ARE THE FEDS PLANNING HYPERINFLATION?
Earlier this week, TTPer "deighv" asked:
"I have always wondered something regarding the dire economic predictions for our country. When the dollar does crash and/or the economy totally collapses, the ‘powers that be’ will continue to want to make exorbitant amounts of money, using methods such as taxes, profits, extortion, etc.
"How will they achieve this money making during and after such a crash? I am positive that they will not allow this crash without having a plan to make money. Any thoughts?"
That is a very good question! I do not think that Bernanke or anyone else at the Fed wants hyperinflation. I think that what they want is a nicely controlled inflation to gradually reduce the value of the US debts. Inflation is a monetary phenomenon; increase the money supply gradually and prices rise gradually, essentially in sync with the increased money supply.
Hyperinflation is a psychological phenomenon that bootstraps off of money supply inflation.
Hyperinflation occurs when large numbers of people expect that prices will increase very rapidly (eventually much more rapidly than would be justified by the actual money supply increase) so their expectations of runaway price increases are self fulfilling.
This results in an actual drop in the price adjusted money supply – real deflation – which causes the monetary authorities to create more fiat money. The Reichsbank officials of the Weimar Republic’s hyperinflation continued to say that there wasn’t enough money in circulation – and they were right.
Of course, creating further fiat money just fed the expectations for runaway inflation, so that is what they got.
Read what Fed officials Bernanke and Yellen say over and over again, "Consumer expectations of inflation have not become unanchored." This means that price inflation expectations haven’t run away from the actual inflation of the fiat money supply — yet.
The problem is that once these expectations run away, prices run up even faster than the fiat money supply, resulting in effective deflation – there isn’t enough money in circulation to maintain normal sales levels of goods and labor at the new unrealistically inflated prices.
If the central bank increases the money supply faster (which they did in Weimar Germany), expectations of price inflation accelerate even faster, and effective (price corrected) deflation becomes more severe. If the central bank tries to stop the expectations of runaway inflation, they can do it in only one way — stop or greatly slow the creation of additional fiat money — which causes even more severe effective (price corrected) deflation.
The Fed is counting on keeping the hyperinflationary expectations genie in its bottle. History shows that this sometimes succeeds — and sometimes doesn’t. They are carefully keeping track of consumer expectations, and expect that their end of QE2 (expected this coming June) will bring the ongoing inflation to a halt. But…
But what about a black swan event causing a major rapid run up in prices that are very visible and important to consumers? What if spring flooding or drought wipes out much of the crops planted in the Midwest and food prices make a big jump? What if a major event in the Middle East causes gasoline to jump to $8 per gallon and diesel to $10?
Events entirely outside the Fed’s control could set off a hyperinflationary expectations explosion. Or not. Hyperinflation isn’t certain to occur, but it is definitely a real risk.
What the Federalies may be planning is a "restructuring" of US debt, if that becomes necessary. "Restructuring" is a euphemism for partial default where the partial default is accomplished by sticking creditors with something that is better than nothing – partial repayment or repayment at lower-than-market interest rates over a longer period of time.
2 year Treasuries might become 10 year Treasuries – with 2% interest rates. This would be far less destructive of both the US and world economy than hyperinflation of the US dollar, the world’s primary reserve and international trade currency.
Of course, most of the politicians, and essentially all of the ‘Crats, think that they can continue to kick the can down the road indefinitely. This will definitely not work for much longer. As economist Herb Stein said, "When something can’t go on, it stops."
Ron Paul’s proposed bill to eliminate the legal and tax impediments to the use of gold and silver as money would help provide hard money resources to help soften the landing.
Even better would be a Constitutional Amendment that would allow the States (or better yet, anyone) to mint gold and silver money. The Republicans could really separate the sheep from the goats by proposing such an Amendment.
The ‘Crats would have a hard time demonizing it. What’s the harm? That could make a huge difference, both with respect to enabling a soft economic landing – and strongly discouraging the further inflation that may lead to the need for a hard one.
Note: I strongly encourage TTPers to read the latest ShadowStats Hyperinflation Special Report. The possibility of the US dollar ending up like the Zim (Zimbabwe) dollar is real. As Kjartan Arnorsson of Iceland explains:
"Since the dollar is a fiat currency, it has no tangible backing whatsoever. It is essentially a religious icon – if we stop believing in it, it becomes toilet paper with faces and numbers printed on it. So the trillions that Washington basically made up out of thin air, heavily dilutes the existing money pool. What this means is inflation, massive inflation. It’s inevitable – that’s just how money works."
Skye will be a featured speaker at Rendezvous X in Vegas.