Are We Headed for Hyperinflation?

It's pretty clear that we'll see much, much higher inflation in the U.S. after the Federal Reserve embarks on another "baby-step" campaign to normalize interest rates and withdrawal all the recently printed money in a manner that will not squash a nascent economic recovery, but Zimbabwe-style inflation seems to be a bit of a stretch.

Not so in the mind of Dr. Marc Faber, according to this Bloomberg report.

The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.

Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.

You can watch the whole interview here, though it's in high demand at the moment.

To get a really good inflation going in the U.S. (per the government's statistics), rental costs have to go much higher since their combined weight in the the Consumer Price Index (i.e., actual rental costs for renters and the nefarious "owners' equivalent rent" for homeowners) is almost one-third of the overall index.

That will be difficult to do as long as there are millions of empty houses across the land.

But, prices for food, energy, and domestic services may rise dramatically and we will surely hear assurances from the central bank along the lines of "we can tolerate a little inflation to ensure a return to economic growth".

But, Faber has no doubts.

“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

Federal Reserve Bank of Philadelphia President Charles Plosser said on May 21 inflation may rise to 2.5 percent in 2011. That exceeds the central bank officials’ long-run preferred range of 1.7 percent to 2 percent and contrasts with the concerns of some officials and economists that the economic slump may provoke a broad decline in prices.

“There are some concerns of a risk from inflation from all the liquidity injected into the banking system but it’s not an immediate threat right now given all the excess capacity in the U.S. economy,” said David Cohen, head of Asian economic forecasting at Action Economics in Singapore. “I have a little more confidence that the Fed has an exit strategy for draining all the liquidity at the appropriate time.”

It's hard to imagine that the Fed will do any better coming out of this than they did going in, blindsided as they were to the global credit deflation that has taken such a toll.

There is little reason to think that they won't be similarly blindsided by much higher rates of inflation in the years ahead, though they will be sure to dismiss its long-term impact initially.

Of course, by that time, it will probably be too late to do anything about it.

Comments

[InnocentsAb...:]

Inflation, at some point, ends up being unpopular.
Either this administration or the next one will quell it.
If the Republicans really want to get ahead of themselves,
they would be advocating a tight money policy, with the
exception ofthe bailouts, of course.

May 27 07:17 PM

[Mad Hedge F...:]

Yes, after the deflation. Just a little note to point out that my long term Treasuries short recommendation has gone ballistic, hitting a new high of $56, and that the futures have crashed to 116 1/2. The ten year yield has ratcheted up to 3.56%, a new high for the year, and the 30 year to 4.5%. The market is finally reading the writing on the wall. Who thought the sale of $100 billion in new paper was going to go well? The dealers are now choking on this stuff. I’m sure government agents are now scouring the country for new sources of high grade linen, the best raw material for printing new $100 bills. My calls don’t always work out this well this fast, so please indulge me, and let me savor the moment. Let the crash continue. Instead of focusing on the bankruptcy of GM, we should consider the United States government going under, as this cataclysmic move in federal debt seems to be presaging.

May 28 12:05 AM

[Dave Wrixon:]

Inflation is part of the strategy.

Uncle Sam cannot repay its debts, doesn't want to be seen to default, so will monetize the debt.

Only a complete idiot would consider high inflation unlikely.

Zimbabwean level would require an extreme level financial of incompetence, but don't misunderestimate America.

May 28 12:57 AM

[Fighting Yoda:]

Ultimately we will have inflation, meanwhile we will deflate. Long bond yields are still too low to signal inflation. With velocity of money plunging, wages dropping - inflation is not so easy to create.

Just remember Japanese could not inflate despite the Govt running deficits of 240%. They tried and tried but still had the lost decade.

May 28 01:14 AM

[MexCom:]

Inflation yes hyper no.
Zimbabwe just prints money with no revenue base.

The US Dollar remains the international reserve currency. People in Zimbabwe are doing busines in dollars and export their earnings to other countries. There is no faith in their Government.

May 28 09:15 AM

[Steven Hansen:]

inflation will kill the economy as interest rates will rise no matter what the Fed wants to do. can you imagine inflation at 5% and home loans at 5%.

i would not bet on hyperinflation (i do not discount it either).

May 28 12:41 PM

[bricki:]

Probably not hyperinflation but I have been predicting stagflation for a while now.

Objects in the mirror are closer than they seem.

May 28 01:22 PM

[y3115y:]

WWII debts were more than we have now. It was paid with four years post war inflation - 40%.

Inflation is equal tax to all, poor or rich. We have to pay, may be 10% of all our cash/bonds/stocks etc a year for three years.

This is the cancer growing in Obama's presidency. He can not push this inflation to his next term. He does not know it yet.

May 28 01:53 PM

[dtblount:]

Marc Faber is completely ridiculous. Saying the US will have Zim-style inflation is just a way to get a few more hits on his website and a few more books sold. There really is no other basis to this comment. I'm glad another one of these "academic investor/analysts" has made a comment like this...keeps the list of the credible ones smaller and easier to follow, haha.

May 28 03:12 PM

[ngwun:]

So much heavy breathing.
You guys in the U.S. ask youselves, nomatter how much you despise your govmint, opposition, or fellow citizens; how much like Zimbabwe is the U.S.?

Calm down a bit. Do what you can, don't bother too much about who dunnit unless you can vote them out. Talk quietly to your friends about what's right & wrong, & live your lives.

The U.S. is a great place, & a light to the world, whether you or the world likes it. Apart from hollywood & TV.

May 28 08:09 PM