Why there will Not be hyperinflation.
August 09, 2008
– Comments (7)
Karl Denninger absolutely nailed this one. He explains hyperinflation will not happen in the US and why goldbugs will be sorely dissappointed when their apocalyptic calls of doom are laid to rest next to Y2K and the killer bees. If you can't be bothered to read his article, I'll summarize:
A banker faces two options when a homeowner can't pay, he can
A) foreclose on the house
B) ask the government to print up and then send the homeowner money to pay off his loan.
In case A, Karl writes: "In a deflationary environment the banker gets as much of your money as he can, and then he also gets the house! You lose big, but does he lose? Well, not really. He started with an asset (money) that was roughly the utility value of the home, and he ended up with the home itself, which has the same utility value. Further, the money he gets before you default goes up in value, as premium comes out of hard assets.
That is, he might have not only the house, but enough money to buy a yacht as well (at a distressed sale.) The banker makes money in terms of real value in a deflationary environment. You, on the other hand, being debt, get rammed.
However, in Case B, Karl writes: "[The banker] gets reamed in both holes. Yes, he has his $300,000 back, but what does that $300,000 buy? Oh, not very much eh? Go look at Zimbabwe, Argentina, or any other place where hyperinflation takes hold. The banker gets stiffed in a big way (as does anyone else who's business it is to move and hold money) because what once bought a house now only buys half a house, or less.
Those who argue that Bernanke will "hyperinflate" have a tiny little problem with their thesis. That thesis depends on Bernanke and the rest of the banks (who are, in fact, his masters as well as his servants) acting in a fashion that is explicitly against their own self-interest."
You think bankers want to intentionally devalue their own asset: cash? Of course not. The Fed, as the goldbugs point out ad nausem is a private institution owned by the banks. I highly doubt "Helicopter" Ben is going to intentionally bankrupt his fellow bankers. Hyperinflation is not going to happen. Gold and silver will not outpace the (single-digit) inflation rate and pay no yield. In the long run, commodities are lousy investments. The boom is over, get out for your own sake.
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