Real e Finance means business
A New Theory
about
Hyper-Inflation
about
Hyper-Inflation
While everyone acknowledges that governments are printing and printing
excess rather than inflation. There is a smaller group concerned about
hyperinflation. There is an explanation though and this indicates that
hyperinflation can not only take place, but that is can happen suddenly.
There have been a number of impediments in how economists look at
hyperinflation that have prevented original thought (and sometimes any
thought at all) in this area. Here are the necessary ideas:
1. Inflation is a currency losing its value (an idea most mainstream
economist can't seem to grasp).
2. Severe deflation is a precursor to hyperinflation. They are not inconsistent
events as is generally thought, but deflation sets the stage for hyperinflation.
3. Disinflation/deflation and inflation need not by symmetrical. For instance,
if there is 30 years of disinflation, this doesn't have to be balanced by 30 years
of inflation. The same amount of inflation could take place in only months or
even weeks, let alone 30 years.
4. Inflation doesn't have to be a continuous phenomenon. The chart can have
gaps in it with prices going up significantly overnight. Furthermore this can
start from a low point where almost no inflation exists.
The origins of hyperinflation are with excess 'money' printing by a
government. It is not possible to produce an ever-larger amount of currency
and have each unit of that currency maintain its value. If it were, real money
could be created out of thin air and everyone in the world could become
infinitely rich overnight. This would also violate the basic laws of arithmetic.
So excess money printing always devalues a currency and because of this
less and less can bought with each unit of that currency.
This becomes a potentially dangerous problem when severe deflation takes
place because of a shock to the financial system (the Credit Crisis for
instance). To make up for the loss in value of assets (deflation), the
government prints a huge amount of money. The printing causes devaluation
of the currency and requires more printing to try to make up for the additional
loss of value. A self-feeding money printing cycle then develops.
Even though huge money creation has occurred because of the Credit Crisis,
we still haven't seen significant inflation yet. Indeed, the American
government claims the U.S. inflation rate has fallen close to zero. How is this
possible? The answer can be found in the banking system. The feds have
pumped huge amounts of money into it (U.S. bank reserves have increased
approximately 100 times or 10,000% since the Credit Crisis began) and
banks have received this money at close to a zero percent interest rate. Yet,
if you look at commercial and consumer bank lending, you will see that they
have been declining. So where did all this money go? It was used to buy
treasuries and this is what is allowing the federal government to fund its
massive deficits. For all intensive purposes, this is a massive Ponzi scheme
being run by the U.S. government.
Ponzi schemes though don't follow the same rules as normal businesses or
economic statistics. They build to a crescendo over time and then suddenly
collapse to zero instantly. The analogy for inflation will be the opposite
however. Inflation will go to zero and then suddenly jump up to some very
high level. In theory, zero interest rates should produce infinite inflation
(hyperinflation), but nothing mandates that this has to be a gradual,
long-term process. If you think about it, the Credit Crisis seems to have come
out of nowhere. It didn't of course; there was a slow, long-term build up
behind the scenes that just exploded suddenly. Inflation is likely to follow that
same path of development. Global governments eventually got control of
the Credit Crisis collapse by throwing trillions of dollars at the problem. That
solution however won't work for dealing with inflation.
Daryl Montgomery
excess rather than inflation. There is a smaller group concerned about
hyperinflation. There is an explanation though and this indicates that
hyperinflation can not only take place, but that is can happen suddenly.
There have been a number of impediments in how economists look at
hyperinflation that have prevented original thought (and sometimes any
thought at all) in this area. Here are the necessary ideas:
1. Inflation is a currency losing its value (an idea most mainstream
economist can't seem to grasp).
2. Severe deflation is a precursor to hyperinflation. They are not inconsistent
events as is generally thought, but deflation sets the stage for hyperinflation.
3. Disinflation/deflation and inflation need not by symmetrical. For instance,
if there is 30 years of disinflation, this doesn't have to be balanced by 30 years
of inflation. The same amount of inflation could take place in only months or
even weeks, let alone 30 years.
4. Inflation doesn't have to be a continuous phenomenon. The chart can have
gaps in it with prices going up significantly overnight. Furthermore this can
start from a low point where almost no inflation exists.
The origins of hyperinflation are with excess 'money' printing by a
government. It is not possible to produce an ever-larger amount of currency
and have each unit of that currency maintain its value. If it were, real money
could be created out of thin air and everyone in the world could become
infinitely rich overnight. This would also violate the basic laws of arithmetic.
So excess money printing always devalues a currency and because of this
less and less can bought with each unit of that currency.
This becomes a potentially dangerous problem when severe deflation takes
place because of a shock to the financial system (the Credit Crisis for
instance). To make up for the loss in value of assets (deflation), the
government prints a huge amount of money. The printing causes devaluation
of the currency and requires more printing to try to make up for the additional
loss of value. A self-feeding money printing cycle then develops.
Even though huge money creation has occurred because of the Credit Crisis,
we still haven't seen significant inflation yet. Indeed, the American
government claims the U.S. inflation rate has fallen close to zero. How is this
possible? The answer can be found in the banking system. The feds have
pumped huge amounts of money into it (U.S. bank reserves have increased
approximately 100 times or 10,000% since the Credit Crisis began) and
banks have received this money at close to a zero percent interest rate. Yet,
if you look at commercial and consumer bank lending, you will see that they
have been declining. So where did all this money go? It was used to buy
treasuries and this is what is allowing the federal government to fund its
massive deficits. For all intensive purposes, this is a massive Ponzi scheme
being run by the U.S. government.
Ponzi schemes though don't follow the same rules as normal businesses or
economic statistics. They build to a crescendo over time and then suddenly
collapse to zero instantly. The analogy for inflation will be the opposite
however. Inflation will go to zero and then suddenly jump up to some very
high level. In theory, zero interest rates should produce infinite inflation
(hyperinflation), but nothing mandates that this has to be a gradual,
long-term process. If you think about it, the Credit Crisis seems to have come
out of nowhere. It didn't of course; there was a slow, long-term build up
behind the scenes that just exploded suddenly. Inflation is likely to follow that
same path of development. Global governments eventually got control of
the Credit Crisis collapse by throwing trillions of dollars at the problem. That
solution however won't work for dealing with inflation.
Daryl Montgomery
Author, "Inflation Investing: A Guide for the 2010s"
The 'Helicopter
Economics Investing
Guide' is meant to help
educate people on how
to make profitable
investing choices in the
current economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
Economics Investing
Guide' is meant to help
educate people on how
to make profitable
investing choices in the
current economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
Truth and nothing but...
