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Hyperinflation Cannot Be Prevented By Debt/Deflation
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Hyperinflation Cannot Be Prevented By Debt/Deflation
Written by Jeff Nielson (Click For Original)
A repetitive flaw continues to circulate throughout much of the media – mainstream and Alternative, alike. This flawed analysis contends that we are heading for a deflationary crash, and reflects a fundamental misunderstanding of economic dynamics.
This fundamental (and unforgivable) error comes from a failure to recognize the definition of deflation: it is when the currency in which a particular jurisdiction is denominated rises in value. It is with this basic fact in mind that we can now view a simple hypothetical example, which resolves the phony “inflation/deflation debate” once-and-for-all.
Imagine two economies which are identical in every way, except for one, important difference. They have the same GDP, the same sized population, and a similar set of identical, economic parameters (except for that one difference). Both economies recklessly decide to hyperinflate their currencies, as represented in the “hypothetical” chart above.
This is not a chart of a potential hyperinflation. Rather, it is a chart of a currency which has already been hyperinflated (past tense). For readers who can’t “see” this already, just imagine a chart even more ridiculously extreme requiring a much larger page.
Both Economy A and Economy B have hyperinflated their currencies (i.e. driven the value of those currencies down to zero). Now we come to the key difference between the two economies – and the obvious folly of the Deflationists: Economy A is totally solvent, without a single penny of debt, while Economy B has a $50 trillion national debt, and is obviously bankrupt.
According to the nonsense of the Deflationists, the currency of Economy A which has ‘only’ hyperinflated its currency will fall to zero, while the currency for Economy B which has hyperinflated and bankrupted itself will rise in value – due to the “deflationary crash” about which the Deflationists are continually jabbering.
We thus arrive at the Idiot Principle of Deflation. A nation which only hyperinflates itself will see the value of its currency fall to zero, but a nation which hyperinflates and bankrupts itself will cause that currency to rise in value. The bankruptcy supposedly does more than merely “cancel out” the hyperinflation, it completely overwhelms it.
By now, it should be patently obvious to anyone with two synapses to rub together that the Idiot Principle of Deflation is utter gibberish, and cannot possibly add up, when one simply views the economic dynamics (and definitions) in their proper context. But the mind-numbing idiocy of the Deflationists becomes even more obvious when we add some empirical evidence from the real world.
What makes the hypothetical example above totally unrealistic? Economy A, the solvent economy, would have absolutely no reason to engage in the recklessness and suicide of hyperinflation. Solvent nations never hyperinflate their currencies. Thus every one of the (numerous) regimes throughout history whose currencies exploded into hyperinflation was also already insolvent/bankrupt. It is only such insolvency which creates the extreme desperation necessary for a government to invoke such economic suicide(hyperinflation).
According to the Idiot Principle of Deflation, this is impossible. Because these nations went bankrupt, their currency should have risen in value, rather than collapsed to zero. But there is another principle of idiocy at work here.
As has been pointed out to readers, but apparently ignored by the Deflationists, until our governments embarked upon the even more-reckless fraud of “quantitative easing” (monetizing debt), our governments literally borrowed every unit of currency into existence. This means that these units of currency are/were literally the IOU’s of our governments – our bankrupt governments.
What is the value of an IOU issued by a bankrupt Deadbeat? Zero. The currency of Economy B was already worthless, even before it began it began its hyperinflationary money-printing. The currency of Economy A only became worthless as a result of the money-printing. The currency of Economy A is worthless. The currency of Economy B is doubly worthless.
However, according to the Idiot Principle of Deflation, when you render a currency doubly worthless, it rises in value.
Sadly, this infantile error in logic/arithmetic of which all the Deflationists are guilty cannot be attributed to mere ignorance. It is (has been) nothing less than abject stupidity. The reason why such a harsh verdict is absolutely warranted can be summarized in two words (and one name): John Williams.
It is now a full decade since the esteemed Mr. Williams (of Shadowstats.com) first published his brilliant essay (and analysis) “The Hyperinflationary Depression” (updated on numerous occasions), where he explained why bankruptcy does not (and would not) prevent the value of a currency from falling to zero if that governments pursues a hyperinflationary monetary policy (i.e. hyperinflationary money-printing).
Put simply, a government can destroy the value of its currency and implode into bankruptcy, simultaneously. Empirically, this is precisely what we have seen with every hyperinflationary episode in history. The deflationary crash of bankruptcy occurs (more or less) simultaneously with the hyperinflationary plunge-in-value of the currency. The former never “cancels out” the latter.
This is the true “principle” at work with these dynamics, and it is one which the Deflationists have either ignored (for ten years) or simply lack the capacity to grasp. Individual facets/sectors within an economy can implode in a “deflationary crash” (within that niche). Not only does this fail to negate any overall hyperinflation at work, it must accelerate it. Obviously a nation whose currency is “doubly worthless” should/must plunge to zero even more rapidly than the currency of a nation which is ‘merely’ worthless.
To repeat, every nation in history which has engaged in the suicidal monetary policy of hyperinflation had already succumbed to the fiscal folly of insolvency. Not only is it “possible” to simultaneously have a nation hyperinflate its currency to zero and have a so-called “deflationary” debt-default crash, it is the onlymanner in which hyperinflation ever occurs.
The Deflationists don’t understand economics. They have ignored all of our economic history (where not a single nation has ever “warded off” hyperinflation by going bankrupt). And (apparently) they have never even heard of “John Williams”. They can be, and should be, totally ignored.
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You have been yelling this "Deflation is a myth" thing since day 1 while the real world has shown it to you. In addition to money behavior, there is also demand.
The show was ending in the 70's. Bretton Woods was collapsing. Unhinging the dollar was the can kick. Then deregulation. Now, complete disconnection between reality and banking. Massive inflation occurred in the shadows and bled into real economy. The forces of deflation and inflation have been fighting it out since the 70's like a drug addict needing more and more to avoid a hangover. Hence the reasons for the continued and ever more desperate actions along the way to keep the system alive. Fighting demand destruction with cheap credit and leverage until the masses are saturated with debt and counterparty exposure becomes so extensive that any shocks to the system have the potential create a domino effect - globally.
And you and I both know it won't hold together much longer. The wheels will come off. Smaller economies will likely hyperinflate. Larger economies may simply choke. We are more likely to choke simply because lesser economies believe in the dollar and will choose it over thier local currency.
Are you really suggesting that prices, especially relative to wages and purchasing power have gone down since the 70's?
LMFAO!!!!
Theory of relatively at play here. THAT has been the illusion all along. Strict, one-dimensional concepts of inflation and delflation work great to confuse the masses. Heck, look where we are today. We can't even come to consensus here. Sort of feels like arguing if the deck chairs on the titanic are white or off-white. Prices have gone up, more so than wages. But the vehicle for this has not been classical increase in money supply that reaches the generally population. Wage growth has lagged horribly. It has been financialization, endogenous money creation, etc. Synthetic growth. Debt and asset bubbles (which cram down more debt).
Give me a few days to put something together as an analogy that I have been thinking of. Maybe that will help shed some light on my position. The short story is that as soon as the game begins, deflation is the opposing force. It does not just manifest later as some outcome. It is there all along. Only in the end the math runs it's course. Either the system hyperinflates (blows up) or it fizzles (deflates).
Thank you. That was a good response.
Am I missing something in the above analysis?
Yes. Hyperinflation is, by definition, a psychological phenomenon that results when confidence in the currency collapses. Your analysis assumes that said confidence will always be there. But it won't. At some point, the increasing supply currency will reach a tipping point that will trigger the hyperinflation. The $64,000,000,000,000 question that can't be answered with 100% certainty is when.
I have been studying this as well since 2008ish.
In my opinion, you are on the right track. Consider also that government has stupid levels of unfunded liabilities. Promises such as pensions - and we all know what is going to happen there. Governments are going to come after the public for anything and everything. They already are actually. It is a deflationary black hole that is going to suck everything is as it implodes. And pensions are just one example.
If we do witness any hyperinflation, it will be an event, not a process. Meanwhile, the deflationary journey is going to be what crushes everyone.
Unless they choose to pay out on the unfunded liabilities with "printed" money rather than debt.
Can't. And they know it. It would destroy DC and Wall Street overnight. If they attempted this, it would be a last ditch effort. A final blow-off event which would like coincide with the dissolution of the Fed. And everyone who bought into the hyperinflation meme without considering the journey to this one "possible" outcome which could be years down the road will have already been seperated from thier "assets" - bought back for pennies on the dollar.
Spot on, this is a deflationary event not inflationary........when money flows slow to a crawl due to gov't chasing taxes to the ends of the earth, the economy simply implodes under its own weight.
At times thoughout history severe deflation can later lead to hyperinflation when government confidence ceases completey (the fall of Rome was a great example of how this works).
Hyperinflation is instantaneous when the producers of essentially goods and services cannot deliver, no matter how much paper bullshit you offer them.
Semantic horseshit worthy of a Ph.D. in eCONomics at America's "best" institutions.
I see evidence of plenty of black market activity already.
I think you need to go back and read some history because although hyperinflation can spiral very quickly (ie panic in the market) the events usually preceding it are usually very deflationary. Hungary in 1921 decided to levy a 20% tax on bank accounts (highly deflationary and crushed money flows). Scared people then hoarded cash which led to a drop in tax revenue (deflation) which caused the gov't need to print like mad (inflation to offset the deflation caused by taxing) to have any money to spend. Markets see this and decide the bonds are worthless and that unleashed the hyperinflation amageddon on thier currency.
At no point in history has the world had this many people so interconnected, so you actually support my argument. Thanks, yes, the death of paper promises/claims is the same, if not worse than hyperinflation. yes, you are correct.
What people are implying is that despite the historical circumstances, human nature (politics) never changes.
This is where we get the saying "Those who cannot learn from history are doomed to repeat it and those that do are simply doomed to watch them".
I think it we removed the semantics, we would likely agree more than disagree. And if this was the physical realm and we were dealing more physical matters, I believe you would find me right by your side - rifle in hand - arguing whose long range zombie shot is going to be better placed.
Always a fan LOP. Seriously. Your a pain the ass (that is a compliment by the way - lol).
Exactly.
Also, hyperinflation is not a monetary event; it is a political event.
It is the sudden loss of confidence in a currency (triggered by the loss of confidence in the government behind the currency) manifested by the holders of the currency dumping it in favor of a perceived 'safer' currency/asset.
In today's global economy, to which other curency would holders of US dollars flee?
Also, gammab0y is dead-on when he points out the difference between Country A & B.
There is currently so much debt in the system (much of it owed in US dollars) that there is a huge built-in demand for US dolars to service it.
This is why, at least at the beginning, the next economic crisis will be deflationary, as debt-holders liquidate assets in a "hunt for liquidity" to service their debts.
As others have stated, I too am an agnostic on the inflation/deflation argument. Perhaps a decade ago I thought as Sprott did: buy gold and wait for the 'hyperinflation' to come. But after literally thousands of hours reading, researching, and yes, visiting ZH, I have come to the conclusion that I really can't predict what will happen.
However, there is one thing of which I am certain: the current financial system is doomed. It will collapse; maybe not tomorrow or next year, but 5th grade math says it is not sustainable.
I am also certain that when the collapse occurs, at least at first, cash will be king. So few people hold actual US dollars, and so many have unsustainable debt. Just as in the 1930's the holders of 'money' will do well. Since gold is 'money' it too does well during periods of deflation (read "The Golden Constant").
We may ultimately get our hyperinflation, but I strongly suspect it will only come when there is a loss of confidence in the US government's ability to deal with an initial crushing deflation...
[Cash, Bonds, Gold...]
As others have stated, I too am an agnostic on the inflation/deflation argument. Perhaps a decade ago I thought as Sprott did: buy gold and wait for the 'hyperinflation' to come. But after literally thousands of hours reading, researching, and yes, visiting ZH, I have come to the conclusion that I really can't predict what will happen.
I followed the same path. I started on the hyperinflation bandwagon but after learning as much as i could about the mechanics of money, I am now in the deflationist camp. I still own silver and gold (or did until my boat sank). I'm not sure there is contradiction between being long PMs and being deflationist.
In any case, it's not a trade for me. It's an insurance policy. Any situation where I get "rich" from owning PMs is almost certainly going to be an overall dangerous and unpleasant one. I might be relatively better off than the guy who is all-in financial assets, but nominally, my life is likely to be a lot less comfortable than it is now.
outstanding post
Agree on the hyperinflation thing... that it can be instantaneous. I can also spool up and run wild for awhile too. All depends on the mechanism of how confidence is lost.
Graph would be a lot more useful if the vertical was on a logarithmic scale rather than a linear scale.
"A repetitive flaw continues to circulate throughout much of the media – mainstream and Alternative, alike. This flawed analysis contends that we are heading for a deflationary crash, and reflects a fundamental misunderstanding of economic dynamics."
KONDRATIEFF WINTER IS DEFLATIONARY.
QE has not caused hyperinflation because the money created has not been used to pay debts in a foreign currency.
Not to mention that the QE is tied up in debt around the globe as well as domestically.
Think of it as a paper mache' cap on a septic tank in the middle of a garden party.
Eventually, that one wrong step will happen, and the party's over.
If the point here is that economic destruction often expresses itself as hyperinflation, then the point is well taken.
The Confederacy, Zimbabwe, and Yugoslavia (Serbia) all had destroyed economies, and hyperinflation.
However, a hyperinflation does not have to come with a destroyed economy. Wiemar Germany had hyperinflation and an intact economy. However, WG DID have a tremendous debt, (war reparations) that were a drag on that economy.
It might also be pointed out that a war was also part of the picture for all these nations. The US seems to be fitting the model pretty well.
If debt suddenly sucks up a tremendous amount of money and makes it disappear in a cloud of default, then you have a deflation. If that avalanche of default destoys an economy, and then the govt associated with that economy tries to print the economy back into existence, you will end up with a Zimbabwe type scenario.
So, yes, debt and hyperinflation can go hand in hand. But somehow, it strikes me that this article doesn't really say that.
The deflationary crash of bankruptcy occurs (more or less) simultaneously with the hyperinflationary plunge-in-value of the currency. The former never “cancels out” the latter.
"However, a hyperinflation does not have to come with a destroyed economy. Wiemar Germany had hyperinflation and an intact economy"
How do you have a functioning economy with a currency worth nothing? Yea wheelbarrows of cash for a loaf of bread intact.
Weimar Germany's economy was not intact. It had been destroyed by war and about 45% of the labor force was a casaulty during the war. The size of the labor force collapsed.
With regard to Sprotts blog...their assumption is flawed. You cannot have two economies with the exact same GDP if one is accummulating debts of $50 trillion along the way and one has no debt. The debtors economy would in fact be much smaller once the debt stopped increasing, assuming interest rates increase with inflation or funders woke up to solvency issues. Demand would collapse to a "sustainable" level exacerbating all the excess capacity. Non printed funding velocity would collapse. Ie the printing press would take the place of the economy, and economic incentives would be destroyed to the point that you are left with a command economy in place and down the road that would lead to economic collapse and hyper inflation but it would take time.
Yet another gold shill post on ZH.
We don't have hyperinflation because the QE money didn't make it into gneral circulation, the banks used it to make various asset bubbles.
"...the QE money didn't make it into gneral circulation, the banks used it to make various asset bubbles."
buying assets till they bubble sounds like general circulation to me....
US debt has doubled in 8 years with the CONgress set to raise the debt limit again this fall. If gold falls to $300/oz. like Dent says, it implies US debt has been discounted by 80%! I'll take gold over nothing.
Yes, this.
But also, all the examples cited of hyperinflation are examples of economies that hyperinflated their currencies in the context of a global economic system that was otherwise solvent. The problem today is that the entire global economy is insolvent, NOT just the U.S. economy. This means that the value of the various fiat currencies is a matter of PERCEPTION of value RELATIVE to the alternatives. As all the global economies melt down we see flight to the “safety” of the U.S. dollar. Technically speaking, this is absurd, and the hyperinflationists are correct to point this out. But we are a very long way away from seeing (if ever) any hyperinflationary pulses within the U.S. economy. What we are seeing is a combination of deflation plus erratic price movements (both cpi & ppi) driven by a combination of factors; central bank interest rate manipulation, and rising costs of extraction of primary resources.
Broke ass governments who have saddled economies with so much private debt and are now consuming more and more as they desperately try to keep the status quo alive.
The money supply can expand. But, if the draw on society is greater than the monetary expansion the net result is a decline in economic activity. Thus, deflation. The collapse of socialism. The failure of governments who have avoided fiscal responsibility. The theft (continued) by those who are closest to the money supply. Etc.
Expanding the concepts globally adds another layer to this as well. The US cannot be viewed in isolation.
Adding the thought that if instead of massive monetary expansion causing inflation (up to but not past the point of a loss in confidence) the expansion is done in the shadows (banking, financialization, asset bubbles, etc.) and via endogeneous money expansion at ever increasing rates what force is really asserting itself?
The US has been liquidating itself for quite some time here. Selling off it's industrial base. Offshoring of jobs. Massive immigration.
The smoke and mirrors are now giving way and predominant force (deflation) is now overtaking the voodoo that we thought was growth but really was one big fraud perpetrated on society.
"Yet another gold shill post on ZH."
You must've read a different story than the rest of us. The one I read didn't even mention gold.
Read the top line of the post. Sprott is just pushing gold.
And the analysis is tragically flawed on every level. From a misunderstanding of the various mechanisms to the lie about history. Established governments default, they don't hyperinflate.
This is a real shoddy snake oil stand here. Piss off Spott.
Since when is the U.S. an established govt? At the same it is provably more a criminal cartel ..
A [criminal] cartel does not know how to default until a gun is pointed at its head ..
In the meantime, all it knows how to do is create and indulge in fantasy, until everyone concerned is engulfed in the fantasy, and eventually become victims of the fantasy/fraud ..
It does get worse, from there ..
https://app.box.com/s/hfgvcqg7gqh7i27at6sv53ywu87lwarp
or better, depending on what actions we take next ..
Yeah, it's a criminal cartel at this point. Dug in like the mafia. With the world's reserve currency at it's disposal and enough zombies dependent on it such that it has it's own momentum.
And yes, it live's in a fantasy world. Right along with everyone else.
Don't think for a minute it will just wake up one day and say "hey, looks like we have really screwed up and outlived our usefulness... I suppose we need to voluntarily fold up and move onto something better!" Fuck no, they are going to go down swinging. And Wall Street is going to be raping and pillaging right there with them. Even just trying to right-size the problem fiscally means curtains for the global financial system. Cash will go into hiding. People will be forced to live on less and less. Money velocity will faceplant.
You forgot to mention criminal headquarters in Tel Aviv. As long as Zionists are allowed to walk the planet without their heads cowed in shame, the rest of us will be can kicking down the road to poverty.
"People will be forced to live on less and less. " -- only confirming that deflation in anything required for a high standard of living is a fucking myth.
Which is a vicious cycle. It ripples right back through and the result is in fact a "classical" definition of deflation in monetary terms as it relates to the velocity of money. Which just happens to be in the process of painting a massive bear-flag since it's 2008 bellyflop.
The difference today being the fact that we have 7+ billion people, so the demand for real resources required in order to simply maintain the status quo has never been higher, exponentially higher.
All hinging the monetary system that is doomed to failure. Hence, we are likely talking two side of the same coin. Hurt the system, the demand for basics remains, but the ability to function is crippled. And despite demand, commerce crashes. In the context of a government that is hunting money at the same time, it becomes even worse. I am sure you have read the historical accounts of grain being dumped while people starved! Yikes. Monetary behavior and human behavior can be divergent.