Vox Rationalis

What Effect Will Hyperinflation Have?

The sky is falling! The sky is falling! I didn't even get past the first paragraph. Let's just assume all of your numbers are correct, though I'm skeptical.

"With the Federal government just having added $5.2 trillion in Fannie/Freddie liabilities of which about $600 billion will likely default..."

Leaving $4.6 trillion in performing assets for which the government will be paid guaranty premiums of how much? At 28 basis points, it's $13B/year. Of course, the other $600B will add $1.5B per year until they default. Let's assume they default -- oh I don't know -- now. Of that $600 billion, the government then holds underlying assets worth what - $300 billion? $400 billion?

Taking my neighborhood as exemplary, the government's immediate losses are then $200B. Think of that as the cost of the investment. Think of the $13B per year from the guaranty fees on the performing assets as the return on the investment - 6.5%. Not too bad of a risk-adjusted tax-free return. Certainly not as bad as you seem to want to think.

"...the Federal Reserve having now polluted its balance sheet by some $700 billion worth of toxic mortgage bonds with a 41.6% default rate ($291 billion in likely defaults)..."

Again, assuming your numbers are correct, this causes a loss of less than $100B IF the borrowing entities default. They won't. See the Treasury plan below.

"...an $85 billion bailout for AIG..."

The best investment I've seen anybody make in a long time. The government gets paid LIBOR+8.5% for two years on the unpaid balance, providing a huge incentive for the company to liquidate assets, plus warrants to own a vast majority of the company. The terms of this are incredibly onerous, but the company had absolutely no choice - it was either this or outright bankruptcy. Do you actually think the government will LOSE money on this one?

"...and, now, the Administration asking for some $700 billion more to bail out financial firms..."

Do you realize you're double-counting here? The bad collateral you say the Fed now holds is part of this. But let's not worry about facts. This is the part where the government is most likely to lose money; that's why there is still so much up in the air, and why the political debates are ongoing.

So counting it up you appear to have one valid cost to the government. Which leads you to...

"...it seems clear that the winds of hyperinflation are upon us."

I tell you what - I'll lend you $100,000 at 25% interest. You can should jump at the offer, right? You can take those dollars, put them in gold, or euros, or whatever, and in a year or two, after your supposed hyperinflation takes over, you can convert a fraction back to dollars to repay me with.

Hyperinflation. Stop being ridiculous.