Hyperinflation? Not exactly.

[JoBBo]

http://www.guardian.co.uk/business/2009/apr/15/us-economy-deflation-recession

The US economy has begun to deflate for the first time in more than half a century as a slump in demand pushes energy and food costs lower.

(...)

"With the unemployment rate and the output gap both headed for 10% and the financial system still crippled, the risk of a pernicious debt-deflation emerging [where the collateral on loans decreases damagingly in value] is still much bigger than the risk that the Fed's quantitative easing actions will lead to runaway inflation," said Paul Ashworth, senior US economist at Capital Economics.

 

[Wayne]

First, welcome back. It's pretty cool to have someone looking at the good side instead of the gloom and doom around here again.

Secondly, interesting article, but it'll be more interesting if the trend keeps it up for a while.

Wayne

 

[FluffyMcDeath]

"The notion that inflation will pick up in the near-term is completely out of the picture," said Peter Kenny at Knight Equity Markets in New Jersey.

That pretty much means that we'll be seeing serious inflation soon.

The Fed has to be careful about injecting money to stave off deflation. Wiemar Germany also had a brief period of deflation before the wheels came off completely. Problem is, you can keep printing money but people won't spend it - they're scared to. So prices fall, and the people won't spend coz they're waiting for the bottom. Why buy today if it'll be cheaper tomorrow.

Then, when the money does finally come out of hiding the prices will start going up and then people will be trying to buy before the price goes up more and the faster they spend the new money the bigger the money multiplier and then there is no way to get all the excess money out of the economy fast enough to prevent serious inflation. The people on the levers will have to watch this very closely... but judging by their record, paying attention isn't their forte.

"With the unemployment rate and the output gap both headed for 10% ...

If the unemployment rate was still counted the same way as it was counted under Reagan the rate would be over 15% already.

 

[redrumloa]

As much as I'd love to believe that article, I just can't. Commodity prices, aka headline inflation, has been coming down simply because prices were a textbook bubble. The bubble has deflated over the short term. Starting with Bush, the money "printing press" has been running overtime. Obama has taken this reckless practice to levels multiple times higher. You cannot dilute a currency at a feverish pace and not have hyper inflation. It would be a miracle if we don't see hyper inflation in Obama's first term.

I hope I am wrong, but I have not been wrong since my eyes opened in mid 2006.

 

[FluffyMcDeath]

Hmm .. graph url syntax isn't liked by BBCode ... messed up this post and did it a different way below....

 

[FluffyMcDeath]

It's graph time again.

Here is the M1 money supply (the most spendable level of money)

So they're chucking the stuff out there... that should fight deflation. Oh, but...

The multiplier remains stubbornly sub unity which means for every buck printed less than a buck of activity occurs. There is hoarding / saving in the system.
People aren't spending like they used to.

and profits are down

Also (happily) borrowing by banks from the Federal Reserve are down a little

but still dwarfing borrowing for any time in the last 90 years.

 

[metalman]

It's pretty cool to have someone looking at the good side instead of the gloom and doom around here again.

Wayne

So, a pernicious debt-deflation spiral is better news than runaway hyper-inflation?

Death by disease, or by starvation, choose.

 

[JoBBo]

"The notion that inflation will pick up in the near-term is completely out of the picture," said Peter Kenny at Knight Equity Markets in New Jersey.

That pretty much means that we'll be seeing serious inflation soon.

Well, I do not disagree that there is a high probability for an increased rate of inflation in the next few years. However, it is probably not going to happen as soon as some expected. Whether that is good or bad news is up for debate.

The Fed has to be careful about injecting money to stave off deflation. Wiemar Germany also had a brief period of deflation before the wheels came off completely. Problem is, you can keep printing money but people won't spend it - they're scared to. So prices fall, and the people won't spend coz they're waiting for the bottom. Why buy today if it'll be cheaper tomorrow.

I agree that the Fed has to be careful. Certainly much more so than they have been in the past decade. As for the comparison with the Weimar Republic, I think that Germany is actually a good example to put the current developments in the US into perspective. The strong inflation of the German currency started in 1914 and then ended in late 1923. Between 1914 and 1918, which has to be considered the 'slow beginning' of the German currency crisis, the broad money, which is roughly what you would call M1 today, grew five-fold. In the US, on the other hand, M1 grew by 15% to 20% during the past 5 years.

(Not a very scientific or comprehensive comparison, but I think it provides it at least some perspective.)

[quote:2oj1r9ol]"With the unemployment rate and the output gap both headed for 10% ...

If the unemployment rate was still counted the same way as it was counted under Reagan the rate would be over 15% already.[/quote:2oj1r9ol]

That is correct. I would like to point out that the unemployment rate is also affected by the amount of incarcerated people in a given country. As is common knowledge, there are far more incarcerated people in the USA than there are in any other country in the world. For this reason, some economists argue that the unemployment rates of, say, many European countries are not actually higher than in the US.

 

[JoBBo]

First, welcome back. It's pretty cool to have someone looking at the good side instead of the gloom and doom around here again.

Secondly, interesting article, but it'll be more interesting if the trend keeps it up for a while.

I have really appreciated redrumloa's postings about the economic crisis for the last few years. To me, whyzzat.org was a useful resource for economic news that the mainstream media (and many others) was ignoring for too long.

That being said, I think some of the more recent comments on this forum seem a bit over the top. Hyperinflation is often defined as a minimum inflation of 50% per month. I think you would have a very difficult time to find any respectable economist out there who agrees that the inflation rate will get anywhere close to that in the next few years.

 

[redrumloa]

I have really appreciated redrumloa's postings about the economic crisis for the last few years. To me, whyzzat.org was a useful resource for economic news that the mainstream media (and many others) was ignoring for too long.

Thanks a lot JoBBo! I agree the media was completely ignoring the looming crisis and many every day people just didn't want to hear it.

That being said, I think some of the more recent comments on this forum seem a bit over the top. Hyperinflation is often defined as a minimum inflation of 50% per month. I think you would have a very difficult time to find any respectable economist out there who agrees that the inflation rate will get anywhere close to that in the next few years.

Well, according to Wikipedia:
http://en.wikipedia.org/wiki/Hyperinflation
Definitions used by the media vary from a cumulative inflation rate over three years approaching 100% to "inflation exceeding 50% a month.

I was thinking more along the lines of the lower end, cumulative inflation rate over three years approaching 100%. IMO we saw close to exactly that from 2004-2007, except the way only core inflation is reported and not headline inflation it was not seen as such. Even I don't think we will see 50% a month, but ~33% a year? Easy.

All that said, I certainly don't think my word is final or word of God ;-) I am no economic or financial genius, by any stretch of the imagination. I am feeling my way through this mess and I put my thoughts out there in what I see. I appreciate counterbalance of people like you with an opposing view (at least on some subjects).

 

[redrumloa]

Reading through Wikipedia a little bit...

In the monetary model, hyperinflation is a positive feedback cycle of rapid monetary expansion. It has the same cause as all other inflation: money-issuing bodies, central or otherwise, produce currency to pay spiralling costs, often from lax fiscal policy, or the mounting costs of warfare. When businesspeople perceive that the issuer is committed to a policy of rapid currency expansion, they mark up prices to cover the expected decay in the currency's value. The issuer must then accelerate its expansion to cover these prices, which pushes the currency value down even faster than before. According to this model the issuer cannot "win" and the only solution is to abruptly stop expanding the currency. Unfortunately, the end of expansion can cause a severe financial shock to those using the currency as expectations are suddenly adjusted. This policy, combined with reductions of pensions, wages, and government outlays, formed part of the Washington consensus of the 1990s.

 

[FluffyMcDeath]

I think you would have a very difficult time to find any respectable economist out there who agrees that the inflation rate will get anywhere close to that in the next few years.

Ha ha ha ... you said "respectable" and "economist" in the same sentence .. ha ha ha.. oh ... AND "agrees" ... HA HA HA HA HA :roflmao:







OK. I'm better now.

 

[FluffyMcDeath]

I was thinking more along the lines of the lower end, cumulative inflation rate over three years approaching 100%. IMO we saw close to exactly that from 2004-2007, except the way only core inflation is reported and not headline inflation it was not seen as such. Even I don't think we will see 50% a month, but ~33% a year? Easy.

100% over 3 years is close to 26% per annum.

50% a month would give about 13,000% a year.

Mind you, it's a slippery slope kind of thing. Many of the worlds currencies, if they were losing half their value in three years would be on their way to finding 50% a month territory because - who wants to hold currency that is losing at 26% per year - it just feeds on itself as people leave. The USD, on the other hand, too many people are heavily invested in keeping the value up because there really isn't anywhere to go that would soak up all the outstanding "wealth" so an en masse conversion isn't terribly likely - at least not until it's totally unavoidable or in someone's interest to spark a stampede. Cardinal rule of finance - never shout fire in a crowded theatre unless you are already at the exit.

 

[redrumloa]

Mind you, it's a slippery slope kind of thing. Many of the worlds currencies, if they were losing half their value in three years would be on their way to finding 50% a month territory because - who wants to hold currency that is losing at 26% per year - it just feeds on itself as people leave. The USD, on the other hand, too many people are heavily invested in keeping the value up because there really isn't anywhere to go that would soak up all the outstanding "wealth" so an en masse conversion isn't terribly likely - at least not until it's totally unavoidable or in someone's interest to spark a stampede. Cardinal rule of finance - never shout fire in a crowded theatre unless you are already at the exit.

The interwebs never forgets. There are no longer too many people invested in keeping the value up. The idea is to collapse the USD while flooding illegals in the country.