Hyperinflation and Stimulus Plan

Yes, it is. Every monetary model says so. The Fed has enough credibility for now that inflation has been kept down, but it is almost inevitable in the long run. Every macroeconomist I know has moved their assets out of dollars.

long GLD...

There is a competing deflationary pressure at the moment, what with people being freaked out and all. But massive inflation will win out eventually.

Yes, but massive inflation is also inevitable, due to the fact that the US has an outstanding public debt of almost $11 trillion

Agreed, but can't the Fed just sell all the treasuries it has bought in 2010 to suck that liquidity out of the system and decrease the money supply? I think a better bet than long gold is to short the long end of the yield curve. Any thoughts?

I've heard a lot about inflation recently, but few mention the effects of the GLOBAL increase in money. Everybody is printing money right now. Reuters had a graphic up in their economy section last week showing the various numbers, but I can't seem to find it.

I have really no clue of how to think about this...if anything, wouldn't everything be more expensive in ALL of the countries that printed some money? SO, we lose a little because we printed more money than everybody else, but it won't be as bad as if we were the only ones doing it. And third world countries that didn't make any changes stand to gain a little, which is okay in my book.

My economic reasoning may be completely off, so feel free to chime in with your opinions.

You've got a point there oversold, but in the short-run I think American consumers won't feel the benefit of that. Worldwide, wages will probably fall in real terms until the global economy picks up again. There will probably be significant lag between rising prices and increased production, and even more so with increasing wages.

Oversold, it doesn't matter if the price level goes up worldwide, inflation will still be a fact and there are commodities, such as gold, which will appreciate as a result.

As for the Fed selling all its treasuries, it has also done a fair bit of seigniorage, and looks to continue doing so

Right, but what I think oversold is trying to say is that it would benefit too much to shift into foreign assets just because you think there will be inflation in the US if there is just as much inflation everywhere. World's ending in 2012 when the earth is hurled into the sun anyway, so I dont think there's any point in wasting time debating long term hyperinflation.

drexelalum, the Fed has no credibility. Just about everything Helicopter Ben has said and done since he's been in office has been dead wrong. INterest rates are still low because the Fed has been buying tons of U.S. debt, pushing the prices up and yields down (they've been printing money to do this). They will print trillions of dollars more next year, for sure, and if our moronic leaders have their way they'll just keep doing this.

When they eventually stop printing money and printing money to buy federal debt, and when banks start lending out more (the current deflationary pressure is in the money multiplier due to our oh-so-stable fractional reserve banking system since banks aren't lending out as much as they could be), we will be left with trillions of new dollars in our system, causing massive inflation.

Not only that, but this is basically a perfect storm. China and Japan and everyone else who holds our debt is going to realize (has realized?) that we can't pay it back. They might not flee our bonds (which would cause interest rates to further skyrocket), but they will eventually just take their dollars back (probably freshly minted dollars) rather than "reloaning" our government the money. Not having any need for dollars (this is another part of the perfect inflationary storm - dollars will lose their status as the world's reserve currency), they'll send them back here for our exports, causing even more inflation.

I believe this all has to happen within the next few years...even if it doesn't, our $50T+ long-term entitlement obligations almost insure the destruction of the dollar...the only way to avoid a hyperinflationary (or at least hugely inflationary) scenario is national bankrupcy and return of sanity in Washington... And this probably won't happen until after the dollar has been destroyed or significantly debased.

Buy gold, silver, anything but worthless paper money...

Agree with cdw, hyperinflation --> devalue the dollar --> repay obligations (or might as well default). Then revalue the dollar upward and everybody who cashed in got screwed (except for the USA). Perfect solution keeping this economy intact.

Commodities...anything really backed by a physical item that can be quantified via demand/supply. Most important...limited supply.

no inflation, we should be so lucky. we are facing the severe threat of deflation, especially since consumers are likely to retrench again, sparking another cycle of the adverse feedback loop.

the fed is paying interest on reserves during a cycle of quantitative easing. (read "the optimum quantity of money" by friedman.)thus, real desired balances are increasing, causing a collapse in the money multiplier as economic actors hoard cash.

inflation is caused by a disequilibrium between real balances and desired balances. because the fed is paying interest on reserves, as real balances increase, so do desired balances. thus, there is equilibrium-aka, no increase in real spending-->no increase in demand-->no increase in prices.

read up on the liquidity trap. the fed cannot 'ease' any more to get us out of this cycle. they are limited to 'open mouth' operations. they have made it clear that they will stay in quasi-zirp mode for some time to come.

short gld.

MJP, deflation is a real concern and what has saved us so far from the inflation we are all concerned about. The Fed does still have some credibility, but we are literally standing on a knife's edge between debilitating deflation and crippling hyperinflation. Either way, the outlook is not good

Actually, deflation is no longer a concern-it is a base outcome given current data. And current data does not take into account the next round of consumer retrenchment I believe we are facing. I also believe we are heading into a severe credit spiral.

Please explain how hyperinflation is possible when real balances and desired balances are in equilibrium.

I dont like models or equations

gold is a pure fear trade. demand for physical gold has evaporated almost entirely. it's all etf buying.

I think MJP's point about real and desired balances highlights the difference with our current situation and that of say Weimar. Whereas Weimar just printed money to pay off creditors with no increased desired balance, our system needs to cash. Just look at TARP funds, that money has basically been sucked into a black hole.

Once things settle though, I suspect desired balances will fall unless we somehow achieve economic activity on par with that of 2007 before even really stabilizing the system.

I understand the commodity and treasury plays, but I was wondering about a currency play.

What is the best tradable currency that you could sell against the US dollar that seems to have inflation and their general economy in check?

it really is just scare mongering

jpy and chf?

Im sure there are less commonly traded ones that people more versed in the fx field could point out.

The majority of the world's wealth lies in real estate. That's a huge contraction right there.

I'd recommend this piece first for Bernanke's views:

“Inside the Black Box, the Credit Channel of Monetary Policy" (Bernanke and Gertler, Journal of Economic Perspectives, vol 9, 1995)

Another good one is his speech at the Fed conference on "The Credit Channel of Monetary Policy in the Twenty-first Century Conference" (2007)

Both should be online

In terms of us falling in to a deflationary liquidity trap, I definitely see the risk. That is in large part what has driven the return on treasuries to nil, as they deliver the bonus of a coupon payment with the security against deflation that cash offers. It is very much a two-edged sword, but I believe the Fed is 1) more scared of a deflation trap than inflation and 2) believes reflation is a better option, as they gain the added benefit of seigniorage revenues. At this point, there also appears to be demand for credit, just not supply. If deflationary concerns were severe, demand for nominally denoted debt should have lowered substantially more.

The private sector is not finished deleveraging. Historically consumption has accounted for roughly 60% of GDP and in the past 10 years it has been closer to 70%. Additionally, private sector debt has been roughly 2x GDP, it currently stands at ~3x. This along with an anemic velocity of money is going to make deflation far more worrisome than inflation in the Feds mind.

Couple that with the fact that deflation is historically very difficult, if not impossible to combat with monetary policy (i.e. Japan) and it is pretty easy to see why the Fed is leaning toward stoking an inflationary environment and combating deflation rather than worrying about hyperinflation and further choking the economy.

This is probably the most relevant Bernanke article on deflation:

http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default…

Definitely, definitely, definitely worth reading for anyone who is interested in economics or in what the Fed is going to do next. Bernanke has begun discussing "less than optimal levels of inflation" (Fed code for deflation), and we've followed his recommendations almost to the letter so far. The next step seems to be buying open market assets and setting long term treasury rates to zero, while Bernanke's version of the nuclear option would be targeting exchange rates. Considering how precisely we've followed the recommendations he laid out in '02, I'd say that speech is a much better guide than anything given by Mr Obama as to what is coming next.

Another item I looked at was inflation expectations (1id=MICH&s1[range]=5yrs" rel="nofollow">http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s1id…) which suggest nominally denoted price levels should continue to reflect deflation fears. If the government can stimulate aggregate output sufficiently within a reasonable amount of time, it is possible we will escape from this without major inflation or deflation. I'm actually pretty impressed with how Bernanke has been playing the two fears against each other.

I think history will treat him well.

Agreed. The initial assumption that MJP had was "economic actors hoard cash." They will not hoard this cash forever as opportunities start to present themselves in different arenas. Add to that the herd mentality and money will be thrown in every direction. Production always lags (You cant build a factory overnight) and until production rises to meet the new demand we will see inflation. A solution would be to stagger the entry of funds into the system while people play catch up.

Regarding the CPI, some argue it is understated. If this is the case, we will only see inflation when it is too late. Inflation is one step ahead of the economists looking to plot it. We keep interest rates low because we fear deflation and then we get hit with the shock. Low interest rates and underreported inflation numbers serve this country as people continue to borrow and rely on debt.

mates, i'm sorry, i must not be making myself clear.

deflation in the us has been, up to this point, mainly driven by a collapse in energy prices.

that is fading as seen in the jan cpi number (gas up 6%). as this continues to fade, we will see slightly higher core numbers.

unfortunately, there is tremendous slack in our economy (see: 7.6% (mostly frictional) unemployment (with NAIRU going to 5-6%) and a potential second round in the adverse feedback loop if consumers retrench once more; 68% manufacturing utilization, lowest number in decades--this also causes concern for us because investment spending will be decimated as a result of under-utilization)

thus, even when production does begin to rise(2010?), producers will not have pricing power, as there will be an enormous abundance of not only labor supply, but capacity utilization.

my prediction is deflation (or serious threat thereof) through at least 2q10.

as noted: a.) demand for credit is still falling off a cliff b.) consumer spending is extremely depressed and may face further cutbacks (savings rate may go as high as 4-5% (it was .2% in 07)) due to a confluence of reduced expectations of future labor income, extreme wealth destruction on two fronts (housing, equities) c.)investment spending is decreasing and there is no foreseeable future catalyst for this (see a; read above) d.) http://www.federalreserve.gov/releases/h3/Current/ look at excess reserves leap in october, and see above explanation about interest on reserves (ior)

lawm- the linchpin of your thesis is "banks will spend money as opportunities arise." what opportunities? read about what i wrote on the liquidity trap. then consider what i just wrote about the prospects of the economy and the current behavior of economic actors.

granted, the argument that the fed is printing money and money is inflationary seems more elegant than mine, but there is a great deal of reasoning behind that.

deconstruct that reasoning. i'm not going to do it because i've spent way too much time on this thread. when you apply that reasoning within an altered framework--one in which the fed pays IOR--you need to alter your results.

your analysis is misinformed and unthoughtful.

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