Is there any action or inaction the government can do to go on the right path and prevent hyperinflation from occurring or have we already crossed the line of no return here in the United States.
Increase the interest rate dramatically and destroy nearly all government programs. Though the former would have a major impact on the market-seeing as it would not be the real time preference of the people, just as how neither is keeping unrealistically low.
There are three things that need to be done, and two of them have been mentioned already. Cut government spending and debt, recall all of the money that has been printed and sent to the financial institutions, and raise interest rates which will also reduce the money in circulation.
In reality those three things are not going to happen, so the real answer is that we are past the point of no return. We are just waiting for hyperinflation to kick in.
Hyperinflation can always be stopped by politicians acting counter to the incentives of their office.
Just increasing reserve rates for banks would work too, right? What would be the possible bad side effects of that decision.
Well, nature was originally gold and blue; Gold then created silver and red; however, the combined force of the state turned the world into an AG (alternating agrarian) indivdiual.
I imagine Nature’s god, whoever it is, did it; sounds like Satan and Goad could “only battle each other to a draw.” Or, perhaps it was Reharl and Agito from the kingdom of Oasis.
Hyperinflation is not a given as of this moment, though it is certainly a possibility.
Hyperinflation is the ultimate limit to credit expansion. It is the market’s way of stopping credit expansion(inflation) by the government by destroying the currency.
The other limits to credit expansion are bank failures caused by bank runs and bank failures caused by other banks seeking redemptions. With the FDIC and a central bank with control over the currency, both of these limits are effectively gone.
Credit expansion could be halted and hyperinflation avoided by tomorrow if the FDIC and Federal Reserve were dissolved and banks were allowed to fail as they did during the Depression.
By not allowing banks to fail, insuring deposits, and continuing to expand the monetary base, the US government and Federal Reserve continues to make hyperinflation a possibility.
Banks now use sweep programs to basically avoid reserve requirements.
See this paper: http://mises.org/journals/scholar/hatch.pdf
Let’s suppose they did not, though.
Increasing reserve ratios can be done in two ways.
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Having banks “unwind” their assets and liabilites until they have the requisite amount of cash. (contraction of credit)
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Having the Fed print enough money so that the banks do not have to unwind their assets and liabilities. (Zero net contraction of credit)
The first case only works if banks are solvent (assets>liabilities). If banks now, in their insolvent state, were to use this method to increase their reserve ratio, their reserve ratio would actually shrink as they would have to use their cash reserves to pay off the difference between assets and liabilities. The Fed would then have to step in which leads to option 2.
In the second case, increasing the money supply is necessary to raise the reserve ratio, so essentially net credit contraction is basically zero. Actually, if banks ever revert back to lower reserve ratios, price inflation would likely ensue as a result of the increased money supply.
In sum, banks have basically ignored reserve requirements for the past 15 years, and raising reserve requirements most likely would do nothing or possibly increase the chance of future inflation.
Hyperinflation has already occurred. Inflation is simply an increase in the quantity of money and bank credit. The effects just aren’t evident yet.
What if banks(not including the fed) see the light and increase interest rates themselves and minimize the practice of fractional reserve while halting the practice of giving out risky loans that rely on the fact that government is backing them?.
Also say the banks were out of the equation. Would the government money to pay for the trillions in government projects and social programs in itself cause inflation? Say the banks gave out 0 loans but the government was building bridges to nowhere and handing out welfare checks.
What does everyone here think of this piece by Robert E. Hall?
Extract:
The Fed’s astoundingly large increase in reserves has many worried about future inflation and wringing their hands over exit strategies. This column argues that the Fed can control inflation by varying the interest rate it pays (or charges) banks on their reserve holding. Consequently, the Fed’s exit strategy need not be constrained by concerns about inflation – reserve interest-rate policy can take care of inflation, but the Fed should publically announce this policy.
That article is complete B.S. Once the money is out of the bottle, there is no bringing it back.
Here’s why:
The US economy is bogus - we all know that. The current economic crash is because we had created an unsustainable economy based on debt and overspending. But, instead of allowing the markets to clear out this unsustainable economy, the US government is trying to prop it up and increase our addiction to easy money and money printing.
If our economy begins to make a slight recovery anytime soon, it will be because of all this money printing - NOT because of fundamentals. Bringing the money back by raising interest rates or anything else will make the economy collapse immediately once again. Politicians will not allow this to happen.
The longer the government keeps this bubble going, the worse our economic fundamentals will get, and the harder the potential economic downturn will be. This will make it increasingly difficult for politicians to even consider reigning in inflation and allowing the bubble to burst.
Hyperinflation will end up being the politically expedient choice. As long as we print money, things look good from the outside, but the imbalances within the structure of production continue to get worse. Any time the government wants to, it can slam on those brakes, and let the economy correct itself. However, that choice comes with an increasingly painful correction (depression) the longer it is put off.
On the other hand, if you just keep on inflating, you get a couple of boom years, Obama gets re-elected, and then the whole thing goes out of control like it did in Germany. In the end, all value stored in money and in debt (which are two sides of the same coin) are vaporized along with the dollar. That means no more national debt, and no more Social Security crisis. It’s like hitting the economic reset button (without lube).
The Rev
The Federal Reserve would have to mandate a huge increase in the reserve ratio to prevent hyperinflation and the federal government would have to default on its debt. That’s the only solution. Otherwise, we’d have to print about $13 trillion simply to pay off the debt we have accumulated.
Even on the topic of just severe inflation or stagflation, right now that pretty much seems like a given despite what any economist will say. It will be like the seventies but worse because we will have high unemployment and high inflation. Our government does have powers to manage inflation right now, its just that it would cause other problems for the government. If the Fed stopped monetizing the debt than we would have to find other ways to pay our huge debt, and economic stimulus packages, and contracting credit and the like will further push the collapse on unsound businesses and keep people unemployed. That is not politically good. Our government’s current fetish right now is to keep rates low and the money pump spewing in order to entice consumers and businesses again. The Fed will see through it that this happens, and once they are “sure” of economic recovery inflation will rear its head. What do they do now? The so called “Phillips Curve” will bite people in the ass.
Hi,
I’m new here!
I don’t see hyperinflation yet. We don’t have a mechanism in place for it. What we have so far is a stimulus plan and a banking bailout. The stimulus plan amounts to an increase in spending at 3% of GDP. The bailout is only shoring the reserves of the banking system and does not promote the creation of new money. If anything, it will have the opposite effect by allowing the banking system to retain non performing debt on their books. We are still in a highly deflationary condition.
Here is a chart of total credit market debt to GDP going back one hundered years:
!(http://lakeweb.com/money/Total U.S. Debt to GDP.gif)
We don’t operate with a fiat system. Our money is ‘credit money’. It basically comes into existence with new borrowing. This makes deflations hideous. There is no impetus to borrow and that feeds on itself. Banking is reluctant to lend and borrowers have no need for new money. So far, talk of Bernanke’s helicopters is just that. And it will likely stay just that. We don’t have another asset class to make a bubble from.
Best, Dan.
The Federal Reserve is currently expanding its balance sheet through monetizing of $1.75 trillion of debt. Historically. this is the mechanism by which money supply increases and hyperinflation occurs.
Granted, it is only a first step, but as interest rates continue to rise, the Fed will be forced to monetize larger and larger amounts of debt in order to suppress interest rates.
If total debt somehow prevented hyperinflation and ensured deflation, why did Weimar Germany, which had massive amounts of debt , still enter hyperinflation? The amount of debt in the economy does not act to prevent hyperinflation. In fact, one could argue, from past evidence, that hyperinflation is more likely to occur in countries with large total and external debts.
I’m not sure where this notion of fiat money versus credit money comes from. It is irrelevant to what is currently happening. If the Fed so desired, it could monetize all government bonds tomorrow. The money supply would be vastly increased and hyperinflation would likely follow. In the case of monetization, there is no “borrowing into existence.” The debt was already outstanding.
If I am holding a $1000 bond, and the Fed comes to me with $1000 of printed money(could be digital), I will gladly sell it to them. Their balance sheet will increase by $1000 and the money supply will increase by $1000.
Borrowing and lending only needed to occur in the past so that I could have the bond which the Fed can then monetize. In the present transaction, there is no new borrowing, and yet the money supply has increased by $1000.
Again, no borrowing is necessary for hyperinflation and no new asset bubble is needed for hyperinflation. All that is needed is determined monetization of debt by the Fed.
This ‘monetizing’ is only going into the reserves of the banking system. It does not create new money.
The German government directly created notes. Ours can’t do that, yet…
Look at the per capita column:
So, I’m not sure what evidence you are citing…
There is a vast difference between fiat and credit money. If I hold credit money it is not mine, I owe it ‘back’, with interest. As far as your ‘what if’, it has nothing to do with our current condition. That the fed ‘could’ does not mean they will. BTW, the bond market doesn’t see hyperinflation, yet. In fact, even with the recent pop, it still sees less than 4%.
Best, Dan.
The type of money, whether it be fiat, credit-based, or gold-backed, makes no difference where the volume of money is concerned. Spain saw a great deal of price inflation as a result of the influx of gold brought back from the New World. As for the increase in the monetary base, it is already out of the bottle. The M1 money supply is increasing at an annualized rate of greater than 20% at the present time; a significant acceleration over growth before the massive base buildup.
Inflation is already here, and I suspect that the latest upsurge in not only the stock market, but the commodity and bond markets, as well, may be the first portent of things to come.
The Rev
Fed can only expand its balance sheet through increasing the money supply. Whether the money stays with the banks or people hoard it, it does not matter. The money supply is still increased through monetization.
The Federal Reserve can most definitely print notes. To argue that the Fed and US government are separate is splitting hairs.
External debt of US/ US exports + US net investment income = ~9x
External debt of Japan/ Japan exports + Net investment income = ~2x
Looking at per capita debt is ignorant. The income of a country (or person) is necessary to find the relative debt burden.
There is no doubt that the debt burden of the US is very large. With US exports continuing to fall, net investment income unlikely to remain positive, and external debt increasing due to the massive amount of government debt, the external debt burden of the US will only get worse.
Again, the US has massive total and external debt. To argue that massive amounts of debt somehow protect against hyperinflation and ensure deflation is to ignore not only economic principles but also historical evidence.
The Fed monetizing bonds has nothing to do with credit money. The Fed prints money and buys a bond, increasing the money supply. The money did not need to be borrowed into existence. Credit money may have previously increased the money supply, but it is not necessary for new money to borrowed into existence.
BTW, using markets to tell the future is not a great strategy. For example, banks were insolvent far before the market capitalizations fell to reflect their insolvency. The market couldnt “see” that banks were insolvent for many months.
I could ask you why rates are rising at all. If we are entering a deflationary period similar to Japan’s, shouldn’t interest rates be at 1.5-2% and stay there? The fact that interest rates are rising at all is an ugly problem for deflationists.