Hyperinflation Is Not Coming Soon...Here's Why

By: James Bibbings | Thu, Apr 23, 2009
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Over the past several months the idea that hyperinflation will hit the United States in the near future has become increasingly commonplace. From mainstream economists and money men to Joe barbeque's cook out, everyone around the world it seems is on board with idea that the US Dollar is headed towards hyperinflation; everyone that is except for me and a handful of others.

Why You're Being Told Hyperinflation Is Coming Soon

Generally speaking, (this certainly is not an exhaustive explanation) the arguments for hyperinflation point to almost exclusively to the idea that the US Treasury is currently running its printing presses non stop to keep up with Federal deficit spending. Through this printing activity, hyperinflationists contend that there is an ever increasing money supply which will create a glut of US Dollars at some point in the future (they do not generally agree to a specific date though most are suggesting late 2009 to mid 2010). To an extent this idea is accurate, the US government is indeed running the printing presses and they are in fact increasing our money supply at an alarming rate. Inflationists often illustrate and supported this through the use of the following charts taken from the Fed

Adjusted Monetary Base

M1 Currency

If you want to hear in detail what (arguably) the most famous of the hyperinflationists, Peter Schiff, was saying early in the crisis and is still saying take a listen here.

Now that you have been able to see the charts above and listen to the argument as presented by Peter Schiff, I'll briefly explain why I think the thought of US Dollar hyperinflation is currently misplaced.

Why You Shouldn't Be Concerned About Hyperinflation

There are three major reasons why hyperinflation will not be playing at a theater near you anytime soon.

1. There has never been a period in US history when home prices have been falling and we have had real inflation. Currently, prices on everything, everywhere (almost) are falling. Even more importantly in the US home prices are still plummeting, so unless there was some sort of abrupt and magic end to this global and domestic price free fall, statistically by all historical accounts, inflation is all but impossible at the current time or in the near future. If hyperinflation can't be happening right now what is occurring? Deflation - A sustained in the general price level of goods and services; read up on it because the word will be in the news more and more frequently in the coming months.

2. Hyperinflationists, in general, only point to one side of the monetary argument when they discuss the "printing presses." In almost all hyperinflationary arguments the discussion of the rate at which global wealth is being destroyed, relative to the amount of currency being printed is never fully reconciled. This is problematic to the hyperinflationists argument because they only take into consideration one component of monetary policy; creation of money not destruction. Institutions, small businesses, and average Joe's the world over have witnessed wealth destruction in the form of massive real and/or paper losses in almost all asset classes. This loss of wealth far outstrips the amount of money which has been printed in the US and points us further away from the idea of hyperinflation on a sheer creation replacement basis.

To illustrate wealth destruction I wish that there was a simple graph which I could use to represent the "print to destruction ratio" I am trying to explain. Unfortunately, given the difficulty of determining how much wealth has been destroyed (there is no government stat for this) the best we can do here is use this projection from the Wall Street Journal and the IMF. They say:

"The report [from the IMF] indicated a significant deepening and spreading of the crisis beyond the mortgage-related assets in the U.S. responsible for sparking the turmoil. The IMF now projects that worldwide financial losses could top $4 trillion through next year, with the estimated damage from U.S. assets alone increased to $2.7 trillion from a previous forecast of $2.2 trillion in January."

Recall form above (see adjusted monetary base graph), the money supply recently rose in the US from approximately $800 Billion to around $1.8 Trillion (Read: $1 trillion hot off the "printing press" which is indeed staggering). Now, according to the IMF, it is estimated that we have lost $2.7 trillion in the US alone; a difference of approximately $1.7 trillion dollars. Keep in mind that this does not include the amount of US Dollar denominated losses abroad.

3. When evaluating the risks of, and arguments for, hyperinflation (again this is not readily discussed) one must also consider the staggering reduction of consumer credit in the US and global economy. Over the past several months we have frequently heard our government officials refer to our banks as "not lending" and that being "the" problem. In fact just today Tim Geithner announced this (again) in response to questions asked of him (rightly) by congress about why the various rescue plans implemented do not appear to be working.

Now that you have looked at the wealth destruction component in point 2 above you can understand why, for these officials anyway, bank lending is a problem. To spell it out, credit is needed to reinflate the loss of US wealth now that we have a staggering aggregate reduction in real global capital. As I have said countless times in the past: If the problem was too much lending, then by definition, the solution could not possible be the same as the problem; more lending. So how does this relate to hyperinflation?

Due to the incredible level of credit contraction within the US, most of the money being put into the banking system by the government is not making it back into the economy. In general, banks are acting as they should by evaluating the overall lending risks in our economy and implementing tighter (more appropriate) lending standards. Under this regime few are willing to borrow and banks are also now unwilling to lend. Also under this ideology the printing presses could (in theory) run all day and nothing would happen because those who can afford to borrow money don't want or need it, and those who do need it can't qualify for it. If you are interested in this phenomenon, check out this video on the money multiplier effects of the fractional reserve system.

After watching it and understanding the "They Won't Lend" model you'll see why many are now suggesting the fractional reserve/Federal Reserve model should be abolished; however that argument is another issue all together.

With regard to "They Won't Lend" this time around a graph is available to show that the money going into banks is not leaving. Notice here, how in the past banks ran with their capital requirements at the bare minimum. In addition, also note that banks have added on about $800 Billion in excess reserve capital over the past year or so. Does that number or this chart look familiar to anything you saw above?

Excess Reserves

Regardless of what you believe inflation, deflation, hyperinflation, total collapse...you should know what strategies to use when investing your hard earned money.

If you agree with me and feel that hyperinflation is not likely in the near future and want to invest in a deflationary period you should: avoid debt and additional risk, consider renting or leasing where possible, and try to increase your cash on hand.

If you agree with the hyperinflation idea you should: spend as much money as quickly as you possibly can, go long on real estate and real property investments, get out of treasuries and low risk fixed income return investments, get into foreign currencies, go long commodities, and check out the Bullion Vault to use Gold as Money.

In closing, based on the proven hyperinflationary and deflationary investment strategies I spelled out above which would you rather do right now? The way you answered that question should be the most compelling argument of all.

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James Bibbings

Author: James Bibbings

James Bibbings

James Bibbings

James Bibbings is an associate editor at Commodity News Center ("CNC"), a website which focuses on providing the latest commodity news and analysis. In addition to this Bibbings is also the president of Hugo James Consulting; a firm which specializes in offering compliance solutions to the brokerage industry. Mr. Bibbings writes daily as the "Economic Bibb" for Commodity News Center and through his writings strives to provide a unique outlook on the economy, the financial markets, and the global political landscape. It is his intention to add variety and insightful information to what he feels is an "over informed, yet "under educated" populace.

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