Hyperinflation Does Not Arise From Too Much Bank Lending.

[sokal]

December 23, 2009 – Contrary to common belief, hyperinflation does not arise from too much bank lending. The sole cause of hyperinflation is always too much government spending. The pattern is as follows.

The government spends more money than it is receiving in taxes, which forces it to borrow. As these deficits grow, they eventually exceed the market’s capacity or willingness to lend money to the government. Invariably, the central bank steps in and provides the government with the money it needs by creating it – as the saying goes – ‘out of thin air’, or what governments today call “quantitative easing”. The central bank does this in either of two ways.

In cash currency economies, where most commerce is completed by making payments with paper-currency, the central bank cranks up the printing press. Examples are the Weimar Germany hyperinflation in the early 1920s, and just recently, Zimbabwe.

In deposit-currency economies, where most commerce is conducted by making payments through the banking system with checks, wire transfers, plastic cards, and the like, the central bank uses electronic bookkeeping made possible through computers to put the newly created money directly into the government’s checking account. There are numerous examples of deposit-currency hyperinflation in the monetary history of Latin America, like the one that devastated Argentina in 1991.

These two different ways in which hyperinflation manifests itself are made clear in the following quote by Ben Bernanke before he was appointed chairman of the Federal Reserve: “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”

There is of course a cost. There may not be one to the US government, but instead, the cost will be borne by everyone who holds dollars and loses purchasing power as a result of Mr. Bernanke creating as many dollars as the government wants to spend. The other word for this cost is inflation.

With this background, the US government’s financial position makes clear that it is heading toward an Argentine-style deposit currency hyperinflation. The first two months of the US government’s current fiscal year have resulted in a record $296.7 billion deficit. During this period, the Federal Reserve grew its balance sheet by about $65 billion, in effect purchasing about 22% of the federal government’s new debt. These purchases clearly show the Fed’s policy of “quantitative easing”.

The following chart illustrates that the difference between the US government’s monthly receipts and expenditures remains at record highs in November.

Unless this gap between receipts and expenditures is closed, there will be hyperinflation. Policymakers seem to believe that they can close this gap by jumpstarting the moribund US economy, so that government receipts can again begin to grow and eventually catch-up to, and perhaps exceed expenditures. But they are pursuing a dangerous path because the rising expenditures by the federal government are increasing its debt, causing more quantitative easing by the Federal Reserve, which in effect is pouring more fuel on the potential hyperinflationary fire.

Much has been made of the huge bank excess reserves “sitting idle” at the Fed. It has been said that hyperinflation is not possible when the banks are sitting on such huge reserves, instead of lending them into the economy. This thinking is flawed because it ignores that there are two sides to the Federal Reserve’s balance sheet. Those reserves are not just sitting there, as if they were in a vacuum. These reserves have funded the Fed’s purchase of US government debt, putting it and the US dollar on the road to hyperinflation.

Edited January 1, 2010 by sokal

[endure]

And the relevance to Thailand is?

[473geo]

And the relevance to Thailand is?

Thailand holds dollar reserves...does it not.....hyper inflation in USA could well have an effect?

[PeaceBlondie]

And the source of sokal's quote is --- ???

[sokal]

And the relevance to Thailand is?

Thailand holds dollar reserves...does it not.....hyper inflation in USA could well have an effect?

Thailand holds substantial dollar reserves because its central bankers are attempting to keep the BHT down which is a very bad long term policy. Thailand happened to have the highest amount of purchases month on month a while ago.

[noahvail]

Mr. Bermanke's quote, from a 2002 speech, has been taken out of context. His scenario for this was that in a period of DEflation, one of the courses of action available to the Fed was to print (physically or electronically) more money:

quote:

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

End quote.

Granted, this last sentence (though still in the context of fighting deflation) might appear to agree with the context of the OP's original quote; but to follow it further, the huge influxes of paper money by the government (it's not just the Fed that does this on its own) would have created a ruinously high period of inflation, which has not come about. But that's just my meager opinion, and the article itself makes for interesting reading. Google Bermanke The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost..

[trogers]

quote:

...But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.

End quote.

Google Bermanke The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost..

Countries in the world can snub the Dollar and the US government cannot keep printing money to finance deficit spending. But these countries have to ask themselves - do they still want to sell to the US? If no, don't hold on to the Dollar. If yes, cross your fingers that many other countries will behave like you do. Value of the Dollar does not only depend on supply.

[Naam]

And the source of sokal's quote is --- ???

and the reason for Sokal's thread is?

[flying]

Mr. Bermanke's quote, from a 2002 speech, has been taken out of context. His scenario for this was that in a period of DEflation, one of the courses of action available to the Fed was to print (physically or electronically) more money:

Granted, this last sentence (though still in the context of fighting deflation) might appear to agree with the context of the OP's original quote; but to follow it further, the huge influxes of paper money by the government (it's not just the Fed that does this on its own) would have created a ruinously high period of inflation, which has not come about. But that's just my meager opinion, and the article itself makes for interesting reading. Google Bermanke The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost..

I highly recommend Ron Paul's book End The Fed

[Naam]

I highly recommend Ron Paul's book End The Fed

an old saying says "paper is patient". not withstanding the fact that i respect Ron Paul i emphasize that any àsshole can write a book as easily as spreading any bullshit in some sorta (kinda) blockschpot.

p.s. i highly recommend to read only books on the efficiency of gasturbines, desalination plants, cooling cycles of nuclear power plants et al and believe what is stated in these books. most (if not all) other books are written to make an additional few bucks of pocket money or to pay off one (or more exes and the children the author has sired).

[flying]

an old saying says "paper is patient". not withstanding the fact that i respect Ron Paul i emphasize that any àsshole can write a book as easily as spreading any bullshit in some sorta (kinda) blockschpot.

p.s. i highly recommend to read only books on the efficiency of gasturbines, desalination plants, cooling cycles of nuclear power plants et al and believe what is stated in these books. most (if not all) other books are written to make an additional few bucks of pocket money or to pay off one (or more exes and the children the author has sired).

Actually the book is very well laid out with lots of history about how it all came about.

Also looks at it from many view points including those in opposition to his own.

Lastly when done reading it I am hard pressed to find a single good reason for the continuation of the FED system of unsound unconstitutional money.

As for the gas turbines...perhaps relative in another thread/forum While I agree most books may be written with the hopes of garnering a profit...This book seems much more geared towards garnering an education for the folks who read it. An education about how & why things are where they are today in the US & its effects on the world due to the USD being the reserve currency.

I would be more than happy to loan my copy

[gregb]

There are many necessary but not sufficient conditions for hyperinflation to occur. One necessary condition is an over abundance of money. The sufficient condition is an over abundance of money combined with loss of confidence in the governing authority. That increases the velocity of money in the economy as people rush to exchange it for something of value, and that is what causes hyperinflation.

This loss of confidence historically only comes about through monetization of debt. However, the US government is in a special position. The ability to borrow unlimited amounts in its own currency blurs the distinction between borrowing and monetization. Thus, the US government is quite capable of borrowing its way into a hyperinflationary collapse of its economy, but it still needs something that will cause a complete loss of confidence.

All we can say for sure right now is that people have not completely lost faith in the country with the world's largest military. It is not clear for how much longer this situation can continue. The physics of energy depletion does guarantee that economic contraction will replace economic growth for the foreseeable future, thus destroying the myth of progress as well as all industrialized economies, but the masses are not very smart, and this fact can be hidden in numbers and statistics for quite a while before it becomes impossible to ignore.

Truth is there are already more than enough digital dollars for hyperinflation to occur. The loss of confidence hasn't happened yet, but the signs are there. Watching home prices or the daily fluctuations in gold is simply a distraction. RP is probably the smartest man in Washington, but even he is blind to the bigger reality.

Hyperinflation will strike in the US (and have knock on effects globally) within a few decades. This will be followed by resource wars and a general collapse in the global industrial economy. Neither bank lending nor the Fed practices are going to be the trigger for this though. It will occur once the smart investor realizes energy depletion has killed the fantasy paradigm of economic growth for the remainder of his natural life.

Everything else is just a sideshow to the main event, and you can't fight physics.

Edited January 2, 2010 by gregb

[hhgz]

"Hyperinflation will strike in the US within a few decades."

Let's see: not this decade, or the next (that would be a "couple", not a "few"). So, according to you, the earliest we'll see this is 30 years from now. That's a fantastic prediction, and it is indicative of your analytical ability.

Edited January 2, 2010 by hhgz

[sokal]

There are many necessary but not sufficient conditions for hyperinflation to occur. One necessary condition is an over abundance of money. The sufficient condition is an over abundance of money combined with loss of confidence in the governing authority. That increases the velocity of money in the economy as people rush to exchange it for something of value, and that is what causes hyperinflation.

This loss of confidence historically only comes about through monetization of debt. However, the US government is in a special position. The ability to borrow unlimited amounts in its own currency blurs the distinction between borrowing and monetization. Thus, the US government is quite capable of borrowing its way into a hyperinflationary collapse of its economy, but it still needs something that will cause a complete loss of confidence.

All we can say for sure right now is that people have not completely lost faith in the country with the world's largest military. It is not clear for how much longer this situation can continue. The physics of energy depletion does guarantee that economic contraction will replace economic growth for the foreseeable future, thus destroying the myth of progress as well as all industrialized economies, but the masses are not very smart, and this fact can be hidden in numbers and statistics for quite a while before it becomes impossible to ignore.

Truth is there are already more than enough digital dollars for hyperinflation to occur. The loss of confidence hasn't happened yet, but the signs are there. Watching home prices or the daily fluctuations in gold is simply a distraction. RP is probably the smartest man in Washington, but even he is blind to the bigger reality.

Hyperinflation will strike in the US (and have knock on effects globally) within a few decades. This will be followed by resource wars and a general collapse in the global industrial economy. Neither bank lending nor the Fed practices are going to be the trigger for this though. It will occur once the smart investor realizes energy depletion has killed the fantasy paradigm of economic growth for the remainder of his natural life.

Everything else is just a sideshow to the main event, and you can't fight physics.

I agree with most of what you said but I am not sold on peak oil/energy. China will probably decide when it wants people to lose confidence in the dollar. All they need to do is sell into dollar strength, and like all bubbles, the first one out profits the most.

[sokal]

"Hyperinflation will strike in the US within a few decades."

Let's see: not this decade, or the next (that would be a "couple", not a "few"). So, according to you, the earliest we'll see this is 30 years from now. That's a fantastic prediction, and it is indicative of your analytical ability.

Lets not argue about this, you go buy $10,000 worth of 30 year bonds and I will buy $10,000 worth of the HUI index. In 30 years you will have no money.

[hhgz]

"Lets not argue about this..."

You're taking this too personally. I'm not arguing anything. You saw a graph, and you've spun a tale to fit your perspective. You want to invest $10,000 in the HUI index, and I think that's a great idea for you.

[sokal]

"Lets not argue about this..."

You're taking this too personally. I'm not arguing anything. You saw a graph, and you've spun a tale to fit your perspective. You want to invest $10,000 in the HUI index, and I think that's a great idea for you.

Spun a tale ? This is fact, this is how and why hyperinflation happens. Also, I didn't write it, Casey Research did.

Do you have a better explanation ? what causes it ?

[gregb]

"Hyperinflation will strike in the US within a few decades."

Let's see: not this decade, or the next (that would be a "couple", not a "few"). So, according to you, the earliest we'll see this is 30 years from now. That's a fantastic prediction, and it is indicative of your analytical ability.

I'm sorry. I had to go away for a few days, and just caught up with this thread. I believe hhgz, you need to reread the paragraph above. The English word "within" means that it will occur between a set of conditions. In this instance, it means between 0 and a few decades. Your misreading of "within" to mean "earliest" is either laughably obtuse or patently disingenuous. Further, using your own ignorance of English to criticize my analytical abilities is simply disturbing.

I will leave it to the TV community to draw their own conclusions as to your true motivations here. I assume you won't be criticizing their analytical abilities as well, will you?

[Naam]

an old saying says "paper is patient". not withstanding the fact that i respect Ron Paul i emphasize that any àsshole can write a book as easily as spreading any bullshit in some sorta (kinda) blockschpot.

p.s. i highly recommend to read only books on the efficiency of gasturbines, desalination plants, cooling cycles of nuclear power plants et al and believe what is stated in these books. most (if not all) other books are written to make an additional few bucks of pocket money or to pay off one (or more exes and the children the author has sired).

Actually the book is very well laid out with lots of history about how it all came about.

Also looks at it from many view points including those in opposition to his own.

Lastly when done reading it I am hard pressed to find a single good reason for the continuation of the FED system of unsound unconstitutional money.

As for the gas turbines...perhaps relative in another thread/forum While I agree most books may be written with the hopes of garnering a profit...This book seems much more geared towards garnering an education for the folks who read it. An education about how & why things are where they are today in the US & its effects on the world due to the USD being the reserve currency.

I would be more than happy to loan my copy

Flying, if we can judge a book how well it is laid out and verify that the history stated in it is correct then we don't have to read the book.

[manarak]

I stopped to read sokal's post after the first sentence, which is utter bullshit.

Was the rest interesting?

[Naam]

I stopped to read sokal's post after the first sentence, which is utter bullshit.

Was the rest interesting?

depends on the person who reads it. normal or ignoramus?

[flying]

Flying, if we can judge a book how well it is laid out and verify that the history stated in it is correct then we don't have to read the book.

Well then let me just say it was both helpful to my understanding & also a very enjoyable read.

Highly recommend

Edited January 6, 2010 by flying

[sokal]

I stopped to read sokal's post after the first sentence, which is utter bullshit.

Was the rest interesting?

What is bullshit ?

[Abrak]

I rather like this quote from Adam Smith (getting on for 300 years old now)

'The problem with fiat money is that it rewards the minority who can handle money, but fools the generation who have worked hard to save money.'

[jackinbkk]

Debasing any currency will have an inflationary effect.

I for one agree that inflation is a symptom of too much money in supply pushing prices higher.

Supply essentially drives demand. When you have too much money

you will be willing to pay more for things and prices must rise in normal competition of a free market.

What is more of a concern to me is the potential for the US to default on it's rising debt burden.

This is an interesting position for the creditor nations. The last thing they want is to see their

debtors just default. If your nations reserves turned to dust over night it will help no one.

I think the housing bubble has to pop and the stimulus packages are all pouring more fuel

on the fire. All the increasing levels of debt being thrown at the problem are hiding the

underlying ills that need to be fixed. Its a false recovery.

[hhgz]

More than a year after the "governments are spending like crazy", and "the governments have turned on the printing presses", where is the inflation? Where is the "hyperinflation"? Jeez, when you use the prefix "hyper", you sound hormonal and hysterical.

[neverdie]

Great stuff, some of you guys could argue about two flys on a wall.

[dudemeister]

yes but maybe they are hyper-flys

[sokal]

More than a year after the "governments are spending like crazy", and "the governments have turned on the printing presses", where is the inflation? Where is the "hyperinflation"? Jeez, when you use the prefix "hyper", you sound hormonal and hysterical.

Every hyperinflation starts with a severe shortage of the very currency that hyper inflates. They don't just start monetizing debt out of the blue for no reason.

[midas]

More than a year after the "governments are spending like crazy", and "the governments have turned on the printing presses", where is the inflation? Where is the "hyperinflation"? Jeez, when you use the prefix "hyper", you sound hormonal and hysterical.

Every hyperinflation starts with a severe shortage of the very currency that hyper inflates. They don't just start monetizing debt out of the blue for no reason.

how long will it be before we start seeing signs of hyperinflation ? are we talking just months or is it years away?