This page has been archived and commenting is disabled.

Will We Have Hyperinflation In America?

Econophile's picture




 

From The Daily Capitalist

I have been reading a lot lately about the coming hyperinflation in America. Among those I’ve read are Mr. Shadowstats John Williams, John Hussman, Jim Quinn, commentators on Zero Hedge, and Mr. Gloom Doom and Boom himself Marc Faber. My favorite philosopher, Nassim Taleb has also taken up the hyperinflation case. And I didn’t forget Jim Rogers, Peter Schiff, and others.

The Case for Hyperinflation

All the writers base their hyperinflation argument on America’s out of control federal deficits and spiraling debt, poor economy, reluctance to raise taxes, loss of control over the money supply, and that at some future tipping point the government and the Fed have only one alternative to prevent a run on US Treasurys, and that is massive quantitative easing (QE). QE is just another way to say the Fed prints money to buy federal debt. Another way to say that is that the Fed is monetizing federal debt.

That tipping point, they say, is when investors lose faith in Treasurys because they fear sovereign default and they start dumping them, and then bond prices collapse. This collapse will bring about worldwide financial panic, a run on other sovereign debt, and the dollar will decline drastically. The Fed will have no choice other than to prop up the market by buying Treasurys and to do that they will have to print money (monetize the debt), probably massively, which will spiral into hyperinflation.

Some commentators bring in arguments about trade balances, balance of payments, lack of exports, low US savings, and other mercantilist ideas to justify their case for hyperinflation.

Hyperinflation is not a far-out speculation. Whenever countries experience hyperinflation the causes are usually the same and hew close to the above circumstances. In any fiat money economy hyperinflation is possible. Only a gold monetary standard has held back profligate regimes from printing money in hyperinflationary quantities.

That said, hyperinflation is something that is easy to say, makes headlines, but is more difficult to achieve.

The question is not is it possible, but is it probable in America today. In my opinion the circumstances make the probability low.

Why Our Problems Could Lead to Inflation

I am not in disagreement with the hyperinflationists’ basic analysis of the Fed, the government, or the economy. All the bad things they describe are real. I won’t go into them in detail here but here are the basic problems we face:

  1. We are still in a recession and we will probably stay in recession for “the foreseeable future” as the Fed likes to say.
  2. Government revenues have fallen off.
  3. Massive government spending has resulted in massive deficits.
  4. The deficits are being funded by debt.
  5. Credit is still very tight and money supply has been shrinking.
  6. The CPI is low, but asset values such as real estate are still declining.
  7. Unemployment is high and will probably go higher.
  8. Massive Keynesian fiscal stimulus (federal spending) has had no lasting effect.
  9. Government social benefit programs (Social Security, Medicare, Obamacare, federal pensions, etc.) are underfunded and their costs will climb dramatically.
  10. Federal taxes now take about 30% of our economy.
  11. Federal debt is at about 90% of GDP and is rising.
  12. It is likely the Fed will engage in large amounts of QE to stimulate the economy, especially if unemployment grows.

This is not a healthy outlook for America.

There are two other factors that we need to consider.

The first is that governments like inflation, at least at moderate levels. Unbelievably, but true, people initially believe in the illusion of prosperity that rising prices from inflation brings. For most debtors the more the dollar is debased the easier it is to pay back debts issued in pre-inflation times. In fact inflation is just another tax on your wealth; governments are paying for stuff at a hidden discount. Savers and creditors lose.

Second, Americans don’t like to be taxed. While they like their benefits, they don’t want to pay for them. The sea change in America is not the dislike of taxes, but the love of the Nanny State. While people cynically say that Social Security won’t be around for them, they haven’t saved enough for retirement or medical care, and they are counting on it.

This presents a dilemma for our leaders. If they raise taxes sufficient to cover their expenses, we would kick them out of office (more on this below). On the other hand since our politicians can’t seem to cut spending, they will continue to borrow.

The answer to their dilemma is inflation.

What is Inflation and Hyperinflation?

Inflation is always a monetary phenomenon. Inflation is when central banks print more money than people desire to hold. The result of inflation is that all prices go up. If tomorrow everyone in the economy had 2x the dollars than they have today, prices would double. No one is wealthier; they just have more pieces of green paper. That is inflation.

Inflation is not caused by a lack of goods or too much demand, or demand-pull. For example, if the price of oil goes up, that’s not inflation. In that case, if we buy the same amount of gasoline as before, it means we will have less money to spend on other goods which goods will decline in price because of lower demand.

Governments print consistently and constantly so that their currency is continually debased. It would take you $22 to buy what $1 could buy in 1913 (the year the Fed was established).

Money is an economic good and it too is subject to supply and demand factors. Generally if people see all prices continually rise because of an increase in money supply, they will choose to get rid of dollars and hold assets. If prices are continually falling, people desire to hold money because it is becoming more valuable relative to assets.

When inflation is an ongoing phenomenon, prices continually rise, money buys less (is debased), and people don’t want to hold on to their devaluing dollars so they spend them. They want goods or assets or gold: i.e., the things that are rising in price. Interest rates also go up as banks seek to offset the devaluation of dollars to be repaid in the future.

Hyperinflation is just an extreme case of inflation. Normally during high inflation central banks at some point slow the presses, let their economies fall into recession, and the economy repairs itself. These boom-bust business cycles are being constantly created by central banks.

But what if the central bank doesn’t want to stop inflation? What if the politicians don’t want the economy to go into recession and expose their reckless fiscal behavior? In that case sovereigns print more and more currency to catch up with rising prices. It is like a feedback loop. The more they print, the higher prices go, so they have to print even more. Spending the currency becomes a mission. Perhaps prices double every month, or increase daily. Hyperinflation is when money printing is so great, that people lose faith in currency. People ignore their currency and barter, or gold or foreign currencies are used for transactions. Generally orderly commerce breaks down, goods become scarce, social order breaks down, and people suffer.

Why Does Hyperinflation Occur?

Aside from the mechanics of hyperinflation, why does it happen? Why do they keep printing? Aren’t the central bankers and politicians smart enough to understand what is happening? The answer to that last question is, in those countries, apparently, no.

In every modern case of hyperinflation the decision to inflate was a political one, not an economic one. In almost every case hyperinflation followed a war or a coup or some massive political change such as the end of the Soviet empire or the rise of a dictator or a populist-socialist takeover, and other political unrest.

In the 20th Century there were quite a number of hyperinflationary events. I used the Wikipedia list of modern hyperinflations (Since WWI) and researched the political circumstances of each country. The circumstances can be put into three rough categories: post-war disruption, post-Soviet collapse, and socialist-populist regimes.

For example we all know what happened in Germany during after WWI when politicians, mostly socialists, blamed all their problems on reparations and continued to print so much money that it resulted in the famous cash-in-a-wheelbarrow photos. They literally had no clue what they were doing.

The post-Soviet empire collapse is easier to understand as former communist/socialist regimes fought for power and struggled with economic policy. Many of these countries have reformed or were forced to reform their monetary and fiscal policies.

Many of the socialist-Marxist regimes were Latin American populist governments who employed “revolutionary” anti-capitalist nostrums for economic policy. Chile (Allende) and Argentina are good examples. Argentina has had years of high inflation to hyperinflation since 1980. In Africa most countries were a mixture of strongmen with socialist-Marxist policies. I am not suggesting that these were pure socialist governments, but rather the typical situation where the government seizes or controls large parts of industry and issues regulations controlling much economic activity.

These hyperinflations all had one common denominator: during a period of instability, spending was used as a political tool and it got out of hand. I understand that the circumstances of each country were different and that it is perhaps unfair to say, lump Israel in with Argentina. But each country faced political factors that created instability or a national crisis; the government spent heavily to gain popular support, and resorted to the printing presses to pay for their spending.

Zimbabwe was the 21st Century’s first and one of the most spectacular examples of hyperinflation. It lasted almost two years and devastated their economy. Marxist dictator Commander Robert Mugabe, in King Lear fashion, believed he could ignore the laws of economics, but at the end of it, they had printed a 100 Trillion Dollar note (1014). At the end, their dollar increased year-over-year by 89,700,000,000,000,000,000,000 percent.

The story of Zimbabwe is quite sad. Robert Mugabe moved to solidify his power after the white minority signed a peace agreement in 1980. His internal security army, trained by North Koreans, eliminated opposition and committed mass murder in rebellious Matabeleland (estimates run up to tens of thousands of Ndebele killed). These goons still protect his regime. Mugabe’s “war veteran” supporters eventually grew restless at his empty political promises and economic failures, and threatened his political base, so he pushed out the remaining white farmers who owned most (70%) of the land, confiscated their property, and redistributed it to members of his ZANU party. Political and economic freedoms disappeared, food production collapsed, exports collapsed, food became scarce, and this once prosperous country was in shambles. Mugabe turned to the printing presses to pay for political largesse. He ordered his finance minister to keep printing money. The result was hyperinflation. Eventually their currency was abandoned and barter, the rand, and the US dollar were used instead. The economy and social structure broke down. As a result, the standard of living collapsed, life expectancy went from 57 to 34, malnutrition stunted children, HIV/AIDS cases are about the highest on the continent, and people fled the country. Everything Mugabe touched turned brown. Hyperinflation stopped when Mugabe dollarized the economy.

Will Hyperinflation Happen in America?

Will hyperinflation happen here? It is possible but unlikely and improbable.

I listed above 12 serious economic problems America faces. The list is not exhaustive but it is accurate. While they are serious, they do not necessarily guarantee hyperinflation.

As an exercise in hypotheticals, I extrapolated from the above 12 issues a kind of worse-case scenario for a potential hyperinflation setup:

  • Government spending continues unabated, running up higher and higher deficits.
  • To reduce deficits, taxation increases to, say 45% of GDP.
  • As a result of high taxation, GDP declines, reducing tax revenues.
  • The government floats even more debt to make up the new revenue losses.
  • Interest rates on Treasurys increase substantially because of less demand due to market-perceived sovereign risk.
  • The Fed starts buying large amounts of Treasurys in order to meet revenue shortfalls and to “stabilize the market” (i.e., monetizing the debt for a different purpose than they are now doing).
  • The CPI takes off as the new money hits the economy and prices rise.
  • Inflation risk causes interest rates to rise further.
  • The debt is not being paid down with inflated dollars.
  • Other major nations become fiscally more conservative thereby reducing the US’s status as the reserve currency.
  • US sovereign credit ratings are downgraded.

These circumstances would lead to high inflation and panic in the bond markets. Whether it would spiral into hyperinflation is possible, but unlikely. More on this below.

Let’s go back to the political circumstances that existed in previous incidents of hyperinflation. We aren’t emerging from a devastating war nor have we gone through massive societal and governmental restructuring that occurred in the post-Soviet nations.

That leaves us with social unrest driven by socialist economic and political failures. But our Nanny State is not experiencing the populist political and economic upheaval that would result from the nationalization of basic industries, state control of the economy, price and wage controls, seizure of wealth, and political intimidation and tyranny that were the trademarks of the Latin American countries. While many on the Right would like to cast Obama in this role, it is not the case.

But let’s assume that my potential hyperinflation setup does happen; for hyperinflation to occur you would then have to believe in something like the following additional political scenario:

President Obama and the Democrats have complete control of Congress, say 75 seats in the Senate. They would continue to appoint leftist justices to the Supreme Court and achieve a clear majority. Then they would perpetuate their power through massive spending programs to reward Democratic constituencies. They would raise the pay and pensions of the unions and government workers, substantially raise the minimum wage, dramatically raise payments to middle-class and lower Social Security recipients, increase taxes to confiscatory levels on “big corporations” and the “rich,” offer “free” health care for the “poor,” nationalize (directly or through total regulation) communications, energy, transportation, drug companies, and defense production in order to “bring down costs.”

 

As the economy slowed down further and unemployment (U-3) reached 20%+ levels, there would be massive political unrest and people would march in the streets. The military would be called out to maintain order in large cities from rioting and looters. In order to placate the masses, more government aid would be offered, more federal WPA-type projects would be created, and people would be “put to work.”

 

In order to pay for all this, federal debt would explode far beyond what we are now experiencing and the new Fed chairman would accommodate the government by monetizing the debt. Inflation would exceed 20% and keep rising until it got to hyperinflation.

Let’s stop for a moment and catch our collective breaths.

Those things aren’t happening here. I’m not saying they couldn’t happen but that’s not our current path.

There are economic and political reasons why I don’t think hyperinflation would occur.

1. The political winds are changing and I think the Democrats will lose their majority in at least one House in November. For purposes of this discussion, I think the Republicans would be better than the Democrats. With the political sentiment shifting to a more fiscally responsible government, I think further massive spending is unlikely.

2. In order for the bond market to panic, investors would have to determine that the US would default on its debt. While one could argue that we don’t have the ability to pay off our debt, that is true of almost all nations. The more significant question is: can the US pay interest on its debt and continue to refinance its existing debt? The answer is yes. This is what buyers of US Treasurys look at when they buy our debt: the likelihood of sovereign default. While the situation in the US is not favorable with out of control federal spending, we still have a gilt-edge rating on our debt. More importantly, we have the ability to raise taxes in order to cover interest on our debt.

If we had a world crisis tomorrow where would investors send their money? So far it has been the US (for example, the eurozone sovereign debt crisis). I’m not saying this couldn’t change, but for now, money flows here.

3. While I think Ben Bernanke is wrong on most things, as a student of Milton Friedman he does understand hyperinflation and the risks of printing money. I think most of Obama’s senior economic advisers all understand this point as well. In fact I almost all central bankers around the world understand the mechanics of hyperinflation. The exceptions would be those anti-democratic socialist regimes where monetary policy in just another tool of political policy. I think it is political science fiction to think that the Fed or any politician would let hyperinflation happen here.

But let’s go further and assume that my hypothetical factors do occur and we have high inflation which is spiraling out of control toward hyperinflation. What would be the government’s response?

1. Impose temporary price and wage controls.

The last time they tried that was in 1971 with Nixon. It didn’t work then and won’t work now, but the purpose will not be so much to control prices, but rather to prepare the ground for their further actions to stop the crisis. I would give this 6 months at the most.

2. Freeze the Treasury bond market.

Again, this is a temporary measure while the world organized to support our markets and the dollar.

3. Establish a moratorium on Treasury debt repayment by extending all short-term maturities for 90 days.

Another temporary hold. Holders of our debt would unanimously agree to this. Otherwise their value of their Treasury holdings would significantly decline.

4. Arrange for massive foreign support of the dollar and Treasurys.

The last thing our trading partners want to see is America crash and burn. International trade would very quickly dry up as the financial markets were in chaos. America still has a unique status with the dollar as the international reserve currency. You would see an immediate massive coordinated support of Treasurys and the dollar by the EU, Japan, China, the UK, and others. Recall that hyperinflation doesn’t happen overnight. Jean-Claude Trichet recently said that the EU had prepared well ahead of time for a possible sovereign default in the eurozone, so they would be well aware of the need to act.

5. Raise the Fed Funds rate, drive up the cost of money.

This is the Volcker solution which is to just stop printing money. He raised the Fed Funds rate from 11.2% in 1979 to a peak of 20% by June 1981. Inflation (and stagflation) disappeared. This is the solution to any hyperinflation.

After the markets cooled down, prices stabilized, and inflation subsided, controls would be lifted and life would go on. This would also sink the economy for a while, but that is better than hyperinflation and the social and political disintegration that it brings.

I respect many of the writers who believe that we will experience hyperinflation. A number of them are, like me, students of Austrian theory economics. I think most of them are jumping the gun. At this point none of the economic or political factors required to set off hyperinflation are present. A careful analysis of theory, fact, and history leads me to conclude that inflation/stagflation is our future. It is quite a leap of fancy to say we are certain to have hyperinflation.

* * * * *

Thanks to David Stockman and DoctoRx for their comments on this article.


For a PDF version of this article, go here.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sat, 10/02/2010 - 13:51 | 621023 Lux Fiat
Lux Fiat's picture

Aside from the mechanics of hyperinflation, why does it happen? Why do they keep printing? Aren’t the central bankers and politicians smart enough to understand what is happening? The answer to that last question is, in those countries, apparently, no.

In every modern case of hyperinflation the decision to inflate was a political one, not an economic one. In almost every case hyperinflation followed a war or a coup or some massive political change such as the end of the Soviet empire or the rise of a dictator or a populist-socialist takeover, and other political unrest.

Western developed economies have the demographic and fiscal equivalent of "the perfect political storm" that will hit in less than 15 years.  In reality, it will likely hit much sooner because of rising awareness of the problem.  Declining demographics, horrendous social obligations cooked up when fertility rates were much higher and lifespans much lower, and a huge debt overhang combined make for one nasty social and political brew the longer it simmers.  Tack on ever more restrictive nanny state policies that further impede real growth when it is most needed.

When almost all of the major contributors to global growth start going down the drain in close proximity to one another (Japan, US, EU), it may not be possible to "Arrange for massive foreign support of the dollar and Treasurys."  China has already decreased holdings by 10% year over year, and Japan will soon not be in a position to buy more US debt as it will need to start liquidating holdings to meet retirement payments to citizens. If the EU is struggling to stay afloat, who exactly is going to be able to throw a lifeline to the US should it be needed?  Who is going to throw good money after bad, particularly if there is no real effort to signficantly rein in spending.

If I understood the author's viewpoint correctly, hyperinflation occurs when a government starts running the printing presses and refuses to stop.  Will developed country gov'ts keep running the presses to "fund" various old-age welfare programs when revenues are clearly insufficient?  Since politicians in both major parties have a long history of supporting "entitlement" program growth (both in scope of benefits and scope of eligibility), will they have the political courage to pull the ink cartridges?  I hope so.  But I'm not sure that the will power is there, either on the part of politicians, or the electorate.   Ditto for state-level financial crises that are starting to playout.  Deflation will wreak havoc with our ability to repay federal debt, so I understand Bernanke's desire to achieve and maintain a certain level of inflation.  However, I doubt that he will be able to take his foot off the gas in time.

Perhaps if we get a lot more Chris Christies in statehouses and Congress, then we might have a shot at getting back onto a sounder footing with only a minor vs. major calamity.  But I'm not as optimistic as you, much as I want to believe.  As others have already said, "It's the debt, stupid."  And what are we doing to shrink that millstone from around our neck?  Nada.

 

Sat, 10/02/2010 - 12:07 | 620861 Pampalona
Pampalona's picture

There is alot of speculation about the likelyhood of deflation and/or inflation, and the difference between inflation and hyperinflation, but what about the fourth possibility: hyper-deflation? which differs as sharply from deflation as hyper-inflation does from inflation.

Sat, 10/02/2010 - 13:17 | 620976 chopper read
chopper read's picture

or 'biflation':  food and precious metals rapidly rising in price while cars and houses rapidly drop in price, when reasons for buying go from vanity towards scarcity/necessity.  everyone is going to want to trade their cars for food, and silver and gold coins, because everyone has 3 cars, nobody needs anymore, and not nearly everybody has silver and gold coins to trade for food.  just how many cars will they take in trade at the farmers market before they have plenty?

Sat, 10/02/2010 - 11:58 | 620845 socalbeach
socalbeach's picture

John Hussman is not in the hyperinflation camp, as he's emphasized in 2 recent commentaries,

http://www.hussmanfunds.com/wmc/wmc100906.htm

For instance, my view that quantitative easing will trigger a "jump depreciation" in the dollar has evidently placed me among analysts warning of hyperinflation and Treasury default (a club whose card is nowhere in my wallet).

http://www.hussmanfunds.com/wmc/wmc100920.htm

Hyperinflation is a much different story, and as I've said before, I am not in that camp. This doesn't exclude the possibility that enough policy mistakes will change that, but for now, my inflation outlook is flat for several years and then accelerating in the second half of this decade.

Sat, 10/02/2010 - 09:24 | 620689 Just_Another_User
Just_Another_User's picture

inflation is economics.

hyperinflation psychology.

when inflation gets to the point where your dollar wont buy you a piece of penny candy, your paper currency is worth more to you as a source of warmth.

Sat, 10/02/2010 - 08:06 | 620647 Ned Zeppelin
Ned Zeppelin's picture

One of the big "steps" to hyperinflation is simply wrong. There is no way politicians will increase the tax burden from 30% to 45% of GDP. Now look at the steps. Monetization occurs much faster, and as for the supposed solutions to hyperinflation, there is only one, forgiveness or default on a vast scale. 

 

Another fault - you assume the purchase of Treasuries from the PD network results in cash reaching the middle class. False. This has already been proven ineffective.  So I don't see it as a pathway to an "inflation" style hyperinflation, i.e. prices for all goods increasing, but rather a currency collapse that begins with sovereign debt being refused by the usual buyers, and the Treasuries purchases from the PDs leading to their investment in commodities as opposed to equities or bonds. Stagflation, then hperinflation.  

Sat, 10/02/2010 - 06:54 | 620618 BigDuke6
BigDuke6's picture

The bit about what Obama would have to do regarding high pay for union workers and public servants is exactly what that nut tony blair and his socialists did to the UK.

They had so many extra non-jobs created - eg 'street football co-ordinator' that they had 1/3 of the voting populace working for them and another 1/5 immigrated there under their tenure - open door to deliberately allow more future socialist voters....

to destroy a country within 12 years. 

Sat, 10/02/2010 - 04:16 | 620521 revolutionnot
revolutionnot's picture

(double comment submit)

Sat, 10/02/2010 - 04:18 | 620520 revolutionnot
revolutionnot's picture

Given that our money is loaned into existence, I'd say hyper-inflation is more a matter of when than if.  Even if interest rates went sky high and the money printing presses were turned off, we are already past the point of debt saturation.  Printing more money only increases debt burden when your money is debt.

 

IOW, we are damned if we do and damned if we don't.

Sat, 10/02/2010 - 01:55 | 620453 laosuwan
laosuwan's picture

once the fed becomes the main holder of treasuries, which is happening, isn't it possible (likely) the government will pass a law forgiving repayment of the bonds to the treasury for bonds held by the fed, thus wiping out much of the federal debt and allowing the board to be reset? i think this is their end game. Assuming they have one. Which they must.

Sat, 10/02/2010 - 01:25 | 620424 gloomboomdoom
gloomboomdoom's picture

we have already enough "inflation" in the system to have a "Zimbabwe Event" in every country on this earth. Enough "inflation" is already in there, once interest rates go nuts you will see a TOTAL WIPE OUT of the entire financial system. Everything will go to ZERO overnight, almost...

Hyper-Inflation is rather short lived. The minute the system crashes, (and it really cannot take very many more blows, we missed hyper-inflation by a millisecond last time).
Without TARP, the system would be gone now, all liquidity in the hands of the people will immediately rush into "things you need". Because the panic of "collapse" is imminent, everyone else will have no choice because of the risk of shortages. Thus, Everyone broke? So stay broke? Print even a slight amount, it gets spend immediately- as gone as quick as you need/consume/value ur toilet paper. Literally (think about it).

What does it matter what you call it? Everyone across the board will loose at the very VERY least 50% of their wealth overnight. YES, OVERNIGHT. Devaluation will happen which is deflationary, but if a sudden price change is realized how does that resonate in the minds of the average Joe?

Does a violent price collapse inspire confidence even if one's savings in FIAT became instantaneously more valuable overnight?

Violent price swings UP and/or DOWN seems odd to the average Joe... If this continues to happen, will our behavior change? Controlled Deflation at these levels with Reserve Currency status, seem impossible when one factors exponents and credit aggregates....

Now this is just the US. Remember we still have the Euro Zone, the YEN (JAPAN), Britain (UK).
Because of our currency agreement, a Hyper-Inflationary "event" would result if any of these countries were to experience the "event". It would not stay contained to single currency/Country.
"Event", "Event", "Event:"

 

Fri, 10/08/2010 - 21:51 | 637093 laosuwan
laosuwan's picture

everything you are saying makes sense but I can remember people have been predicting this since I was in high school a long, long time ago. anyone listening then would be waiting a long time for this coming crash. what's different now? 

Fri, 10/01/2010 - 22:40 | 620175 gwar5
gwar5's picture

Well, there we are on the hyperinflation causation chart ----------> Socialist Regime Collapse.  That would be us.

Fri, 10/01/2010 - 21:52 | 620096 gloomboomdoom
gloomboomdoom's picture

we have already enough "inflation" in the system to have a "Zimbabwe Event" in every country on this earth. Enough "inflation" is already in there, once interest rates go nuts you will see a TOTAL WIPE OUT of the entire financial system. Everything will go to ZERO overnight, almost...

Hyper-Inflation is rather short lived. The minute the system crashes, (and it really cannot take very many more blows, we missed hyper-inflation by a millisecond last time).
Without TARP, the system would be gone now, all liquidity in the hands of the people will immediately rush into "things you need". Because the panic of "collapse" is imminent, everyone else will have no choice because of the risk of shortages. Thus, Everyone broke? So stay broke? Print even a slight amount, it gets spend immediately- as gone as quick as you need/consume/value ur toilet paper. Literally (think about it).

What does it matter what you call it? Everyone across the board will loose at the very VERY least 50% of their wealth overnight. YES, OVERNIGHT. Devaluation will happen which is deflationary, but if a sudden price change is realized how does that resonate in the minds of the average Joe?

Does a violent price collapse inspire confidence even if one's savings in FIAT became instantaneously more valuable overnight?

Violent price swings UP and/or DOWN seems odd to the average Joe... If this continues to happen, will our behavior change? Controlled Deflation at these levels with Reserve Currency status, seem impossible when one factors exponents and credit aggregates....

Now this is just the US. Remember we still have the Euro Zone, the YEN (JAPAN), Britain (UK).
Because of our currency agreement, a Hyper-Inflationary "event" would result if any of these countries were to experience the "event". It would not stay contained to single currency/Country.
"Event", "Event", "Event:"

 

Sat, 10/02/2010 - 02:12 | 620470 Econophile
Econophile's picture

Why then would interest rates go up?

Fri, 10/01/2010 - 21:14 | 619993 kaiserhoff
kaiserhoff's picture

Thank you for a thoughtful and well reasoned article.  The history review was a little canned, but still a good start.

The best argument for high inflation leading to hyper-inflation is that so many institutions in the whole western world simply can't pay their debts.  They will try moderate inflation to work out of the mess, but it will get away from them.  The experience of the seventies shows how contagious inflation can be.

I agree that nothing we are doing now leads there any time soon.  When the government prints money and spends it, as during the Vietnam War, all bets are off, but money now is simply flowing into the black hole of busted loans.

Don't like that answer, because it could lead to Japan style lost decades, but I think that's where we are. 

Fri, 10/01/2010 - 19:39 | 619783 Duck
Duck's picture

Econophile,

Finally a well-reasoned analysis of the possibility of hyperinflation on ZH.  Good to see some pragmatic rational analysis.

Fri, 10/01/2010 - 19:28 | 619738 grunk
grunk's picture

I wish we could have a Radio Zero debate between the hyperinflation-yes folks and the hyperinflation-no folks. Otherwise, let's have a steel cage death match. That lady running for Senate in Connecticut could promote it. This argument is getting tedious.

Sat, 10/02/2010 - 17:54 | 621341 RockyRacoon
RockyRacoon's picture

Oh, great, a CNBC octabox of blabbing that gets nothing resolved.

Fri, 10/01/2010 - 19:22 | 619722 tom
tom's picture

The sequence I can see possibly leading to hyperinflation is QE monetization of the deficit, accelerating inflation, and then the government being unable to roll over outstanding debt. If the government reacted by stepping up QE monetization, that would be hyperinflationary. But it's hard for me to imagine why any set of US politicians would choose hyperinflation over default, when default is so much less destructive and so much more politically palatable.

I also see a one-off real devaluation of the dollar, especially against the labor of other countries, less so against commodities, as plummeting global demand for commodities will at least partly balance the decline of US buying power.

Fri, 10/01/2010 - 19:35 | 619763 Matto
Matto's picture

The US has never defaulted (technically) - who really wants to be the first?

Fri, 10/01/2010 - 19:48 | 619813 Shameful
Shameful's picture

What do you call closing the gold window in 71?

Fri, 10/01/2010 - 20:13 | 619875 Glaucus
Fri, 10/01/2010 - 19:57 | 619846 Matto
Matto's picture

Thats what the 'technically' reference was for. they will inflate but not 'default'

Fri, 10/01/2010 - 19:12 | 619712 dot_bust
dot_bust's picture

The author of this article is mistaken. What will create hyperinflation is the massive dumping of U.S. Treasuries by China, which is not at all happy about QE II.

Fri, 10/01/2010 - 19:10 | 619705 Jasper M
Jasper M's picture

Excellent article. 

Those "fighting the last war" can't let go of inflationary expectations, and their rush to be proved right makes them cast their chosen terror as right around the corner. 

patience

Fri, 10/01/2010 - 18:33 | 619614 TheDavidRicardo
TheDavidRicardo's picture

Econophile miss the point of inflation.  Inflation is an expansion of credit due to future expectations of productivity increases.  Everything else is just currency debasement.

 

Also missing from this article is the physiological expectations of a population.  If a population expects their currency to buy less in the future, they will buy necessities today, forcing up prices in a classic postive (or is it really a negative) feedback loop.

 

 

Fri, 10/01/2010 - 18:26 | 619588 tunaman4u2
tunaman4u2's picture

I was HOPING this guy would have a reasonable article but I was VERY mistaken! Theres so many holes, its not even worth getting into. TRASH! 

Fri, 10/01/2010 - 18:21 | 619570 medicalstudent
medicalstudent's picture

is it possible to have selective loss of confidence in digital dollars but not paper dollars?

 

 

Fri, 10/01/2010 - 18:47 | 619639 Shameful
Shameful's picture

The problem is digital dollars are promises for real dollars.  If you follow the promise chain up you hit the Fed, the Bid Daddy Printer.  So while the collapse unfolds paper dollars might work for a while while the digital ones are not accepted, with the rational that the counter party might not deliver in a timly manner which kills the value.  However the chain reaction will also kill paper dollars, as the only choice the Fed will have is crank the presses into over drive to convert the digital money supply into a paper money supply.

Fri, 10/01/2010 - 19:11 | 619707 medicalstudent
medicalstudent's picture

makes sense.

then they add zeroes in ink, not pixels.

if we were limited to larger paper bills, the psychology for the layman may be a bit different.

another modern marvel to conveniently evade the masses' detection.

 

Sat, 10/02/2010 - 09:25 | 620690 Glaucus
Glaucus's picture

Exactly.  It's the central bank chasing physical currency, not digital, because that's what the people are chasing.  Sure, the central bank's money-printing might have caused the people's loss of confidence in the currency, but hyperinflation doesn't kick in until, for whatever reason, that confidence is lost.

And that is when the paper chase takes off.

Sat, 10/02/2010 - 17:52 | 621335 RockyRacoon
RockyRacoon's picture

Don't discount the fact that the money has already been printed and is sitting in idling trucks -- waiting.  The gambit being that if cash can hit the streets fast enough a panic can be averted.  Sure thing.  Right.

Fri, 10/01/2010 - 19:26 | 619739 Shameful
Shameful's picture

That is not to say have no fun bux sitting around.  I have decent sized stash in bills and coins in case that happens.  Sure I may lose purchasing power but I also might REALLY need to buy something then to.  When the first balloon goes up I don't want to start liquidating PMs there.

Sat, 10/02/2010 - 03:46 | 620507 StychoKiller
StychoKiller's picture

PMs should only be used as a last resort, or after grass has started growing the bomb craters.

Fri, 10/01/2010 - 18:35 | 619616 Matto
Matto's picture

Not sure, id presume one would lead to the nother. The first would be shown by a run on the banks, which isnt supported by the underlying currency so that would probably lead to a bank holiday and the FED printing enough to support all the banks, hence debasing the currency base to the point that the paper is now worthless too, once the multiplying of the banking system started to come back into place (provided paper confidence is maintained thoughout) 

Fri, 10/01/2010 - 18:37 | 619620 Matto
Matto's picture

fk does that sense? sorry.

Fri, 10/01/2010 - 18:31 | 619565 Matto
Matto's picture

As Niall Ferguson points out, the only time in history that austerity has worked once a government reaches critical debt levels was the UK going through the industrial revolution, and it took about 100 years. Every other time its either via inflation or default with a bit of austerity layered on top.

Governments simply dont pay off debt with austerity, it'd take endless hardship for generations and result in electoral failure at the first instance.

The US Govt has proved an unwillingness to make the hard decisions, particularly over the last year. So as the economy hasnt lifted and everything including the kitchen sink has been thrown at it, expect the printing to hit a new level - massive increases in taxation are not likely to have much effect simply because the economy at this point could not sustain it.

When the printing fails to lift the economy and confidence is lost in the underlying currency it is exchanged for anything useful as soon as it is recieved (as it is no longer a store of value) hence velocity up on an expanded monetary base - and voila! hyperinflation.

Fri, 10/01/2010 - 18:19 | 619562 medicalstudent
medicalstudent's picture

inflation = increase in currency supply

hyperinflation = decrease in currency demand

in both cases the demand for money increases.

currency dne money.

Fri, 10/01/2010 - 18:11 | 619545 danpar
danpar's picture

"For purposes of this discussion, I think the Republicans would be better than the Democrats. With the political sentiment shifting to a more fiscally responsible government,"

 

Republicans and Democrats; both are fiscally inresposable.

Spend, spend ,spend is their motto.

Sat, 10/02/2010 - 00:08 | 620319 chopper read
chopper read's picture

in other words, i have a strong conviction that a politician will win every election in November.  

 

1-very-unique-1-in-a-million (Ron Paul) will seek to vote himself out of a job (term limits) while the other 'lawmakers' continue trying to 'fix the problem' 'for the good of the people'.

Fri, 10/01/2010 - 18:20 | 619569 wintermute
wintermute's picture

100%.

The Republicans only want to cut $100 billion off the annual budget. This is like an alcoholic cutting down from 12 to 11 drinks per day.

Unfortunately the amount of cutting required is far beyond what even the Republican party can stomach.

Fri, 10/01/2010 - 18:41 | 619624 akak
akak's picture

And while the Republicans might cut the alcoholic's daily intake from 12 to 11 drinks, they will merely be substituting slightly stronger beverages to maintain his daily intake (deflation of the alcohol supply), while simultaneously picking his right pocket instead of his left one --- before marching him off to some new and completely unnecessary war.  All for his own good, of course.

(I hear the brain-damaged make just as good cannon fodder as the young and naive.)

Fri, 10/01/2010 - 18:05 | 619527 win
win's picture

Wow

Well, this article in itself is the best explanation for why we will not have hyperinflation. That explanation is based on the idea that "few people know what hyperinflation is and most that think they do imagine it to be inflation on steroids"

Both the a) "not knowing" and the b) "imagining that it is the exaggeration of something beneficial" tend to dampen hyperinflationary behavior because they prevent "loss of confidence in currency".

 

Fri, 10/01/2010 - 18:05 | 619525 MGA_1
MGA_1's picture

I could very well see the US having a currency crisis which will most likely be quite unpleasant.  During Argentina's currency crisis, the value of the peso dropped from 1 to 1 to 4 to 1 within several months.  The economy was already in trouble, but this really crashed things.

I've been wondering how we could have a true hyperinflation here in the US (like 10,000% inflation per year).  I didn't think it was possible for a hyperinflation because I didn't think any sane person could pursue such policies, but the more things progress, the more I think Mr Bernanke may be caught in the money printing trap - if he doesn't print money, the economy crashes down.  If he does print, then he produces inflation, but it's less troublesome than the crash of the economy.  We'll have to see how 2011 progresses.

Fri, 10/01/2010 - 18:29 | 619599 Matto
Matto's picture

The hyperinflation comes in from the lack of confidence in the currency, lifting the transactions (velocity) of the underlying currency as it is exchanged ASAP once received, lifting the money supply in use far beyond the monetary base.

At that point its either embraced through further printing and bigger note denominations ala Mugabe, or wheel barrows become the latest shopping accessory ala Austria/Germany.

 

Fri, 10/01/2010 - 19:09 | 619703 MGA_1
MGA_1's picture

Again, a currency crisis and a rolling hyperinflation are two different animals.  There is no need to expand the money supply for a currency crisis.  If china decides to sell all their US bonds, and then get rid of the cash from the procedes, we'll have a currency crisis.

For a rolling hyperinflation such as weimer or zimbabwe, but govt has to print money - i.e. monetize debt of some type to increase the supply of money in the economy.  The reason Japan didn't have a hyperinflation is becaues it's citizens bought the govt bonds themselves.

Anyway, I'm believe a currency crisis is quite likely for the US over the next couple years.

 

Fri, 10/01/2010 - 19:38 | 619775 Matto
Matto's picture

Who is going to buy the debt? Continued moneterization is virtually ineviable. Which leads to confidence crisis then hyperinflation.

Fri, 10/01/2010 - 17:57 | 619506 wintermute
wintermute's picture

The "War" category can include spending for a war even if it not fully executed.

http://www.warresisters.org/pages/piechart.htm

This source would likely illustrate the upper limit of the real level of US defense spending. Including all defense items it is arguably 54% of the budget. Remember that the budget is less than 50% tax funded (the rest is via debt.)

So ALL the government's real income is being consumed by "war" related items. Right now in 2010.

Fri, 10/01/2010 - 23:59 | 620307 chopper read
chopper read's picture


hey, i think bin laden is in the gobi desert.  lets invade mongolia.  

 

...the military industrial complex has children in desperate need of braces and private schooling. 

Do NOT follow this link or you will be banned from the site!