Monday, June 22, 2009

HyperInflation Anecdotes

Bill Bonner has them here.

His key observation is about the central banker of Germany and the Fed's Ben Bernanke:

But neither Karl Helferich nor Ben Bernanke set out to ruin their economies. Central bankers don’t do it intentionally; they do it inevitably. Not because they want to, but because they have to. Like the Germans in the ’20s, America has no politically acceptable way to pay her growing debts – except by printing more money. And now, her leading intellectuals urge her on. Cometh the hour when the feds begin to think about cutting back on their program of inflation, cometh the experts who will tell them to keep at it.

“The crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts,” writes Nobel winning economist Paul Krugman in the New York Times this week. “Those demands should be ignored. It’s much too soon to give up on policies that have…pulled us a few inches back from the abyss.”
As I wrote:

Either government spending has to be cut way, way back--obviously unlikely under Obama, or the Federal Reserve is going to be buying a lot of debt by printing money. Who else is going to buy it? At some point the American public (and in the dollar's case, world dollar holders) figure out that the money printing is going to lead to more and more price inflation, and people start to buy anything rather than hold dollars. It will be the exact opposite of what we have now, instead of a strong demand to hold cash balances, the opposite will occur. There will be a desire to spend the depreciating dollars by keeping cash balances low.

At some point this madness takes on a life of its own. Treasury bond interest rates suddenly jump to 10%, which will be viewed as unacceptable by the Obama Administration and so Bernanke, by making huge Treasury purchases, gets the rate down to 8.5%, but the new money used to push rates down pushes price inflation even higher and, thus, puts upside pressure on Treasury bonds, which results in rates climbing to 15%. Of course, this will be viewed as unacceptable and Bernanke will have to add twice as much money as last time to get rates down to 12.5%. At this point the Chinese will be in total panic, and use the Bernanke buying support to unload the remains of the U.S. bonds they hold, which will mean even more money printing by Bernanke to take the Chinese out of their position. This will mean even more inflation and the Treasury bond interest rate climbing to 25%. And the vicious circle continues. That's how you can end up getting to Zimbabwe type inflation, 500 basis points at a time.
Bill Bonner is exactly correct, Bernanke won't start out to bring about hyperinflation, if it does occur, it will sneak up on Bernanke and most of the American people.

1 comment:

  1. Inflation is growing at rapid rate and situation is going worse. Thanks for giving such detailed information. According to me hyperinflation is in which entire currency of an economy is discarded or gets replaced.