Saturday, May 14, 2011

Inflation versus HYPERINFLATION

A lot of Deflationists like Mish think that Hyperinflation is impossible as we havn't got any real inflation.
In that respect he is correct we havn't got any REAL inflation . Real high Inflation has already taken place in the bubble years. Most of the worlds money supply gets created as debt or credit when people take on loans.
Debt is money, so the argument goes that as not many people are taking on new debt to buy a house now that the money supply shrinks and thus inflation is low. This is now the case in the real economy as people pay down debt rather than take out new debt and hence the recession. However HYPERINFLATION (IMHO, note I am not an economist, just read a lot) is caused by a LOSS OF CONFIDENCE in the currency through excessive
money printing to pay off debt. Zimbabwe hyperinflated when they printed money to pay off an IMF loan.
Sound familiar?
What is the difference to that and what the Bernank is doing when he monetizes the debt each month with QE?
none at all that i can see. That sets off a viscious circle where other countries no longer buy your debt/currency
and as tax receipts tank the only option is to print and thats exactly what QE is essentially.
So I wager that HYPERINFLATION is not excessive credit growth but excessive blatant printing to pay off debt. Japan got away with it as it own population were savers and bought the debt themselves
The Hyperinflation that the deflationists say will never arrive already has. The dollar hyperinflated in the private credit phase to to fuel the housing bubble. Cash was flipped for condos/houses. That phase has gone and now we enter the sovereign debt hyperinflation where the goverenment itself hyperinflates. If the bubble had been allowed to burst
and banks had gone bust and people had gone bust then yes the deflationists would be correct but when
you print money to counteract a deflationary depression, unless you have a lot of willing buyers for your new debt then that is when IMHO the real ZIMBABWE/WEIMAR hyperinflation occurs.

Remember these wise words

There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."

- Ludwig von Mises

1 comment:

  1. I have a post called "FAQ for Hyperinflation Skeptics".