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Debunking Hyperinflation May 15th, 2009

Debunking Hyperinflation

James Bibbings recently wrote a great article about how inflation isn’t a concern regarding the bailouts and stimulus.

here are some of the more pertinent points:

Due to the incredible level of credit contraction within the US, most of the money being put into the banking system by the government is not making it back into the economy. In general, banks are acting as they should by evaluating the overall lending risks in our economy and implementing tighter (more appropriate) lending standards. Under this regime few are willing to borrow and banks are also now unwilling to lend. Also under this ideology the printing presses could (in theory) run all day and nothing would happen because those who can afford to borrow money don’t want or need it, and those who do need it can’t qualify for it.

Agree. The money being printed is being used to negate toxic assets. Inflation is caused by excess money chasing too few goods, which isn’t the case with regards to the bailouts and stimulus. The money that’s being printed isn’t being circulated in the overall economy, which means no inflation.

2. Hyperinflationists, in general, only point to one side of the monetary argument when they discuss the “printing presses.” In almost all hyperinflationary arguments the discussion of the rate at which global wealth is being destroyed, relative to the amount of currency being printed is never fully reconciled…..This loss of wealth far outstrips the amount of money which has been printed in the US and points us further away from the idea of hyperinflation on a sheer creation replacement basis.

The fed has made it abundantly clear they will print an arbitrary amount of money to bailout the too big to fail, and make the stock market go up. By conjuring one trillion dollars the supposed financial crisis has been fixed. We can stop pretending there are problems with the economy. This recession was a deflationary one (wealth destruction), and fundamental macro economic theory dictates that in such circumstances quantitative easing is the appropriate fed policy to combating deflation.

The stress tests were a success and the bailouts are working as evidenced by the rallying stock market and falling LIBOR rates, as just a few examples.

You can inflate your way to prosperity to combat deflationary forces such as money hording and risk aversion, which explains why money market yields are at historic lows. It worked in 1982, 2003, and it’s working now. Bernanke is the enabler of prosperity though easy monetary policy. If inflation somehow becomes an issue the fed can gradually raise rates like in 2004-2007 or in the 90’s without hurting the overall economy.


May 15th, 2009 at 14:38 | #1

Ned, you have the wrong problem. Suppose you’re right, no inflation. Think debt.

The U.S. has a debt problem at 400% of GDP, not even counting the huge problem of social entitlements, and that’s before Obama has his way with the balance sheet with tax revenues way down.

Niels Jensen estimates global government debt will rise another $15,000B in the best case, and $33,000B more in the likely case … forget the worst case. This is just a LOT of debt. In deflation it gets even BIGGER.

The U.S. and the world NEEDS to reignite inflation to dissipate debt and
Ben Bernanke made it clear that he will get inflation to 3-5%, no matter what it takes. Eventually he will get what he wants.

The Fed has already printed $300B to buy Treasury bonds (and few seem to realize it was a total of $1,200B in credit market instruments), yet prices are steadily falling, driving up yields. They can’t have long yields rise!

John Maudlin makes the point that the Fed is just getting started, and you can expect another several hundred billion every quarter for years to come.