There is a difference between inflation and hyperinflation…and there is no gradual path from one to the other. To wind up with true hyperinflation, some very bad things have to happen. The government has to completely lose control… the populace has to completely lose faith in the system… or both at the same time. [Will the U.S. go down that path? Let’s review the situation.]
The comments above are edited ([ ]) and abridged (…) excerpts from the original article by Justice Litle
Do You Still Have Faith in the Monetary System?
Faith in the system is a very important concept and it is very hard to kill and by “faith” I don’t mean liking what the government is doing, or being happy about the direction the country is going…
Here are a few simple questions to determine whether you still have “faith” or not:
- Do you still have a meaningful amount of cash in checking or savings accounts?
- Do you rely on electronic payment systems (credit cards, bill pay etc.) for most of your transactions?
- Are you still comfortable with your employer paying you in legal tender or, if you own a business, with your customers paying in same?
- Does the percentage of your net worth tied up in physical hard [i.e. gold and/or silver] assets amount to] less than 50%?
If you answered “yes” to the above questions, then…you are still invested in the functioning financial system as we know it. You still have “faith”… not in your heart but in your deeds
Inflation Versus Hyperinflation
Inflation, even double-digit inflation, can be handled within the confines of the system. The unofficial inflation rate in Argentina is somewhere around 25% right now, and people aren’t even rioting in the streets. They aren’t super-happy, obviously, but they are adjusting. (The government is pumping up wages, so that may have something to do with it.)
Hyperinflation, in contrast, means that all hell has broken loose. To get true hyperinflation,
- the economic engine has to break down
- or there has to be a clear sense the government has lost all control.
This is why hyperinflation tends to come:
- in the aftermath of wars,
- or at the tail end of badly mismanaged regimes where the economy has been going from bad to worse for a very long time.
The possibility of rapidly accelerating inflation in the United States is very real…but hyperinflation is a much darker prospect. To get to that point, cash has to be seen as not just undesirable, but worthless. [You would be in a] real-life nitty-gritty panic mode [going] to the grocery store as soon as your paycheck hit on Friday knowing [full well] that prices [would be going] up again on Saturday; buying two months of food at a time; fighting for the last loaf of bread on the shelf; turning off the heat because the gas bill is double the rent.
Hyperinflation in the U.S.
[While] hyperinflation could come about in the United States I would argue [that it would not happen] quickly or easily. Americans won’t just wake up one day and say “Gosh, look at that.” In fact, to get to U.S. hyperinflation, I believe something else would have to happen first — the onset of a new Great Depression scenario, even worse than the last one.
Already the deficit hawks are yelling and screaming [citing] high inflation risk… In Washington, this is playing out as dramatic lip service to austerity – massive budget cuts and a timetable for raising interest rates so here’s the thing: If the inflation problem becomes too serious for the hawks to be ignored [one of two scenarios could unfold:]
- eventually the Federal Reserve will be forced to…pull a “Volcker” and hit the inflation mule over the head with a sledgehammer. This “Volcker action” could then trigger a collapse in the value of paper assets, as all the rebuilt Ponzi schemes pumped with Federal Reserve money come tumbling down again. [Why? Because] the underpinnings of the U.S. economy were much stronger in Volcker’s day [back in the 70’s when] there was far less debt and leverage built into the system… [or]
- the stock market could crash on its own, as investors realize the stimulus rainbow has delivered them to the edge of a cliff.
Either way, some aggressive action will be taken to stop the build-up of inflation, be it through Washington policy backlash or the organic effects of another Wall Street meltdown. (As a side note, China and the Middle East are two other strong candidates for “meltdown catalyst.” If the China miracle implodes, the global economy goes with it. If the Middle East goes up in flames, oil becomes the $200 a barrel grim reaper.)
When…[such an] inflation-stopping event drops [our current] recovery in its tracks positive sentiment will quickly collapse. The dreaded “D” word, deflation, will be back on everyone’s lips – and that is one of the great ironies at this juncture of financial history. The deflation monster still has not been vanquished! It is simply hiding under the bed, biding its time until the Fed-and-China-created stimulus bubble pops and when that bubble DOES pop, that’s when things [will] get really frightening.
What Would Cause Hyperinflation to Occur in the U.S.?
When the global economy encounters some domino chain combination of Japan/Middle East/China/America implosion, the threat of Great Depression 2.0 [will] come roaring back, bigger and uglier than before [because] all the “extend and pretend” actions [that have been] undertaken until now [will] have only made the problems worse… [Those past] attempts to stop “normal” inflation [will] trigger an economic collapse that rivals [the conditions experienced during the] Great Depression… At that juncture, it will be apparent to all that the Federal Reserve has run out of bullets – that “more stimulus” simply cannot work – that trillions have already been thrown down the drain. That is the point where true panic comes in.
It is then, when the monetary authorities wet their pants in the face of a new deflationary panic, that the real threat of hyperinflation [will] return to the fore. If all hope becomes lost… we could see the Fed desperately propose something like QE2 times 10, on the order of not $600 billion but $6 trillion. That is when the real horror would begin.
Not since the Civil War has there been a crisis serious enough to tear families apart at the seams – but we believe this one will turn brother against brother.