AgTalk Home
AgTalk Home
Search Forums | Classifieds (52) | Skins | Language
You are logged in as a guest. ( logon | register )

What happens if inflation takes off?
View previous thread :: View next thread
   Forums List -> Market TalkMessage format
 
John Burns
Posted 11/11/2012 23:37 (#2692219 - in reply to #2691937)
Subject: three possibilities



Pittsburg, Kansas

Hyperinflation does, yes. The currency becomes like a hot potato, where every one tries to get rid of it and buy something that will hold value. So velocity attempts to go to infinity.

Some would argue that this is not possible in an environment of deflation. It is actually quite common for hyperinflation to start from a deflationary environment. Was in France. Was in Wiemar Republic. They tried to correct the weakening economy by printing money to pay for government needs and stimulating the economy. Sound familiar? In both cases the "stimulus" effect was short lived and required "more" at regular intervals till it became continuous. Key elements are a government that continues deficit spending and high levels of government debt. When outside creditors will no longer support the debt by continuing to refinance it the country turns to creating new money to finance itself (monetization).

Unless this cycle stops, there is only one ending possible. Hopefully the cycle stops.

Three possibilities. 1. We somehow experience Superman type growth in the economy and there is enough tax revenues to cover all the entitlements and current government spending so we have a balanced budget and we all live happily ever after. 2. Our representatives grow some balls and figure out how to balance the budget or at least get it to a low enough deficit that is sustainable with whatever growth there is available in the economy (most likely leading to a deflationary recession/depression 3. We continue to spend what we don't have and create new money to pay for it which will ultimately end in loss of confidence in the currency. When half of our government debt is held externally (unlike Japan that is pretty much financed internally) by foreigners and there are many trillions of dollars that reside outside the US, confidence lost can happen on any number of different fronts that starts the cascade of events that leads to the self reinforcing feedback loop. Once started that feedback loop is extremely hard if not impossible to stop. (this leads to a hyperinflationary depression)

Few people realize that hyperinflation and debt deflation are just two sides of the same coin. They both lead to repudiation of unsustainable debt burdens. Debt deflation does it outright through defaults on the debt burdens. Hyperinflation does it by destroying the currency and making the debts easily repayable. One changes the numerator, the other changes the denominator. The outcome is the same. They both end up in a financial depression. There is just a different set of winners and losers. Hyperinflation is by far the worse of the two.

Bernanke is playing with matches in a room filled with open gasoline cans. Congress needs to live within their means. Congress causes the problem and the Fed is complicit in enabling the deficit spending by creating the new money to cover congress bad checks.

John



Edited by John Burns 11/12/2012 00:07
Top of the page Bottom of the page


Jump to forum :
Search this forum
Printer friendly version
E-mail a link to this thread

(Delete cookies)