we could have rapid deflation of immobile assets while simultaneously experiencing high inflation in mobile assets - we're already on this slope.  

But, in the long term, if real estate deflates, the banks collapse and the Fed ends up printing to support FNMA, FHC and banks - or it prints now to avoid printing later.  In either case, the Fed prints, andat best case, can only support immobile asset prices, but cannot stem the hyperinflation due to their printing of mobile assets.

 

Mon, 04/04/2011 - 10:34 | 1132262 Abby Normal
Abby Normal's picture

It seems to me that inflation will come not only from dollars, but from competing foreign currencies.

There are two classes of assets, mobile (like food, oil, metals) and immobile (like most real estate).   Mobile assets can be bid up from growth overseas regardless of the decline of American demand.  The dollar is in competition with all other currencies and many foreign countries with young demographics will continue to grow and others, like Japan, may just flood the world with currency.   

So, in the short term, we could have rapid deflation of immobile assets while simultaneously experiencing high inflation in mobile assets - we're already on this slope.  

But, in the long term, if real estate deflates, the banks collapse and the Fed ends up printing to support FNMA, FHC and banks - or it prints now to avoid printing later.  In either case, the Fed prints, andat best case, can only support immobile asset prices, but cannot stem the hyperinflation due to their printing of mobile assets.

 

Mon, 04/04/2011 - 12:01 | 1132719 UninterestedObserver
UninterestedObserver's picture

Right - look at the tax breaks for buying a house. The Govt "printed" $8000 for every house sold. Doesn't matter if they physically gave you 80 $100 bills either

Mon, 04/04/2011 - 10:33 | 1132248 Johnk
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"...tell me exactly where the cash will come from that would allow Americans to bid the price of hard assets into the ionosphere?"

 

Why would the dollars have to come from Americans?

Mon, 04/04/2011 - 10:29 | 1132236 Alea Iacta Est
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I have to disagree somewhat with this statement:  "But other than mattress money and the relatively paltry sums of cash on hand at branch banks, there would be precious little cash to shift."

 

I personally know of a number of people (none of whom have ever heard of Zero Hedge) who have moved their assets out of stock and into cash/PMs.

If the poeple I am thinking about have made this decision on their own, I have to believe that others are doing this as well.

My "gut" is that your understanding of this topic is definitely correct, insofar as the past is prologue.

That said, I believe it is very difficult to predict how modern economies will react to these inflationary pressures and therefore it is likely to emerge in an unforeseen manner, or at least a not well understood manner.

While the past is helpful in describing how events may put pressure on economies, we have little context for how the role our shift to a "semi-cashless" society will impact modern fiscal turmoil.

 

Mon, 04/04/2011 - 10:50 | 1132222 Stuck on Zero
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The Author is blowing smoke when he states: "Hyperinflation occurs when people, fearing their money is about to become worthless, panic out of currency and into physical goods." Why just currency???  People will panic out of all dollar denominated assets.

$14 trillion will come from Treasury notes and $2 trillion will come from currency held overseas.  If holders of U.S. debt decide to dump it fast the buyer of last resort will be the Fed or the government will collapse forthwith.  It will have to pump huge amounts of cash into the system to keep the price up.  This will be high-velocity money which is the scariest.  People will seek to put it into any available asset other than cash.  The government itself will then have to compete against the herd and that can only mean increasing the speed of the printing presses.  If there is one thing that "electronic currency" has over cash currency is extreme velocity and that translates into inflation.

I score the Author -1.

Mon, 04/04/2011 - 10:21 | 1132220 Urban Redneck
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"a financial collapse is not just likely, but inevitable"

If Ackerman believes, this then why does he insist that a producer of a given product will be willing to accept less of Bernank's funny money in exchange for said product in the event of the a financial collapse?

There are two things human civilization cannot function without - FOOD/WATER and ENERGY.  So it is ironic that the Bernank explicity discounts them in his economic thinking.  However, the producers of food and energy do not even have to bring their products to market if they find the medium of exchange unacceptable.

For example, the MacMillans and the House of Saud can continue to swap oil for food and live comfortably regardless of economic events.  But in the event of an economic collapse what will Ackerman be willing to trade to meet his Food and Energy needs?  If you price the food and energy needs in terms of Bernank funny money you have hyperinflation (even without the printing presses running), if you price the same food and energy needs in terms of the luxury million dollar Colorado home which now trades for 3 months of food, then you have a deflationary collapse.  Two sides of the same coin, simultaneous hyperinflation and deflation, simply a matter of perspective.   

If there is a collapse of the economic system because there is no confidence in the current medium of exchange then the situation is FUBAR.  Hyperinflation and Deflation are just words that tend be used by people who will be adjusting to their new position as BITCHEZ if they possess nothing to trade to meet their needs.     

 

Mon, 04/04/2011 - 10:17 | 1132196 chockl
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Fiat is not printed till after the fact of hyperinflation.

 

Mon, 04/04/2011 - 10:17 | 1132194 ATTILA THE WIMP
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Where will the money come from?

When the USD loses its status as world reserve currency all the USDs currently circulating outside the USA in the form of marketable US Treasury IOUs will come back to where they are legal currency, the USA.

It will be a double whammy tsunami because the amount of dollars in circulation  in the USA will go to the moon and the amount of foreign goods coming into the USA will go south because China/oil producers will no longer hand over their manufactured items/oil for USA currency.

And please keep in mind that the mountain of USA Treasury IOUs can not be made worthless by a collapse of USA Treasury market and thus decrease the "money supply." These USA Treasury IOUs will have to be redemed at their maturity value thus guaranteeing an ongoing gusher of USA currency to the note holders.

All the above is certain. On top of all this my guess is that the CFR, Bilderberg etc.PTB that call the shots in the USA will print up tons of Treasury debt and hand it over to their pals like the Squid etc. in one last orgy of a buying spree while the USD still has ANY value. Actually, this final "looting by pumping" phase is going on right now, it's called QE.

  

 

 

Mon, 04/04/2011 - 10:16 | 1132193 chockl
chockl's picture

Fiat is not printed till after the fact of hyperinflation.

 

Mon, 04/04/2011 - 10:14 | 1132187 Dangertime
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There seems to be two arguments made here......

1)  There is not enough actual currency in physical circulation.

2)  People do not have enough money in general to cause hyperinflation.

 

To point number one, I have to ask.....does it really matter if people are buying with physical cash or with numbers on a screen?  If people are frantically trying to purchase goods, what difference does it make if cash is being physically presented or if it is changing digitally via numbers in accounts?  One could almost argue that the velocity of money could climb even faster in a digital economy.

 

For point number two, there may be some logic here.  If people have neither dollars whether digital or physical, the only way I can see hyperinflation occurring is if the dollar is abandoned by everyone around the world, at which point, I think the businesses themselves would be the new impetus in hyperinflation as they locked in prices on every Raw material they possibly could, sending the prices of all sorts of goods sky-high in a speculative frenzy.

 

In short, while it is the money supply that causes inflation, I believe it is the velocity of money that transforms the beast to hyper-inflation.

Mon, 04/04/2011 - 10:15 | 1132184 chockl
chockl's picture

Fiat is not printed till after the fact of hyperinflation.

 

Mon, 04/04/2011 - 10:23 | 1132167 forexskin
forexskin's picture

one minute after a deflationary collapse event, when the dollar has no more confidence and there is nothing of utility remaining for sale, the fed will have no choice but to crank up the credit presses.

those connected TPTB types will not allow themselves to be priced out of the market, except at that point, they have a choice: give up present purchasing power or give up their claims on ownership and future delivery obligations (from the indentured serfs). that will be an easy choice when items of necessity are no longer available (with predictable consequences).

 

the problem with your thesis is that you put an artifical stop right at the point of the deflationary collapse. now you tell me about what happens next.

Mon, 04/04/2011 - 10:07 | 1132157 Beau Tox
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Ackerman does not follow through to the end.  Hyperinflation or deflation, the result will be the same.  Financial collapse will destroy the division of labor, which has been cultivated by the power of paper.  When the necessities of life are not available FOR ANY AMOUNT of paper / credit, then the exact route which the civilization has traveled to get to that point won't matter.  When the utility company strikes occur, employees will stay home to tend their gardens, woodlots and livestock.  When the grid collapses, it will never come back.  Only true barter, supplemented by PMs (think of the PMs as change) will serve as trade transactions.  Ackerman could make clear the possibility that fixed cost expenses (insurance premiums, mortgages, other fixed-rate agreements) will become the only purpose for what we know as money.  If these contractual relationships do not survive, then the Mad Max scenario predominates.

Mon, 04/04/2011 - 10:06 | 1132153 zenon
zenon's picture

The man is right. The US has a credit based system not a cash based economy. Now that the credit mechanism has broken, the Fed is doing its best (through QE) to transform the system into a cash-based one. This will take time. A dislocation in the financial system will lead to a collapse and deflation first. The Fed's response we all know will be to pump even more money into the system. Hyperinflation follows a deflationary collapse.

Mon, 04/04/2011 - 10:02 | 1132137 sweaty7
sweaty7's picture

first, 25-50k is a rather low number for cash available at branch banks. i've been a branch banker and on a busy payday friday 25-50k would last u about 2 hours. try a multiple of 10, 250-500 for cash on hand. that however doesn't diminish your point. the kind of deflationary collapse you are laying out involves a full collapse of the financial system (ie the FED and/or other large banking insitutions cease to exist). in that case, it's gonna be time to go to Tree Village. what i see is the fED "injecting liquidity" up until it's final last breath. they'll keep adding zero's at an exponentially increasing rate until we do collapse from the stress. the hyperinflation will lead to the deflation. this may not transalte across assett classes. in fact real estate may be stuck in a death spiral while commodities and fuel continue to soar.

Mon, 04/04/2011 - 09:59 | 1132127 Paul Krugman
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This might be the worst article I have ever read on the inflation versus deflation debate. First of all he asks the question where will the money come from to bid up asset prices. The fact that he even asks this question is proof that he doesn't understand the situation. Secondly when hyperinflation really kicks in, the value of money in circulation is actually declining not increasing and was especially true in Germany. This is because the value is dropping faster than they can print it. It would be like the USA printing a trillion dollars next year but the exchange ratio dropping by a magnitude great enough that the total money stock is actually worth less than before the trillion dollars was printed. 

Mon, 04/04/2011 - 09:51 | 1132089 Cthonic
Cthonic's picture

Not addressing anything else in this essay, except for the obsfuscating statement that the Weimar Republic hyperinflation took place over the course of several years.  While it did last several years, the first eight months where enough to wipe out over 66% of a cash or bond portfolio's real value; the first year would have done in over 87% of the purchasing power of those paper assets.  After that point, the rest of the hyperinflationary episode is rather meaningless in terms of any prior wealth held in those forms.  Also, the author asks where the 'cash' comes from, given the limited amount of paper currency in circulation, while neglecting the phenomenon wherein the receiver of such cash under inflationary circumstances is just as desperate to spend it (as well as the wholely electronic form) back into circulation, pumping up prices of marginal goods (those actually for sale).  Like the author points out, eventually in a credit system, if no further credit is created, then deflation may eventually ensue once a new price level has been achieved.  There is plenty of cash in the system for a nice burst of hyperinflation as there not much limit on the velocity of exchange; the funding assets would be repatriated physical cash, CD's, bonds of all varieties, cash values of life insurance policies (borrowed against or surrendered), underpaid taxes, and if rates (and nominal prices) rose significantly enough, (fraudulent) new borrowing against real estate assets.

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