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Hyperinflation causes



May 04, 2009 – Comments (5)

Early in this financial crisis I put myself in the deflation camp and I have stayed here, but I do keep my eye open for anything that might change that.  So far I do believe we are seeing deflation.

At some point inflation is possible again, and I have been watching for any signs, or for that matter, what I should be looking for.  Financial Armageddon has a post about hyperinflation and what is believed to have been the causes, so this is a good one to check out.  As someone in cash, I want make sure I move away from cash should a high rate of inflation come.

The piece suggests it is high government debt that is the first part of a hyperinflation event.  The most important thing to correct the problem is "fiscal restraint, which in most cases meant outright elimination of the budget deficit, was probably the most important of these policy measures."

Well, this looks very bad for the US when you look at the degree to which fiscal restraint is a concept that seems to belong in fairytales...

Interesting, the article suggests that interest rates will rise, which is something else that I have been expecting.  I think that will result in a massive collapse in the price of treasury bills as longer term treasury bills are repriced to deliver a higher price.

Canada is increasing debt at a massive rate this year and also showing very little fiscal restraint, but I think the debt load per person is considerably smaller so Canada has more room to wise up to a true fix rather then policy that can lead to hyperinflation.

So, two years ago I was reading up on the Depression and developing a timeline estimate based on the housing bubble that was followed by the stock market crash.  It was something like 6 years from the housing bubble peak to the stock market bottom.  I think we are about 3 years past the housing market peak, at least in some places. 

I do not see how we get a hpyerinflation in the near future, but  I am watching for it and it appear that we are entering the first part of what happens prior to a hyperinflation.  I have no idea on the timeline for a hyperinflation event.

5 Comments – Post Your Own

#1) On May 04, 2009 at 9:58 PM, ottomobile55 (< 20) wrote:

KFT is a good long term hold

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#2) On May 04, 2009 at 10:58 PM, ChrisGraley (28.51) wrote:

I'm on the inflation bandwagon for sure, but not on the hyperinflation wagon yet.

Something I've been mulling over...

What if every country delibertly weakend it's currency at the same time? What would our respective currencies inflate against? Couldn't we then just call a G-12 summit and agree to lower the global prices on everything? I know we couldn't do it globally by debt, we'd all have to print money, but that's a huge incentive for debt holders to get a quick economic recovery without the effects of inflation.

I know I'm missing something and it can't be that easy, but it eludes me. If any of you could dissolve that pipe-dream, I would appreciate it.

BTW Dwot, take that cash and buy silver. You'll never get an oppotunity like this again!

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#3) On May 05, 2009 at 12:55 AM, usmilitiadude (< 20) wrote:

I was just reading a book written in the 90's that was talking about Americans living on an inflated economy created by debt. That if the value of homes drop during an economic downturn, borrowers and lenders are in trouble. Hmmm..... The author was also talking about mortgage,consumer, federal,state, and local government debt and inspired me to find this link. 57 trillion in total debt. 5.7 trillion at 10% interest.

Our founding fathers would be proud....We the People of the United States, in Order to form a more perfect Union, establish Justice, ensure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

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#4) On May 05, 2009 at 8:39 PM, ChrisGraley (28.51) wrote:

OK, I'm by no means an economic expert, but I'll add another 2 cents to this.

I was hoping those of you with a better understanding of Macro-Economics would reply here, since I'm more of a self taught hack but  this is a conversation that I'm desperately interested in at this point.

First the UK is already showing hints of a deflationary outcome when their March Retail Price Index fell below zero for the first time in 50 years. Don't panic, it was only 0.4%, but I'm looking for 2 things.

1) How they react to it.

2) If the US makes any new economic changes at the same time. (Could show how they may react to deflation themselves.)

The US has shown just a few hints already that they are more worried about deflation than inflation. (Other than the obvious thing of printing money faster than Zimbabwe)

1) They lowered interest rates to zero pretty quickly. (Shows that they weren't afraid to print money or buy T-bills)

2) They have nearly doubled the monetary base in as litte as a few months.

3) They have monetized previously worthless asset back securities. All 3 of these things point that they are less afraid of inflation than deflation, they aren't sure signs.

Then I took a look at a 4th thing....

4) In March the FED bought long term treasuries instead of short term! This caused the 10 year note to fall to 2.5% Which is exactly what they wanted and made sense. They all got pats on the back and the nickname of "Rambo Fed". I didn't think much of it then, but it just occurred to me today, when they need to unwind this position what happens? In a deflationary economy we are going to have sell these back at a much higher percentage to make them attractive to foriegn investors, and we'll do it at a time when we have less tax revenues, higher unemployment and a FED that's gun is out of bullets. Raising interest rates is a killer in that type of economy. We've recently seen with Japan, how accomodating other countries were in that type of scenario.

If on the other hand, if we had to unwind it in an inflationary economy, we face all of the same obstacles except that raising the interest rate is exactly what we need to help the economy.

These guys have to be smarter than I am, and they can control which way we go to an extent, so I have to think they are assuming an inflationary route. It's not proof, it's just got me leaning toward inflation.

Another thing to look at are the winners and losers of deflation and inflation.


Hard Money

Preferred by creditors

May create or prolong a Depression for the short term.



Soft Money

Preferred by debtors

Can destroy a countries credit rating for the long term.

Given that fragile debtors have caused this whole mess and the US is arrogant enough to think that they are too big too worry about their credit rating, I'm concluding that they are leaning toward inflation.

Now that I've thought this all out, although I'm fairly debt free, I'm think about borrowing all the money that I can and investing it in a precious metal.

If any of you are better at Macroeconmics, please reply before I make my own version of a "Bank Run" tomorrow.

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#5) On May 05, 2009 at 11:18 PM, dwot (28.88) wrote:

Interesting comments...

That debt link is frightening...

I am in Canada and I don't think our debt is as bad as the US or Britain, but it is getting worse.  Our debt was much worse then the US in the 80s and the result was a tough economy for years and years.

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