U.S. Hyperinflation: Is Faber's Prediction Realistic?

Images from the Weimar Republic of housewives using currency to heat their homes are bound to surface again as commentators discuss Dr. Marc Faber’s prediction of hyperinflation for the modern United States.

In an interview with Bloomberg TV he said:

The U.S. economy will enter hyperinflation approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates.

Dr. Faber claimed inflation might get to rates ‘close to’ Zimbabwe where inflation has reached 231 million per cent recently. He left no doubt about his prediction.

I am 100 percent sure that the U.S. will go into hyperinflation. 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.

Over-the-top

Now perhaps the original Dr. Doom has lost it, or at least got a little carried away with the strength of his analogy. It is hard to equate the market savvy Obama administration with the corrupt court of Robert Mugabe, or to imagine a scenario that would bring such economic devastation.

But what Dr. Faber’s hyperbole does flag up is the possibility of a return to the inflation levels of the 1970s, or indeed something worse. It is true that what politicians are doing to head off an economic slump today does indeed have consequences for future inflation levels.

In short, pumping money into the global economy will eventually prove inflationary. The money supply is being recklessly expanded to accommodate rising levels of public spending, largely on zombie banks and bankrupt automobile companies.

Government control

At the moment this new money is only compensating for a collapse in the private sector, global trade and consumer spending. But it is far harder to take money out than put it in, and Dr. Faber’s point is that left-leaning politicians will be reluctant to downsize the public sector at the appropriate time.

The investment conclusion he draws is that gold and silver are the best options to beat inflation and that buying US treasuries is likely to be a complete disaster. Those buying T-bonds in the auctions this week might care to reflect on what hyperinflation, or something close to it, would mean for this asset class.

Oil or black gold would be another clear and major beneficiary from a trip down the hyperinflation road.

Comments

[capitalisth...:]

Faber is correct hyperinflation is inevitable. I'm personally divesting my dollars and buying commodities. The problem is that I'll get hit on the capital gains tax even though my gains will only be nominal. Get ready for a lower standard of living :(

May 28 04:24 AM

[Golden Oxen:]

Market savvy Obama administration, you must be kidding?

May 28 06:39 AM

[DONE_SONZ:]

Not only will we have it,we are shooting for it.

May 28 07:14 AM

[odin:]

While it is politically difficult to rein in the monetary supply accomodations (esp. when a recovery is nascent), at least in theory, central bankers are supposed to be indepedent. Just as they have many tools of money creation, they have equally enough and potent tools to destroy fiat money.

It will be politically much more difficult to rein in public spending and the size of the government (fiscal policy), a distinction not made in the article above. However, the impact of that policy on inflation is a lot more indirect.

There is record amounts of overcapacity in the global economy. Unemployment rates are still rising. Commercial real estate and credit card default hits are yet to hit the bank's bottom lines (and further impact their ability to lend). The money multiplier has completely broken down. For several years, just as with private individuals, balance sheet repair will the primary goal of these banks and they will use the steep yield curve to rebuild the equity side of their balance sheets and deleverage...not lend the excess. The consumer cut off from credit, employment will be kept on life-support with government transfers but will save more rather than go on another spending binge. Against this backdrop, inflation-mongering doesnt make sense.

Education and Healthcare seem impervious to any deflation worries...and there might very well be inflation, even hyperinflation in our future. (and it depends of many 'ifs' and inflation expectations especially can rapidly materialize), however, when you've been starving for two weeks, it seems hardly prudent to keep worrying about the fat content on your next meal (i.e. being too early on a call is no different than being wrong).

May 28 07:37 AM

[fireball:]

i hold gold. i like gold. i expect inflation. maybe even hyper-inflation in 11/2 to 2 years. i am steadily buying silver on pullbacks. still i will keep trading and watching for a pullback to add more gold. the longer this rally lasts the better chance for a pullback. i would call it reckless spending to pay off cronies and secure more centralised power instead of market savvy. politicians from the apparatus never miss an opportunity to sieze more control.
i had a friend who bought to much gold. when he got in financial trouble another friend bought about 30 ounces from him at market price because he intended to buy anyway. friend one took a pretty good loss. after a few weeks he was mad at friend two. keep enough federal reserve debt notes to work with. unfortunately it is still legal tender.
do not belive that the govt. beast is going to help you. it will hinder at best and often harm. consider some silver too.

May 28 09:07 AM

[Did U Think...:]

"It is hard to equate the market savvy Obama administration with the corrupt court of Robert Mugabe..."

WHAT???? You have to be kidding! The corrupt government is controlled by the corrupt bankers! Everyone knows TARP and all the other programs are just massive bail outs for the insolvent banks. We could have given the money to solvent, smaller banks and let the big ones die a natural death but that would wipe out the oligarchs and so they got the liar in chief to hire a tax evading ex GS chief who now tells the liar in chief what to say and when.

I cannot believe the level of gullibility that some Americans display. Who knows if the situation turns into hyperinflation or not but to same that our government is any less criminal or corrupt than any other despotic 3rd world money grubbing power grabbing government in the world is childish at best and dangerous at worst.

By the way, what ever happens will start with a deflationary crash. Mike Shedlock has the right view on this. The fed can't stop this from happening because debt destruction is deflationary and it is happening faster than the fed can reflate. After all the bad debt is discharged and housing stabilizes, could we then enter hyperinflation? YES, if the fed is allowed to continue interfering with free markets it very well could flip around to hyperinflation. Perhaps that is the final intent of the managers of a dying currency. I do know for sure that we have no intention of paying off the national debt.

You hear me, China? The hooknose money leaders of this country certainly plan to try to scam you out of the value that you loaned us. They are con artists and thieves to the very core.

May 28 09:17 AM

[whatnext:]

The potential mechanism for hyperinflation has its roots in the bond market, used to finance government spending. As bond prices drop, new capital shortages in banks would emerge. Banks mark to mark to market capital positions become worse as bond values deteriorate against higher costs of borrowing. As bank equity vanishes, six trillion dollars of deposits will become unstable, forcing government to 'walk the walk' to guarantee them, as the FDIC becomes less able to do so.

This is the scenario Faber envisions to produce hyperinflation. It hinges on the credibility of safe bank deposits. A bank run, where depositors want all their money back to due to a perceived inability of the government to insure them, is not inevitable (IMHO), but a distinct possibility.

May 28 09:24 AM

[reluctantQuant:]

Gee, I guess putting Paul Volcker on the econ team was just a random act. Not that he has any direct relevant experience or anything.

--rq

May 28 10:00 AM

[johnmorrison9:]

If Obama can control Biden he can control choas,
and keep his tax cheating brats out of jail too.

May 28 10:53 AM

[mr freddo:]

Inflation is coming but not 231 million percent inflation. Expect that, as the economy recovers, inflation will start to move toward the 5% level. The Fed will clamp down, sending the economy into a second recession but whipping inflation.

Faber is predicting that the Fed will essentially lose control of the process due to political pressure. That could happen, considering the huge deficits that are projected this year and on into the future. But it probably won't.

Protecting your portfolio with inflation hedges is a good idea in any event. Whether the inflation rate peaks at 5%, 10%, or higher, inflation is coming...

May 28 12:05 PM

[TracingError:]

It's not the flation that hurts, it's the stag part.

Weimar wasn't so bad...compared to the deflation that brought the Nazi's to power.

May 28 12:22 PM

[Konrad:]

Is it realistic? Absolutely not.

Seems this man finally figured out that when consumer prices drop along with the prices of real-estate, largely stable income ranges, and large investment volumes into the best buyer's markets in decades; what follows is a period of double digit inflation

Someone get him a Nobel's Prize, this man is onto something a college freshman could tell you.

May 28 01:24 PM

[Michael_Cohen:]

100 million % inflation is ridiculous. But we could see 20% or so.

Either way, gov bonds are a terrible investment, and gold/silver are solid imo.

May 28 04:09 PM

[Tony Daltorio:]

Hyperinflation? Probably not, but double-digit inflation is inevitable.

I think you miswrote a line in your article where you said " the market savvy Obama administration". I think you meant to say " the market-controlled Obama administration". He has been bought and paid for like most other politicians. Look at who were the biggest contributors to his campaign - Goldman Sachs and the boyz.

May 28 05:22 PM

[Did U Think...:]

Please tell me why hyperinflation cannot happen in this country. Because your "gut" says it can't? Because Americans are somehow immune to the laws of finance? We certainly have a much bigger economic flywheel than other countries, but we also have a much much larger cash burn rate.

People who think the US can't go down in a fiery ball are the same ones who said it could not happen to AIG and GM. No, the US is not too big to fail. In fact, it's pretty clear that it's too big to bail.

It is not the new money printing that causes hyperinflation. It is the impression by the users of the currency that the currency managers have lost respect for it. And since it is backed by nothing, how much respect can anyone really hold for the dollar?

People outside the US are not obliged to accept our currency in trade for their stuff. When they stop doing this, hyperinflation will occur in a matter of months. This is the famous Von Mises "crackup boom". No where in his writings did he say "except in the USA".

On May 28 04:09 PM Michael_Cohen wrote:
> 100 million % inflation is ridiculous. But we could see 20% or so.
> Either way, gov bonds are a terrible investment, and gold/silver
> are solid imo.

May 28 05:46 PM

[Angel Martin:]

Is hyperinflation "inevitable" just like housing price increases were "inevitable"?


On May 28 04:24 AM capitalisthero.com wrote:

> Faber is correct hyperinflation is inevitable.

May 28 10:50 PM

[H. E. Canada:]

Maybe we will not the see the hyperinflation levels of Zimbabwe or the WiemarRepublic (and I pray we do not), but let's be real about what hyperinflation is. From Dictionary.com: "Hyperinflation:
Extremely rapid or out of control inflation.

Investopedia Commentary

There is no precise numerical definition to hyperinflation. This is a situation where price increases are so out of control that the concept of inflation is meaningless."

With this perspective in mind, we could experience hyperinflation by the mere fact that inflation becomes uncontrollable. Is that possible? Yes. Is it worth hedging against? You bet.

We are in unprecedented monetary and fiscal territory. What we are seeing done with our nation's money supply and debt ratios will produce unintended consequences we cannot yet define. "We don't know what we don't know" - and that truth is undeniable.

May 28 11:44 PM

[User 142738:]

On May 28 09:17 AM Did U Think The Ponzi Scheme Would Last? wrote:

> "It is hard to equate the market savvy Obama administration with
> the corrupt court of Robert Mugabe..."
>
> WHAT???? You have to be kidding!
Mugabe’s reign of terror is decades in the making. Unless Obama makes it illegal for white people to own farmland and denies the existence of cholera I would say the Zimbabwe-U.S. comparison is ridiculous at the very least.

> It is not the new money printing that causes hyperinflation.
You are partially correct. An extremely high money supply growth rate is merely a symptom of hyperinflation. The loss of faith in the currency is also a symptom. Like influenza, nobody knows how it started: it just exists.

> People outside the US are not obliged to accept our currency in trade for their stuff.
Actually, they are. Zimbabwe’s rampant inflation was a result of the breakdown of the agricultural trade between Zimbabwe and other countries. Mugabe confiscated fertile land and gave it to inexperienced farmers, which caused the agricultural sector to shrink slightly every year. The rate of shrinkage accelerated in the late 1990’s, which coincided with the sudden rise in inflation. With lower demand for Zimbabwean goods and a constant money supply, the value of the Zimbabwean dollar began to fall. Mugabe (actually, Gideon Gono, the president of the Reserve Bank of Zimbabwe) actually instated a policy where military personnel would receive continuous pay raises. Most of the printed money simply went into the hands of militants, who then used it to buy South African rand, Botswanan pula and the U.S. dollar almost immediately after being paid. Very high money velocity multiplied by very high money supply growth equals very high inflation.

The amount of debt relative to the economy (tens of thousands of percent in Zimbabwe versus 80% or so in the U.S.) and the money supply growth (several quintillion percent in Zimbabwe versus about 12% in the U.S.) The money supply growth in China is 26% — does this mean China will experience superhyperinflation? Russia's money supply growth, as well as the money velocity, is even higher than that. Will Russia experience megasuperhyperinflation?

No economist can possibly give a solid definition of hyperinflation. Its definition can only be compared to the definition of “obscene material” as by the U.S. Supreme Court (“I know it when I see it”). We know the symptoms and the damage, but there are so many exceptions to every rule that it simply cannot be defined.

> I cannot believe the level of gullibility that some Americans display.
Leading by example, I see.

May 29 12:18 AM