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Posted on 12/25/2009 12:11:21 PM PST by JustTheTruth
Hyperinflation Watch
December 23, 2009 – Contrary to common belief, hyperinflation does not arise from too much bank lending. The sole cause of hyperinflation is always too much government spending. The pattern is as follows.
The government spends more money than it is receiving in taxes, which forces it to borrow. As these deficits grow, they eventually exceed the market’s capacity or willingness to lend money to the government.
Invariably, the central bank steps in and provides the government with the money it needs by creating it – as the saying goes – ‘out of thin air’, or what governments today call “quantitative easing”. The central bank does this in either of two ways.
In cash currency economies, where most commerce is completed by making payments with paper-currency, the central bank cranks up the printing press. Examples are the Weimar Germany hyperinflation in the early 1920s, and just recently, Zimbabwe.
In deposit-currency economies, where most commerce is conducted by making payments through the banking system with checks, wire transfers, plastic cards, and the like, the central bank uses electronic bookkeeping made possible through computers to put the newly created money directly into the government’s checking account.
There are numerous examples of deposit-currency hyperinflation in the monetary history of Latin America, like the one that devastated Argentina in 1991.
These two different ways in which hyperinflation manifests itself are made clear in the following quote by Ben Bernanke before he was appointed chairman of the Federal Reserve: “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”
There is of course a cost. There may not be one to the US government, but instead, the cost will be borne by everyone who holds dollars and loses purchasing power as a result of Mr. Bernanke creating as many dollars as the government wants to spend. The other word for this cost is inflation.
With this background, the US government’s financial position makes clear that it is heading toward an Argentine-style deposit currency hyperinflation. The first two months of the US government’s current fiscal year have resulted in a record $296.7 billion deficit. During this period, the Federal Reserve grew its balance sheet by about $65 billion, in effect purchasing about 22% of the federal government’s new debt. These purchases clearly show the Fed’s policy of “quantitative easing”.
The following chart illustrates that the difference between the US government’s monthly receipts and expenditures remains at record highs in November.
Unless this gap between receipts and expenditures is closed, there will be hyperinflation. Policymakers seem to believe that they can close this gap by jumpstarting the moribund US economy, so that government receipts can again begin to grow and eventually catch-up to, and perhaps exceed expenditures. But they are pursuing a dangerous path because the rising expenditures by the federal government are increasing its debt, causing more quantitative easing by the Federal Reserve, which in effect is pouring more fuel on the potential hyperinflationary fire.
Much has been made of the huge bank excess reserves “sitting idle” at the Fed. It has been said that hyperinflation is not possible when the banks are sitting on such huge reserves, instead of lending them into the economy. This thinking is flawed because it ignores that there are two sides to the Federal Reserve’s balance sheet.
Those reserves are not just sitting there, as if they were in a vacuum. These reserves have funded the Fed’s purchase of US government debt, putting it and the US dollar on the road to hyperinflation.
There is every reason to believe that out of control spending on social programs will only accelerate in the years ahead - at the same time that oppressive tax policies will be implemented stifling economic investment in the U.S. economy, damaging prospects for employment and prosperity in general.
Merry Christmas.
This is how I’m waking up the sheeple at work... I keep saying “Wait til you’re paying $5 for a loaf of bread...”
Why is this on a log scale?
Pay now, or pay later with interest.
Just the way life is.
it is also true that ALL ECONOMIES based on Fiat currency ALWAYS FAIL and will Collapse under it’s own weight of DEBT
The only way out of this is a massive default on the part of the government. This will suck in a whole host of ways but there is no way out of it. Younger people will have no choice but to look at the older generations and tell them to GFY since it was their greed and piggishness that has us in this mess.
Government cannot be counted on to manage and provide for us financially.
Individuals are responsible for their own welfare and that of their offspring.
We are not supposed to live forever and trying to cheat The Reaper is a fool’s errand. We have conned ourselves into thinking we deserve to live longer than we were intended to and have elected to rip off future generations to make that happen.
Politicians have behaved like cowards for years and refused to hold the line against greedy and foolish Seniors who expected the government to take care of them even if it meant taking money from future generations.
Politics have also acted like cowards by pandering to the masses who demanded a hand out.
America, RIP
One benefit of a log scale is that a constant increase appears as a sloped line, and “acceleration”, for example, on the right side of this graph, is easily seen as a change in that slope.
An excellent analysis. Excess deposits on the Fed balance sheet represent liabilities, that is, monies the fed owes to other banks. Each liability must be matched by an asset so that the balance sheet balances.
The Fed could keep an amount of cash equal to the excess deposits, in which case it would not be inflationary, or they could purchase government debt, injecting the cash back into the economy.
That is the source of Fed caused inflation.
wth are you talking about? A sloped line on a linear plot represents a constant increase. A sloped line on a log plot represents acceleration.
Go back to school, you parietal lobe deficient, math illiterate! Let someone smart answer my question.
sheesh
it’s still Christmas, ask Santa to make a second trip to bring you some better meds before midnight
How bout 5k for an ounce of gold and 350 for an ounce of silver?
According to Mises.org there is only ONE reason for inflation, and that is the government printing more money thereby inctreasing the money supply. GWB stopped posting the indicator that allowed us to know just what the money supply was, but they said no one was interested in that information any longer.
So, GWB the great American Socialist printed money to the n th degree and this new band of socialists are only following in his foot steps.
In other words you create a new dollar for every dollar you borrow. Neat trick.
“Younger people will have no choice but to look at the older generations and tell them to GFY since it was their greed and piggishness that has us in this mess.”
Agree...there is NO REASON why my kids and (future) grandkids should be STRANGLED by the debt incurred on them from guilt-ridden people generations before them.
In some ways I admire Obama’s death panels...if they could be used to punish the people that have DESTROYED this country.
And you some better smarts
I think if you reserch more you will find that the credit expansion is only possible due to the increase in the fiat money supply. Those at the beginning of the credit cycle (new money printed) benifit from the increase in the money supply before the inflation cycle kicks in. In other words before they can loan the money they must print it or at least plan to print it. That is the increase. Von Mises covers it, I will look and find the paper on the website.
In my mind they're basically the same thing. Credit is money for all practical purposes.
If you can find that paper I would be interested in reading it.
Yes but before you can expand credit you must have the money.
This is from the Mises websitre:
“Henry Hazlitt estimates that a dollar of today is worth less than 25 cents of a 1940 dollar, and certainly no one has to be told that a dollar continues to buy less and less. Yet, how many people realize that since 1940 the federal government has increased the money stock by well over a thousand percent? Hazlitt reports that at the end of 1939 the total number of dollars in the economy was 63.3 billion, and at the end of 1977 that figure stood at 806.5 billion. Anyone who is aware of these events should surely sense a logical connection between constantly rising prices and a continuous expansion of the money supply.
Mr. Hazlitt points out that there are two sides to every price.
A price is an exchange ratio between a dollar and a unit of goods. When people have more dollars, they value each dollar less. Goods then rise in price, not because goods are scarcer than before, but because dollars are more abundant, and thus less valued.
He clearly explains that the present predicament of ever-soaring prices results from a deliberate government policy to flood the economy with more and more dollars simply by “printing” them. In fact, the term inflation originally meant increasing (inflating) the money supply. Today the term is commonly used to mean the most evident consequence of creating money, generally rising prices.”
Not any more. "Money" now exists as a series of ones and zeros in a computer ledger backed up by pieces of colored paper pumped out on demand.
Back in the day 'money' was backed by something that had an agreed upon value, say 35 dollar bills for one ounce of gold, or one ounce of silver for one dollar bill.
It was very difficult to simply 'expand' the money supply under those circumstances. The Government, as we have seen, is now free to produce as much 'money' as they desire which they hand out to politically connected bankers who then, supposedly' give that out as 'credit'.
The entire system, such as it is, is a scam and we will soon be paying a terrible price for tolerating it.
What a pleasant fellow you are. Merry Christmas.
Hank
Don't forget "poor man's silver" - nickel hit $8.50 a pound, which puts the lowly 5c piece right at melt value. How soon before we see ads offering multiples of face value for that coin?
In second place is the even lowlier 1c piece, made mostly of zinc, which is at 65% face value, as per Coinflation.
This is why folks are working to get “their Obama money” ASAP.
They know that they have a window to buy assets before the money is hyperinflated and asset prices show the way.
As an example:
I am having ultra-energy efficient ground-source heatpumps installed in my house. In order to get the 30% Federal tax credit and the $8400 on NC tax credit money, I have to have the system operational by December 31, 2009. The HVAC installers were at my house Thursday and will be back tomorrow to hit the deadline.
I want the money NOW, because if I wait until I file my 2010 IRS 1040 form in April of 2011, the 30% and the $8400 will unlikely be adjusted for inflation, and the cash will buy fewer goods and assets.
Yeah whatever. Enjoy your healthcare and this lovely global warming we’re having. There’s gonna be a tax for it.
Some people argue that the high prices for goods come first, then the wheelbarrows of cash to try and buy it. This crunches the system, because there isn’t enough physical currency to go around. Only a small percentage of transactions are cash only.
With fractional reserves you create many, many dollars from every dollar you have deposited. That’s where the real kicker comes in. Funds are so liquid transferred between banks all the time that just the act of transferring funds around for a day allows banks to alter how much money they can create out of fractional reserves to lend. It’s amazing what a scheme this is.
It’s basically like derivatives and ponzi schemes, creating wealth out of nothing. Only government and the banks (who play by the Fed’s rules as to how much they can do this) get to be the ones that can do this stuff. ANyone else would be jailed for fraud, bad bookkeeping, etc.
TX. That is what I thought. Well I am heading for the Kona Coast. That sucks. Might as well go Marlin Fishin in an Outrigger Canoe.
The GOP needs to be defunded and money needs to be sent directly to candidates
who are conservative and electable.
BTW, I'm not electable.
Higer prices are the result of the increase in the money supply. This increase in the money supplly deflats the value of the money thereby raising prices to cover the devalued dollars.
So when the amount of money was X the price of some good or service was $100.00, an increase in the money supply of say 25% would push the price for the same good or service to $125.00.
The people who benifit from the increase of the money supply are those who get the money first. For instance, a big bank gets 1 billion dollars from the fed at zero percent interest and then loans it to consumers at 30% because they know there is going to be inflation of around 25%. But they don’t just make 5% profit because they recieved the money before the inflation hit.
Last month wholesale prices were up 1.8%, that works out to an annual inflation rate of 21.6% at the wholesale level.
i do not defend the Fed or the Government or this POSident
but i do not see hyperinflation on the horizon.
and the horizon i speak of is 3 to 5 years...beyond that...yes perhaps maybe probably almost certainly but not positively.
first argument...why have we not seen it yet? all the elements are in place. is it inivisible?
answer to first argument: because the money supply is actually shrinking not increasing. the destruction of wealth in the housing section has the effect of decreasing the money in circulation. the government is countering this by the creation of enough new money and injecting it into the economy in amounts sufficient to counter the destruction of wealth. its a balancing act and they are reviewing the data every day to keep it in balance. i am not defending this action, just stating what is happening.
second argument: more to come. the destruction of wealth will continue at least another 3 to 5 years. there is a second wave of foreclosures coming...many threads posted here on FR in the last couple of days show the Credit Swiss chart with the second wave of forclosures in residential housing will start to hit in 2010 and run thru 2012...finally clearing in 2013. look for house prices nationwide to slide another 10 to 20% at least during this second wave. again i do not defend the government but the announcement by the Treasury that the debt limits on Freddie and Fannie are lifted and now unlimited for the next 3 years shows their agreement with this assessment.
conclusion: the near term danger is not inflation, but deflation...and the government (not defending them) has decided to combat this with infusions of money into the economy. they cannot lower interest rates any more to stimulate...so government spending is the only means they have to try to maintain this balance between deflation and inflation.
while contemplating these things, if you want to get a real headache, factor in the Commercial Loan defaults that are about to hit....and then if we manage to survive the Residential and Commercial properties problems, we will have the demographic “bomb” of the end of the productive years and retirement and entitlements of the “Baby Boom” generation to absorb.
then, there is Islamic Fanaticism, Iranian nuclear weapons, and a host of other issues.
does any sane person really want to be POTUS? and have to deal with all this and a disfunctional Congress, idiotic media and hedonistic culture?
oh Sarah! what a mess.
1. Kill the IRS and the morally evil income tax..
2. Create a national sales tax..
3. Massive sell off of the many trillions of dollars of government owned land and assets to private ownership to pay for our astounding debt..
Without the above 3 things happening, this nation is over.
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