Quote from detective: US economy is more likely to go the Weimar Republic post WWI Germany route than the Great Depression. We have an easy Fed, rigged inflation data, and every incentive to devalue the dollar from an American perspective, there is no way you will see deflation despite huge debts that won't be repaid. This is opinion. There has been a lot more overall deflation in the world's past than hyperinflation. And most hyperinflation events were small countries or those with small ecomies. Germany after WW1 was an economically enfeebled country And if the US goes under, what do you think will happen to the rest of the world? China, India, Philippines, etc.? Commodity prices will contract rapidly and deeply, because demand will plunge. This is called DEflation. This is what the Depression was about. Petroleum is vastly overpriced. It wasn't too long ago that oil hit $13 a barrel. Most of what is keeping it up now is smoke and mirrors - expectations and war premium. In the not too distant future, when wave energy, oil shale, methyl hydrates from the sea bottom, improvements to wind/solar energy, and other things come on the scene, there will be no such thing as peak oil. Technology leaps are coming faster than anyone can imagine. The Saudis will be trying to pawn off $15 a barrel oil. Consider the following on Japan during there 1990s deflation. This sounds a lot more like what will happen to the US: Deflation in Japan (wikipedia): Deflation started in the early 1990s. The Bank of Japan and the government have tried to eliminate it by reducing interest rates (part of their 'quantitative easing' policy), but despite having them near zero for a long period of time, they have not succeeded. In July 2006, the zero-rate policy was ended. Systemic reasons for deflation in Japan can be said to include: * Fallen asset prices. There was a rather large price bubble in both equities and real estate in Japan in the 1980s (peaking in late 1989). When assets decrease in value, the money supply shrinks, which is deflationary. * Insolvent companies: Banks lent to companies and individuals that invested in real estate. When real estate values dropped, these loans could not be paid. The banks could try to collect on the collateral (land), but this wouldn't pay off the loan. Banks have delayed that decision, hoping asset prices would improve. These delays were allowed by national banking regulators. Some banks make even more loans to these companies that are used to service the debt they already have. This continuing process is known as maintaining an "unrealized loss", and until the assets are completely revalued and/or sold off (and the loss realized), it will continue to be a deflationary force in the economy. Improving bankruptcy law, land transfer law, and tax law have been suggested (by The Economist) as methods to speed this process and thus end the deflation. * Insolvent banks: Banks with a larger percentage of their loans which are "non-performing", that is to say, they are not receiving payments on them, but have not yet written them off, cannot lend more money; they must increase their cash reserves to cover the bad loans. * Fear of insolvent banks: Japanese people are afraid that banks will collapse so they prefer to buy gold or (United States or Japanese) Treasury bonds instead of saving their money in a bank account. This likewise means the money is not available for lending and therefore economic growth. This means that the savings rate depresses consumption, but does not appear in the economy in an efficient form to spur new investment. People also save by owning real estate, further slowing growth, since it inflates land prices. * Imported deflation: Japan imports Chinese and other countries' inexpensive consumable goods, raw materials (due to lower wages and fast growth in those countries). Thus, prices of imported products are decreasing. Domestic producers must match these prices in order to remain competitive. This decreases prices for many things in the economy, and thus is deflationary.
So how will the Fed accomplish hyperinflation? And don't tell me 'print more money' or 'lower to zero'. What are the details?
What do you think the Fed is doing with TAF? Replacing junk CDOs and mortgage backed securities with cash. How about the dollars raining out of the Treasury with the economic stimulus package? How about lowering interest rates to levels way below the rate of inflation. The Iraq war. Where do you think that money comes from? Out of trees?
TAF - it doesn't matter how many times the toxic waste gets rolled over, it's still toxic. And the banks have to pay interest each time. Stimulus - most everyone agrees it's too little/too late. Besides, the taxes will have to be made up in the future somehow. Interest rates - they can keep lowering, if no one is making or taking loans how will this help? Iraq - good question. Where IS this money coming from? BTW, if current estimates for Social Security and Medicare future liabilities are in the neighborhood of $45-50 trillion, how will hyperinflation affect those numbers?
Most commodities are already quite expensive, an indication that people are not blind stupid to irresponsible government policies. I'd say you are super smart if you bought tons of commodities back in 2000 when everyone went jumped into U.S. securities. But I would feel quite uncomfortable to build commodities positions at today's high (U.S. dollar terms) prices. Sigh, i have the fact most of my assets are in USD. I was such an idiot...
The government has this little toy they call the CPI, it spits out numbers that they want to have spit out! And guess what? Thats was Social security is based on for liabilities. So while the real inflation rate is higher than the CPI, the government can get away with giving less while printing more. There is a ton of liquidity out there and it is going towards the commodities. The commodities look expensive because everyone is still anchoring the "fair" price to the 90s when inflation was not out of control. From then to now, the supply of money has gone up astronomically. The fair price now is a lot higher now, and people are having a hard time adjusting to the new reality. The market is not wrong. People's backward based thinking is wrong.
Does anyone have figures for how much the money supply has grown recently. I'm aware that it grew dramatically during the later Greenspan years with the consequent real estate bubble, but my impression is that it has not grown as much as thought since Bernanke took over because i think the Fed took advantage of recent market weakness to sell bonds. But i'm not really sure about this. I need an expert to weigh in. Those in debt benefit from inflation if they have low, and fixed interest. People with these kinds of loans should not accelerate payments on principle, but rather string the loan out as long as possible. Some may even get to net negative cost of borrowing. The US government benefits tremendously from inflation so long as their creditors don't demand much higher interest in compensation. The government also benefits tremendously by computing an artificially low inflation rate because of entitlements indexed to inflation. The lower number saves many billions. The unfunded liability problem in Social Security is almost trivial to fix if the fix is not delayed too long. The medicare cost problem is another kettle of fish however. The only solution, regardless of what medical care delivery modus operandi is eventually adopted, is to bring down costs. Moving the costs around or sharing them differently will not solve the problem. I am not as pessimistic as some. We will fix these problems, and we won't become another Argentina, but we could if we don't do something and soon. When you look for places to cut you naturally look at the parts of the budget where expenditures are greatest and within that category at the highest cost-to-benefit ratio items first. I think this will force us to focus squarely on military expenditure. In fact, the argument could be made that our expenditures in this area have not only returned little of value but actually been harmful.
I posted a link to M3 earlier. Bernanke has been even WORSE than GreenScam about printing money... but that shouldn't come as a surprise... after all, he promised he would.