I have been watching numerous youtube videos where Peter Schiff is predicting that hyperinflation will soon destroy the dollar.
Here is my question … with banks currently contracting their money supply isn’t deflation the much more likely scenario? True, Obama is pumping a trillion dollars into the economy (how much of this is stemming from simply printing money?) but isn’t that just meant to compensate for the money currently being removed from the system by banks forcing people to repay their loans?
I’m not an economist so any insight would be greatly appreciated!
Deflation is not the cause of our economic issues it is a symptom. The “deflation”, the reduction in money and credit from the economy is a reaction to past inflation, the increase in money and/or credit. Consumers are preferring to buy different things or the same things at lower prices recently than in the previous inflationary period. The economy is trying to better allocate capital resources to coincide with these new preferences. A large number of capital resources were devoted to activities that could only be supported by consumers in the inflationary period. One of the methods consumers have to force reallocation of capital is to stop buying things from those producers. This behavior is defined as deflation by the economic illiterate.
The Bush-Obama fight against deflation, consumer preferences, it is more than futile, it is harmful. Consumers are in a painful process of reallocating capital. Along comes these bozos and they figure they are smarter than the hundreds of millions of consumers and can allocate capital better. So they go nuts stealing money (through taxes, debt and inflation) and investing it in capital projects that make their friends happy at the expense of what consumers are trying to do. The end result is only MORE allocation of capital resources to activities that do not satisfy consumer preferences.
As for hyperinflation, it is already done. The only thing left is to see if prices rise which is the best scenario. The worse ones are what happened in the 1930s and in Japan in the 1990s. Consumers preferences and the government moves to fight deflation were completely out of synch. They still are in Japan. The result were malaises lasting decades of low economic growth, high unemployment and lots of poverty. The Nikkie is at 8000, it was at 59000 in 1989. The US took 17 years to get out of the Depression and 24 years to get the Dow back up to the previous maximum in 1929.
my question is more like … isn’t the money supply currently decreasing because of banks contracting their credits? Thats why consumption stopped. Money is thus becoming scarce which should lead to falling prices or not?
is it somehow quantifyable how much money is removed by private banks contracting their credits versus the govs pumping money into the system via the stimulus package? If not isn’t this all guessing?
Also what percentage of the stimulus package is just newly printed money and how much comes from other sources such as taxes?
You can look at the numbers for M0, M1, M2, and bank reserves. We had de facto price inflation so far this year; Bernanke was even on TV praising inflation. There’s no way to tell how much of Obama’s stimulus package will be printed.
we’ve been strangely fortunate to this point that banks have not been lending the money injected into them by the Fed. It’s quite possible at this point that the Fed could increase the reserve requirement to prevent a hyperinflationary event. I doubt seriously that they’d do this, but it’s not out of the realm of possibility. They may decide that after a few months of not lending money out and if an increase in commodity prices spooks them, they could pull the lever. They don’t really understand how this works anyway, so why deny the possibility that they’d push the wrong (in the Keynsian sense) buttons?
Right now I think we’re waiting for an event to happen that will push us into either hyperinflation or deflation. The next two important months are April and July.
April: 1Q09 financial reporting numbers are compiled and due to be reported by public companies. I can’t imagine anyone is doing exceptionally well this quarter so another round of poor sales results, decreased inventories, and layoffs will create another readjustment downward in debt and equity markets. Unemployment rate accelerate faster than the government predicted and DC continues to panic. Gasoline begins to rise for the summer fuel mix.
Here a legitimate question will be raised by the market about whether Teir I capital on banks books is actually good or not. Again, the Fed and Treasury will need to decide whether to infuse an new round of capital. Will the Fed double-down on the bet or just nationalize the major depositories?
July: The 6 month window that the Treasury allowed for banks to raise more capital is coming to an end. Even if their books don’t deteriorate to this point, if they haven’t raised capital, the Fed will again have to make a decision whether or not to begin nationalizing these banks or continue to infuse more capital. If they continue to infuse capital the entire time, then you’re waiting for hyperinflationary event. That could come in the form of capital flowing to hard assets and commidities. What will be obvious at this point is that the only thing the 6 month capital raising window accomplishes is delaying a decision for 6 months. This could be when the DC crowd runs completely out of political capital to do anything.
Really? We are ‘having inflation now’. Is that so? Do you know what the definition is of Inflation is? It seems you do not. Here it is.
Inflation
1. The act of inflating or the state of being inflated.
2. A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.
Did you write this 2-26-1999 or 2-26-2009?
Please tell me where you see inflation? I’m deftly curious.
Even if the banks stopped lending it wouldn’t be deflation, it would be disinflation as all the money they had previously loaned into existence would still exist.
Wait a minute. The money they loaned would still exist? Where? If you bought a house for a million dollars and bought it with a paper loan of created dollars and that house is worth half a million dollars how does that other half million still exist? It doesn’t not. Inflation comes from monitization and debt destroying in homes and goods now is money destruction which is not Inflationary. Inflation is when money is flooded into the system and prices rise. If money is destroyed like in this case the money ‘previously loaned’ that is no longer there does not exist in a monetary sense. It has no purchasing power and cannot be borrowed against.
If banks stopped lending, total debt would be falling, as people/companies are gradually repaying their loans. Contracting outstanding credit would lead to deflation (as money is destroyed when debt is repayed if banks do not lend it again). Banks need to expand credit for inflation to actually kick in.
thanks Azazel. I was starting to feel like I was on an island alone. This is exactly how I see it. and it’s exactly whay is happening, why can’t people see this?
Falling home prices, OTOH, have lot influence to your willingness to borrow. If your home price is falling, you are losing your wealth. Especially if you spent everything you earned (no savings) and count on your home to provide pension money.
A large part of the dollars are held outside of the US. An international switch to another currency in world trade, would drastically decrease demand for dollar and potentially destroy it. That fall might in turn even make domestic US use of the dollar impopular. The potential death of the dollar should be traced from a scenario with an event which triggers international abandonment of the dollar. Or am I wrong? Fall in demand might not classify as “hyperinflation”, but the effects would be similiar.
One likely replacement for dollar would be the euro. US policy seems much more inflationary than that of the eurozone. However, that may change when eurobanks get into problems because of credit losses in central and eastern Europe, and that might even tear up the eurozone politically. The difference in infaltionism between US and Euroland should be of importance.
But already the fact that world trade shrinks, should lower demand for dollar. When companies trade less, they demand fewer dollar, and then central banks don’t “need” so much dollar in their foreign exchange reserves either. Recession and protectionism therefor should be negative for the dollar relative to all other currencies (no other currency has a similiar international dependence).
While most governments don’t want to seea dramatic dollar crash, no central bank except from FED has any interest in the dollar being world currency, instead of their own currency! Therefor I doubt that the dollar will have many foreign friend the day that it really gets into trouble. Why wouldn’t the EU prefer the euro to replace the dollar? Why aren’t many oil producers fed up with financing US oil imperialism through inflation of the dollar they hold?
There exists some treshold where the disadvantages of keeping dollar for trade, exceeds the disadvantages of switching (to euro). When it is exceeded, that’d be the big dollar crash!