Will There Be Hyperinflation?

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Category: Global Perspectives

Published on Monday, 03 October 2011 13:37

Written by Jeff Thomas

Jeff Thomas addresses an important topic and a constant source of argument within economic circles - whether we're heading into an overall deflation or inflation scenario. And if inflation, whether it will take on a "hyper" aspect to it as occurred in the German Weimar Republic of the '20s, and more recently Yugoslavia in the '90s or Zimbabwe of the past few years. So, could the US face a hyperinflation scenario? Let's take a look.

Will There Be Hyperinflation?

The likelihood of hyperinflation is not exactly on every newscaster's lips at the moment, but before too long, I expect they will make reference to it as commonly as they now refer to jobs and debt.

Hyperinflation is one of those subjects that is so misunderstood and so scary to most people that it's one of a handful of economic eventualities (like default and depression) that causes the average person to blindly state, "That won't happen. They can't allow it to happen."

Of course, those who make these statements don't have any suggestions on how to prevent it, but there is a general assumption that the Treasury or the Fed has a magic wand in a drawer somewhere that can be brought out when needed.

In part, the public misunderstanding regarding hyperinflation is due to the fact that most people don't actually know the definition of the word. Inflation is defined simply as an increase in the number of currency units in circulation. By extension, hyperinflation is a dramatic increase in the number of currency units in circulation. However, inflation is commonly assumed to mean a decrease in the purchasing power of the currency. While this may not be the correct definition, it might as well be, since it is a knock-on effect.

If this relationship were better understood, even the average guy could comprehend - if his government increases the number of currency units in circulation, inflation will be a by-product. If his government dramatically increases the number of currency units in circulation, hyperinflation will be a by-product. Pretty simple really.

As simple as it is, the mere fact that the average citizen does not understand that hyperinflation in the near future is inevitable - and has been - at least as far back as when "Helicopter Ben" Bernanke made his famous pronouncement nine years ago that he would dump money from helicopters to get it into the system, if necessary.

Had he actually purchased enough helicopters to distribute as many currency units as have been created in the past few years, he would likely be on the Christmas card list of every executive at the Sikorsky [helicopter manufacturing] company.

So, is there no hope to avoid hyperinflation?

Well, actually, yes there is. Back in the days when laissez faire was the solution to economic downturns, those who had gone too far out on a limb and were now in trouble were simply allowed to die. Those who borrowed or lent too much simply went bust. This, admittedly, was a bad shock to the system, but it was over quickly - in a year or two. Not so, when a government decides to escape the problem through hyperinflation. Whenever a government decides to keep the party going a while longer by dramatically increasing the money supply, the result is always the same - a dramatic crash.

But, surely it's not too late to do something?

It seems to be difficult to get across to people that the bomb has already been released from the Enola Gay and is on its journey downward. Though that is hardly a sentiment you will hear from the leaders of his country.

They never say that the situation is beyond redemption - they only argue over whether the liberal or the conservative solution is the more effective choice in fixing it.

For those who are still in a state of confusion at this late date as to whether hyperinflation is on the way, my advice would be the following:

1) Stop consulting the mainstream media for economic advice.

2) Read the following statistics until their significance is thoroughly understood.

• Annual U.S. tax revenue: $2,170,000,000,000
• Federal budget: $3,820,000,000,000
• New debt: $1,650,000,000,000
• National debt: $14,271,000,000,000
• Recent budget cut: $38,500,000,000

In order to make this information easier to absorb, we'll remove eight zeros and think of it as a household budget:

• Annual family income: $21,700
• Money the family spent: $38,200
• New debt on the credit card: $16,500
• Outstanding balance on the credit card: $142,710
• Total budget cuts: $385

Imagine this to be your household budget. Let the numbers really sink in. What conclusion do you draw? You will probably conclude that there is no chance of "bouncing back" from numbers this severe.

The choices are default or hyperinflation.

The Fed has already announced that its choice is to pump as much new money into the system as is necessary, and they have been doing just that. Quantitative easing has failed miserably, but it has been useful in putting off the inevitable crash for a bit. However, there are only so many injections of morphine you can give an injured patient before he overdoses.

You will likely conclude that the numbers speak for themselves; that once the endless chatter from the reporters and legislators is removed, these simple, inescapable statistics are all you need to know to be able to predict the inevitability of what is on the way.

Tags: Fed Chairman Ben Bernanke , federal government , federal reserve , hyperinflation , inflation , Jeff Thomas , US government