Welcome To Hyperinflation Hell: Following Currency Devaluation, Belarus Economy Implodes, Sets Blueprint For Developed World Future

Tyler Durden's picture

"A ‘91-style meltdown is almost inevitable." So says Alexei Moiseev, chief economist at VTB Capital, the investment-banking arm of Russia’s second-largest lender, discussing the imminent economic catastrophe that is sure to engulf Belarus following the surprise devaluation of the country's currency by over 50%, which we announced on Monday. "Unless Belarus heeds Russia’s call for mass privatization
of state assets, it is headed for “hyperinflation, massive un-
and under-employment, and a shutdown of production
" Moiseev concludes. Ah: "privatization" as Greece is about to learn, the lovely word that describes a fire sale of assets to one's creditors, courtesy of a "globalized" new world order. Ironically, this is precisely the warning that will be lobbed at each country in the developed world, as the global race to devalue currencies, first against each other on a relative basis, and ultimately against hard currencies, or on an absolute basis, as the world realizes that there simply is not enough cash flow to cover the interest payments on a debt load, in both the public and private sectors, that continues to rise at an astronomic rate, even as the world prepares to exit from the latest transitory, centrally-planned bounce in the Great Financial Crisis-cum-Depression that started in earnest in 2007 and has been progressing ever since. Ultimately, Belarus will succumb to hyperinflation, as will each and every other government seeking to devalue its currency (hint: all of them): "Unless Belarus heeds Russia’s call for mass privatization
of state assets, it is headed for “hyperinflation, massive un-
and under-employment, and a shutdown of production
,” VTB’s
Moiseev said. The ruble will slide to 10,000 per dollar, he
added." Of course, this is the primary side effect of attempting to avoid formal bankruptcy through currency devaluation. And all those who continue to believe deflation is an outcome that will be allowed by the Fed, need to look just to the former Soviet satellite to see what lies in store for everyone currently doing all in their power to devalue their currency.

First look at the Belarus Ruble chart below: this is what always happens to every country that resolutely continues to live outside its means. Always.

And here are some additional observations from Bloomberg on the country that everyone in the media continues to ignore, yet which will very soon be the model for virtually everyone else engaging in central planning warfare.

The Belarusian central bank let the managed ruble weaken by 36 percent versus the dollar on May 24 as demand for dollars and euros from importers and households threatened to derail an economy already laboring under a current-account deficit equal to 16 percent of gross domestic product. Russia and other former Soviet partners last week agreed to give Belarus a $3 billion loan and urged President Aleksandr Lukashenko’s government to sell $7.5 billion of assets to replenish the state’s coffers.

Finance ministers from former Soviet nations agreed in Minsk on May 19 to give Belarus up to $3.5 billion over three years, with the first $800 million payment expected in the week after a separate meeting on June 4, Russian Finance Minister Alexei Kudrin said in Moscow yesterday.

The Nationalnyi Bank Respubliki Belarus set its official dollar-ruble rate at 4,931 for today’s trading, from 3,155 on May 23, according to its web site. Trading of foreign currency between companies, banks and individuals needs to stay within a 2 percent range of the daily rate, the regulator said May 23, when it announced the devaluation and reintroduced restrictions lifted on the interbank market on April 19 and for households on May 11.

Devaluing the currency will only worsen the situation for Belarus, VTB’s Moiseev said.

“The main problem is that the economy produces goods which consist of little else than a combination of imported spare parts,” he said. “So devaluation only makes things worse.”

Belarus’s economy effectively collapsed in 1991 as the disintegration of the Soviet Union eliminated natural markets for the country’s exports of farm machinery, textiles and agricultural products.

The catalyst for the country's imploding economy: socialism and price controls. Sound familiar?

Lukashenko reintroduced controls on prices and the currency and re-nationalized some companies and infrastructure after coming to power in July, 1994, on a platform of “market socialism.” The nation’s economy returned to growth in 1996, according to World Bank data.

At the Minsk Refrigerator Plant Co. shop in the capital today, about 20 people queued in drizzling rain to use their rubles to buy fridges. While the shop didn’t open on the day of the devaluation, most of the models in the store already had ‘Sold Out’ stickers on their doors.

“I came on Saturday and it was a nightmare, the store was stormed by people who wanted to spend their rubles because of rumors about the devaluation,” said Nikolay, a 74-year-old pensioner who declined to provide his last name. His entire savings of 6 million rubles now buy one fridge compared with three before the devaluation, he said.

The people are not happy...

The devaluation lifted the local price of automobile fuels as much as 24 percent, according to Belneftekhim, an industry group for the country’s oil sector. Last night, about 50 people protested the price increase in the car park of a Minsk hypermarket.

“I can’t describe how I feel without using obscenities, this is all our government’s fault,” said Sergey, a 32-year old attending the protest who works for a computer importer. “The whole world tells them, guys, you have economic problems, you should do something, and all they did was live off getting more and more loans.”

Who can blame the country if it devolves into civil war: as a result of Monday's decision the average salary was "1.6 million rubles
in April, according to the government statistician. Converted
into dollars, it fell to $325 after the May 24 devaluation, from
$507 a day earlier, using central bank exchange rates."

Naturally, the IMF wuz here:

Both the IMF and the EBRD have blamed Lukashenko’s spending before last year’s presidential election for much of the economy’s woes. Lending was increased by 38 percent last year and public-sector salaries rose by about 50 percent, the Washington-based IMF said in a March 9 report.

Belarus got a $3.5 billion bailout loan from the IMF during the global credit crisis and the country has more than $2 billion of ruble and dollar debt outstanding. Foreign-currency reserves hit a 1 1/2-year low in March.

“The ruble is probably still too strong, but devaluation hurts the average consumer through imported inflation and deteriorating purchasing power,” Sanna Kurronen, an economist in Helsinki at Danske Bank A/S, said by e-mail yesterday. “There is really no easy way out of this economic distress and the only way is to do a major reform in the country.”

Here comes hyperinflation...

The price of children’s diapers has “gone completely insane” in Minsk, said Natalia, a 24-year-old mother also queuing outside the refrigerator store. “I used to buy a pack for 69,000 rubles, now they cost 140,000,” or almost half the 343,260-ruble monthly child benefit paid by the government, she said.

“We have become paupers,” said Tatiana, a 70-year-old woman in the line who also declined to give her last name. “We have been squeezed into a corner by this devaluation.”

Belarus’s dollar debt has been buoyed by news of the Russian loan, with the yield on the government’s debt due 2015 dropping four basis points to 9.881 percent by 6:35 p.m. in Minsk, the lowest since March 14. Dollar-denominated notes due 2018 yielded 10.38 percent, down six basis points.

The country has raised its refinancing rate twice since April 20 to 14 percent, the highest in Europe. The central bank also stopped selling foreign currency out of its reserves in March and will continue to stay out of currency markets, spokesman Anatoly Drozdov said by phone in Minsk yesterday.

...And following that, complete socio-economic collapse

Unless Belarus heeds Russia’s call for mass privatization of state assets, it is headed for “hyperinflation, massive un- and under-employment, and a shutdown of production,” VTB’s Moiseev said. The ruble will slide to 10,000 per dollar, he added.

Unemployment was 0.7 percent in December, according to government data. Inflation accelerated to 14 percent in March, the fastest since April 2009 and more than neighboring Russia’s 9.6 percent in April. Imports into Belarus exceeded exports by $7.3 billion at the end of 2009, according to the latest annual data available.

Russian media are creating a “flurry” of speculation about the nation’s asset sales so they can “make good at our expense,” Lukashenko said today in Astana, the capital of Kazakhstan, according to comments reported by state news agency Belta. “But we will not throw anything to anybody for nothing.”

Note the parallels to Greece, which would follow the same fate if it were to make the choice of returning to the drachma.

Alas, there is nothing left to add: this is the future, and it is coming to a developed country near you.

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Popo's picture

I think you have your order of operations wrong.

Thomas Jefferson had it right years ago:  "First by inflation, then by deflation".  

It's an old game.


akak's picture

WonderDawg, nice to see you back spouting your disingenuous misinformation once again.

There is NOT ONE example of a true deflation under a fiat currency regime, despite your claims to the contrary, and I welcome you to discredit yourself on monetary matters even further by attempting to locate any.

PS: The Great Depression was deflationary ONLY during the time (1929-1933) that the USA was still on the gold standard --- once the statist bastard Roosevelt took the USA off the gold standard, the deflation ended virtually to the hour.

DK Delta's picture

akak, there is no such thing as permanent deflation or permanent inflation. Deflation and inflation are transitory phenomena. In a fiat money system, the dominant trend is inflation, with shorter but more powerful periods of deflation.

akak's picture

That can only be true if one is willing to torture and mangle the definition of "deflation" beyond all classical recognition.  I stand by the historical record, which clearly demonstrates that the sad and sordid history of fiat currency is DEFINED by currency debasement and frequently outright collapse.  I still ask those of you who believe that deflation has EVER ocurred under a fiat currency regime to show me one example of it.

DK Delta's picture

I just did. JAPAN. Your definition of deflation makes no sense. You can't isolate prices. You can't just look at prices in certain areas. You have to look at prices everywhere. Money and credit flows through the entire economy. Deflation or Inflation has to start at the source, and that source in a fiat system is the expansion in money and credit, not prices of xyz

akak's picture

I am certainly no economist, but I think you (and all other deflationists whom I have read) are making a gross errror in casually conflating credit with money --- one can NOT make such a sweeping assumption!  By blithely equating the two, you are being led astray into taking the decrease in their sum as somehow indicative of deflation, when in fact you are comparing apples to oranges, or trying to find the sum of 8 + blue.

By that erroneous rationale, we should have been experiencing massive inflation during the runup in the stock and real estate markets, when I note that we as a society did not.

WonderDawg's picture

The more you write, the more clueless you reveal yourself to be. In a fiat (fractional reserve) system, credit IS money. That is where you miss the whole fucking concept and reveal your ignorance.

Get a clue, junior, before you hurt yourself.


akak's picture

You are either wildly misinformed, or particularly disingenuous and dishonest.

Probably both.

And your statement is absurd --- ALL credit does NOT equate to money!  Give me a break with such shallow nonsense.

traderjoe's picture

Debt-money is not money. Money is a store of value. Check the Black's Law Dictionary definition of money - it specifically excludes notes, etc. (the frn is a note). You really think in a deflationary collapse people will demand MORE fiat? They'll sell their food, guns, etc. for less fiat? Good luck with that.

DK Delta's picture

I'm not conflating money with credit dude, but it should be noted that the federal reserve notes in your pocket are a credit issued by the central bank. There actually isn't any real money (money in the sense of a non-liability asset that can function as a unit of exchange and store of value) in our economy; it's all smoke an mirrors.

This being said, you have to understand that prices are affected by both money as well as credit. If you want to buy a house, you don't pay cash. You take out a mortgage, in other words, you borrow on top of an initial capital base.

Do you understand the implication of credit availability on prices? The more credit in an economy, the higher the prices. Credit pushes prices up or down like an acordian. If you expand credit in an economy, you expand prices. If you contract credit, you contract prices. Money supply can remain constant. We saw this during the south sea bubble, the tulip bulb mania, the Compagnie Nouvelle du Canal de Panama fiasco, etc. etc. etc....

Credit is what creates that giant vacuum that allows for huge price drops. It is what allows for air pockets in asset prices. Thats why you can have a crash and everyone can say "where did all the money go????" It didn't go anywhere duhhhh it wasn't money. It was credit.

Inflation in money AND credit is what you need to look at, not the CPI or the price of homes or the price of an AC hooker. You must look at all prices, and the best way to do that is to look at the source of those prices which is the supply of, once again MONEY AND CREDIT.

Alpha Monkey's picture

Utah made gold and silver legal tender.

tarsubil's picture

Okay. So M3 can decrease while M0 has dramatically increased. Now, credit can continue to tighten and shrink but doesn't the extra M0 used to compensate sooner or later get converted to credit and M3 expands beyond where it started, a lot? Hence the argument that we are in the deflationary cycle before sustained high inflation or hyperinflation right now?

WonderDawg's picture

DK, I've had debates with akak before and his usual tactic is to resort to misdirection and semantics when confronted with indisputable evidence that blows his argument out of the water. He is close-minded to the facts. For some reason, I feel compelled to educate him, but it's futile, I know.


akak's picture

On the contrary, it was you, WonderDawg, who fled from the overwhelming monetary historical facts and evidence provided by tmosley and myself.  You argue from an implicitly pro-Establishment, Keynesian, statist position, and I'll be damned if I will allow you to subvert and misrepresent data and events relating to monetary history that I know all too well, and clearly far better than you, who can only repeat the shallow and inaccurate economic and monetary talking points heard in such stellar sources of wisdom such as CNBC.

WonderDawg's picture

"You argue from an implicitly pro-Establishment, Keynesian, statist position, and I'll be damned if I will allow you to subvert and misrepresent data and events relating to monetary history that I know all too well, and clearly far better than you, who can only repeat the shallow and inaccurate economic and monetary talking points heard in such stellar sources of wisdom such as CNBC."

Nicely done, the exact opposite of all my comments. No wonder you don't know shit, your reading comprehension is about equal to my 6 year old niece. Why don't you read Vjay Boyapati's Why Credit Deflation Is More Likely Than Mass Inflation: An Austrian Overview of the Inflation Versus Deflation Debate. I downloaded it and read it last year.

Now, what am I again? A Keynesian? Try again.


akak's picture

This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.


WonderDawg's picture

I've already explained my stance, I'm not going to keep repeating it so you can keep getting it wrong.

I agree there will be hyperinflation, but not before a deflationary collapse that makes 2008 look like popcorn fart.

That is all.


akak's picture

Yeah, that's right --- convince the gullible and ignorant to take exactly the WRONG steps towards preserving their savings, by spreading your specious and dishonest fearmongering over the nonexistent threat of a fiat currency deflation, and setting them up to be thoroughly fleeced yet again by the sociopathic and criminal power elite.

Just who do you work for, and on whose behalf are you spreading your malicious disinformation and lies in this forum?

WonderDawg's picture

See, that's the difference between you and I. You resort to name calling and tantrums when someone disagrees with you. I, on the other hand, respect the right of someone else to have a different opinion.

I understand the inflationary argument, and I disagree. I've looked at the facts, I've studied various arguments for both sides, and I conclude that we are in the early throes (3 years) of a deflationary depression. The first bout with hyperinflation already occured in the number one asset of the average American adult: real estate and housing. Then the bubble popped, and that was deflationary. Now the Fed is attempting to reflate the bubble and save the banks, but the ruse is wearing thin on the American population. You can't lend money if you have no borrowers. This is deflationary.

After the next phase of the deflationary collapse, then when might see hyperinflation. Maybe. But not now.

But I respect your right to take the other side. I know you haven't actually formed this conclusion on any study of the facts, you're merely repeating what someone told you. Clearly you don't understand the nature of the monetary system, you've demonstrated this time and time again. I only hope that one day you'll open your mind and try to take an objective look at the facts. This isn't merely economic. This has much to do with the ebb and flow of the collective social mood.

My conclusions are based on a blend of elements from several different schools of thought, the primary two being the Austrian School and a study of Socionomics. The two would seem contradictory at first glance, but there are elements of both that can be used to formulate a picture of the truth. Von Mises studied the trees, Socionomics studies the forest.

So now it's on the record. I'm not a Keynesian, statist, status quo anything. Put that in your pipe and smoke it. Good shit.


akak's picture

My conclusions are based on a blend of elements from several different schools of thought, the primary two being the Austrian School and a study of Socionomics.

But like every other misinformed and/or disingenuous deflationist, your arguments are NOT based on monetary history, particularly the indisputable fact that EVERY --- as in ALL OF THEM --- chronically overspending government (such as that of the USA today) that took on exponentially increasing levels of unsustainable debt, ended up causing the debasement if not the total collapse of their currency, and the resultant wiping out of their citizens' savings (except for real, physical assets such as real estate, physical plant, gold, silver, artwork, etc.).

Do you deny this?

The fact is that there has not been ONE single example of your putative "fiat currency deflation", in which escalating levels of government spending and debt magically somehow led to an appreciating fiat currency --- it has always, ALWAYS led to the precise opposite.

Do you deny this?

So you still have yet to explain to us, in your COMPLETE denial or avoidance of ALL of monetary history, why you feel that "this time is different".  But for the record, and in light of your past lies and disingenuous arguments and evasions when cornered by the truth, I do not believe that you are participating in this discussion with goodwill and honest intent.

asdasmos's picture

+1 for monetary history

WonderDawg's picture

Every time someone gives you an historical example, which I've already done several times (for instance, I cited the Great Depression; you say it wasn't "fiat", I say it doesn't matter, it was fractional reserve, which again today is the underlying cause of this catastrophic situation), and so has DK, you ignore it. Not only do you refuse to acknowledge the valid arguments of others, you act like a little bitch when confronted with facts that you can't understand. Grow up.

akak's picture



You have to be one of the most annoyingly disingenuous posters, and outright liars, with whom I have had to interact in this forum.

NO, you did NOT give me any examples of a fiat currency deflation --- because you know that you cannot (I NEVER claimed that NO historical deflations ever ocurred, just none under a fiat currency regime --- you dishonestly put words in my mouth again).  But you then, in later posts such as the one above, will dishonestly claim to have done so. 

There is utterly no possibility of intelligently or honestly conversing with such a misleading, deceptive, disingenuous liar such as you.  All you know how to do is push other people's buttons, and antagonize them in the most outrageous manner --- which I suspect may be your real motivation here.

And again, you have also still pointedly ignored the fact that I keep throwing in your face, that every chronically overspending government that has taken on massive, exponentially-growing and clearly unsustainable levels of debt has ended up debasing their currency, or watching it outright collapse. 

So again, liar, give us all here all those examples of your putative fiat currency deflations --- which do NOT include Japan post-1989 as discussed above, and which do NOT include the Great Depression after the 1933 ending of the gold standard, which period being notably and clearly inflationary.

asymptote's picture

Not that I really want to disagree, but in 1920, the UK was battling with inflation from the rampany money printing during the war, resulting in a 250% rise. The BOE decided to intentially deflate the economy to return to the gold standard at the same sterling PPP as it had prior t the war.

Taken from Lords of finance, Liaquat Ahamed, page 156. 


This does not disprove your intent however, as the deflation was intentional and related to the gold standard mentality(prices must not change due to monetary expansion). In fact I think that all the cases we could bring up will be clustered around the tail end of the gold standard. Central banker psychology was different back them.

Meaning no offence. 

Fiat2Zero's picture

Hyperinflation is transitory until the currency drops below the cost of 20% cotton based paper, and ink, as well as energy costs to run the printing press.

Transitory, now where have I heard that 2-bit word?

Ben, is that you?

WonderDawg's picture

Dude, fiat doesn't make a shit, it's irrelevant. Focus, son. It's fractional reserve that's the problem, and perhaps the fractional reserve system itself could survive if enforced, but the reserves are fiction and have been for years.

When debt is defaulted, it's deflationary, no? So, then, the Fed can attempt to save the system with bailouts, but only as long as the public allows it. The tide is turning, and when it does, the Fed will be, not toothless, perhaps, but certainly less able to continue this course. The collective public mood will see to that. Sooner than you think.


akak's picture

When debt is defaulted, it's deflationary, no?


There you go again, simplistically equating credit with money!  Where do you get the theoretical or historical justification for making such a wild assertion?  I know that all the Keynesian hacks do so, but I hope you are not claiming to be following their lead in ANYTHING relating to the real world!

WonderDawg's picture

I'll give you some guidance with regard to reading material. Start with Irving Fisher's The Debt-Deflation Theory of Great Depressions. Read that, and then get back with me. Until then, you would do yourself justice to shut the fuck up because you have no clue what you're talking about.

I'm more in the Austrian camp, by the way. If you get time, check out Human Action by Von Mises. It's a light read, shouldn't be any problem for a guy like you.



akak's picture

If you were REALLY "in the Austrian camp" as you claim, you wouldn't even be willing to take a dump on the statist, proto-Monetarist, quasi-Keynesian bilge written by the discredited hack Irving Fisher.

God, you are a disingenuous liar!  And a particularly bad one, too.

WonderDawg's picture

That is some funny shit. Normally I would say let me have some of that shit you're smoking, but in this case, I'll pass. That shit be make you stupid, man.


Spalding_Smailes's picture

Dollar denominated debt ....


Always a thirst for more or rolling over maturing dollar denominated debt 


Credit default swaps, commodities, securitization, forex, letters of credit for global trade ... Everyone across the globe plays the game using our poker chips


Petrobras is considering its financing options as it reviews 680 investment projects, Gabrielli said in an interview at a conference outside Oslo. The Rio de Janeiro-based company sold $6 billion of dollar-denominated bonds in January.



May 19 (Bloomberg) -- Malaysia is said to be planning a 10- year dollar-denominated Islamic bond, its second sovereign sale of Shariah-compliant debt in a year, four people familiar with the matter said.



On February 2, the Swiss National Bank, a well respected central bank, announced that starting in the middle of February, it would issue its own US dollar denominated certificates—T-bills by another other name.These dollar-denominated bills will be sold every two weeks, starting Feb 16 and in tenors of 28, 84 and 168 days. Current counterparties of the Swiss National Bank can participate in the auctions and the bills can be used as collateral in other dealings with the central bank.

Sophist Economicus's picture

Why not.   If you want to raise money, sell dollar denominated debt.   It will be gotten on better terms (folks are awash in dollars and want to get rid of them) and then you can exchange for the currency of your choice.    This game works till it doesn't.    And when it ends, watch out below

Alpha Monkey's picture

"It's the fractional reserve lending that "creates" money, and is responsible for the crisis we are experiencing now, and will ultimately lead to deflation, because money (credit, debt, whatever) is being destroyed and will continue to be destroyed as more debt is defaulted."


What else creates money? The federal reserve.  As more and more people default, the federal reserver will step in (read: bail-out) to attempt preventing asset depreciation, as well as ensure his bankster buddies are able to continue collecting record paychecks and bonuses.  Yes, we know this policy doesn't work, yes we are watching it fail right now.  But the central bank and the financial elites don't care.  They are getting theirs, while the rest of us will suffer the concequences of corrupt monetary policy and financial regulation.


Furthermore, what happens as more money is printed by the fed?  It will lose value.  What happens when one of the central banks we've forced to take dollars, decides they are tired of holding an asset that only goes down in value (long term trend)?  What might they trade those dollars for, in an attempt to retain value or store wealth.  And when this trade occurs, what do you think the effect of that will be on the dollar?  And what effect do you think that will have on other central banks and investors world wide holding dollars?  What asset(s?) might be used as a world recognized store of wealth?

Mec-sick-o's picture

When there are no more people to lend to, the credit bubble/ponzi blows.

This starts a deleveraging cycle and debt defaults occur due to lack of money in the system.

It is exacerbated by further consumer retrenchment.

That's what bothers me.  The consumer should spend wisely, as needed.  Not induced by fashion, easy money credit or government spending.  Bubbles are caused by easy credit, but taken by consumer.  We are part of the problem.

Eternal Student's picture

Here you go, Akak. Yes, the cost of living has been falling, and only with today's numbers has the CPI recently increased:


"Japan's core consumer prices rose in April from a year earlier for the first time in more than two years"

So much for the argument that you can't have deflation in a purely fiat regime. Reality is always a b*tch.

tired1's picture

Much depends on who owns the debt, it Japan it's held by its' citizens. Under no circumstances should Belarus cede controling interest of anything to the bankster vultures. If they do, it will be a repeat of the robbery of Russia by those same vultures. which occured under Yeltsin.

TruthInSunshine's picture

We have had deflation in the U.S., and nasty episodes of it, in the past.

It occurred in the 30s and the 40s and 50s.

In fact, we're still seeing it in categories of assets requiring access to credit to purchase - even now.

Let's look at housing as an asset class. It's a rather large one.

If the claims I believe are accurate play out according to the numbers (banks sitting on piles of foreclosed and ultimately taking on more foreclosed properties - residential, office, industrial, commercial) takes place, gravity dictates more bad loan writeoffs and downward price pressure (two forces, that when taken together, create yet another cycle of the deflationary process).

Banks aren't loaning money right now, except in the select cases where they're getting an express government backstop on the loan (think FHA), because they know they can't afford to put the very capital that they have in reserve at risk, as they much more deleveraging to deal with.

QE failed to do anything but help distort the price disequilibriums that ZIRP goosed into irrational territory.

QE was an abject failure of economic and monetary policy, even by Bernanke's goals as stated from the outset.

Not only did QE and ZIRP kill consumption and drive the middle class into paranoid mode, but they now have created yet more bubbles that Bernanke now has to try and create a solution to deal with (because he's incompetent).

ZIRP and QE have tilted the ship that is the global economy into a 45 or 50 degree angle, and Bernankincide now has to try and figure out how to level it before it capsizes.

akak's picture

The only deflations that the USA has ever experienced, even broadly defined (i.e., falling general price level, in addition to the more strictly proper falling money supply)  was the extended and gradual one from the 1870s through the 1890s --- which incidentally, coincided with the greatest economic expansion in US history --- and the period of 1929 to 1933, while we were still on the gold standard, and which ended precisely when the statist tyrant Roosevelt removed the USA from the gold standard.

jm's picture

Whether I agree with you or not, this conversation is a damn sight better than the usual name-calling and hysterics you've spewed in the past. 

Keep up the good work.

Hugh G Rection's picture

stop arguing guys...


Well get to experience BOTH!

Sophist Economicus's picture

TIS - DEflation would be right if governemnt didn't meddle, transfer payments were stopped, ALL debt, including GOVERNMENT were allowed to collapse and TAXES stayed at some level of parity to support the EXISTING debt and transfer promises.

BUT, none of the above will happen - cannot happen.    As soon as the govenment fails to make a bond payment, the currency will devalue.   If people take to the strrets - transfer payments will flow fast and hard.   The idiots in washington will come up with spending scheme after spending scheme to 'stop', 'abate', 'remedy' the debt collapse.

THe FED has been buying debt and montizing the Treasury.  IT WILL NOT STOP.   Hyperinflation will be upon us -- it IS THE RESET we need.


I am not, and never have been Chumbawumba

akak's picture

Yes, SE, the scenario you describe is not how fiscal and monetary events MUST play out --- it just happens to be how identical or similar fiscal and monetary events HAVE played out, every time, throughout history.

Governments always believe that THEY will be the ones, 'this time', to finally dodge the debt bullet --- and every time they end up proving themselves wrong.

Maybe, one day, this time WILL be different --- but are you willing to bet your life savings on it?

TruthInSunshine's picture

Let us see if we can all agree on some basic premises.

Both hyperinflation and hyperdeflation are political phenomena. Anyone disagree?

Plain vanilla inflation and deflation are monetary and/or economic conditions. Anyone disagree?

We have yet to experience hyperinflation nor hyperdeflation since the crisis (regardless as to the cause, or how bad is truly was, or what systemic risk one believes it actually posed) of 2008. Anyone disagree?


Okay. Moving on.


We have seen a dual track of some inflationary and some deflationary trends since the 'crisis' of 2008, with the inflationary trends revolving around inelastic goods/services, such as oil, food, energy, medical care, and the deflationary trends revolving around real estate, some segments in the durable goods category, and labor/services. - Anyone disagree?

The most deflation has taken place in asset classes most heavily dependant on consumer credit and access to capital-on-loan in order to obtain, while the most inflation has taken place in asset classes that compete with bonds/treasuries, such as commodities and equities (even discounting that the real demand/supply curve for commodities has been weak for much of this period, as I believe it has been). Anyone disagree?

Bernanke has flooded member banks with easy capital by purchasing assets from them through the TARP & TALF programs, allowing them to replenish capital reserves that had been diminished due to the need to write off bad debts via the discount window (and in the case of foreign banks, currency swaps), but many of these banks are not parting with what have now become excess reserves due to the still poor condition of their balance sheets and loan portfolio quality (even the ones that have written off massive amounts of toxic assets via Bernanke's assistance). Anyone disagree?

Bernanke and Geithner have pushed Congress hard to dramatically relax the standards by which the integrity of banks is judged, and in fact, many banks have been allowed to dramatically underestimate the amount of bad debt they still own and further deterioratio in their loan portfolios. Anyone disagree?

Quantitative Easing was drafted and implemented, at least in large part, in order to allow the Federal Reserve to monetize approximately 75% of U.S. Government deficit spending, and to allow Bernanke to artificially lower all portions of the interest rate yield curve, as the Fed has become the buyer of last resort of treasuries bearing artificially low yields. In other words, had the Fed not done so, more treasury auction failures would have surely occurred, and interest rates on treasuries and in the real economy would be at least somewhat higher than where they are now. Anyone disagree?

It is at least plausible, and maybe even a near certainty, that equity markets have been heavily inflated as a result of Fed policy, via POMO, and in fact, it's even possible that the Fed has even been actively and directly undertaking actions to drive indexes higher, or alternatively, and at the least, provide an artificial 'floor,' by which they are striving to prevent a collapse in equity markets, as might be the case if normal market forces absent large scale central bank intervention was not taking place. Anyone disagree?

Conversely, the Fed has sought the opposite result in bonds and interest rates, via the treasury note monetization discussed above.

The true rate of U.S. inflation is most likely between 4.5% and 6%, annualized, at present levels. Anyone disagree?


Bernanke and the Congress are now running into conflict, as Bernanke's monetary policy, while not producing hyperinflation, has produced enough real inflation to foster anger on Main Street, with the added negative consequence that some Americans are increasingly frustrated by their general perception that U.S. Governmental Policies (whether they are able to discern between Fed policy and Congressional or Executive Branch actions, or not) have favored Wall Street over, and even at the expense of, Main Street.

However, Congress and the Fed are in a symbiotic death spiral, as Congress needs the Fed to keep monetizing the debt, absent either a) a dramatic reduction in U.S. deficit spending, or b) a dramatic hike in U.S. Treasury Note yields (and consequent spike in general interest rates throughout the economic complex).

Quantitative Easing thus has accomplished or contributed to accomplishing four things, intended or not, and directly or not, that can be affirmatively proven: 1) QE has artificially bolstered equity market valuations; 2) QE has allowed the U.S. to engage in deficit spending at artificially low costs (based on lower treasury yields); 3) QE has contributed to artifically low interest rates throughout the general economic complex (this is especially true for large multinational companies issuing corporate debt at record low rates), and; 4) QE, especially in concert with the ZIRP or near-ZIRP of the Fed, has acted as a catalyst for risk-on speculation in alternative asset classes, such as commodities, which has fueled a dramatic (but arguable very inorganic) spike in the price of most commodities, as the lower yields on savings, bonds, treasuries and similar assets has been driven to rather unattractive levels.

As a result of the conditions laid out in 1 through 4 above, the organic economy has been thwarted from truly recovering, and in fact, price surges in commodities that are now trickling down to end users and consumers are creating at least some level of demand destruction, and hampering consumption. Job growth has been awful, as has wage and benefit growth accompanying that job growth, and in fact, more jobs are of a temporary and/or part time quality in the U.S. than any time since the BLS has recorded data. The housing market remains in a literal depression, and there is a literal tsunami of toxic residential, commercial, office and industrial properties that still is building and will be released for absorbtion, at some pace, with unknown but potentially very adverse consequences. Government transfer payments such as Medicare, SNAP, Social Security, as well as growth is government sector employment and pay (at least until very recently), has prevented the types of scenes we would have seen by now, absent them, that we did in the 1930s.

Is there any portion of this so far that is fundamentally flawed in its analysis?


akak's picture

TiS, aside from possibly your first two premises (I feel that inflation and deflation are both monetary AND political events, as our fiat currency is inherently and at all times under political control), I think you have made an excellent summation of the current, sad economic and monetary sitations.

Fiat2Zero's picture

True inflation is probably closer to 8% (shadowstats). Also, it will take 18-24 months for fed money creation to hit consumer prices in the form of inflation. This means we are just starting to get QE lite.

So the bulk of the chickens are just starting to come home to roost. Add in the increasing numbers of dollars from China and Japan (pension redemptions, rebuilding).

We should really just have this same argument in 6 months from now to see how that inflation is going...

WonderDawg's picture

That is the most accurate, coherent, and concise analysis I've seen anywhere.

Calmyourself's picture

Hyperinflation is not a political phenomenon it is a psychological occurence that spreads like wildfire as fiat is recognized for its true value. That said, a concise evaluation of past actions, where they take us is a psychological, political, mass media, black swan who the hell knows where the wheel stops roller coaster of fun future..

asdasmos's picture

Just some clarification needed:

"Quantitative Easing was drafted and implemented, at least in large part, in order to allow the Federal Reserve to monetize approximately 75% of U.S. Government deficit spending, and to allow Bernanke to artificially lower all portions of the interest rate yield curve, as the Fed has become the buyer of last resort of treasuries bearing artificially low yields. In other words, had the Fed not done so, more treasury auction failures would have surely occurred, and interest rates on treasuries and in the real economy would be at least somewhat higher than where they are now. Anyone disagree?"


While I do not disagree with this statement, I would like you to comment on the implications of this. If indeed the FED was needed to be the buyer of last resort through monetization with regards to QE, going forward, doesn't the FED still need to be?


ZIRP has indeed allowed the FED and the Treasury to fund the deficit (albeit ponzi-esque) at historic low rates, but hasn't this done something much worse? Even now the interest payments are substantial, what happens when they rise? (A debt spiral is fatal to the currency via inflation or to the bond market and/or eventually both)


Cut, they say? Well apparently the "Government transfer payments" (Medicare, SNAP, Social Security...etc...) is keeping this house of cards going. Yet these are the largest part of the federal budget, so they will not be cut (and even if they wanted to, they are mandatory no?). Enter the debt spiral.


If indeed, as you say, they are the buyer of last resort, won't they continue to monetize the deficits going forward? Where is the absortive capacity going to come from for all the future borrowings and the higher interest payments?


I am unsure. Won't they have to print more and more, eventually pushing inflation higher and higher?


Is this not an implication?

TruthInSunshine's picture

I do not disagree with this.

I only claim that there is a tension building, and a point is nearing (some may feel it's already here - they'd be most likely to argue QEx won't happen; Jim Rickards has a good theory on this, claiming the Fed will use its existing balance sheet income to continue monetizing a chunk of the deficit, though ZH and I think his estimates of how much income they will receive and how much treasury monetization they can do is vastly overstated) whereby the Fed and Congress will be forced to continue to cooperate, with Congress and Obama potentially getting extreme popular pushback, or Congress will break away from the Fed (whether Obama will join Congress openly or in secret facing re-election if consumers and small businesses are still being pressed hard by high everyday prices amidst a stagnant or contracting economy is open for debate) because of political repercussions caused in large part by Federal Reserve monetary policy.

If Congress and/or Obama decide to change course, how will they accomplish this, given that absent significant cuts to the holy trifecta of Medicare-Social Security-Defense aren't possible or likely, especially in a run-up to an election?

I honestly don't know. One possibility, and this is definitely leaning heavily into the conspiracy direction (though I'm not opposed to leaning that way, necessarily), is to allow for the much talked about 'risk off' scenario to play out, whereby equities and commodities crash hard, and the assumption is that there'd be a rush of substitute buyers for U.S. treasury debt in another crisis period, at any yields, out of sheer desire to preserve capital.

And what would this scenario take to implement, assuming that I and many others are even somewhat correct in asserting that Bernanke is literally supporting equity markets (and goosing commdodity markets, albeit not by his own desires - it's complicating his life)?

In an incredibly ironic twist, firmly rejecting any possibility of further deficit monetization by the Federal Reserve could be the catalyst that crashes risk assets, and provides the stampede of substitute buyers of U.S. Treasury Debt that Bernanke would need to withdraw QE fully.