Will We Have Hyperinflation In America?

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 20^th 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 21^st 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.

Comments

[chopper read]

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. 

[geno-econ]

Splitting hairs. In practice, inflation can be  perversely hidden especially during a credit meltdown despite gov't efforts to stimulate economy by printing and cheapening currency and at same time keeping interest rates low. If successful, its justifiable inflation , with   higher debt levels  and everybody goes back to work or play. If efforts fail , and loss of confidence ensues , it becomes hyperinflation and everyone runs for cover. Thats when a Volker steps in , raises interest rates and calls for austerity. No doubt, reason why Obama keeps him around in the background .

[Djirk]

I would argue that some of the factors are already in motion:

• Government spending continues unabated, running up higher and higher deficits.
• Check
• The government floats even more debt to make up the new revenue losses.
• Check
• 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).
• Check
• The CPI takes off as the new money hits the economy and prices rise.
• In progress, back out housing and you have a rising CPI
• Other major nations become fiscally more conservative thereby reducing the US’s status as the reserve currency.
• Check
• US sovereign credit ratings are downgraded.
• De facto via the dollar dropping compared to other major currencies

[Shameful]

Not probable, try certain.  Lets get into it.

1.  We are still in a recession and we will probably stay in recession for “the foreseeable future” as the Fed likes to say.

So no economic growth.  Spending continues to grow, liabilities continue to grow but revenues do not.  I will remind you that we borrow about every dollar we take in via taxation to run the government.

2.  Government revenues have fallen off.

And they will do so barring inflation.  The tax system is built on inflation.  So they must force inflation into the system to keep it working.  Does anyone here really think Bernanke can thread the needle and not spook anyone with his money printing in the face of deflation?  And as an aside what about hte states?  CA, IL, MI, NJ, NY all bigger problems then Greece, all will need a bailout.

3. Massive government spending has resulted in massive deficits.

The spending will not decrease appreciably every again.  The blues now complain they cannot get their agenda through because of those nasty minority reds.  When the reds take over they will use the same excuse as they share in the spoils of the plunder "We can't pass anything because that guy Obama, but man we tried to help".  Look for spending and deficits to go up not down.

4. The deficits are being funded by debt.

Debt so large it has never seen it's equal in human history.  Debt so large that it requires a vast percentage of the worlds capital to keep it fueled, at record low rates I might add.  And I would suggest everyone look at trade deficits and ask how everyone can afford to buy these dollars without printing their own currency to buy them?

5. Credit is still very tight and money supply has been shrinking.

Business will not expand, even if there was credit.  Talk about uncertainty!  You have a business unfriendly administration and a massive tax hike in the middle of most sever downturn since the great depression!

6.The CPI is low, but asset values such as real estate are still declining.

CPI is a joke you know that.  Look at the massive spike in real things this summer.  Unless it goes down soon producers and consumers are going to have as problem, but we all know they will mask it in the CPI.

7. Unemployment is high and will probably go higher.

Way higher numbers then reported and we have recently all read about the BLS number fraud.  To the moon Alice!

8. Massive Keynesian fiscal stimulus (federal spending) has had no lasting effect.

It's political payouts and graft.  This will accelerate as the looters dial up as the ship burns to the waterline.  It's foolish to think they would stop when their looting potentially is drawing to a close.

9. Government social benefit programs (Social Security, Medicare, Obamacare, federal pensions, etc.) are underfunded and their costs will climb dramatically.

This is such a time-bomb it will detonate and destroy everyone and everything.  A fed gov was saying years ago they figured it at 100 trillion.  Yes boys and girls 100 trillion, quite the hammer blow to the gut.  Don't think the Japanese will finance that bad boy.

10. Federal taxes now take about 30% of our economy.

On it's way up, which will be a further drag on the overall economy.

11. Federal debt is at about 90% of GDP and is rising.

Rising is the wrong word, try skyrocketing.  And the GDP number is bull.  We get to include off-shored labor and productivity in that number.

12. It is likely the Fed will engage in large amounts of QE to stimulate the economy, especially if unemployment grows.

The Fed is on deck to be the largest holder of Treasuries, officially!  If that isn't enough to scare the pants off our foreign creditors I don't know what it.

Also your position that the reds will be any better then the blues is downright laughable.  Really where were you the past 10 years?  We had the Republican revolution and good God it was ruinous!  There was an unprecedented expansion in spending war and government.  Now the blues can in and said "We can top that" and sure enough they did.  I can only expect that come 2012 the reds will get into the locker room and say "Gentlemen, we have a hard task in front of us.  The blues looted more then anyone in human history.  But with hard work, diligence, and perseverance I think we can beat their record and loot even more!"  The reds will nt save us.  They cannot cut spending because all the bit ticket items are sacred cows.  Will the reds cut the war budget, how about social security, or medicare?  I know the reds, they will lust for more blood and war and spending will reach epic new heights previously undreamed.  Remember we may get a few good reds, but the leadership is the same.  That means the same temptation will be there "Play ball or get no party support.  Play ball, get support and join in the looting"

Our political system demands hyper inflation, the lust for looting only increases and there is not much left to take.  No one is allowed to fail, main street is dieing, and the political class is into hardcore looter mode.  The dollar will not be here in it's present form in 10 years, I would bet my life on it.

Oh and as to the foreigners all sacrificing themselves to bail us out, why?  When everyone says the emperor has no clothes that's a losing game.  They would in effect be agreeing to ship us goods for free, they know we won't pay.  Who here would agree to work if the terms were to be paid in none redeemable IOUs?

Even Krugman, that lunatic has acknowledge that we will default.  But it won't be an honest default, that doesn't happen as it carries a political burden. There will be printing, "To infinity and beyond!!!"  At some point the damn will break and peopel will lose faith in the Dollar.  It might be when they are wading through them neck deep I don't know but there will be a confidence loss and that's it. 

[chopper read]

who junks this?

the world is awash in $US. 

http://www.chuckypita.com/700-billion-cash-found-in-baghdad-iraq/ (for effect)

we are no longer fiscally conservative in any way, shape, or form; which is to say we are much like every other 'western' economy that possesses burgeoning government beauracracies.  yes, we still have military might backing our currency (which is to say we somewhat rule by fear that we can take what we want if push comes to shove), but this military industrial complex cannot be maintained with a 'european-style' economy that is already overburdened with debt (largely financed by foreign entities!).  Sorry, Canada, you'll have to provide your own national security from here on out.  ...but I digress.  

trade (at least half of, if not all of) your fiat currency for gold (or other hard asset) immediately (if you have not already).  get out now. 

if The Fed somehow finds religion and aggressively raises rates to 20%, for example (i.e., the $US actually becomes somewhat scarce again), then you can always trade your gold back for green linen (so you can loan it out for a decent rate of return as it relates to food and energy price inflation).

more predictably, it is doubtful that we will see more than one Paul Volcker in our lifetime.  ...betting against Bernanke is easy money (as The Fed balance sheet is loaded with the same crap as most US citizens: loads of McMansions in once fertile corn fields). 

[ViewfromUnderth...]

Hey Chopper,

Your link to $700 Billion cash found in Iraq? Is actually $200 million...well the headline, then another $650 mil, so $850 mil. A lot but not 700 Billion!

http://news.bbc.co.uk/2/hi/middle_east/2988455.stm

This link is from the dopey site you linked to, so the inflation was theirs but the dopey link was yours.

Harden the fuck up!

[chopper read]

i deserved that for my sloppy link to make a sloppy point.  

simply put, they're everywhere them greenbacks.  the world don't need more stinking greenbacks.  there are 'mounds' of them, okay?

 http://www.pittsburghlive.com/x/pittsburghtrib/s_130622.html

[Shameful]

We can't handle a Volcker shock treatment.   Plug in the numbers for our debt at a volker rate then run it against tax revenue and expenses.  Without cutting all spending and raising taxes it won't work.  The odds of that happening are infinitely approaching 0.  The course we are on cannot be changed, the point of no return was a decade ago, and even then it would have been hard to turn off the path.  Now all that is left it to brace for impact.  After all the ship of state does not turn on a dime, this is akin to trying to right hte course of the Titanic after striking the iceberg, a noble attempt but ultimately futile. 

[IQ 145]

 Agree; "passengers, assume the position".

[chopper read]

sadly, you are right about the Volcker treatment.  the 'economy' would be brought to its knees, leaving no room to service our insurmountable debt as it spirals further toward default.  

Yes, Shameful, the 'point of no return' probably did manifest itself a decade ago.  Greenspan could have raised rates, curbed our rampant 'consumerism' and borrowing, caused a much-needed and meaningful recession (purging the excessive risk-takers, particularly in real estate), and preserved the integrity of our US dollar for a while longer.  ...but, in a fiat world with no Federal 'balanced budget' requirements, an unshakeable ivory tower/text-book belief in Keynesian economics at our highest administrative levels, and a fundamental lack of personal responsibility in every corner of our country, we find ourselves on the wrong end of a checkmate situation.  in this way, we may as well say that the point of no return was in 1913 when this doomed-to-fail central planning took hold.

all said, i do believe that the 'stimulus' accelerated our demise exponentially.  without the wallop of this additional debt overhang, we may have been able to default on social security, instead of our national debt, and possibly saved our country.  the default against the generation who voted for more government than we can afford could have been gradual.  Instead, we have proven to our creditors that we are glutinous beyond reproach, and our loans will continue to be called with the dumping of our dollars for gold.  

savers of the world unite.   

[akak]

+100 Trillion trillion trillion hyperinflated units!

The author of the original article also overlooks the fact that we are experiencing a skyrocketing and exponentially-rising level of governmental debt while under a regime of historically unprecedentedly low interest rates!  This either insures that the govbond/debt bubble continues until all available capital within the economy has been destroyed, along with said economy (a la Antal Fekete), or that the burden of servicing that debt rises to an unsustainable and federal budget-breaking level if and when interest rates finally rise. 

The Fed has already painted itself, and us, into a corner, and short of walking through the paint and making a BIG mess of things (i.e., hyperinflation and/or currency collapse), there is simply no way out of that corner.  Face it, the monetary cake has already been baked: our choices are simply chocolate cake with shit frosting, or shit cake with chocolate frosting.

[Shameful]

I didn't mention interest rates because I don't think it's an issue.  The Fed can and probably will keep the rates down with the power of the press so to me it's not a direct issue.  It's just more fuel for the fire.  We are already watching new record lows in yields while the USDX is bleeding like a stuck pig.  We could have prices doubling every week and still see record low yields, it's not a market when one party can dictate pricing.

[akak]

We could have prices doubling every week and still see record low yields, it's not a market when one party can dictate pricing.

Completely agree, Shameful.  I want to hurl my TV against the wall every time I am foolish enough to tune in to CNBC, and listen to Rick "I Invented the Tea Party!" Santelli talk about yet another "successful Treasury auction"!  That's like jerking off and then bragging about being a wonderful lover.

I was not faulting you in any way, but Econophile, the author of the original article itself.

[Glaucus]

"That's like jerking off and then bragging about being a wonderful lover."

Really got to, um, hand it to you on that on, Shameful.  

[akak]

Hey Glaucus, give credit where credit is due!

Anyway, one goes with what one knows  ;-)

[Glaucus]

In my prime, I was ambidickstrous.

[Sudden Debt]

The deficit will be at 100% in 2011. Nuff said.

[chopper read]

Nuff said, bitchez. 

[ViewfromUnderth...]

At last, the real Chopper.

Someone too smart to be you is pretending to be you on this site.

http://www.youtube.com/watch?v=XY3TfjOeuhM

[chopper read]

"take off your skirt, cancel your manicure, grow a moustache, and harden the fuck up."

[Dr. Acula]

"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."

Does it count that USSA government owns 50% of the mortgages in the country? If USSA bails out GM and AIG, does that count as "regulations controlling much economic activity" or "spending... out of hand"?

[anony]

Hyperinflation in many things we need to survive is already here.

A single 1/2 " nut and collet for my router, a part that weighs less than a flea fart, cost $32.00. I figure it's total cost to make, ship and stock is about a buck.

A single Cashew cluster at my bakery costs $2.50 plus tax.  Cost to make? About a nickel.

Box of bandaids (for mishandling the blade in the router), $5.00. Couldn't cost more than .50 cents to make the entire 100 bandaids.

Pricing is all over the map. Attorneys charge 5% to take an estate thru probate. Their total hours couldn't exceed 8 on a sizable estate.  Highway robbery.  Investment banksters get trillions in bonuses for creating the worst financial nightmare in living history. How can that NOT be UBER-Hyperinflation?  CEOs in failed banks take home billions for ruining institutions that had half a million employees (who now cannot find a job).

Pricing is so out of whack for so many services and stuff that even the gubmint leaves out the most important items that a typical family would consider essential to their survival.

[RockyRacoon]

Let's not even talk about the price of a box of freakin' corn flakes.  Kroger's house brand was $1.35 a box 8 months ago -- now a "bargain" at $2.40?  It's obvious that the package costs more than the contents, and there isn't even any cost of advertising as in the Kellogg products. 

[contrabandista13]

Jeff Harding, the author of this post is so cognitively disconnected from reality that I recommend he be prescribed psychotropic medications, as soon as possible...

Hyper inflationary events always occur in a deflationary context.

WHAT A FUCKING MORON.....

I too wish that this idiot would have put his definition  further up in his article....

Best regards,

Econolicious

[Econophile]

Thanks! 

[Dr. Acula]

>Inflation is when central banks print more money than people desire to hold

The Austrian School defines inflation as an increase in the money supply

>The result of inflation is that all prices go up.

Actually, the prices of individual goods may increase or decrease. For example, particular kinds of computers have decreased in price through the years despite ongoing inflation. But, generally, prices will increase.

>If tomorrow everyone in the economy had 2x the dollars than they have today, prices would double

This is not at all true. There is no reason why all prices would change synchronously or why people would seek cash holdings that are double the previous size. In fact, the hallmark of hyperinflation in a currency is that the subjective value - specifically, the objective exchange value against most goods - drops at a faster rate than that at which the money supply increases. Furthermore, in reality, inflation doesn't get distributed to everyone in the way you describe - instead, the first receivers of the new money benefit by taking advantage of low prices, while others will generally face bid-up prices. 

>A careful analysis of ... history leads me to conclude

You cannot deduce the future by looking at previous epochs or different places, each involving different market structures and different people.

>This is what buyers of US Treasurys look at when they buy our debt: the likelihood of sovereign default.

And what about decreases in the objective exchange value of the dollar?

>I think it is political science fiction to think that the Fed or any politician would let hyperinflation happen here.

But what if the only alternative is to default?

[Econophile]

My hypothetical example was made simplistic to emphasize a point. I get the idea that the first borrowers get the money, bid away goods and services, cause prices to increase, the guy at the end of the chain gets stuck with high prices.

I am not a positivist, and you misunderstand the role history and theory (Mises wrote the book!). Austrians don't reject history, they reject is as a means to theory. Doesn't mean you can't learn from it.

[Glaucus]

"Hyperinflation is just an extreme case of inflation."

No, it is not.  Inflation, as you rightly say, is a monetary phenomenon, while hyperinflation is a loss of confidence in the monetary unit itself and over which the monetary authorities have no control.  Read FOFOA (who is conspicuous by his absence on your list), and you will understand.  His superb, three-part post on the subject can be found here: http://fofoa.blogspot.com.

[Econophile]

See my comment above. If the government had no control over hyperinflation, why do they keep printing money? Why does it stop when they stop printing? They have everything to do with hyperinflation, otherwise please explain where the bundles of cash come from. It is just inflation which at some point totally debases the currency. And all inflation stems from the central bank. This kind of thinking is similar to what the economists running the Weimar government thought. They asserted that nothing they were doing caused hyperinflation. Please see Hyperinflation in Germany. All hyperinflations have been preceded by large and continual increases in money supply. "Digital money" is just another way of saying money. Credit is another issue but is integral with money in our fractional reserve system. I understand the role of debt in the expansion of money supply through fractional reserve banking. Of course, QE side steps this mechanism. I also understand that gold is money. But it is not true that the monetary authorities have no control over it.

[OldTrooper]

If the government had no control over hyperinflation, why do they keep printing money? Why does it stop when they stop printing?

I think you are confusing cause and effect, econophile.  The exponential printing of money is because of hyperinflation.  They stop printing because, in fairly short order, the currency has been totally abandoned and there's just no point to printing any more.

Still, I appreciate the (for ZH) contrarian view and you've certainly presented some good food for thought.

[Econophile]

I think that's what I said except for the fact that they abandon a worthless currency because of money pumping. Otherwise you can't explain hyperinflation. It starts with the central bank who through inflation (an increase of the supply of money without an increase in the demand for money) completely debases the money. I had assumed here that everyone had some knowledge of Austrian business cycle theory.

[StateofFraud]

I seem to recall Zimbabwe's central banker saying that he printed more and more notes in response to a perceived need by his people for more money so they could buy goods they desperately needed. In other words, prices rose because people lost confidence in the money and wanted to convert what they had into hard assets, but there was not enough money to buy the assets, so he injected more into the economy. First the lack of confidence in the currency, then the printing.

"I've been condemned by traditional economists who said that printing money is responsible for inflation. Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren't in the textbooks."

http://www.newsweek.com/2009/01/23/it-can-t-be-any-worse.html

[Internet Tough Guy]

I am amazed that anyone named Econophile would not know the most basic fact about hyperinflation, but write a post about it! Hyperinflation is not high inflation, it is the loss of CONFIDENCE.

[percolator]

And why is there a loss of CONFIDENCE in the currency?

Because the central bank is PRINTING TOO MUCH currency which is chasing to few goods.

[Glaucus]

Yes, but until there is a loss of confidence in the monetary unit itself, inflation is just that: an increase in the money supply that results in an increase in prices.  Hyperinflation, on the other hand, is a loss of confidence in the monetary unit itself, which causes the monetary authorities to chase their tail in a vain attempt to keep up.

In other words, consumers chase prices during inflation, while monetary authorities chase consumers during hyperinflation.

[IQ 145]

 Correct. Clearly stated in the history of the Weimar event; the public demands more currency, and the printing facilities have great difficulty to keep up with this accellerating demand. It's a mass psychology event that becomes a self-fulfilling prophecy. The only possible conclusion is that "econophile" didn't do his homework; ie. dedn't read the book on the Weimar event.

[akak]

Does issuing an exponentially-rising and completely unsustainable amount of debt equate to "printing too much" as well?

Which comes first, the hyperinflationary chicken or the printing-presses-on-overdrive egg?

[RockyRacoon]

I'm going with the egg.  Marilyn vos Savant has figgered that one out already.  The egg contains what will be a "chicken" so the egg is first.  I'll take the printing press as the precursor to Hyper-I.   What's behind curtain #3?

[tmosley]

Hyperinflation is just an extreme case of inflation.

Wrong, wrong, wrong, wrong, wrong.  Inflation happens when credit is growing.  Hyperinflation happens after credit collapses and people stop trusting the currency.  

This fundamental misunderstanding of what hyperinflation is is the reason you don't think it will happen.  The hole that is being left by credit deflation is being filled with cash.  This has left us with a situation where those things that are bought with cash are rising in price (witness food commodities up 60-80+% in the last quarter), while those things that are bought with credit (homes, cars, electronic gadgets) are declining in price.  This trend will continue and accelerate.  You don't see it in the CPI because the CPI is designed to hide it. 

[chopper read]

tmosley, i do not know who junked you, but i find your thoughts well-configured.  call it what you will, folks are going to need more food before they are going to need more house.  food (and metals) prices will be massively higher before The Fed gets their desired consumption in the usual suspects (cars and houses).  nobody needs another house or car, but they best stock up on food before their neighbor beats them to the store shelf.  the world is awash in $US and we are going to trade them for what we need.  

...we only spend borrowed money on the sh*te we don't need, because its someone else's money (sort of like Congress).  we're going to get a lot more selective now that we actually have to earn it.  

[Pampalona]

Oooops sorry, had a iphat finger moment, didn't mean to junk this comment

[chopper read]

press it again, to 'unjunk'.  thank you, Pampalona.  

[wintermute]

tmosely

I reckon you should be writing the "Why hyperinflation" articles.. you would do it far better!

[anony]

Thanks for this simple statement. ++++

[anony]

Thanks for this simple statement. ++++

[XitSam]

+1 to parent.

"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."

I agree that they understand it, but they will also think "this time it will be different, we can control it, we can be disciplined."  They will be wrong.

[lookma]

"Hyperinflation is just an extreme case of inflation. "

You shoulda put this further up in the article, that way I could stopper earlier.

The level of ignorance expressed in this article is astounding. 

Here's a baby step hint- CBs print in response to the hyperinflation, which is a collapse in confidence in a currency.

Start here maybe? - http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post.html

[Econophile]

Lookma:

Thank you for your comment. Unfortunately, you are quite wrong. As Akak says below, who put all those zeros on the currency? There is not one case in the histories that I mention in the article where hyperinflation did not start as inflation and end with hyper-inflation because of government printing presses. Including the episodes in Argentina. Inflation is always a monetary phenomenon whereby the government prints money to pay its bills and debases its currency. The Argentinos have a habit of monetizing their debt which lead to high, spiraling inflation which led into hyperinflation in the two recent instances it occurred there. I believe I explained the hyperinflationary process in some detail which, in all extreme cases, ends with a rejection of the currency because it is just worthless paper.  There is a reason people reject their currency and it's not because it is valuable. It's because it is just paper backed by nothing, fiat money, printed to excess. I promise you, you would understand this lesson if you had to cart around an armful of cash to buy a latte and then two armfuls by the next day. These things don't just happen out of thin air. The cause is entirely a government printing money--too much money. Do you think that people just wake up one day and decide they have no faith in their money? 

[ViewfromUnderth...]

Leaving aside the confusion you create as to the cause of it, Hyper-inflation will be avoided because a Tall Paul will come back. Really?

So, no mention of the effect an increase in rates will have on the huge Treasury bubble....just an automatic assumption that those losers will "suck it in" and not seek a stronger currency. Brave assumption in the face of Soros, Einhorn, Paulson (J), Tudor-Jones et al, and now Greenspan (!) taking the other side of that bet. Oh, and me as well.

Why are we doing this? 

What interest rate can the US Gov't afford to pay on its debt? At last count 10% rates (half of Tall Paul's cure) meant 100% of GDP.... oh sorry, they can pay any amount because they "have a thing called a printing press, or its electronic equivalent"....I shit you not, Ben said it.

I leave you with the words of Hugh Hendry, and, given the credibility and fortitude shown by our leaders, in my opinion this assures the answer: "if inflation is a monetary phenomenon, hyper-inflation is a political phenomenon".

Good luck to all.

[Econophile]

You need to read what I actually wrote.