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Could Hyperinflation Happen?
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by PIM of SPAIN | August 4, 2009 at 03:37 am
729 views | 26 Recommendations | 20 comments
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But most people say that it will not happen this time. They make this claim because they believe the Federal Reserve has the capacity and the foresight to prevent this. This was part of the reason the Fed was created is argued.
However consumer purchases meanwhile have declined, which means the money is not yet in circulation, and is therefore being used to pay back debt or is being saved in banks, as it’s obvious no one is investing. Moreover unemployment shows no sign of improving, either. The stimulus program was supposed to cap joblessness at 8%. Officially, the rate is now 9.5%. Economist David Rosenberg puts the real unemployment rate almost twice that high. And businesses are cutting jobs even faster than expected. But firms are not only laying-off redundant workers; they are laying-off workers who would normally be spared. What's more, those who are left are working the shortest weeks ever recorded. As long the unemployment rate remains anemic economic upswing is impossible and today’s deflation and creative destruction – reducing production capacity - shall continue.
But sooner rather than later, the flush of money shall have to come back into circulation, and to all intents and purposes this shall start a period of hyper-inflation in other words: lots of money is chasing fewer goods.
More often in discussions of the policy actions undertaken by the Fed in response to the financial crisis a concern is raised that the massive injections of liquidity will create inflation and even hyperinflation in the near future. This concern is based on the assumption that the printed money created by the Fed will translate at some point into purchasing power that will put pressure on prices to go up, as was the case in the housing bubble that imploded and started the financial crisis in Aug. 2007. Indeed “from September 10, 2008 to December 31, 2008 the monetary base in the US - i.e. a narrow measure of money supply controlled by the Fed - has doubled from about $840 billion to over $1.68 trillion.” According to the Federal Reserve Board, the money supply in the United States has almost tripled over the last 6 months, from Jan. 2009 – July 209, increasing by 271%, to about 4,5 trillion.
In normal circumstances, this increase in the base will create too much liquidity in the system, which will increase lending, spending, and inflation. In the current environment, is said, “this is not happening”. The money created by the Fed is stored in banks’ vaults or technically, kept as deposits in the banks. To be used for what? If the banks didn't lend the money out, what did they do with it? Well, in Europe the banks did lend the money back to the people they borrowed it from. In June the banks bought $75 billion worth of government bonds and lent nearly $30 billion directly to European governments.
At this point is understood why the banks are doing so fine. They earn money without taking the risk of lending to the real economy. But what good does it do for the economy? NONE. Only it created higher bonuses for the bankers themselves, to make money on taxpayers account. Doesn’t that look like a scam?
To oppose against the hypothesis that the gold standard or currencies backed by gold not is required, it's important to realize that fiat money is the worst kind of money whenever it has been used. History showed that fiat money has been a great failure. In fact, EVERY fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well.
The performance of fiat currencies in the past century has been dreadful. The dollar has lost 97% of its purchasing power in the last century alone, and yet, it still beats almost all of its rivals, sometimes by very large margins.
But what has changed? If anything, the monetary setting of today is worse than that of the 20th century, for at least in the earlier part of that century there was still a gold standard. Really, up until 1971, there was some semblance, however weak, of an international gold standard. Consequently putting up a valuable resistance to printing infinity quantities of paper money, as is the case today, and done by the feds and other central bankers around the world. For example look at Zimbabwe to understand where al this will lead.
The monetary shackles on today's central bankers are too lenient. Hence, the threat of inflation is far more lethal. Paper monetary systems have a tendency to blow up, in what is commonly called a hyperinflation. They are really not so rare, looking again at the 20th-century experience. There is the famous German hyperinflation of 1922-23, where price inflation was 3,422% in 1922 alone and where, in January 1923, one could buy a dollar for 20,000 marks - but by early November it took 630 billion marks to buy that same dollar! The numbers are simply staggering and hard to comprehend. Yet, Hungary's hyperinflation of 1945-46 was even more spectacular, with price inflation of 19,800% per month.
The huge un-payable debt owed by the U.S. is an invitation to repeat the German Weimar experience. Inflation got so bad in this period that German citizens were literally using stacks of marks to heat their furnaces.
To demonstrate the devaluation of a currency in a period of hyperinflation, here a brief overview of the German marks per one U.S. dollar exchange rate during the Weimar Republik:
• April 1919: 12 marks
• November 1921: 263 marks
• January 1923: 17,000 marks
• August 1923: 4.621 million marks
• October 1923: 25.26 billion marks
• December 1923: 4.2 trillion marks.
There are lots of things that can happen along the way. It was not that long ago - 1996, that Argentina became the 'Weimar Germany' of South America.
This is not to say hyperinflation is yet imminent, although this will become a severe thread let say 5 years down the road, when today's deflationary climate turns into an inflationary one, as result of too much printed liquidity that not can be taken out of the financial system quickly enough. This points to the dangers of men and specifically Bernanke's - fed with printing presses. It points to the weakness of the dollar - or any paper currency in general - as a long-term investment.
What happens in a hyperinflation is that people start buying things, anything, and everything, desperately getting rid of their money, spending all their cash to stock up on these things that are going to cost more in the future or even tomorrow, because their money is going to be worth less every day if it isn’t spent immediately. Consequently prices rise like they were rocket-propelled in response to this increased demand. The result is that everybody who has any money that they were not able to spend is gradually bankrupted.
Note:
Bloomberg Television in Hong Kong did an interview with Marc Faber, the author of the Gloom, Boom & Doom Report.
Here some quotes to show how serious of an issue hyperinflation will be:
• “I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said.
• “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”
• “The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe …Zimbabwe’s inflation rate reached 231 million percent in July.”
• Other notable Fed watchers have repeated the refrain that Bernanke may not be politically able to raise rates while employment data continues to be ugly.
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PIM of SPAIN
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at 04:57 on August 5th, 2009
Another great article. I wonder where you always find the great images to go with the story. reading the article reminded me of a piece by one of my favorite writers and peak oil supporters Dmitry Orlov. He discusses the topic of hyperinflation in laymen's terms, more specific in fuffle's (фуфло- e.g. "a bunch of liar loans packaged into toxic assets and placed on the balance sheet of the Federal Reserve as collateral for rescue loans"). I can only recommend Orlov's online writings and articles at his blog, and his book Reinventing Collapse (ISBN 0865716064).
I am currently reading "The future or money" by the Belgium professor Bernard Lietaer, he discusses the nature of or money system, together with four big threats to our current economy and lifestyle: climate change, monetary instability, 'the grey wave', and production growth without new jobs due to the information age). He then discusses durable alternatives, including barter systems, as currently employed by several companies (Pepsi cola and Stolichnaya wodka!) and countries. Prices for a used paperback range between $300-600, because of limited availability. Luckily the Dutch and German versions are still affordable. (ISBN: 9022528197)
I highly recommend both books to you, they should be a great inspiration for several more articles.
Looking forward to your next article.
Branko
at 10:02 on August 5th, 2009
Thanks Branko. Concerning the images; over the years I have developed a special snag. I certainly will have a look into Orlov's ideas. Thanks for the links. May be more ideas for even better articles? The article about fiat currency may be of interest as well.
at 05:16 on August 6th, 2009
I have read your article about fiat currency also. Did you know that the constitution of the USA doesn't allow the creation of any kind of money except in gold and silver? The founding fathers of the USA knew that money is not created by the government, they even imposed death penalty on anyone not complying to the coinage act.
A nice chart is the 200 year dow/gold ratio, which expresses the true nature of fiat currency and the influence of the 'federal' reserve, against the only stable currency for the past 3000 years, gold.
Looks like the dow has been falling for the past 10 years now.
at 05:59 on August 6th, 2009
You're completely right Branko. I knew about the fraud committed by the FED.
Gold is the only hedge against fiat money. As soon the trust in a fiat currency is over, as we are yet coming close, gold is the best hedge to protect yr savings.
at 19:14 on September 2nd, 2009
The ultimate fraud committed by the FED:
FED has no idea where the $2 Trillion of US taxpayer money had gone or who got it.
For it was the Federal Reserve Inspector General, Elizabeth Coleman, who admitted before the US Congress on May 5, 2009, that she had "no idea" where $2 Trillion of US taxpayer money dispersed by the Federal Reserve had gone, or who got it. In November of 2008, as a prelude to Coleman’s admission, Ben Bernanke refused to disclose the recipients of the trillions of dollars in question, in response to demands by Bloomberg.com.
at 07:02 on August 6th, 2009
There are several reports of China dumping parts of it $900bn US treasury bond, effectively withdrawing from the use of dollars. Hyperinflation could be nearer than many people think. What do you recon will be the influence of a dollar crash on the euro, as the dollar it is still the de facto reserve currency of the world?
at 20:18 on September 2nd, 2009
The American bailouts even went to European banks, as it was reported in March of 2009 that, "European banks declined to discuss a report that they were beneficiaries of the $173 billion bail-out of insurer AIG," as "Goldman Sachs, Morgan Stanley and a host of other U.S. and European banks had been paid roughly $50 billion since the Federal Reserve first extended aid to AIG." Among the European banks, "French banks Societe Generale and Calyon on Sunday declined to comment on the story, as did Deutsche Bank, Britain's Barclays and unlisted Dutch group Rabobank." Other banks that got money from the US bailout include HSBC, Wachovia, Merrill Lynch, Banco Santander and Royal Bank of Scotland. Because AIG was essentially insolvent, "the bailout enabled AIG to pay its counterparty banks for extra collateral," with "Goldman Sachs and Deutsche bank each receiving $6 billion in payments between mid-September and December."
Europe banks silent on reported AIG bailout gains. Reuters: March 8, 2009.
at 07:43 on August 6th, 2009
(Hyper) - Inflation will cost the Chinese dear. They already buy as much of commodities, overseas land (Africa), Companies, shares in mining, whatever can be paid in US dollars, just to get rid of the stuff. There is a real possibility when the dollar goes under that other currencies are slept with it. Maybe the Euro and the Yen have a chance to survive, that depends on the action the respective CBs timely will undertake. When the us dollar goes under we'll have a 1930s Great Depression and count with 20 years before the dust is settled. In my opinion Gold and similar will provide the best wealth protection, as you already correctly mentioned. There will be a new reserve currency developed, a basket of other currencies or even back to gold.
at 07:51 on August 6th, 2009
This is a great article especially in the trying times of today. It is hoped that we can avoid hypeinflation. If countries had remained on the Gold and Silver Standard maybe we will not have this problem.
at 10:00 on August 6th, 2009
Thanks Alvarez, lets hope hyperinflation will be avoided, but authorities in charge still don't see the dangers ahead, the end of the recession isn’t near, a long while off, and that is not understood. They govern by wishful thinking. Unemployment shows no sign of improving, and as that not is happening no end is in sight. The official rate is now 9.5%, but probably much higher. Keep the fingers crossed!
at 10:15 on August 6th, 2009
Do you know about executive order 11110; in 1963 JFK tried to install a silver standard, returning to the constitutional legal tender..
at 11:30 on August 6th, 2009
No I'm not aware of. It wonders me a bit, because at that time there was still a reserve currency, the us dollar, backed by gold, which was in 1972 abolished by Nixon.
at 16:21 on August 6th, 2009
I did some more research, it turns out that the matter is a bit more complicated. EO 11110 simply gives the Secretary of the Treasury the power to issue silver certificates without the president's approval. (These powers are described in EO10289)
EO11110 added the power "to issue silver certificates against any silver bullion, silver, or standard silver dollars in the Treasury not then held for redemption of any outstanding silver certificates, to prescribe the denomination of such silver certificates, and to coin standard silver dollars and subsidiary silver currency for their redemption"
Now the real question is whether this bypasses the fed, or give them more control through the secretary. It does neither: it merely placed the power to keep or abolish silver notes into the hands of the secretary of treasure. The secretary of treasure at the time was Clarence Douglas Dillon, who had close ties to many bankers and especially the Rockefeller family. In 1964 Dillon halted the redemption of silver certificates for silver. This means no more silver backing. The notes are now worth about $1.50 FED money. Which, as of 1971, is FIAT money: only backed by all the goods and services in the US economy.
Now I did some research and I think this sums up a part of the dollar history:-------------
The original term dollar comes from the Coinage Act of 1792, stating the exact amount of silver or gold for a dollar, and the silver gold exchange ratio. This is a dollar: the value of a specified amount of gold or silver. All coins were made of gold or silver. But because they were difficult to carry, paper money was created for larger amounts of money, these could be handed in for the silver/gold coins.
Looking at the 20th century there were a lot of currencies; the main ones were the United States Note, the Federal Reserve Note, Silver Certificate and the Gold certificate. Only two were true notes: the gold and silver certificates, meaning (1) the bearer could redeem them (2) at the Treasury (3) on demand (4) either for dollars or a specified weight of gold or silver. With a dollar being not the paper as we know it, but defined by law as 371.25 grains of pure silver in any form. After the gold or silver was payed out, the note was destroyed because there was no metal silver or gold backing it. The USN was basically a form of fiat money, but had some years where it could be redeemed for gold. The Federal Reserve Note could officially be redeemed at the federal reserve for gold (until 1933) or silver (until 1964). The gold standard was abolished in 1933: possession or trading gold in excess of $100 could be fined with a 25 year imprisonment! This ban lasted until 1977 (see Executive order 6102). Also note that between 1933 and 1971 only foreigners could exchange their dollars for silver or gold. This makes the FRN backed by gold, but not redeemable for it. The silver certificate was abolished in 1964. In 1971 the United States Note was abandoned, leaving only the fiat federal reserve note, which is now considered 'the dollar'.
Basically where a 'dollar' used to be the name for a fixed amount of precious metal -like a meter or foot defines a certain length- it has become the name for a paper federal reserve note worth not a fraction of its intended value.
at 16:45 on August 6th, 2009
Ron Paul is one of the few American politicians who really understands the federal fraud, and is not afraid to speak out.
For a recap of all info above, check out Ron Paul on Federal Reserve, banking and economy.
at 23:20 on August 6th, 2009
Very interesting Branko, and clearly explained - I suggest to put it an article and post it on the internet nowpublic and eventual other blogs. Good work you did. Under the tittle The True US Dollar or so. It is trust that backs paper fiat currency, and the trust has been spoiled by the Feds and the US Government.
at 15:25 on August 10th, 2009
Gentlemen, your arguments are logically flawless, yet the economics is an imprecise science. The events may take 25 years to reach the hyperinflation level. Or the global financiers will collaborate to dampen the impact, or some new article of technology will change the rules. We may be lucky.
at 19:32 on September 2nd, 2009
Major investors have also been warning about the dangers of inflation. Legendary investor Jim Rogers has warned of "a massive inflation holocaust." Investor Marc Faber has warned that, "The U.S. economy will enter 'hyperinflation' approaching the levels in Zimbabwe," and he stated that he is "100 percent sure that the U.S. will go into hyperinflation...The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate."
We Are Facing an "Inflation Holocaust': Jim Rogers. CNBC: October 10, 2008
U.S. Inflation to Approach Zimbabwe Level, Faber Says. Bloomberg: May 27, 2009
at 02:55 on August 11th, 2009
Demonact thanks for yr input. Economics isn't a science at all. For some it has become more fortune telling than predicitng, if you read the nonsense often published. Back to basics is the best foundation to make a proper analysis about what can happen. The likelihood of hyperinflation isn't imminent, but continuing the way it goes nowadays will be a sure bet that it is going to happen.
at 17:57 on August 12th, 2009
But US is not Argentina... We have many submarines, missiles and still dwarf China in manufacturing output. And God also favors Americans...
So, can we escape this fate? If not, when, in your opinion, will we see it here in US (the hyperinflation, that is)? Muchas gracias.
at 21:55 on August 12th, 2009
Correct the US is not Argentina, but monetary policies are quite similar, what happened in the past in Argentina can likely happen in the US too, the more US government continues with stimulus packages, bailouts, etc. and thinking that debt can be resolved by creating more debt. It's like extinguishing a fire with gasoline!