Guest Post: The Mathematics Of Hyper-Inflation

Tyler Durden's picture

From Alasdair Macleod of FinanceAndEconomics.Org

The mathematics of
hyper-inflation

We
have already passed the point of no return on our
journey into hyper-inflation for many paper currencies,
and investors seeking to protect themselves from
currency debasement should understand why. This opening
statement is valid even if we ignore today’s abounding
systemic risks.


There is a simple reason why monetary inflation becomes
an exponential phenomenon. As currency is debased, an
increasing quantity of money is required to achieve the
same real-money effect.  For example, if the quantity of
money is increased 25%, the initial benefit to the
issuer is a tax of that amount on the holders of
previously-existing money stock.  To achieve the same
tax in real terms for a second time requires a further
expansion of 31.25% of the original monetary units, and
continuing with subsequent 25% expansions on increasing
totals we obtain our exponential series of monetary
inflation.

In
practice, the realisation of the loss of purchasing
power a currency suffers depends on how quickly it is
transmitted into the general price level, and this can
vary considerably; but eventually it is reflected in
prices. So we need to consider the likelihood of an
improvement in government finances sufficient to
eliminate reliance on funding through the printing of
money, which is the root of this evil. It is here that
governments have great difficulties, which lie generally
in the nature of government bureaucracy.

In
government departments, there is always a complex and
expensive structure designed to ensure compliance with
the wishes of the executive, and to ensure that public
money is properly used. This is why boxes are ticked;
why it is so important to employ gender and race
equality officers to ensure a department complies with
government policy. The process, therefore, overrides the
result, and nothing can change this. So when a
government restricts public spending, there is no cut in
bureaucracy; on the contrary, often more bureaucracy is
required to administer the cuts and monitor the results.

The
consequence is that restraint in public sector spending
always feeds through disproportionately to cuts in
services, leading to public outcry. And this is
precisely the problem faced in Britain today. The
Coalition government has adopted a hard line on public
spending, following the profligacy of the previous
socialist administration. This corrective approach is
creating uproar, not only from users of government
services and civil servants, but also from the
intelligentsia who fail to properly understand the true
cost of public services. So Keynesian economists are
providing the public with an intellectual argument
against the cuts by claiming they are recessionary, and
opposition to them is growing.


What has become lost in the political debate is that at
no time is the Coalition government actually cutting
public spending: it is set to rise in every year of this
Parliament.
[i]
The pain expressed so loudly in all sections of the
community is solely the result of a reduction of the
increase in previously planned expenditure. It is
evidence that bureaucracy triumphs over services
provided, and it is an illustration of the extreme
difficulties politicians face in merely reducing the
rate of increase of public expenditure.


These difficulties have their roots in the current
situation, but a glimpse at the future also confirms
government spending has to rise exponentially, with
welfare and other future liabilities compounding at an
alarming rate.  We know that there are more pensions to
provide and people are living longer, requiring
increasingly expensive care services; and that all this
is expected to be funded from the public purse. Less
appreciated are the long-term destructive effects of
inflation on private sector savings and nominal cost of
providing state welfare. In other words, inflation
itself has directly increased the burden on the state,
and indirectly has ensured there is little private
capital to fund any shortfall.  Consequently, future
public spending is firmly tied to an exponentially
accelerating path.

In
most Western democracies it is already too difficult for
politicians to face up to this reality.  Instead, they
pursue policies conceived through hope rather than any
realistic assessment of the prospects, dreaming of an
economic recovery that will bring public sector
borrowing back under control. This allows governments
and their independent statisticians to concoct tables
showing economic growth, an improvement in tax revenues,
and a reduction in welfare costs as employment improves.
There is no actual evidence to support this optimism.

A
detailed critique showing why economic recovery is a
forlorn hope is beyond the scope of this article; but if
the private sector is expected to regenerate itself
without savings, no sustainable recovery can possibly
occur.  It will also require an historical precedent: an
economy increasingly under government command to
actually succeed. Furthermore, governments continue to
believe that all that is required is the stimulation of
further bank credit, when it was excessive levels of
bank credit that created the economic crisis in the
first place: this is the quackery of prescribing port to
cure gout. And there is very little evidence that
meaningful economic recovery is developing.

The
supposed economic recovery of 2010 was merely
statistical, with governments using monetary inflation
to puff up the numbers,
[ii]
and not the start of an improving economic trend.
Furthermore, targeting tax increases at high earners
discourages the most successful elements in society from
further productive effort, and encourages them to
redirect their efforts at tax avoidance instead. The
consequence of these simple policy errors is to make
economic recovery even more remote and reduce actual tax
collected, and so spread-sheet forecasts of lower
government deficits are even less likely to be achieved.

For
all these reasons, we can see that socialistic
government policies rely on accelerating monetary
inflation. As inflation accelerates, it becomes
increasingly difficult to escape the compounding effect
of this exponential arithmetic.

The
only way the exponential loss of purchasing power that
results from monetary inflation ends is through the
complete collapse of fiat currencies.  Whether this is
brought on by a financial crisis or through
hyperinflation is irrelevant: the result is the same. 
Furthermore, quantitative easing programmes have merely
accelerated the trend. Particularly worrying is the
dramatic expansion of the monetary base in the US, which
has greatly exceeded our theoretical example of 25% by
increasing 168% over the last two years.  While this is
routinely explained as a policy response to the banking
crisis, it has the likely effect of accelerating future
government demand for printed money even more, speeding
up its inevitable demise.

For
those of us who will be victims of the collapse of paper
money, there is little point in hoping that more port
will somehow cure our gout: it will not. Nor can we turn
to our leaders for salvation: they know not what they
do. And to this rough law of the exponential trend of
monetary growth we must add the abounding systemic risks
present today, which we have ignored in order to
simplify this analysis.

 1
February 2011


 





[ii]

GDP numbers are deflated by a measure of cost
inflation, while monetary inflation is
considerably greater. The Increasing monetary
input has the effect of raising nominal GDP
artificially.

See

http://www.financeandeconomics.org/Articles%20archive/2011.01.12%20USDGP.htm


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Cheesy Bastard's picture

Scientific notation, bitchez.

HarryWanqer's picture

A fantastic idea.  This could employ legions of scientists and engineers as consultants for those unable to read it.

Michael's picture

Here is an excellent lesson on exponential functions.

The Most IMPORTANT Video You'll Ever See (part 1 of 8)

http://www.youtube.com/watch?v=F-QA2rkpBSY

 

luckylogger's picture

I understand what you are saying and in one hand it is true.

However, I have not seen any studies that compares the M2 money supply with the amount of money available befor the crash due to the shadow- banking system.

Has anybody seen a comparison and if so are we up to the asame amount of money available as we were in 2008?

From what I have seen is we are not. I am very interested in seeing creadible studies that either support or reject this theory.

thanks guys

Richard Head's picture

The money supply has barely moved, because the printed money is largely being held as excess reserves held at the Fed.  It earns a sliver of risk free interest for the banks.  My data shows that of $1.7 trillion worth of QE, M1 has only increased by $168 billion in 2009 and $141 billion in 2010.  If the banks ever decide to start lending, which would require a genuine economic recovery and not the sham we are being fed right now, then the ~$1 trillion of excess reserves could turn into $14 trillion or so vis-a-vis the reserve multiplier.

New_Meat's picture

I've often thought that the excess money 'printed' was actually replacing money that vanished when the CDS/MBS etc. nonsense imploded and vanished off of the balance sheets.

Sausagemaker's picture

+1,  I had the same thought/question. Is the money being printed in an attempt to fill a trillion-plus MBS black hole?

tired1's picture

Question for me is: How do the banksters expect to escape the consequences?

Dr. Porkchop's picture

Secret stashes of gold and island getaways in warm places.

Sudden Debt's picture

Yes....

It's where all the hookers go to and where they party 24/7.

Hell....

 

FUCK HEAVEN!!! I'LL GO TO HELL!

Milestones's picture

Really?? If the Jews could track and find Mendella(?) in Argentina or wherever in the 60's how pray tell are these louts going to escape detection with Internet, instant photo I.D., DNA, GPS, etc. in todays world with of course the computer to follow them.

These "super brains" are also super idiots.   Milestones 

P.S. Run to Paraguay?? Put a million $$ price tag on their head and you can have it on a platter in 3 days.

minus dog's picture

This isn't Israel - and show me one of them who doesn't know about the holocaust.

Most people in this country are clueless about anything other than football, nascar, or American Idol.  How do you expect them to understand what happened, how it happened, and who did it, and then go find them?  If it gets bad enough to warrant the effort required to hunt someone down, then they're all going to be busy slaughtering each other anyways, and arguing that it was some other faction's fault.

Our public education system simply has not prepared people to comprehend what is going on.  They're told that things work a certain way, and then they are shown - or they believe they are shown - that playing by those rules is how to acquire a big house, big TV, and a bass boat.  Most of them will keep marching into their stupid cubicle farm jobs to the bitter end.

Dash Riprock's picture

Gosh darn! Aren't you a FU*KIN genius! Do you have a million to strap to their head or are you going to be worried about eating?

DeltaFunctionToronto's picture

 

Allow me to explain:

There is a causal relationship between banking (both investment and central) incompetence (immorality) and the corresponding inflation derived therefrom. Largely, global food price inflation is a function of Western government monetary base expansion in the long run, as this has a prodding impact on the monetary aggregates of countries world-wide.

Given out of control monetary base expansion due to the above mentioned incompetence (immorality), lower median income level jurisdictions, such as outside urban and rural parts of Asia, will experience increasing levels of unrest. This is currently visible as an ensuing effect, and will become more pronounced in the months to come. The mandate of the Governments established in many of these regions, under girded by cultural responsibilities and personal constitutions, implies a need to do the following:

 

a) address instability, first and foremost, to stabilize the domestic security situation both in terms of violence and market prices;

b) establish and preserve public confidence in the ability of Government to effectively remedy the situational conflict;

c) ensure there is a preventative mechanism in place to avoid a future occurrence;

d) appropriately allot justice to the perpetrators.

 

Which of the above is most simply carried out to provide the domestic citizenry appeasement?

It costs a government, especially one as large as China's, nothing to employ currently commissioned intelligence assets for this specific purpose.

I hear all this talk of island destinations and South American or African getaways -- it means absolutely nothing. If there is a political incentive, such as the publication of capture of a responsible miscreant, to say nothing of the economic incentive to "coerce" their gold from them to add to your own central bank holdings, they will not be able to get far.

Records of position, pay and responsibilities from nearly every major governmental or non-governmental (usually financial) entity are commonly sought assessments by intelligence agencies, to establish rapport in order to penetrate nodes of weakness in relationships and security measures. Particularly interesting information that comes to light is used to coerce and compromise.

Why are these individuals not currently targeted?

 

Intelligence assessments establish value thresholds, or conditions which must be met in light of associated contingencies, prior to acting, in order to minimize potential harmful outcomes.

 

These individuals are still largely protected by the State's monopoly on protection and violence from external entities, much like the Fed protects the identity and business of its middle-men.

 

In time, the state loses this incentive when its upkeep becomes more costly that the purported benefit. This would be when the G6 loaded with Credit Suisse bars heads for Argentina, in an attempt to ensure a continued monopoly on violence protecting the individual is shifted to the local domestic government.

The assumption is that “I will be safe – why would anyone suspect a thing of me in Argentina?”. This is the single invalid assumption of the perpetrator – that there is no economic or political incentive to pursue him or her outside of their original domicile, and thus all other considerations are void.

 

This is what arrogance, immorality, and a failure to understand other cultures provides.

 

Much like their tenacity in prosecuting and executing those responsible for fraudulent financial transactions, they will pursue culprits of mass financial crime internationally. Take my word for this.

Snidley Whipsnae's picture

lol... With all the sophisticated equipment at their disposal the various gov agencies have not found the worlds tallest and probably most infamous Muslim, Osama Bin Laden.

Of course, they might not be looking for him or he might have been an electonic construct from the beginning.

A fairy tale bogeyman?

FunkyMonkeyBoy's picture

Checkout what they are constructing under Denver airport.

http://vigilantcitizen.com/?p=58

Confused's picture

Damn, just when I thought I couldn't get any crazier. Thanks for sharing. 

slewie the pi-rat's picture

 

Tired 1 sez: Question for me is: How do the banksters expect to escape the consequences?

Ans.: they are super-intelligent master criminals, and there is nothing we can do.

just kidding.

actually, they are just a bunch of thugs, like the Beagle Boys in "Uncle Scrooge" comics.  Remember when we were kids:  how could the folks in Duckville be so DUMB as to not see this?

just maybe we are so well conditioned to be sheep that they just do it plain sight, while the vast majority, who "pay attention to the imortant news of the day in the MSM, by watching TV" think everything is fiiiine because we MUST pretend not to notice. 

wtF?  well, even tho virtually ALL of us know the story about "The Emperor With No Clothes",  very few seem to have escaped the conditioning that this does NOT apply to ME.

in that story, the person who notices is a "child" who just blurts out:  BUT THE EMPORER HAS NO CLOTHES!!!

the "little child" is not conditioned to pretend that the absurd is normal.  the child is still REAL.  hasn't been "taught" that to step out of line and NOT be one of the sheep is VERY dangerous to the mentality, comfort, and "homeland security" of the dumbass (conditioned) sheep herd.

if this had not been a child, the "society" would have come back with a death sentence.

over the top?

ask "socrates":  death by hemlock for CORRUPTING THE YOUTH.

ask "jesus":  death by crucifixion for "claiming to have divine power" to HEAL THE BLIND SO THEY COULD SEE.

ask "martin luther king":  he had a DREAM(!) and, when he shared it, people started to UNDERSTAND EACH OTHER MORE DEEPLY.  Ka-BOOM!!!

Dr. Porkchop's picture

Exponents are a bitch.

umop episdn's picture

Exponential curves, bitchez.

http://www.youtube.com/watch?v=F-QA2rkpBSY&p=6A1FD147A45EF50D

This lecture will instill the fear of exponential growth in anyone who cares about the future.

NOTW777's picture

"socialistic government policies rely on accelerating monetary inflation"

ben and obama

karl and marx

CowboyMonkey's picture

Corn closed at 666...coincidence......I think not

william the bastard's picture

In your socialist fury you missed the irony.

robertocarlos's picture

The crisis is over. Except for housing.

buzzsaw99's picture

genben can fix this in like 15 minutes.

asdasmos's picture

but can he tender his resignation in that same 15 minutes as well?

buzzsaw99's picture

That would put Sack and Frost out of work too.

stewie's picture

He was referring to an Inception-type "15 minutes" where his "15 minutes" feel like 15 years to us, on the outside of his recursive mind-fuck.

 

 

buzzsaw99's picture

Well, in theory he could but that would mean stepping on the tbtf execs necks, those same execs who own hizzazz. Theory works, implementation, not so much.

Caviar Emptor's picture

Simply put: what if the roller coaster just kept zooming higher after the rails already started going lower? What if the G-force set in motion from the whip-turn at the bottom just made the cars coast into space instead of being guided to a soft landing? Man what a final flameout that would be! That's what might happen to prices despite the Fed's vain attempts to guide them lower. 

I think I need to buy a gun's picture

ok so there is no difference between communist soviet union and free capitalist america. So does this end gold 36000 or is all the muni debt mortgage debt and all other debt wiped out and we end up like argentina. And with 36000 gold they go and buy all the bridges roads water companies and everything the us sheeple need to survive.

This was planned. Look back at the last 10 years they knew where they were going all along.

Peter Schiff circa 2007 "the only thing left will be all the debt we owe to foreigners"

Caviar Emptor's picture

It's called presiding over the demise, making sure it's as gradual as possible and striping the carcass clean of anything of value that remains by those with the power to do so

robertocarlos's picture

It ends with me on the street selling my leather shoes.

Gashole's picture

 Newbie question:  Why won't the Fed simply be able to quickly tighten and remove liquidity?

whatz that smell's picture

die.ponzi.die.

until the last dollar is destroyed this beast will rampage. 666$999.