The Case for Hyperinflation in the US
Tuesday, September 20, 2011 at 4:47PM Earlier this month, Gary North penned an article on LewRockwell.com entitled, "Mass Inflation, Yes; Hyperinflation, No".
In it he stated the following:
"The United States is not going to get hyperinflation unless Congress nationalizes the Federal Reserve System.
It will get mass inflation at some point: anywhere from 15% per annum to 30%. But it is not going to get 50% or 100% or more.
Why not?
1. The temporary nature of the payoff
2. The fear of getting blamed
3. The boom-bust cycle
While he makes good points for each, we take exception based on historical precedent, common sense and factual data.
1. The Temporary Nature of the Payoff
Gary North states:
"Hyperinflation lasts only a few years. People in the hard-money camp ought to know this, but they tend to forget.
Those economic forecasters who keep telling us the dollar will fall to zero forget the obvious: big banks are creditors. Bankers lose when a currency falls to zero."
And, yes, that is correct. The bankers (who are all artificial, non-free market entities in this non-free market financial system) would lose everything if the currency goes to zero.
However, that has never stopped them before. In fact, during many of the hyperinflations of our time, including Weimar and the ongoing hyperinflation in Argentina, the last people to see the causes of the hyperinflation (money printing) are the central bankers and the economists of the banks.
Remember, they've all been brainwashed with modern day Keynesian economics, which is witchcraft and delusionary. They actually believe that inflation is caused by prosperity... and not money printing. That's why the following quotes were made during the Weimar Republic hyperinflation after they had already had thousands of percent gains in prices:
And, even when the US dollar goes to zero, it does not mean the banks are out of luck. Not if they were like the French banks in the beginning of the 20th century. In a book published in 1912, called "Fiat Money Inflation in France", Andrew White recounts how the government changed the rules and stated that all debts increased along with the issuance of further currency, so that for every so many additional assignats printed, one's debts increased by 25%.
The US Government owns all the guns. It would not be beyond them to state that all debts held in dollars are now held in the New Dollar. Or, what they will likely name, the "Patriot dollar".
As Congressman Pete Stark stated, "The Federal Government can do most anything in this country."
2. The Fear of Getting Blamed
Here, Gary North states that thanks to the internet and Ron Paul, too many people understand what the Federal Reserve does and they won't allow them to go into hyperinflation.
He makes a good point here that the public is more aware than ever about the Federal Reserve criminal enterprise.
However, in order for Ben Bernanke to stop he would have to admit that everything he has focused on for his entire life and achieved has all been a lie. Not many people have this kind of ability to admit complete error in their ways after having their entire persona based on the false information.
Plus, the entire US media propaganda organization stands as ready and willing as ever to back the Federal Reserve until its dying days. Paul Krugman at the New York Times has been wrong for years and years about absolutely everything yet he is still thought of by many people as being a "smart" economist - despite his calling for a housing bubble after the tech bubble and now having resorted to stating that the best way to get the American economy on track is through a massive, fake alien invasion.
Remember, that almost every US economics PhD, every major economist at most banks and people like Bernanke and Krugman will all have to admit they were all fools in order for them to stop with their Keynesian witchcraft. Most white, older men who look in the mirror and see they are monsters rarely admit their flaws... they tend to take us all down into hell with them rather than, as the Japanese say, "lose face".
In Japan, at least, when a finance minister realizes his policies haven't worked he usually kills himself. We can only hope for the same from Krugman and Bernanke.
3. The Boom-Bust Cycle
Here, Gary North states that because of the boom-bust cycle, the US will be forced to stop printing money before entering hyperinflation. As example, he states how Volcker was forced by rapidly rising prices to slow money printing and allow T-Bill rates to rise to 22% to stop the inflation.
There is only one problem with this. The US Government debt in 1979 was hardly anything as it had only been 8 years since Nixon delinked the dollar from gold. Today, however, the US Government (and most western governments, ask Greece) have had plenty of time to build up mountains of debt.
Today, as we showed here, an interest rate of only 11.1% will effectively take all real income of the US Government just to pay for the interest alone.
In other words, raising the interest rates to even 11% this time around will destroy the US Government.
That's why Paul Volcker, who was on a "panel of experts" advising Barack Obama already quit and left town on January 5th of this year. He took out his calculator, punched in a few numbers, looked around and decided it was time to retire.
Greenspan left on similar premises right before his housing bubble burst.
CONCLUSION
Gary North makes some good arguments. And he very well could be right. But historical evidence, common sense and the amount of current US debt makes stopping this train towards hyperinflation a lot tougher job than it looks.
We aren't counting on it. Even if all we have is "mass inflation" our portfolios, heavily laden with gold and gold stocks will do very well. If we do get US hyperinflation, many dollar vigilantes are also prepared for that as well, having left or in the process of moving assets outside of the US, getting a second passport (like here in the Dominican Republic) or expatriating outside of the western world.
Hyperinflation isn't fun. And we aren't as convinced as Gary North that it is so impossible.
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Reader Comments (26)
This increase in velocity will lbe only modest as US is in a deflationary phase right now and for the immediate future.
Consumers are not looking to increase their borrowings or in reality significantly increase their spending. There is simply too much existing debt and along with minimal pay increases and high unemployment most consumerrs have no desire to start a new inflationary spiral of debt.
All increased spending will be funded from inreasing debt. This will not happen at the present.
The increased liquidity will have to be given away i woudl think to spark runaway inflation.
Expect modest inflation 2-3 percent no more.
Many analysts will undoubtedly claim that the increasing rate of money-supply growth isn't important because the velocity of money will remain low, but such claims reveal a misunderstanding. There is no magical quantity called "velocity" that operates independently of money supply and demand, causing prices to rise during some periods and to fall during others. Like changes in the purchasing power of money, the thing commonly called "money velocity" is simply an effect of inflation.
By way of further explanation, during the early part of a major upward trend in money-supply growth it will typically be the case that inflation is not widely perceived as a problem. Actually, it's quite likely that deflation will be seen as the bigger threat. This is the situation that we often refer to as a "deflation scare" -- rising money-supply growth (inflation) combined with rising fear of deflation, with the fear of deflation being fanned by falling commodity and equity prices.
During the early part of an inflation cycle the demand for cash balances will tend to be relatively high -- due to falling inflation expectations -- and the average economist will perceive a low "velocity of money". But as time goes by the effects of the increased rate of money-supply growth will start becoming apparent and people will become a little more conscious of the inflation threat, the result being a decline in the demand for cash balances (people will begin to save less cash). The average economist will interpret this as an increase in the velocity of money and may well conclude that prices have begun to rise in response to the increased velocity. Clearly, though, both the increase in velocity and the rise in the general price level are just lagged EFFECTS of the preceding money-supply growth.
The bottom line is that "money velocity" is a redundant concept at best and a misleading one at worst.
Time will of course tell all. One of us will be right, there is no doubt.
A question to ask yourself, if they were going to deflate why haven't they done it already? It would have been less painful to deflate everything in 2008 than it will be when they have to do it (or it is forced upon them) eventually. Short of Ron Paul winning and a radical shift in Congress (a less than 10% possibility IMO) then no-one has the backbone to end all the entitlements (social security, medicare, medicaid, military industrial complex etc) to balance the books now that it is going to be so much more painful. With Krugman, Bernanke et al providing intellectual cover and a populace more concerned with eating KFC and watching reality TV their is only one realistic outcome
I miss the United States - I have missed it for a long time, and I want it back. Where is that leader who will break through and NOT be polite any longer?
Follow "the script". The elite's role is to "carry the stick" ..... inflation.
You cannot pour new wine into old wineskins.
Germany's hyperinflation took the form it did because workers were paid cash. Americans are not.
Hoovervilles were possible because there was no welfare. Soup lines were possible because there were no food stamps.
It strikes me that as long as interest rates continue to flirt with zero, the Fed can create as much money as it wants, and the federal government can dole it out a little at a time in the form of welfare, and this situation can continue for a long time without the hyperinflating money supply causing big increases in price inflation.
Additionally, this is the first moment in history where one currency dominates a fully integrated global economy. There is no alternative to the dollar. There is simply too much money in the world, and too large a percentage of it is parked in US Treasury debt. If a large percentage of those owners of dollars wanted escape the trap, the only place to go would be silver and gold, because there are not enough Euros or Yen in the world (and the Euro and the Yen have worse fundamentals than the dollar, so I can't imagine them being bid up sufficiently to absorb that much money). Of course, to mop up all the abandoned dollars in such a scenario, silver and gold would be driven into the tens of thousands of dollars per ounce.
But even then, the average person would have to be delivered vast numbers of newly created dollars in order for prices to be bid up sufficiently for hyperinflation to occur. Am I wrong? Say that all the food commodities follow silver and gold to the moon. What mechanism would get vast numbers of dollars into the hands of the common man to buy that hyperinflated food? Would every American be on welfare at that point?
It strikes me that most of this deflation/inflation debate ignores the fact that this is a remarkably unique moment in history. The dollar is de facto the entire world's money. It is obviously dying, but we have no model to compare its death throes to. I'm tempted to believe that a catastrophic war is likely, in the aftermath of which a new, world currency will be introduced. A war of sufficient scale would mask the dance of death of the dollar (and the Euro and Yen and maybe the RMB, too) from public perception. This is the only way I can picture the dollar's endgame.
Then I read this (linked originally by Rick Ackerman on ZeroHedge).
I am now 100% convinced the US will hyperinflate, and the politicians and the people will be begging the Fed to bring it on (preferring money creation to the reality of austerity).
I highly recommend you to have a read of this link, and delve into the site:
http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html
The Fed was likewise reflating bubbles and giving away free money to those who showed the most talent for fraud and wealth destruction. The country has lost the ability to wage any more wars (in reality profit support for wealth destruction companies).
In order for outlooks to improve, we must first stop the bleeding, then liquidate the bankrupt, and rededicate economic activity to productive unlevered pursuits.
You make some very good points, and I can only hope that you are correct! Certainly, if the market is allowed to choose, it will go to a digital-real-time gold (or silver or other commodity) monetary system. The problem is that governments not only have VERY big guns, they also have the benefit of the doubt, at least from average citizens. Will governments allow the changeover to a digital system, or will they fight with every tool (the big guns) that they have to keep control of the most profitable scam on earth, the Legal Tender business?
Still think the Fed is strictly private? Go to www.federalreserve.com and you will get a "Page not found" error. Go to www.federalreserve.gov and you will find them there.
Trust me, the confusion about the nature of the Fed is not an accident, it is a design feature.
I'd like to thank Jason C for his wise words. I'm glad we have comment moderation. Most comments on most sites are juvenile and off-topic, as well as ridiculously profane and offensive. Here the comments are generally worth mulling over. Let's keep it that way!!!
In your retort, you mentioned this:
"Weimar and the ongoing hyperinflation in Argentina, "
...as examples of hyperinflation.
Dr. North does not disagree with you.
However, you did not continue to read Dr. North further in his article where he specifically noted:
"Which are the famous hyperinflations? In Western Europe, Germany, Austria, and Hungary after World War I. They had lost the war."
and
"... Latin American examples over and over. These are not major industrial economies"
It is a serious mistake to assume the lessons of Weimar and Argentina are applicable to the situation facing the USA - whose currency represents the world's reserve currency, who has not suffered a major defeat in a war, and is the largest industrial economy on earth.
PS:
Dr. North did not say hyper-inflation was "impossible".
In fact, he noted specifically that it may be likely in the situation of Congress nationalizing the FED.
His general point was that due to self-interest, the bankers will not commit suicide, but political self-interest - being wholly different from economic interests - politicians might consider such an act.