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On Friday I attended a Symposium on hyperinflation at the American Institute for Economic Research. Participants were Thomas Glaessner of ICG at Citigroup, Peter Heller of the International Monetary Fund, Gerard Caprio, Professor of Economics at Williams College, and Joshua Rosner of Graham Fisher & Co.

Glaessner had much experience with the hyperinflations of Brazil and Argentina; Heller did also but from the angle of the IMF. Rosner gave his own analysis, and Caprio served as moderator.

Glaessner and Heller both felt that hyperinflation was only a remote possibility due to the strength of various factors within the U.S. They both expect inflation at some point, but think that the Fed will somehow pull it off. Glaessner pointed out that the EU was in no better shape, in fact was worse off, and that the euro was not a real competitor to the dollar.

Rosner was more pessimistic in that he felt the Fed had lost some credibility and that the underlying problems that got us where we are today have not yet been addressed. He had predicted our current trouble well before it began, but no one would take him seriously. He now expects another strong deflationary downturn before things get better but also thinks inflation is a distinct possibility once the next downward swing has had a chance to run itself out. After questioning, he did agree that there existed a possibility that there might be a flight from the dollar. They all agreed that China might just find another medium of exchange with some of its trading partners.

Rosner pointed out that the securitization market had become the principal avenue of financing over the last dozen or so years, and he thinks that the recovery will depend upon the revival of this market, because the banks must accumulate capital and are not in a position to take back that function. They all agreed that the reforms of the OTC marketplace will be helpful if they are done correctly (and useless if done incorrectly), and the major OTC market participants are very active currently in trying to see that it is done well.

Gold was only mentioned in passing and time ran out before I could bring it up, which is a pity. I'd have liked to ask whether they thought there might be some more action. In my view, this deflationary cycle is the result of the previous inflationary cycle, and trying to buck the trend to preserve the price level is not going to solve the problem, but in fact make it worse. Judging from past idiotic government attempts to do so, such frontal conflict with deflationary momentum always ends in distortions, and I don't see why this time will be any different.

What does this mean? It means that the deflation will continue until the market finds its sea legs again, but because the underlying problem hasn't been solved, the market will not get those legs until the toxic cancer has been cut out and the financing channels are reestablished. When that will be is anyone's guess.

Meantime, government meddling with interest rates, the dollar, spending, and credit will backfire as usual. The interesting part will be to observe what happens this time. The country and the world might just not accept another inflationary spiral as they did in the 1950s, the 1960s, the 1970s, the 1990s, and the 2000s. Then again, I suppose there is a chance they will.

Rosner argued that there were too many debtors in the country who would all be quite happy with inflating their debt away. But I argue that this only works when wages rise, and I don't think businesses will let wages rise this time, all the more because unemployment doesn't look like it'll moderate any time soon and it'll be an employers' market (except on Wall Street). Non-banking business is getting too savvy about inflation. Rather than pass through any profits to labor, the extra cash will flow back to speculating (as it has already started to do), and we'll get even more disequilibrium between Main Street and Wall Street. (Seen those bonuses?)

We are in a 1929 situation with 2009 tools and a 2009 government mindset, but also with a 2009 public and business mindset. Whatever we get, whether it be deflation, inflation, or a mix of the two with or without hyperinflation, this is going to be interesting.
Source: Hyperinflation Is Not an Option, Say Some