Guest Post: How Hyperinflation Will Happen

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Mon, 08/23/2010 - 12:01 | 537645 kengland
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The inflation will come when debts are forgiven in mass. Until then...deflation bitches

Mon, 08/23/2010 - 12:03 | 537653 Azannoth
Azannoth's picture

REPENT!                                                (the debt)

Mon, 08/23/2010 - 17:03 | 537886 dlmaniac
dlmaniac's picture

As far as Japan goes, I think they only managed to delay the inevitable mass inflation as their savings have been drained by years of irresponsible fiscal policies. With little savings to back up that huge government debt, they are now in for either default or print as well.

 

As for hyperinflation in US, it will happen but not for very long as they'd quickly switch back to gold standard to end the madness as by then even the dumbest politicians would scream for gold standard to cover their behind.

Mon, 08/23/2010 - 22:53 | 539313 hedgeless_horseman
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Thank you.  I appreciate both of your insights, and have learned from each of them.

Mon, 08/23/2010 - 23:10 | 539322 tictawk
tictawk's picture

Massive Deflation will happen BEFORE Hyperinflation because the Fed CANNOT purchase all the debt out there.  The author is making the ASSumption that the Fed is in control of everything financial.   Events of the last couple of years just prove otherwise and Remember the ratio of "debt" to "cash in circulation" is 50:1.   I believe that nobody is bigger than the market and ultimately the market wins.  Politics inflate and Markets deflate.  The DEBT bubble has more latent deflationary power than all the Fed's ability to print.  The Fed is a pimple on the ass of a $100+ trillion dollar debt bubble and Bernanke is the prick that will burst it. A dash for the exits from any large bond holder will be enough to raise interest rates at the long end (remember the Fed does not control the long end, it can only influence it over the short term) making the debt burden untenable.  The spread between the long and short end will widen incredibly to a point where borrowing will cease and Cash will be king.  After a period where a significant amout of existing debt has been reconciled via default, restructuring or paydown, it might be politically expedient to inflate the rest but I doubt it.  I think once borrowing and lending cease, the Fed will be forced to make the dollar a hard currency in order to attract capital to our shores. 

Mon, 08/23/2010 - 23:36 | 539365 Spitzer
Spitzer's picture

hahaha, just when we though we might have made some progress with these deflationists along comes this tool.

If the economy contracts as much as you say it will, there will be no tax revenue to service the debt. The dollar is backed by this debt. The dollar will sell off as fast as the bond bubble bursts.

Tue, 08/24/2010 - 00:14 | 539393 tictawk
tictawk's picture

The dollar is NOT backed by anything (it is fiat) but is a debt instrument.  It is a Debt based fiat currency.  There aren't enough dollars to satisfy the outstanding debt.  What is it that you don't understand about debt:cash ratio of 50:1?  Debt/credit is not the same as cash.

Tue, 08/24/2010 - 00:30 | 539410 Spitzer
Spitzer's picture

The dollar is backed by the full faith and CREDIT of the US government.

^I didn't make that up.

Why did the Euro inflate when it was on the cusp of debt destruction then ?

Why didn't the Euro gain in value(DEFLATION) when Greece was unable to service its debt ?

Tue, 08/24/2010 - 08:44 | 539774 ATG
ATG's picture

The dollar and the euro have two quite different central bank objectives and backings.

The primary objective of the ECB is to maintain price stability across the EEC, not in each member state.

http://en.wikipedia.org/wiki/European_Central_Bank

The Fed has multiple and sometimes conflicting objectives, including maximum employment, moderate interest rates, stable prices, averting financial panics and strengthening the US Economy:

http://en.wikipedia.org/wiki/Federal_Reserve_System

Meanwhile, the EC has far more gold than the USA and any other regional bloc in the world...

http://www.gata.org/node/104

Tue, 08/24/2010 - 00:20 | 539401 kengland
kengland's picture

What other liquid assets are there to buy? The world is drowning in dollars. CB's need the liquidity for a myriad of reasons. The debts of the world are net denominated in dollars. How are they going to pay those debts back? Yen?  Revenues or no revenues, they will covet the dollars until they can't.

Tue, 08/24/2010 - 01:09 | 539448 tictawk
tictawk's picture

@kengland

"the world is drowning in dollars"

No the world is drowning in dollar denominated debt, i.e. dollar denominated IOUs that need to be satisfied with dollars /cash.   Debt / cash in circulation ratio = 50:1

Mon, 08/23/2010 - 13:43 | 537924 ATG
ATG's picture

Lord spare us from would-be Italian filmmakers and writers who, with limited market experience, somehow think they are smarter than Fed, 0 Advisers and Wall Street, who already made a muck of things with their failed national socialist central planning agenda.

There is absolutely no hyperfinflation evident like the Revolutionary War Continentals or Civil War Greenbacks. Zero. Zilch. No hedge.

M3 is -8%, the adjusted monetary base growth is -90%, total credit is declining at -9%, the real cost of mortgage money is the -35% decline in real estate plus the nominal 5% on mortgages, or 40%, and the money multiplier is less than 1, losing 15 cents for each additional dollar the Fed creates trying to prop up dead mortgages and insolvent Treasuries.

The Fed well knows if it monetizes all Treasury liquiditions, every banker, CEO or CFO will be dragged out of their corporate jet easy chair and crashed, defenestrated or piked.

Rather, the tipoff to any repudiation of the dollar will be interest rates going crazy as people sell everything in a mad dash scramble for cash.

Every single hyperinflation was preceded by runaway interest rates, from Argentina to Zimbabwe.

Meanwhile the 83 cent currency-weighted dollar is targeting 115 after a respite from 70.70 and 80.08 lows, still shy of 120 in 2001 before endless imperial wars became neoCon policy for both parties with their CIA candidates...

http://stockcharts.com/charts/gallery.html?%24usd

Mon, 08/23/2010 - 13:58 | 537991 Eternal Student
Eternal Student's picture

"Smarter than the Fed"? That's hilarious! You mean you're in awe of the same group who not only caused this mess, but couldn't see the disaster of 2008?

Goodness, man. My grandmother is smarter than the Fed, and she's been dead for over 20 years.

Mon, 08/23/2010 - 14:21 | 538055 ATG
ATG's picture

Learn to read...

Mon, 08/23/2010 - 17:09 | 538617 Eternal Student
Eternal Student's picture

Sorry, but by your "Lord spare us from" comment I was under the apparently silly impression that you didn't like non-PhD Economists. I'll take them any day over those with PhD's. That includes the disparaged "Italian filmmakers and writers ... with limited market experience". Even a monkey with a dartboard is probably preferable.

Tue, 08/24/2010 - 08:56 | 539810 ATG
ATG's picture

Fed, 0 Advisers and Wall Street, who already made a muck of things with their failed national socialist central planning agenda.

Usually, integrity and values more important than intelligence.

Anyone who understands Henry Hazlitt's Economics in One Lesson, may appreciate better economics than most PhD government economists, who create more blowback with central planning, than common sense practical Constitutional workable economic solutions like uniform taxes, gold and silver money, limited government and the protection of private property.

Anyone who thinks they can predict the markets to a T is kidding themeselves, as ZH comments and 0 Economists proved time and again, with their failed No more than 8% unemployment forecast...

Mon, 08/23/2010 - 19:12 | 538947 Bendromeda Strain
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He did. You said "somehow think they are smarter than 0 advisors". Once you stick a fork in Orszag and Romer, you are left with Summers, because we know he isn't listening to Volcker.

I'll take Sergio Leone over that crew...

Tue, 08/24/2010 - 08:59 | 539819 ATG
ATG's picture

Me too.

The present author is no Sergio Leone or Clint Eastwood, yet...

http://www.imdb.com/name/nm0001466/

Mon, 08/23/2010 - 14:48 | 538183 GoinFawr
GoinFawr's picture

M3 this, M3 that.

LvMises says,

"Hunh."

M2, TMS

Regards

Mon, 08/23/2010 - 18:08 | 538791 technovelist
technovelist's picture

The US hyperinflation will be accompanied by runaway interest rates, as the Fed becomes the only purchaser of Treasurys. I'm betting they won't stop before they destroy the dollar, as if they do make any attempt even to slow down the rate of purchase, it will cause a deflationary crash to appear immediately, which will cause them to panic and open the spigots wide.

Mon, 08/23/2010 - 22:43 | 539293 dark pools of soros
dark pools of soros's picture

well who buys the treasuries besides the FED during this dump off?  Why does the FED have to buy them?  They make the market since they are the only bidder.  So they can IGNORE all the ones the banks and asset managers are trying to dump...  NO SALE..    BUT the price of the new treasuries can continue as before since the buying is totally rigged anyway...

 

you are going to have to be more of a con man to con these cons

Tue, 08/24/2010 - 02:11 | 539488 bigkahuna
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you are going to have to be more of a con man to con these cons

That is the best way I have seen that stated. People just do not get that though. I tell people all the time that everything down to legal tender laws will be, as a previous commenter said, defenestrated, meaning "thrown out the window". We are so darn crafty to be ahead of the wave of people who will be blind-sided by all of this, but even most on this forum do not understand that the rules are optional right now--and they will certainly not be followed during ANY kind of destabilization. People think they will be able to use dollars to pay for anything? Including a mortgage? Nope. The bank is just going to say, "We'd rather take your house/land/car/whatever". This will get very ugly if/when it happens.

Tue, 08/24/2010 - 04:16 | 539568 mophead
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Aren't you over stating things? It doesn't take everyone to dump their treasurys to cause a collapse, no more than it takes a few traders to pump up a stock. There will likely be enough buyers and sellers to crash the treasury bond market.

Mon, 08/23/2010 - 18:25 | 538838 trav7777
trav7777's picture

Dude...let's take a step back and look at this.  Deflationists seem to miss the forest for the trees.

The USG is the most heavily indebted entity on the planet.  How would THEY be able to tolerate deflation?  It'd kill them as surely as it nearly killed every levered player in 2008.

The USG can incontrovertibly not repay ITS debts.  How the hell can the FRN maintain worth in the face of that?  I understand that the "math" says that the FRN becomes more worthful as deflation sets in, but this simply defies any common sense or intelligence, because the FRN is the note of a bankrupt sovereign and a bankrupt central bank.  Only in bizarro world can that become more worthful.

Eventually as deflation continues to grind, confidence in the FRN will evaporate.  Military or not.  Nukes or not.  Reserve currency or not.  And then it is all over in a heartbeat.

Is that TODAY?  No.  Obviously not.  Is it coming?  Of course, just as surely as a Pound Sterling is a fraction of a pound now (11 pounds to the ozt of Ag) despite the UK having suffered "deflation" in the 1930s and god remembers how many wars and the South Seas bubble and all that shit along the way.

The Pound's march toward ever-smaller fractions of an ACTUAL pound of sterling silver has been RELENTLESS.  So shall it be with the dollar.  By hook or by crook man.

Study freakin history.  Deflation precedes devaluation as surely as night follows day.  It is the ONLY way to make the math work.  I marvel at precious dollar FRNbugs, I really do, thinking that this time will be different from every other time in history and the FRN will simply live forever.  It won't.

So, you can either prepare now for that or try to be a vulture and pick up wallets and cellphones and watches DURING the panic stampede out of the burning nightclub.  FRNbugs must fancy that there is some exit that the rest of the patrons don't know about, or that they are fireproof, or Batman.

Mon, 08/23/2010 - 18:49 | 538903 boiow
boiow's picture

well said,  that man.

Mon, 08/23/2010 - 19:12 | 538945 sid farkas
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I feel bad for you son...

The economy's got 99 problems and inflation ain't one.

Mon, 08/23/2010 - 21:57 | 539234 Spitzer
Spitzer's picture

I can tell by that comment that you have a mind that is not well suited for investing. You are one of those people that cant precive time. Your mind is always in the now, it is stuck there. You are fucked up

Mon, 08/23/2010 - 22:03 | 539239 kathy.chamberli...
kathy.chamberlin@gmail.com's picture

well, i don't know about that.

Mon, 08/23/2010 - 22:22 | 539263 sid farkas
sid farkas's picture

Yeah, that's why I rode the gold bull from '03-'09. Now I'm long USD, you'll realize I was right in about 6 months, until then there's no point in arguing.

I pity the gold bugs that are about to lose their ass, but I see there's nothing I can do to help.

 

Mon, 08/23/2010 - 22:29 | 539270 Turd Ferguson
Turd Ferguson's picture

Well, Sid, differing opinions make a market.

Thank you for selling me your gold. Lose my ass or not, I'm glad I have it.

Mon, 08/23/2010 - 23:18 | 539348 w a l k - a w a y
w a l k - a w a y's picture

well said Mr. Ferguson

Mon, 08/23/2010 - 23:44 | 539377 Spitzer
Spitzer's picture

The real unmolested low for gold, when you discount Gordon Brown dumping the UK gold like shit, was about $480 to $500.

So you think that a price that goes from $500 to $1200 over 10 years is an over heated market ?

Is that really bubble territory in your mind ?

Tue, 08/24/2010 - 00:59 | 539434 sid farkas
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Overheated, not one bit, gold doesn't change in value (much). Saying that gold has gone from 500 to 1200 is really saying the USD lost value. I was long PM's to be short USD, but I don't think USD will lose anymore value over the next few years due to a reduced supply of dollars (i.e. deflation).

My current shorts on PM's (among other shorts) are a way to be long dollars against something of constant value. It really says nothing about my view of gold.

 

While I hold austrian school in high regard I don't think they got everything right. Specifically I disagree with their definition of money. If you want to calculate real interest rates I think M3 is closest to the true definition of money. We'll see shortly, if you use M1 or M2 or TMS you're going to come to the conclusion that real interest rates are low or negative, in which case long gold would be a great idea. I use something close to M3 which leads me to the conclusion that real interest rates are positive (and pretty high), which tells me I should be long USD.

Tue, 08/24/2010 - 07:16 | 539626 Escapeclaws
Escapeclaws's picture

Sid, I'd be interested to hear what you have to say about gold vs euro. Currently, gold seems to be in perfect negative correlation with the euro. Does that mean that real euro interest rates are negative?

Tue, 08/24/2010 - 08:00 | 539670 sid farkas
sid farkas's picture

I'm no expert on the euro, but it seems like there is a whole lot more going on over there which you would need to take into account.

Mon, 08/23/2010 - 23:46 | 539375 Village Idiot
Village Idiot's picture

"I can tell by that comment that you have a mind that is not well suited for investing. You are one of those people that cant precive time. Your mind is always in the now, it is stuck there. You are fucked up"

 

 

I am not in a position to comment, but that may be the funniest thing to come out of your spitzer in a while. LMAO

Tue, 08/24/2010 - 00:00 | 539386 RaymondKHessel
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99? That's it?

Mon, 08/23/2010 - 21:08 | 539145 wake the roach
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Deflation precedes devaluation as surely as night follows day.

 

Yes, and this is because modern economic ideology does not appreciate the fact that the value of money is determined by each monetary units energy value (the slice of the energy pie, energy consumption that allows the production and exchange of goods and services within an economy). 

Deflation is a loss of energy value per monetary unit (purchasing power) just as inflation is.

Both are a loss of energy value per monetary unit as a result of the increase (inflation) or decrease (deflation) in the total supply of monetary units  within an economy, without a relative increase or decrease in the supply and consumption of energy within an economy (as a result of overproduction or as a result of a nominal increase in the price of energy, pick your cause, energy supply or demand?).

However, it is only through the destruction of these non existent fantasy monetary units known as credits that gives the word deflation any meaning to us at all. Yes, when credit units are destroyed, the real energy value that each credit "represented" is transferred to the pure money supply.

This increase in the energy value of the base money supply via deflation can only be maintained if it once again leads to a sufficient increase in economic activity (energy consumption) that allows the total money supply to return to its previous energy/credit equilibrium and within a time frame that does not lead to a  further serious fall in economic activity (reduced economic activity=reduced energy consumption per monetary unit= less energy value/mon-unit=inflation).

But, if the destruction of debt on balance sheets does not occur allowing asset prices to fall to regain a monetary energy value equilibrium that leads to real economic growth (energy consumption and so increased demand for credit units), people will begin to lose faith in ever regaining the market value paid for the assets they purchased with credit.

Hyperinflation is as much as a result of a loss in faith of asset values as it is the loss of faith in the value of the currency. Obviously, this trend is picking up momentum.

I rushed this explanation but I hope it made sense to someone besides myself and Frederick Soddys ghost. Hyperinflation is assured unless the public has trust that the assets they purchased with credit will regain the previous real market value, or unless uncle Ben can somehow increase the supply and thus lower the nominal price of energy to the point that sustained the previous two decades of credit bubble growth (economic growth can only be produced through an increase in energy consumption, or an icrease in energy efficiency)

Oh, and Mr. Lira mentioned the distribution of credits/ration cards . THAT IS THE END GAME! And let me add that these credits will be given purchasing power not by the energy value each credit buys, but by the carbon units each credit buys. Welcome to the new world folks, if we don't blow the world to hell first.

 

Mon, 08/23/2010 - 22:08 | 539249 Spitzer
Spitzer's picture

i get what your sayin.

I have some issues with the reasons you think people will lose faith in the currency unit. The spenders in the closed economy will not have as much of an effect on the loss of value of the unit of currency as the holders of debt denominated in the currency will.The debt holders will get the ball rolling before the peasants in the closed economy knew what happened.

 

 

Mon, 08/23/2010 - 23:52 | 539364 wake the roach
wake the roach's picture

Yes I agree with you... I've already waxed the old longboard, all set for the bond mega tsunami ... Just trying to make a point on deflation but I have always been a useless writer ;-).

 

Tue, 08/24/2010 - 02:17 | 539495 superuser
superuser's picture

This is after a few glasses of wine, so please be gentle (I realize that's not possible on ZH).

Based on your first sentence, are you assuming "energy" = consumption towards some production of a "useful asset"? i'm a bit of a plebe, but if that's your definition of "energy," then doesn't pretty much the consumption of "pure entertainment" shrink your "energy pie?" And if that's the case, don't things like virtual goods accelerate deflation at an even more rapid pace, assuming they gain scale (give a signal) w/o mass adoption (not sustainable)? Sounds like our economy for the past n years...but I'm a plebe.

Tue, 08/24/2010 - 00:46 | 539422 BobWatNorCal
BobWatNorCal's picture

No, I think he has a point.
Inflation: economy running too hot.
Hyper-inflation: everyone trying to get out of fiat currency.
The trigger could be widespread collapse of CRE, causing a domino of regional bank failures, the FDIC is overwhelmed and payoffs are slow.
People withdraw from weak banks, the domino becomes a firestorm, and we've reached the 3rd gate of financial Hell.

Tue, 08/24/2010 - 08:11 | 539686 The Alarmist
The Alarmist's picture

I dunno ... there is potential energy and there is kinetic energy. 

Inflation is like when you pour a little more water into the glass and thereby increase the potential energy.  Hyperinflation is when you break the glass and find yourself awash in cash that you wish could be contained rather than simply sloshing all around anything that will hold it.

Wait ... maybe inflation is like an electron jumping from one orbit to another ... same mass, but perhaps a different charge to that atom.  Hyperinflation is when the whole atom breaks apart.

Nah ... never mind. Too theoretical for me.

Tue, 08/24/2010 - 09:04 | 539833 ATG
ATG's picture

They may have no choice.

Markets are bigger than the Fed and government,

as derivatives already proved several times in panics.

Unfunded agency mandate liabilities dwarfing the GDP may be about to prove that again,

with default, not inflation.

Repossession is not inflationary... 

Mon, 08/23/2010 - 21:45 | 539208 Spitzer
Spitzer's picture

Are you aware that we need no money printing and no QE to have hyperinflation ? Looks like not..

When the treasury goes bust because the real economy cannot service the debt, the dollar will go bust. Its that simple.

If there was no bailout in 08, the dollar would have been done by May of 09

Mon, 08/23/2010 - 21:55 | 539228 SWRichmond
SWRichmond's picture

yup

Tue, 08/24/2010 - 09:22 | 539876 ATG
ATG's picture

Spitz, arrogant tone does not become you or cover up for lacunae.

Maybe you could tell us how many dollars are actually in circulation, as opposed to virtual credits on the internet that can disappear with the flick of a switch?

Hint: currently a whole lot lot less than inflationary amounts, less than a trillion in a $14 T GDP.

In fact, the average life of a paper dollar is 21 months.

The reason Jefferson and other founding fathers feared Central Banks was their ability to inflate the economy with debt, and then secretly deflate and foreclose it for controlling ownership.

That's what the IMF and World Bank did with a large part of the world, coming soon to a country near US.

Bailouts and stim programs only accelerate the process.

Every inflation since 1776 relied on the dollar as de facto currency when times got tough and dollars got scarce. Argentina, China, Germany, Hungray, Japan, Mexico, Thailand, Vietnam and Zimbabwe were no exception.

Assuming the Fed can and will print its way out of trouble indefinitely might be quite an expensive portfolio mistake.

Currently, all money supplies are slowing or contracting, and the USD is targeting 115, hardly the harbinger of inflation, let alone hyperinflation...

http://stockcharts.com/charts/gallery.html?s=%24usd

 

 

 

 

 

Tue, 08/24/2010 - 10:32 | 540118 SWRichmond
SWRichmond's picture

Tell me how the U.S. will service its sovereign debt in your scenario.

Tue, 08/24/2010 - 16:43 | 541292 MsCreant
MsCreant's picture

I would like an answer to this too.

Fri, 08/27/2010 - 10:16 | 541426 kathy.chamberli...
kathy.chamberlin@gmail.com's picture

hey seet pea do you think we can get up to a 1000, and celebrate with a party? i will help and leave lots of dumb and stupid comments about off topic things of course.

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