I'd think first there would be a huge crash as everybody rushes to get out, but once the very bottom stabilises from that level stocks would finally rise with inflation. Who sells first profits most. More real money to buy real things while they're still affordable. Later it's all the same what the figures are with the mickey mouse money...
under ordinary circumstances inflation lifts stocks the same as everything else. If you look at the markets net performance for the past twenty years or so you will see that once dividends are taken out that the markets rise can be accounted for almost entirely by inflation. There is a nearly trivial amount (about 3%) that can be attributed to real earnings growth. In the case of hyperinflation, which you should not count on happening in the US anytime soon, that usually goes hand in hand with the government losing ability to borrow at reasonable rates. That could happen in the US eventually, especially if there is a move away from the dollar as the reserve currency, but don't look for it in the near future. We will have double digit inflation but we won't have "hyperinflation".
No offense, but I am laughing at the question. What we are facing is more "Book of Revelations" than the book for Econ 101. Why? I will explain...We are not looking at the collapse of a currency of a"minor" country. What we are talking about is the collapse of the world reserve currency. I see people try to use Weimar or Zimbabwe as examples. I do not believe they have any relevance to the present discussion - precisely because they were minor players on the scene at the time of their hyperinflationary periods. They still use US dollars on the black markets of Zimbabwe - what would we use for the newly created black markets that would pop up from the hyperinflation of the USD? In 600 AD when the monetary system in Italy collapsed - Italy returned to barter - could we do the same? If Italy is any example for us - you had better load up on beef stock, chicken stock, vegetable stock, etc. and not worry about the stock market. Just my $0.02 ..... or soon to be $2,000,000.00 -gastropod
And no offense, but I'm laughing at the prospect of hyperinflation. This also isn't some "minor" weak goverment like Zimbabwe either. If high inflation become a problem, it would be relatively easy to slow it down. Just raise interest rates. Inflation in a very liquid economy like the American economy is much easier to control than some third world country like Zimbabwe. Yes, high interest rates would also destroy growth and would probably continue the crisis. What I can see being the long term plan here is to get deflationary concerns under control first. Deflation is FAR worse than inflation. Once that is under control, and if inflation starts to skyrocket, than the fed might be forced to increase rates significantly. Then once you've controlled inflation, you can start the easing process of interest rates. This isn't a one trick pony where you only apply one method. This is very much likely what will happen over the next few years. It's like losing control of your car and going into a tail spin. The first thing you want to do is to correct in one direction. If you over correct, you then ease back the other way. Eventually you stabilize your car. Contrary to the constant "book of Revelations" doomsday prophets here at ET, this isn't rocket science and there's no reason it can't work. Now yes...if the FED never reacted and just kept interest rates low as hyperinflation took over, yeah...we would be doomed. But also contrary to all the Bernanke haters here at ET, I actually think the guy knows what he is doing and wouldn't stand there like an idiot while it happened.
In the Weimar scenario, the stock indexes inflated but by the end of it the currency had far outrun the indexes. That was Germany, probably the USA with it's service economy will be more like Zimbabwe [maybe, I'm guessing here for sure] I actually inherited all the stuff for barter from a relative that was very, very, defensive in investments. Guns, bullets, coins, I have a safe chocked full of that stuff, and some small scale farming capability. It feels ok to be hedged like that really. It's like a life insurance policy, you hope you don't have to collect on it... I'm going to get some Martial Arts personal training going and upgrade my knife skills too. All this stuff has no downside really, other than opportunity cost in the money tied up in the stuff in the safe...
Where do I begin??? Why is deflation far worse than inflation -rhetorical question - it is only worse than inflation in that the morons at the Fed feel they can't control it - and that is bad??? The bubble needs to burst! The bubble cannot continue, because nobody can afford the new higher prices caused by the bubble. Housing at greater than 5X salaries is not manageable for the average worker - even 3X is a hard pill to swallow for a lot of people. The root cause of the "crisis" is the drop in house prices - sorry, it has to happen - in spite of the desires of the dumb asses at the Fed and Treasury. This isn't rocket science????? Hmmm, even the proponents of this ridiculous plan to inflate our way out of this problem admit that they are in "uncharted territory" - just do a web search for those exact terms from Bernanke, Geithner, Paluson, etc. I guess I need to understand your definition of rocket science, because when somebody tells me that they are in uncharted territory, I understand them to be saying that they don't know the outcome of their actions. "No reason it can't work" - like I said - even the proponents in charge of the Fed and Treasury don't know if it will work - they think it will work, but they don't KNOW it will work. Actually, I take that back and agree with you - this isn't rocket science - rocket science is MUCH more predictable - the US economy is far less predictable than rocket science. Bernanke is not an idiot??? Is this the same guy who was telling us everything was fine in late 2007??? The same guy who last week said that we had avoided another Great Depression??? Great, serious crisis averted - call our people back from the G20 meeting? Hmmm, I guess commercial real estate and credit card problems won't be a threat - no need for further bail outs there? Oh, wait tomorrow Geithner is puttting forth his crappy plan to screw the American taxpayer with the banks' crappy assets...crisis averted Did you not get the ET'er Doomsday handbook ;-) -gastropod
Let me guess...you own a ton of gold? I can always tell when somebody owns gold because they buy that doomsday stuff like kids in a candy store. If you can't understand why deflation is FAR worse than inflation, then you obviously don't understand the psychology of economies. Deflation means companies have to cut their prices to the point of making virtually zero profits in order for people to buy goods, which in turn means zero profit opportunities across the board for ALL goods...including those precious god like commodities. Need any proof? Tell me why commodities dropped 70% when Jim Rogers and all the commodity preachers told you they were recession proof? Apparently they forgot that while they may be recession proof, they aren't deflationary proof. Secondly, we have avoided another great depression. What made the great depression so severe was that 10% deflation they had for year after year. We've had relatively very little deflation. But again, the commodity markets had priced in a depression, hence the catastrophic drop in prices. Like I said...this isn't rocket science. Deflation is FAR worse than inflation. Inflation can be controlled. Deflation on the other hand is very hard to contain. Lastly, as for the US being a "service" economy. That's another great myth. All those propagating that myth probably don't realize that it was only last year that China surpassed the US in manufacturing. The US is still in second place by a long-shot in terms of manufacturing. So we aren't quite as service oriented as the gold bugs would like.
The closest the US has come to "hyperinflation" was in the late 70s, early 80s. Attached is a chart showing just how disasterous this was for equity markets. http://dshort.com/charts/dow.html?dow-since-1900-real-notes
but i do not think we will see inflation like we did in the past. With the promises the government has made to social security and medicare the real debt is close to 50 trillion(which is over 3x our GDP i believe). America will either default or turn on the printing presses. I assume the latter.