Where is the Hyperinflation in America?

People get confused about the nature of mass inflation, hyperinflation, and what causes both. Historically speaking, hyperinflation is essentially always a political event. Someone loses a war, the government collapses — some huge dramatic political event happens that triggers the hyperinflation.

After this huge event, the politicians in charge generally begin printing money and dishing it many times more than existed the year before… as inflation begins to pick up, the leaders then also generally speed up the printing.

This is very unlikely to happen in the United States in the very near future. We’re absolutely going to suffer from inflation, and we have plenty of malinvestment bubbles created by the Fed, but the end result is going to be stagflation rather than hyperinflation. I’ll explain more below.

What is Hyperinflation?

First, high inflation and hyperinflation are different. I think we’re going to see high inflation over the next five to ten years — unless something goes very, very wrong with the economy, that is. But that’s not hyperinflation.

Hyperinflation is when people spend money as fast as they can because it’s losing value on a daily or weekly basis. In other words, it’s when savings of any sort become stupid. That’s absolutely, absolutely not the case right now. People who understand the value of cash have made a killing, because we’re not yet in a hyperinflationary economy.

Why Hasn’t Hyperinflation Hit Yet?

Hyperinflation isn’t going on right now. Even gold prices keep on falling. Some prices are going through the roof, but nothing close to what it would be like in hyperinflation, especially not since some other prices are staying steady or dropping. Sure, inflation is occurring– but not hyperinflation.

Hyperinflation hasn’t hit yet for several reasons:

  • Credit dried up. During 2008 to now, credit isn’t what it used to be. We went from credit being something anyone could get to it being almost impossible for huge hunks of society to get loans. It might be bad economics, but that’s deflationary. And the Fed and even congress’ printing hasn’t put enough money into the economy at a rate fast enough to counteract much of the loss in the supply. There’s more money, but just barely. Maybe that will change soon, but so far it just hasn’t happened.

Remember, in our economic system, debt is currency. That’s where the “currency” comes from. It’s a horrible system that creates huge bubbles that have to burst, and it will probably cause dozens of more depressions over time. But it’s still the system we have.

And during a recession and/or a depression, credit dries up. Banks are afraid to lend money. That means deflation kicks in. So if $500b in loans are not lent out, then we’re going to have deflation — even if the Fed lowers interest rates.  That’s just the world we live in, for better or worse.

  • Printing is “too” slow. For hyperinflation to hit, they’ll need to simply issue much, much more currency, especially with all of the credit slowing down and/or drying up. They’ll need to print more money than loans aren’t being loaned out — and that’s just not going to happen anytime soon. If hyperinflation happens, it won’t be because of anything currently in the news. If anything, we’re about to head into a bunch of more deflation — especially because of what’s going on in Europe.

When I say that the printing of money is happening “too slow”, I don’t mean that I want them to print more — I’m a hardcore capitalist. I want the government to be a fraction of the size it is right now. I hate deficits and I hate government debt.

But that doesn’t mean that the printing of money is creating hyperinflation — at least not yet. Even during QE2, when the Fed essentially bought government debt with newly “printed” currency, the impact was minimal because the purchased debt is just on the Fed’s books… it’s essentially the government paying the government money.

In other words, that money isn’t in circulation yet, and probably won’t be in circulation to the extent to trigger anything like hyperinflation.

People who are always predicting hyperinflation might be right, but not because of what’s happened so far. In a world where debt is money, a drop in the availability of new credit is essentially a drop in the money supply. And that’s why hyperinflation hasn’t hit, and won’t hit unless something drastic happens.

Can the Fed Cause Hyperinflation?

The Fed doesn’t print money and most likely can’t “create” inflation. They can only allow inflation to be created — but that requires the banks to do a bunch of lending. That’s not going on and during a horrific recession, it won’t happen. If we’re about to go into economic crisis, I wouldn’t take money to lend out to random consumers. That sounds like a good way to go broke.

There was, of course, huge backlash against Quantitative Easing. I also reacted to it. It was inflationary, though the impact ended up more of a wash — at least so far — than anything else. The Fed is trying to play duct-tape with the economy, and even that’s not currently working. Basically, the Fed is running out of bullets.

Some called QE2 “monetizing the debt”. Even some of the more conservative members of the Federal Reserve did the same. After all, the Fed did create new money and bought T-Bills. There’s more money in existence. So why didn’t this create massive velocity and explode consumer prices more than the jump that it did cause?

The reason is pretty simple… they just bought US debt, but it’s still on the balance sheets. When they did that, the reserve requirements suddenly changed. That’s why even Ben admitted that the QE really didn’t achieve anything except a psychological impact. Just because there’s more money on the Fed’s balance sheets doesn’t mean that that same money will hit the market.

I’ll explain more about this in the next week, because it can get hairy, but here’s a simple explanation:

If the government printed $1 Trillion dollars and sent that cash to the moon, would that create massive inflation? Of course not. That money is on the moon.

That’s one of the reasons QE2 hasn’t had the huge impact many thought it would… the overall amount of money in circulation barely changed. I disagree with QE2. Heck, I disagree with the Fed in general. But that doesn’t mean that every bad idea they have will create massive or hyperinflation.

This is the most important thing you can learn from this article is this:

The Fed can’t print money at will. It can only lend money out when there’s a demand for credit or buy certain assets already in existence. And during a recession, it’s very, very hard to lend that money out.

The treasury prints money because of deficits, and then afterwards issues bonds to try to manage the overnight rate. And the treasury prints money to do Congress’s bidding. In other words, the only people with real access to the printing press are congressmen.

By Alexandre Laurent

Alexandre Laurentl is working in the jewelry and investment gold since 2002. Alexandre graduated from The Normandy School of Business and from the University of Perpignan a Bachelor of economics in 1995.

Leave a Reply

Your email address will not be published. Required fields are marked *