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Hyperinflation or Hyperdeflation?

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From the Archives : Originally published May 13th, 2010
1540 words - Reading time : 3 - 6 minutes
( 10 votes, 3.7/5 ) , 4 commentaries
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Category : Gold University




James Turk’s article Hyperinflation Looms dated April 20, 2010, is based on Quantity Theory of Money (QTM). It draws an analogy between Weimar Germany of 1923 and the United States of 2010. Both precepts are invalid. As far as the QTM is concerned, it suffices to point to the very fact, admitted by Turk, that it is possible to have a shortage of money simultaneously with the overworking of the printing presses. Hyperinflation is not the same as the ultimate inflation of the money supply. It is the ultimate depreciation of the currency unit. The two concepts are far from being the same, QTM notwithstanding.


         The reason why QTM fails is that money is not one-dimensional. It is in fact two-dimensional. Quantity is one, and the velocity of circulation is the other dimension. Central banks control the former, and the market firmly controls the latter. As long as fair weather lasts, velocity may be ignored. But as soon as the weather grows foul, velocity returns with a vengeance. If it increases, we talk about inflation. If it decreases, we talk about deflation. In the extreme case the increase in velocity may start feeding upon itself and velocity could grow beyond any limit. People buy anything they can lay their hands on because they expect prices to rise further. This is hyperinflation, wiping out the value of the currency unit. It is an irreversible process: once fiat currency loses its value, it is lost for good. The pendulum has stopped swinging. If there is a bounce, it is the dead-cat bounce.


But it is also possible that, at the other end of the spectrum, the shrinkage in the velocity of circulation refuses to stop and starts feeding upon itself. People postone buying indefinitely because they expect prices to fall further. This is hyperdeflation. It manifests itself in the ever rising value of the currency unit. It is important to remark that it can happen while some prices are still rising. Other than gold, food and energy are two important exceptions. People have to eat, and they want to keep themselves warm and mobile, no matter what. Paradoxically, this may reinforce deflation. Because of rising food and energy prices people will have that much less to spend on other goods, accelerating price declines in other sectors. This defeats the arguments of Turk and others who try to refute the case for deflation by pointing to high or rising cost of food and energy.


  The point in either pathology of money is that the government is helpless. Once the point of no return is reached, there is nothing governments can do to convince people that the process will end — short of opening the Mint to gold and/or silver. As far as people are concerned, the feedback from their experience tells them to expect more of the same.


         I am not trying to adjudicate between the two schools of thought, one asserting that hyperinflation and the other asserting that hyperdeflation of the dollar is inevitable and imminent. I am merely trying to point out certain facts about deflation that most people are unaware of, or tend to ignore.


         Let me state first that it is not impossible for the dollar to go into hyperinflation during the next 12-month period. For example, consider the case of a shooting war between the U.S. and Iran in the Persian Gulf. After an initial euphoria the American military could start suffering setbacks on the ground, in the sea and in the air, simply because of the longer lines of communication from the home base, and also because of the disadvantage of the aggressor in face of patriotic zeal on the part of the defenders (c.f. Vietnam). In this scenario hyperinflation of the dollar could be a possible outcome. But short of war threatening to destroy supplies and producing facilities the word ’hyperinflation’ rings hollow in the ear.


Post-World-War I Germany versus Post-Cold-War U.S.


To draw a parallel, as Turk does, between Weimar Germany and present-day U.S. is, to say the least, grotesquely unrealistic. In 1923 the once mighty German army was defeated and disarmed, the navy was scuttled, the territory of the country was badly truncated by the peace treaty of Versailles, the Rhineland was under military occupation while the rest of the country was still under a partial blockade. No speculator would touch the falling Reichsmark, except to short it.


         By contrast, the United States in 2010 has an army, navy and air force that can be put on high alert in a matter of minutes. Its military bases pockmark the face of the globe. The over-riding fact is that the whole world is still anxious to sell its wares on the American market, and is happy to lend back to it the proceeds of the sale in order to finance future U.S. purchases. Furthermore, it is a fact that the bond market trading U.S. Treasury debt is still the largest and most liquid in the world. Significantly, it still has room to go up ― thus offering speculators juicy profits at a time when the bloom is off the stock and the real estate markets. How can you compare the circumstances of a beggar with those of the emperor — prodigal and bankrupt as though the latter may be?


         All the signs around us point to deflation. The money supply is being pumped up on an unprecedented scale, but all it does is pushing on a string. You cannot make a case, as Turk is trying to do, out of the fact that the price of crude oil doubled as compared to its recent low. Another fact, more startling, is that the price of crude oil has declined 45 percent as compared to its all-time high. We must see the general decline in world prices, even though in some cases they may be disguised as a loss of pricing power of the producers. True, list prices have not declined, but nobody trades them. They are for window-dressing only.


         Obviously, you need a theory to explain what is happening other than the QTM. I have offered such a theory. I have called it the Black Hole of Zero Interest. When the Federal Reserve (the Fed) is pushing the rate of interest down to zero (insofar as it needs pushing), wholesale destruction of capital is taking place unobtrusively but none the less effectively. Deflation is the measure of wealth in the process of self-destruction — wealth gone for good. The Fed is pouring oil on the fire as it is trying to push long-term rates down after it has succeeded in pushing short term rates to zero. It merely makes more wealth self-destruct, and it makes the pull of the Black Hole irresistible.


         But why is it that the inordinate money creation by the Fed is having no lasting effect on prices? It is because the Fed can create all the money it wants, but it cannot command it to flow uphill. The new money flows downhill where the fun is: to the bond market. Bond speculators are having a field day. Their bets are on the house: if they lose, the losses will be picked up by the public purse. But why does the Fed under-write the losses of the bond speculators? What we see is a gigantic Ponzi scheme. The Treasury issues the bonds by the trillions, and promises huge risk-free profits to the bond speculators in order to induce them to buy. Most speculators believe that the Treasury is not bluffing and they buy. Some may believe that the Fed is falsecarding doubts and they sell. But every time they do they only see foregone profits. What we have here is a rare symbiotic relation between the government and the speculators.


         When he was forced out of business by the courts, and his customers lost everything they invested, Charles Ponzi declared that he would have paid them to the last cent as contracted if they had let him. There is no reason to doubt his sincerity. Now, 90 years later, Charles Ponzi’s dream has come true. The US government is duplicating Ponzi’s scheme in the bond market. The only difference is that the stake is much higher: it is the national, nay, the world economy! And, most importantly, this time there is absolutely no danger that the courts will stop the racket. The world begs to be fooled.


Antal E. Fekete



Copyright © 2002-2008 by Antal E. Fekete - All rights reserved







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Professor Antal E. Fekete is a mathematician and monetary scientist., with many contributions in the fields fiscal and monetary Reform, gold standard, basis, discount versus interest and gold and interest.
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Hyperdeflation is good if you own bullion because you can swap it for assets which are now hyper- cheap !
Nice to see it was not 300 and done.

Your assertion may be accurate. Certainly for a time it should prove true. What remains to be seen is just how severely society gets shaken by the collapse of many, perhaps all of the debt instruments, backing the major currencies we know and distrust. Certainly it will be cause for drastic changes. There would seem to be a number of possible outcomes and much would depend on just how orderly of a transition to a new and trusted medium of exchange could be executed. The longer one of those black swan events that they talk about can be averted, the better the odds are that China, along with the other BRICS can have something viable in place so as that trade does not collapse completely.

But a disorderly collapse could arise as a result of one of many looming disasters. Japan, as but one example, by trying to inflate the yen, could destroy their own government bond market. Or given the lunatic policy of bailing in depositors, a run at one of the big French, Italian or German banks could start us cascading back to a time similar to the collapse of the Western Roman Empire. We know it as the Dark Ages. There were no rights. There was no property. There was not even money. Most everyone who was not a lord was the personal property of the dude who said you and everything you would ever produce belonged to him because your mother gave birth to you on his property. Japan went through a very similar stretch of time where they simply stopped minting coins and used a standard size bag of rice as their medium of exchange. Who is to say that we are not headed down that same path? Given what seem the incomprehensibly ill conceived policies of the national and supranational bodies to deal with the situation, the only mystery seems to be the actual moment when total collapse can no longer be averted. And of course, to what degree does society break down? Does it go on for only weeks, or will the next gold coin not be minted until 2638?

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"People post(p)one buying indefinitely because they expect prices to fall further. This is hyperdeflation. It manifests itself in the ever rising value of the currency unit. "
The presumption being people have the money to spend.

"This defeats the arguments of Turk and others who try to refute the case for deflation by pointing to high or rising cost of food and energy."
If the people have little to no disposable/discretionary monies after buying food and energy, all arguments fail.

Inflation/deflation are solely monetary events. Hyperinflation combines a monetary event with loss of valuation trust.

Folks, economics is NOT science. It IS philosophy. Trotting out pseudo-theories such a QTM is nonsense and does not provide evidence that economics is a science.
Put down the WSJ and read something on the "scientific method." Outcomes in science are predictable once the theory is developed by repeated testing of hypotheses.

Were economics science, the predictions would always come true. Or the economists are just a pack of liars and NOT really economic scientists. The facade of science lends the economist some measure of credibility when none is due.

Economists trot out history and then misapply it. All history economic data does is prove what didn't work. So any attempt to use historical data as compelling evidence for a new tactic is equivalent to reading goat entrails.

In support of philosophy, you can freely use statistics as a metric. Generalities work most of the time. Exceptions can and usually do exist within any groupings of data sets. And you can always apply the human element; yep, that sudden bout of irrationality that just ain't logical.

Strip away all the mumbo-jumbo, toss out the cowry beads and toss the healing crystals in the garbage and remember this: even dumb animals understand economics. You must consume more than you expend. You can shove a hundred balloons in your pocket until you begin to inflate them. Empty or filled to almost the breaking point, they are still just latex sacks. Popcorn has no more food value to it than boiled corn kernels.

Let's get something straight folks. As go the people, so goes the nation. Not the other way around. You either have some savings or you have non-productive debt. The dumb animal carries its savings as fat. With homo sapiens supposedly having the capacity to remember and the ability to reason, why is their meager savings concentrated around their waist and still in serious non-productive debt?

Inflation and deflation are purely monetary events. If you are broke or nobody will accept you trinkets/tokens or script as payment, you are deflated. The surest way to arrive at that climax is by increasing your quantity of trinkets/tokens or scrip without desired products to support the amount of t/t or s.

All mediums of exchange (money, gold, etc) represent surplus productivity. Debt is NOT surplus anything. Individually managed surplus usually gets the individual through periods of shortages. Commerce is based upon exchanging surplus and has the direct effect of reducing shortages. It keeps the hungry peasants from attacking the manor. Without large in-debt government, there wouldn't be many economists. Perhaps then people would'nt be so brainwashed and be capable of understanding dumb animal economics. No surplus, no survive. So back away from my wildebeast.
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The primary difference between Weimar Germany and America was that W.G. did not have a functioning bond market. There has never been a nation with a functioning bond market that has experienced hyperinflation. Nor will there ever be.

The likelihood of a war with Iran leading to hyperinflation seems remote in the extreme to me. As seen from my perch in the cheap seats, the only way to bring about hyperinflation would be for the formation of a third political party that will vow to repudiate the national debt. If it received enough public support, nobody would dare to purchase U.S. debt. For the sake of those who have not yet been impoverished by a government hell-bent on keeping the bond holders happy, it would be better if this happens sooner rather than later. But make no mistake, be it as a result of such a third party or events overtaking whichever crime syndicate that happens to occupy the Oval Office at the time, repudiation of the debt is how it will end. That is how sovereign debt crises always get resolved. There is no reason to believe that this one will end any differently.
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Hyperdeflation is good if you own bullion because you can swap it for assets which are now hyper- cheap ! Read more
S W. - 5/28/2013 at 11:05 AM GMT
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