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Thread: Hyperinflation

  1. #1
    Senior Member reason's Avatar
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    Default Hyperinflation

    The U.S. Government is inflating the money supply with expansionary monetary and fiscal policy.

    When President-elect Obama implements his $775 billion "economic stimulus package", there will be $775 billion of additional spending in the economy. President George bush and Federal Reserve Chairman Ben Bernanke have already authorised or spent trillions, and with the Obama administration there appears to be no end in sight. None of this is being paid from savings. The U.S. Government is already running an ever growing deficit. Some of its debts are going to mature soon, and when they do more money will be borrowed. Politicians will call it 'consolidation' though, as if to suggest they have some intention of paying it off.

    Bailouts, deficits, Ben Bernanke's secret handouts, low interest rates, and Obama's "economic stimulus package", all are going to create inflation. All these dollars being pumped into the economy are going to be competing with those held by ordinary Americans for scarce goods and services today. Obama does not want you to save, so the government is surreptitiously appropriating the buying power of your dollars and forcing you to spend (and they will not even let you decide what to spend it on).

    Ordinary loans create inflation too, but ordinary debtors pay back their loans and offset it with deflation. The U.S. Government is no ordinary debtor. It does not pay off its debts, but rather "consolidates" them endlessly. Government debt is inflationary, and this year is expected to see an additional $2 trillion.

    Almost half of the world's dollars are held by foreigners. Foreigners hold dollars because they want to make purchases from the U.S. or store value. Because dollars have historically retained purchasing power, many foreigners exchange or save them in lieu of the own currency (which may have been debased by inflation). Inflation debases a currency by reducing its buying power; it induces less saving and more spending. When foreigners notice inflation in the U.S. they will spend dollars as soon as possible, and swell the money supply.

    President-elect Obama will then come on TV. 'After an unexpected rise in prices', he will calmly say, 'the $775 billion economic stimulus package has been depleted too quickly'. He will then go on, 'many programs vital to the future of the American economy have yet to be undertaken', and after a dramatic pause, 'so today a new $1.5 trillion stimulus will be approved by Congress for the sake of ordinary middle-class Americans'. Meanwhile, Ben Bernanke will continue to hold interest rates down, just to spit in the face of any American who might consider saving to rebuild a future.

    The cycle will repeat and the U.S. will be saddled with hyperinflation--Weimar Republic style. Hitler was elected after that mess ...

    Please tell me I am wrong.
    A criticism that can be brought against everything ought not to be brought against anything.

  2. #2
    Lallygag Moderator Geoff's Avatar
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    Hmm, I thought the real risk was real-terms price deflation in 2009 for the US, UK etc. Or am I missing something?

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    Quote Originally Posted by Geoff View Post
    Hmm, I thought the real risk was real-terms price deflation in 2009 for the US, UK etc. Or am I missing something?
    Aggregate demand dropped sharply last year as people began paying off debts and the credit bubble started bursting. Inventories, however, were already prepared for the previous demand, and were now overstocked. Prices have been going down because of this temporary supply glut, but once that dust is settled all the money that the Federal Reserve (and the Bank of England I am led to believe) will begin to appear in prices.

    If more people had actually paid their debts things would have been better. When people fail to pay their debts, the money supply flatlines and buying power is lost forever (rather than reinjected by the productive activities which pay the debt off). "The productive activities which pay off debt" manifests itself in deflation, and transfers buying power back to lenders from debtors.

    Governments are scared of deflation and welcome inflation. Ordinary people should be more welcoming of deflation and scared of inflation (deflation caused by a run on the banks is very bad, of course, but most deflation occurs because people are paying off debts collected during a boom).
    A criticism that can be brought against everything ought not to be brought against anything.

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    The Federal Reserve confuses me.

    Using credit to increase the supply of money is a strange idea. It adds new money to the economy in the beginning, but it also has to be paid back eventually. Paying off or defaulting on debt is deflationary.

    Suppose the Fed increases the money supply to increase the supply of credit (and push down interest rates). Many people then buy homes using credit within a short time. Since most mortgages have similar repayment schedules, this is setting up a deflation in the future when all those people begin paying off or defaulting on their debts.

    And indeed this is exactly what has recently occurred. But the Fed doesn't like deflation--not even a little--so now they're are increasing the supply of credit even more than usual. But does not anyone else see the problem with this action? Are they not simply setting themselves up for an even bigger deflation in the future?

    Also, the deflation is caused when people start paying off their debts, and the only way to stop it is to destroy the real value of those payments i.e. rip off the lenders and discourage saving and investment. The Fed wants people to borrow, but it does not want them to decrease consumption, work hard and pay their debts.

    The problem is that it is during the deflationary period (usually a recession) when all the productive work is done to make another Fed induced boom possible. The boom is all about consuming and malinvestments, and by trying to keep the economy stuck in the boom they are slowly eroding its productive ability--not a good long term strategy.
    A criticism that can be brought against everything ought not to be brought against anything.

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    Deflation will give rise to inflation. We're in a deflationary period right now. The recession is taking its toll on oil prices as well as the prices at retail stores. They're marking down prices like never before just to get those products out the door.

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    About deflation.

    If the supply of money declines relative to available goods and services, then deflation can cause problems. This is what happened in the 1930s when there was a run on the banks.

    Recent deflation has been different. The supply of money declined as debtors began paying off or defaulting on their loans, but many of the resources which that money had been spent on never really existed. Real estate was massively overvalued, and as that value has evaporated in recent months the decline in the money supply has tracked it some. In other words, the number of goods and services has, to some extent, declined along with the money supply. Additional deflation has been caused by temporarily overstocked inventories and other debtors turning away from consumption and toward production to pay off their debts.

    Perversely, the U.S. Government is trying to stop this.
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    Arcesso pulli gingerios! Eldanen's Avatar
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    Your next thread should be named: NOT ANOTHER ECONOMICS THREAD.

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    Senior Member ptgatsby's Avatar
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    How is monetary deflation even remotely a good thing? We aren't talking increased purchasing power, as wages and production are locked together... Especially given the resulting unemployment from downward sticky wages...

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    Quote Originally Posted by reason View Post
    About deflation.

    If the supply of money declines relative to available goods and services, then deflation can cause problems. This is what happened in the 1930s when there was a run on the banks.

    Recent deflation has been different. The supply of money declined as debtors began paying off or defaulting on their loans, but many of the resources which that money had been spent on never really existed. Real estate was massively overvalued, and as that value has evaporated in recent months the decline in the money supply has tracked it some. In other words, the number of goods and services has, to some extent, declined along with the money supply. Additional deflation has been caused by temporarily overstocked inventories and other debtors turning away from consumption and toward production to pay off their debts.

    Perversely, the U.S. Government is trying to stop this.
    Yep. It will be driven in part by the overture of supply/product with a low demand and cash flow. The inflation will begin when the cash we've been printing really starts to take its toll on the currency value, and dollars begin to really flood our economy. Then we'll have all this money floating around and an increase in demands for goods, which will be swiftly be met by shortages because these companies were keeping low amounts of product on hand in the deflationary period. Then all the other inflationary factors will pile on top of that.

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    We aren't talking increased purchasing power, as wages and production are locked together.
    But we are talking about a shift in purchasing power. After getting a loan, a debtor is like a monetary counterfeiter. He imposes a negative externality on everyone else by decreasing the purchasing power of their money. But unlike a counterfeiter, a debtor will eventually pay back his loan plus interest. When producing to pay off his debt the money supply decreases, and a positive externality is imposed on everyone else by increasing the purchasing power of their money. During the deflation the debtor is repaying everyone else for the buying power which he took from them when the loan was first being spent. When inflating the money supply the debtor is consuming or investing (and when the Fed makes credit artificially cheap, he is often consuming too much or investing badly). It is during the deflationary period when the production to pay for the inflation occurs, it will resemble a recession for our debtor, but it is also vital for his long term prosperity.

    Especially given the resulting unemployment from downward sticky wages.
    Sticky wages are a problem. But I think it is a habit that can and should be unlearned. Inflation is a high price to pay for such an error of economic reasoning. If this ignorance of prices is pandered to, then it will only make the problem worse. Labour markets are distorted by it.
    A criticism that can be brought against everything ought not to be brought against anything.

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