I have been reading a lot lately about the coming hyperinflation in America… [and while] I respect many of the writers [who express that opinion] I think they are jumping the gun. At this point none of the economic or political factors required to set off hyperinflation are present – and 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. Words: 2780
So says The Daily Capitalist (www.thedailycapitalist.com) in edited excerpts from the original article* entitled Will We Have Hyperinflation in America?.
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The Daily Capitalist goes on to say, in part:
The Case for Hyperinflation
All the [financial] writers base their hyperinflation argument on America’s:
- out of control federal deficits
- spiraling debt,
- poor economy,
- reluctance to raise taxes,
- loss of control over the money supply.
- At some future tipping point the government and the Fed have only one alternative to prevent a run on US Treasurys, and that is…[even more] quantitative easing (QE)….
- The tipping point is when investors lose faith in Treasurys because they fear sovereign default and they start dumping them, and then bond prices collapse.
- The 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 [also] bring in arguments about trade balances, balance of payments, lack of exports, low U.S. savings, and other mercantilist ideas to justify their case for hyperinflation.
Hyperinflation is not a far-out speculation,[however]. 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.
The Case For Inflation – Not Hyperinflation – Happening[In my opinion, however,] hyperinflation is something that is easy to say [and] makes headlines but is more difficult to achieve. The question is not, is it possible, but, [rather,] is it probable in America today. I think the circumstances make the probability low.
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… Below are the basic problems we face:
- We are still in a recession and we will probably stay in recession for “the foreseeable future” as the Fed likes to say.
- Government revenues have fallen off.
- Massive government spending has resulted in massive deficits.
- The deficits are being funded by debt.
- Credit is still very tight and money supply has been shrinking.
- The CPI is low, but asset values such as real estate are still declining.
- Unemployment is high and will probably go higher [at some future point].
- Massive Keynesian fiscal stimulus (federal spending) has had no lasting effect.
- Government social benefit programs (Social Security, Medicare, Obamacare, federal pensions, etc.) are underfunded and their costs will climb dramatically.
- Federal taxes now take about 30% of our economy.
- Federal debt is at about 90% of GDP and is rising.
- It is likely the Fed will engage in large amounts of QE to stimulate the economy, especially if unemployment grows.
The above is not a healthy outlook for America.
There are two other factors that we need to consider.
- 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.
- 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.
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.
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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 [and those] goods will decline in price because of lower demand.
Governments print consistently and constantly so that their currency is continually debased. [For example,] 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.
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 use gold or foreign currencies 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.[All previous] hyperinflations all had one common denominator: during a period of instability, spending was used as a political tool and it got out of hand. 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.
Will Hyperinflation Happen in America?
Will hyperinflation happen here? It is possible but unlikely and improbable. The list above of 12 serious economic problems America faces is not exhaustive but it is accurate. Serious [as they may be, however,] they do not necessarily guarantee hyperinflation.
a) Worse Case Economic Scenario
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 U.S.’s status as the reserve currency.
• U.S. sovereign credit ratings are downgraded.
The above circumstances would lead to high inflation and panic in the bond markets. It could spiral into hyperinflation but that is unlikely. More on that below.
Let’s go back to the political circumstances that existed in previous incidents of hyperinflation [and relate them to the situation in the U.S.. The U.S. is not] emerging from a devastating war nor has it gone through massive societal and governmental restructuring as occurred in the post-Soviet nations [for example]. 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.
b) Additional Political Scenario
Let’s assume for the moment 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:
1. President Obama and the Democrats [would] have complete control of Congress, say 75 seats in the Senate and would:
- continue to appoint leftist justices to the Supreme Court and achieve a clear majority
- perpetuate their power through massive spending programs to reward Democratic constituencies
- 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.”
2. As the economy slowed down further
- unemployment (U-3) would reach 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…
- more government aid would be offered, more federal WPA-type projects would be created, and people would be “put to work.”
3. In order to pay for all this
- the federal debt would explode far beyond what we are now experiencing
- the new Fed chairman would accommodate the government by monetizing the debt.
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.
What Would Happen IF Hyperinflation Were to Occur
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. In such a case the government’s response probably would be to:
- Impose temporary price and wage controls
The last time they tried that was in 1971 with Nixon. It didn’t work then and it 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.
- Freeze the Treasury bond market
Again, this is a temporary measure while the world organized to support our markets and the dollar.
- Establish a moratorium on Treasury debt repayment
The government would extend all short-term maturities for 90 days [but that would be just] another temporary hold. Holders of our debt would unanimously agree to this. Otherwise their value of their Treasury holdings would significantly decline.
- 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….
- 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.
Why I Don’t Think Hyperinflation Will Happen in America
There are economic and political reasons why I don’t think hyperinflation would occur….
- In order for the bond market to panic, investors would have to determine that the U.S. 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 U.S. pay interest on its debt and continue to refinance its existing debt? The answer is yes. This is what buyers of U.S. Treasurys look at when they buy our debt: the likelihood of sovereign default. While the situation in the U.S. is not favorable with out of control federal spending, we still have [an excellent] rating on our debt [albeit not as good as it once was] and, more importantly, we have the ability to raise taxes in order to cover interest on our debt. If we had a [major] world crisis tomorrow…where would investors send their money? So far it has been the U.S.. I’m not saying this couldn’t change, but for now, money flows here.
- 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 [think] 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. [Frankly,] I think it is political science fiction to think that the Fed or any politician would let hyperinflation happen here.
I respect many of the writers who believe that we will experience hyperinflation [but] 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. [Indeed,] 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.
[Frankly,] I think it is political science fiction to think that the Fed or any politician would let hyperinflation happen here.
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The six charts I provide in this article illustrate why the hyperinflationary pressure in America is growing. This is not necessarily a forecast for hyperinflation – this is simply a demonstration that some of the precursors to a hyperinflationary cliff are building. (Words: 1001; Charts: 7)
Timing the U.S. debt implosion in advance is virtually impossible. Thus far, we’ve managed to [avoid such an event], however, this will not always be the case. If the U.S. does not deal with its debt problems now, we’re guaranteed to go the way of the PIIGS, along with an episode of hyperinflation. That is THE issue for the U.S., as this situation would affect every man woman and child living in this country. [Let me explain further.] Words: 495
Many investors are treating inflation as a certainty because the Fed has expanded its balance sheet to unheard of levels through its quantitative easing strategy. Some have even gone so far as to say that this program will utterly destroy the U.S. currency. To demystify this conclusion, I’m going to explain quantitative easing and why the Fed is using this monetary strategy. Afterward, I’ll explain why gold is still positioned to rise even if inflation continues to be low. Words: 786
We are on the precipice of enormous financial and economic change. It is not change for the good, especially for the United States. Excesses and mis-allocated resources of several generations are about to be exposed as modern industrial nations sink deeper into the economic hole they have dug for themselves. The purging of these economic mistakes will be painful, could create new wars as politicians attempt to deflect blame and may end up changing the political form of government in some countries. (Words: 364; Charts: 1)
What would happen if someday the rest of the world decides to reject the U.S. dollar and that process suddenly reversed and a tsunami of U.S. dollars come flooding back to this country? It is frightening to think about. Just take a moment and think of the worst superstorm that you can possibly imagine, and then replace every drop of rain with a dollar bill. The giant currency superstorm that will eventually hit this nation will be far worse than that.
NOone is expecting rampant inflation. After all, the CPI is low with nothing happening in spite of all this money printing. While there has been no fallout I think that is the critical point. You cannot do these kinds of things we are doing forever and not experience any consequences. Sooner or later there are going to be consequences to what we are doing, and my fear is that it is going to be nasty, catch a lot of people off guard, and really hurt our society. That is the bottom line and why I am buying gold and silver, still, to this day. Words: 795
With investors concerned about inflation it begs the following questions: “What is the best way to attempt to inflation-proof ones’ portfolios? Buy TIPS? Short Treasury bonds? Stocks? Real Estate? Commodities? Gold? Currencies?…[In this article we review each option and come to a conclusion as to how best to hedge the risk of inflation.] Words: 1672
If inflation starts to head towards 5%, you can be sure it’s headed for 10% because they don’t have the ability to stop it now. The only antidote they have to the mess we are in, which is massively excessive debt reinforced by derivatives, is unlimited money printing. The idea that you can withdraw the punch bowl or sharply raise interest rates, it just doesn’t exist, unless you want to take a complete deflationary collapse.
James Turk believes hyperinflation is ahead. Bob Prechter believes massive deflation is coming. An interesting discussion between the two takes place in this audio. Ultimately, both lead to Depression. Only the route taken differs, but that is important.
Whether our current economic crisis will end with massive inflation or in a deflationary spiral (ultimately, either one results in a Depression) is more than an academic one. It is the single most important variable for near and intermediate term investing success. It is also important in regard to taking actions which can prepare and protect you and your family. [Here is my assessment of what the future outcome will likely be and why.] Words: 1441
The developed economies of the world have opened the money spigots…[and this] massive money and credit creation is sitting in the banking system like dry tinder just waiting for a spark to set it ablaze. How quickly it happens is anyone’s guess, but once it does we are likely to be enveloped in a worldwide inflation unlike anything before ever witnessed. [Let me explain further.] Words: 625
People get confused about the nature of mass inflation, hyperinflation, and what causes both. [Let me clarify the nature and causes of each.] Words: 930
The U.S. economic and systemic-solvency crises of the last four years only have been precursors to the coming Great Collapse: a hyperinflationary great depression. Outside timing on the hyperinflation remains 2014, but there is strong risk of a currency catastrophe beginning to unfold in the months ahead…moving into a full blown hyperinflation [in a few] months to a year… depending on the developing global view of the dollar and reactions of the U.S. government and the Federal Reserve. [Let me go into more detail.] Words: 2726
…The US Government and its catastrophic fiscal morass are now viewed by the world as a ‘safe haven’. This would easily qualify for a comedy shtick if it weren’t so serious….[but] the establishment is thrilled with these developments because it helps maintain the status quo of the dollar standard era. However, there are some serious ramifications that few are paying attention to and are getting almost zero coverage from traditional media. [Let me explain what they are.] Words: 1150
With the U.S. election just months off, political pressures will mount to favor fiscal stimulus measures instead of restraint. Such action can only accelerate higher domestic inflation and intensified dollar debasement culminating in a Great Collapse – a hyperinflationary great depression – by 2014. [Let me explain why that is the inevitable outcome.] Words: 2766
Daniel Thornton, an economist at the Federal Reserve Bank of St. Louis, argues that the Fed’s policy of providing liquidity has “enormous potential to increase the money supply,” resulting in what The Wall Street Journal’s Real Time Economics blog calls “an inflation inferno.” [Personally,] I think it’s too soon to make significant changes to a portfolio based on inflation fears. Here’s why. Words: 550