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Possiblity of hyper inflation / economic collapse

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Axiomatic

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What do you guys make of the possibility of hyper-inflation in the US?
What do you mean by "hyper-inflation"? Traditionally, it describes inflation of the type seen in post-WWI Germany or Zimbabwe, with prices rising 40% or more per month in some months (over 1000% per year). Edited by softwareNerd
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What do you guys make of the possibility of hyper-inflation in the US?

Do I detect the nature of the Federal Reserve being exposed for what it is?

When Money Dies, So do people, including Americans - by Gary North

Fractional Reserve Banking versus Ayn Rand's Ethics

or is it just Fractional Reserve Banking - by 'Helicopter Ben' Bernanke?

Let us hope not.

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Hyper-inflation is when a government floods a market with money with no intent of retiring that money at a later date. It's different then what the Federal Reserve currently does when it loans money at very low rates.

Lately, when a country tries that in today's very interconnected world, other countries tend to slap them down. Imagine if the US tried it. Do you think China would accept that money as a way for the US to retire it's debt? No. In a way, being in hock up to our "you know what" with China keeps our government from trying to revisit that tactic (which was last used in 1970's).

However, there are still other ways that the government can screw up the economy based on our current monetary system. I just don't see us taking wheelbarrows of cash to Safeway to buy a loaf of bread.

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What do you guys make of the possibility of hyper-inflation in the US?

Peter Schiff lays out a some scenarios that hyper-inflation could be likely. The main scenario involves China's shifting economy and their estimated 2 trillion in US currency reserves. See his book Crash Proof 2.0, for the details.

Our politicians seem to be doing everything in their power to position America's economy in a state vulnerable to massive inflation; everything to place downward pressure on the dollar, promoting China and others in the world to dump their dollar reserves back into America's already inflated economy.

Some conditions promoting hyper inflation in America:

*Our government is pumping trillions of dollars into the economy with their spendulous programs.

*US government debt is at all time high 11 trillion +

*US government adding trillions more debt with ever widening programs such as healthcare

*The FED has pushed billions $ out into the reserve banks to promote loans to push more currency into the economy.

*The US Treasury is constantly monetizing debt.

*The US Treasury bonds are becoming increasingly unattractive promoting the US government to monetize more debt, printing more money.

*Our trade deficit is still massive, such that we are not manufacturing our own goods

*China's economy is growing rapidly with a super massive untapped consumer base ready to buy up all the used goods they built and exported to the US.

*The US sitting on over supplies of goods we'd be eager to sell back to China and elsewhere.

*China sitting on 2 Trillion dollars of reserve which is rapidly depreciating as the dollar is pressured downward.

*Gold is at all time high and shows signs of going into backwardization.

-When is China going to get sick of funding our deficit spending to keep importing their goods?

-When are the Chinese going to have a significant consumer class eager to import and enjoy some goods, rather than continue to produce them and ship them to America and the rest of the world?

Edited by phibetakappa
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When skeptical economists insist that there will be no hyper-inflation, they usually point to the massive (and unprecedented) amount of reserves banks are currently holding.

This is interesting because perhaps the banks are perfectly aware of what would happen if they lent that money out. Which means that they must be scared out of their minds to hold such huge reserves. In the end, the argument that inflation won't be a problem because banks are holding huge reserves seems to fail miserably because it proves that if the situation were to change there would be an inflation problem.

I don't know if that's true, but I wonder about it more than anything else. Does anyone know what's going on with banks and excess reserves?

Also, skeptical economists say that inflation will be offset by a debt deflation spiral (if I understand right, the idea is that the value of assets fall, so money borrowed against them isn't covered, this leads to solvency fears, thus a retraction of money, thus even lower values for assets, and on, more or less). If that's true, you can't tell me it will all balance out. Something in the real economy has to perish. But what? That's what I wonder. Let's see, house prices fall (non-tradeables), consumer prices rise (imported manufactured goods more expensive). So in the end the price level is even, credit flows, but nobody can afford anything because goods are overpriced, and assets are underpriced. Is that right? It seems pretty bad - worse than deflation or strait inflation.

Trying to understand economics according to the science of economics, ergh....

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What's interesting and ironic about the state of the world economy, outside the U.S., is that a historically significant number of people under existing socialist governments know that socialism does not work, and they are trying to find a way out from under it. The governments in socialist countries also know that socialism can't be sustained (as it truly cannot), but they can't admit it because they would lose power -- and no politician will ever willingly give up power by admitting they are wrong. The Chinese government is the quintessential example of this, but it's also holds true for much of Europe.

We don't hear much about this growing unrest in the MSM but if you read between the lines in the foreign press you can see that people are getting fed up. Chronic under-employment, dwindling services, etc.

America is the last developed country that has yet to openly embraced socialism – and therefore we haven't gotten it out of our system yet. Unfortunately, I think we will have to embrace it enough that we either hit rock bottom or at least see that we are about to before we wake up and reject it.

What could prove to be the most absolute and supreme irony in the history of the world is that it will be the Chinese Communist government that will slap us awake. As they are moving away from socialism, we are moving towards it. China does hold a significant amount of the U.S. debt, but they do not want to see the U.S. collapse. It would cost them trillions of dollars and destabilize their power. They will only play their trump card if we don't shape up.

I wish I could have been a fly on the wall when Obama met with the Chinese in Copenhagen. They probably told him where to stick the proposed carbon trading scheme being cooked up in the U.S. It remains to be seen if Obama can get out from under the special interests (or even cares too) that are trying to ram it through Congress.

We live in interesting times....

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The bottom line is that Bernanke has no exit strategy. He can talk about it all he likes, but when it comes time to actually pull the trigger, his nerves will buckle. The current communications campaign is simply an attempt to calm the markets. I doubt few citizens or members of Congress had any hope of understanding the exit strategy mechanisms that Bernanke described. Many likely place their faith in his seeming mastery of financial minutiae. Sadly, as with the mythical “strong dollar policy,” confident talk may be the sum total of the Chairman’s strategy. [...]

But make no mistake, in order to mop up all the excess liquidity, the Fed will need to raise interest rates substantially to attract buyers for all the bonds that the Treasury must sell. Fed officials know that our economy is completely dependent on cheap money and limitless government credit, and can’t tolerate the loss of either. Of course, the longer the monetary spigot remains open, the more addicted to low rates we get, and the harder it will be to kick the habit. If the Fed could not remove the punch bowl during the years before the bust, how will they do so while the economy is far weaker? Even if they do start the process, the minute the “recovery” seems in jeopardy, look for the Fed to turn the showers back on.

Peter Schiff, http://www.europac.net/archives.asp?year=2009&qtr=3#

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This thread paints a very bleak picture for the future of the future of the US economy.

Another question: What do you think will be the new reserve currency given this scenario? Also, do you think it likely that in such an event the US would return to a gold standard?

Edited by Axiomatic
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I think true hyper-inflation it is an extremely low possibility for the U.S. in the foreseeable future. Of course, it may simply be because I think of hyper-inflation as being different from "very high inflation". The way I use the term, the U.S. has never seen hyper inflation (unless one considers some outlier cases like confederate dollars as it became clear that they would lose the war).

During the period that we have had the Federal reserve, price-increases have averaged under 5% a year. Some developing countries get along with annual price-increases of about 10%, and most people adjust to that level. Hyper-inflation is usually used to mean something many times that in seriousness. This is why I asked what was meant by "hyper-inflation". None of the other posters clarified their own meanings, but without such clarification the discussion is quite meaningless. This does not mean one has to predict a narrow range, but we should at least have clarity about whether we're talking about price-increases going to 10%-15% for a year or two, or about it going to 40%-50% or higher for many years, or something else... (For instance, gold is a little over $1000/oz today; if it rises @10% for 10 years, it will be a little under $3000/oz; however, if it rises by 40% for 10 years it will, be over $28,000/oz. It's a huge difference.)

Edited by softwareNerd
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(For instance, gold is a little over $1000/oz today; if it rises @10% for 10 years, it will be a little under $3000/oz; however, if it rises by 40% for 10 years it will, be over $28,000/oz. It's a huge difference.)

Funny you should bring that up. I was considering it for yesterdays post, and now you couched it nicely.

10 years ago, gold was ~$255/Troy oz.

At 10%, that should equate to ~$660/Troy oz. today.

At 20%, should come to ~$1580/Troy oz.

The 10 year high/low in US$ is 1214.80/255.30 /Troy oz. with spot currently at $1128.70

(Hyper-Inflation is merely the speed that the ticket was issued for, after the fact? Worthless in 10 minutes or 10 years is still worthless.)

Edited by dream_weaver
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10 years ago, gold was ~$255/Troy oz. ...
Not sure what message you're trying to convey by those numbers.

Hyper inflation is not the speed as such, but a certain range of speeds. I'm not sure what range the OP meant when he asked his question.

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Not sure what message you're trying to convey by those numbers.

Hyper inflation is not the speed as such, but a certain range of speeds. I'm not sure what range the OP meant when he asked his question.

Well, 5%=$415/T. oz.

Message? Just doing the math.

Gas, Eggs, Bread, Stamps ran closer to the your stated average of 5%.

If taxation for the purpose of raising government revenue is obsolete,

why is the privately owned corporation known as the Federal Reserve viewed as an agency of the U.S. Government?
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Well, 5%=$415/T. oz.
So, you're trying to say that gold rose higher than 5%? Is that it? If so, why choose the last 10 years? Why not 15 or 20? Or why not start with the average gold price during 1980? I'm not saying one of those is better, but choosing gold's lowest point from the last 30 years is a good way to make a point to an ignorant reader, but a sure way to have your argument written off as hyperbole by folks like me. Edited by softwareNerd
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The way I use the term, the U.S. has never seen hyper inflation

What about the Continental? Maybe that situation was not hyper-inflation like in the Weimar Republic or Argentina, but it completely devalued the currency for everyday activities and led the public to stop using the currency. It dropped to 4% of its value in 4 years.

Looking at some examples from Wikipedia's page on hyperinflation, I see several countries where their "dollar" effectively became worth a "tenth of a cent" (0.1% of its value) in about 5-10 years. Had we kept using the Continental, that could certainly have become the case.

With the US dollar having a govt-enforced monopoly on its use as money in the US, if we replayed the Continental scenario, people couldn't simply use a different currency, as they ultimately did when moving away from the Continental. We would have to wait for the government to play catch-up in revaluing the currency (e.g. decreeing that a "new Dollar" is worth "100 times the old dollar").

Edited by brian0918
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So, you're trying to say that gold rose higher than 5%? Is that it? If so, why choose the last 10 years? Why not 15 or 20? Or why not start with the average gold price during 1980? I'm not saying one of those is better, but choosing gold's lowest point from the last 30 years is a good way to make a point to an ignorant reader, but a sure way to have your argument written off as hyperbole by folks like me.

Fair enough. Nixon severed the redemability in '72. Prior to that, the price was 'fixed' at $35.

5%=$223.49

10%=$1309.15

20%=$35723.60

I know what an inch and millimeter are, but trying to afix a dollar to an elastic standard makes economics more difficult to measure IMHO.

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With the US dollar having a govt-enforced monopoly on its use as money in the US, if we replayed the Continental scenario, people couldn't simply use a different currency, as they ultimately did when moving away from the Continental. We would have to wait for the government to play catch-up in revaluing the currency (e.g. decreeing that a "new Dollar" is worth "100 times the old dollar").

During the 2008 presidential race I heard some 'conspiracy' sounding things from youtubers, media hacks and of course the infamous libertard Ron Paul concerning a new gl;obal standard that politicans from around the world came together to try to agree on, so it is certainly plausable that a new standard would not nessaserily be based on one nations currency, but on a new standard agreed upon by many nations in the name of 'securing and preventing a future global economic crisis.'

During that election I also heard some strange talk of the Amero and North American Union. I'm not quite certain how that fits in, but any comments on whether that might also be a possibility in the future might be interesting.

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I think true hyper-inflation it is an extremely low possibility for the U.S. in the foreseeable future. Of course, it may simply be because I think of hyper-inflation as being different from "very high inflation". The way I use the term, the U.S. has never seen hyper inflation (unless one considers some outlier cases like confederate dollars as it became clear that they would lose the war).

During the period that we have had the Federal reserve, price-increases have averaged under 5% a year. Some developing countries get along with annual price-increases of about 10%, and most people adjust to that level. Hyper-inflation is usually used to mean something many times that in seriousness. This is why I asked what was meant by "hyper-inflation". None of the other posters clarified their own meanings, but without such clarification the discussion is quite meaningless. This does not mean one has to predict a narrow range, but we should at least have clarity about whether we're talking about price-increases going to 10%-15% for a year or two, or about it going to 40%-50% or higher for many years, or something else... (For instance, gold is a little over $1000/oz today; if it rises @10% for 10 years, it will be a little under $3000/oz; however, if it rises by 40% for 10 years it will, be over $28,000/oz. It's a huge difference.)

You were able to export all the inflation to China.

Hyperinflation is higher than 50% a month, which Schiff considers possible in 5 to 10 years if policy is not changed.

Now, if policy is not changed in 2010 I am sure it will be changed in 2012. So maybe the US will avoid that fate.

You can't leave interest rates at 0% while printing trillions of dollars for stimulus plans and bailouts without eventually seeing price inflation. It's a

sure thing and those who don't prepare for it now with silver will see a dramatic decrease in living standards, that I think, will cause policy change before it gets hyperinflationary.

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This thread paints a very bleak picture for the future of the future of the US economy.

Another question: What do you think will be the new reserve currency given this scenario? Also, do you think it likely that in such an event the US would return to a gold standard?

Probably a basket of Yen, Euro, Renminbi. But expect inflation in these currencies, too.

Gold and silver to some.

Regarding the US returning to a gold standard: I am not sure what the federal government will do in such a situation, but I can see nullification issues emerge. There are already people fighting legal tender laws:

The United States Constitution declares, in Article I, Section 10, “No State shall… make any Thing but gold and silver Coin a Tender in Payment of Debts.” State-Level Constitutional Tender laws seek to nullify federal legal tender laws in the state by authorizing payment in gold and silver or a paper note backed 100% by gold or silver.

http://www.tenthamendmentcenter.com/nullif...utional-tender/

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Fair enough. Nixon severed the redemability in '72. Prior to that, the price was 'fixed' at $35.
The $35 price was a fiction maintained by various controls. If to choose a "market-objective" measure, you should go to the gold-convertibility days of FDR, and start your trend from there.
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What about the Continental?
Okay, historical point conceded. So, the U.S. has seen hyperinflation in some extreme situations like the revolutionary war and the civil war.

However, that's incidental really... I was really trying to see if the OP's concept of "hyper inflation" included times like the 1970's, or whether he was talking about true hyper inflation.

There is little reason to believe the U.S. will see true hyper inflation in the next 5-10 years. This is essential a political prediction, and not primarily about economics. Right now, we're in a typical stage of falling prices. Unfortunately, such a stage creates the political push toward increased fiscal and monetary irresponsibility. Obviously, this cannot go on forever. We have to pay the piper some day: at some point the shadow liabilities (Fannie/Freddie/public-pensions) will become explicit liabilities. At some stage when the deterioration of the Federal balance sheet becomes more explicit, there will be more reluctance to buy US debt, and a higher expectation of price increases. When such sentiment changes, people might rush for the exit, so the change can be swift. I would not dare make a guess as to when the tide changes. (I hope it will be sooner rather than later.) When it does, we will see higher interest rates and higher inflation. However, this next stage will also change the political pressures, which will grow into a majority opinion that we should have higher taxes and less money-printing.

We also have the advantage of history. If things deteriorate, there will come a point when people will hark back to the days of Paul Volcker and seriously begin to talk about 15% and 20% interest rates. At some point, the tide of opinion will swing toward taking serious action.

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Right now, we're in a typical stage of falling prices.

Falling prices in what? Given the size of the supposed recession, and the amount of unemployment it generated, you would expect to see prices drop dramatically, but they haven't. Houses, cars, staple goods - these prices haven't dropped much if at all, in comparison to the size of the recession - that was the entire point of the stimulus, to keep people spending and keep prices up, keeping the bubble inflated.

So, we had a non-frugal "recession", followed by a jobless "recovery".

However, this next stage will also change the political pressures, which will grow into a majority opinion that we should have higher taxes and less money-printing.

These stages are not discrete in time, though. Henry Hazlitt's Economics in One Lesson gave a great example illustrating that the damage can be done before the majority notices it. I believe the example was about price/wage controls, but it would also apply to counterfeiting, or magically adding money to balance sheets.

Edited by brian0918
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What do you guys make of the possibility of hyper-inflation in the US?

Worrying about hyper-inflation is not really the question that we should be concerned with here. In fact, worrying about consumer goods prices takes your eyes off the ball and plays into Bernanke's hands.

I will say that the quotation from Schiff about the Fed is spot on. Schiff has major problems with many issues, but he has the Fed nailed. His recent blog post about Bernanke's Jan. 2 speech was also excellent. My point here is that the Fed and the Treasury, with the Obama programs coming on line are going to soak every available real bit of savings that we may have into the government and you will see that we did have manufacturing capacity, because it will go belly up in many significant ways. Manufacturing is where most of the job losses have been. (The thing that bothers me most about those who are ardent Schiff followers is that you do not demand that he prove his claims. That he claims something seems to be enough. It is as if you haven't learned anything from Ayn Rand. Insist that anyone who wants to convince you connect his claim to reality.)

The economy was severely damaged with this last "business cycle" and it is offering a major opportunity for more and wider regulation in the economy and our lives. Here's the deal, it was all caused by inflation, made-up money. One of the major lessons from von Mises and the Austrians is that the impact of inflation begins where it is introduced into the economy. In our economy, inflation is introduced via credit expansion, primarily to businesses (some consumer credit, too), and thus the "business-cycle". To get a very good idea of this last one, involving house prices, read Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas Woods (my review). You Schiff people will like it because he positively mentions Schiff three times, for good reasons, too, I think. Inflation does a lot of bad things besides run up consumer goods prices.

If you want to look further down the road, we have guaranteed problems coming with social security and medicare. Those demands upon the federal budget make our current (justified) worries about Obama's spending look small and insignificant. That is why John Lewis sent out his warning. I will take John Lewis over Schiff any day.

Bankers aren't loaning money because they are being bankers. It is necessary to know something about a subject in order to understand it. I don't know everything, but I do know some. I can say that bankers want to build up their capital and loan-loss reserves before lending much again. They want to not just survive, but make profits. They are also skiddish about other banks, and are not willing to accept other bank's paper and guarantees as they did two years ago. Banks are also having trouble finding people to loan to who meet the credit standards that banks want today, which are much more strict than they were just a couple years ago. Those standards do not expect the rosy picture that Obama wants them to assume. Finally, banks are getting interest paid on their fed member reserves. A guaranteed, albeit low, interest rate, guaranteed by the people who can make up money, is a far better deal than loaning the money to some business that has to work to make a profit. To the banker, it is a very risky world out there, especially when everyone, including the government is yelling at them for being too risk-taking at the same time they are being yelled at for not taking enough risk today and make loans.

I read Bernanke's speech and wrote about it. I thought that he was out of touch with reality and power hungery before. Now, however, I am almost frightened. There was the attempt to absolve himself of responsibility for the rise in house prices and his call for more regulation, all of which I expected. But what I was amazed about and what convinced me that he is completely cut off from reality is the "scientific" evidence he used to justify his positions. Those techniques would never permit a mind to find the causes for events. They are designed to do the opposite. Well, I read the speech so you don't have to. I am sure that eventually I will heal :) .

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Houses, cars, staple goods - these prices haven't dropped much if at all, in comparison to the size of the recession - that was the entire point of the stimulus, to keep people spending and keep prices up, keeping the bubble inflated.
Since their top, these prices have plummeted. There is still a lot of downward pressure on home-prices, rents, food, clothing.. and on the price of labor. We just completed a sort of hyper-deflation.

Still, I agree that it would have gone down deeper in absence of fiscal and monetary stimulus. It is not easy to fight the natural tendency of credit deflation that we are currently experiencing, though the government is trying hard to do so.

These stages are not discrete in time, though. Henry Hazlitt's Economics in One Lesson gave a great example illustrating that the damage can be done before the majority notices it.
Huge amount of damage is being done, and the more things get prolonged, the more damage is done. Without government intervention, we ought to have seen a sharper drop in GDP/employment/stocks, but we would probably be seeing the start of a real turn-around by this time. Instead, we're in a nominal turn-around in GDP, based on government spending. Employment being held artificially high, thus keeping many younger workers out of the job-market. I don't dispute that great damage is being done, and that more is to come. However, damage does not equate to hyper-inflation. It is far more likely that we're headed to what PIMCO terms a "new normal". When we get there, we will have high-unemployment, high-taxes, high-interest rates, high prices and low investment (high/low by the standards of U.S. 20th century averages, not based on where we are today).
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