Saturday, July 28, 2012

Which Will It Be: Deflation/Depression or Hyperinflation/Depression

By Gary North

What the Federal Reserve System can do and what it will do are two different things.

The Federal Reserve System can monetize anything. It can create digital money and buy any asset it chooses to buy. There are no legal restrictions on what it is allowed to monetize.

If it were to do this, and it continued to do this, the dollar would fall to zero value. This would produce hyperinflation. The result would be the destruction of all dollar-based creditors. Debtors could pay off their loans with the sale of an egg or a pack of cigarettes. This is what farmers did in 1923 in Germany and Austria.

The economists who advise the Federal Reserve System know this. The bankers who run the banks that own the shares of the 12 regional FED banks know this. Bernanke knows this.

The day will come when the decision-makers on the Federal Open Market Committee will have to fish or cut bait. They will have to decide: mass inflation (20%) or hyperinflation (QEx). They will have to decide: recession or hyperinflation.

Will they see that it's really Great Depression 2 vs. hyperinflation? I don't think so. They have been able to manipulate the economy for over 90 years between recessions and booms. Only once did it become a depression: 1930-40. That depression became deflationary, 1931-34, because the Federal Deposit Insurance Corporation (1934) did not exist. Depositors took their money out and did not redeposit it. That created monetary deflation through the bankruptcy of banks. The fractional reserve process imploded.

The FED inflated the monetary base in order to prevent this, contrary to the account by Friedman and Schwartz in their famous book, "A Monetary History of the United States" (1963). Depositors thwarted the FED, 1931-33. A chart produced by a senior official at the St. Louis FED should forever silence those economists who think that Friedman and Schwartz proved the case of FED "complacency." It won't, of course. The Friedman/Schwartz story is just too convenient for pressuring the FED to inflate. Friedman and Schwartz wrote the single most important book favoring FED inflation ever written, because it is universally believed in academia. The only section of the book ever cited by mainstream economists is the section on the FED in the early 1930s. That story is analytical and historical bunk. Here are the facts.

Today, depositors could do it again. If the FDIC were not backed up by a $600 billion line of credit from Congress, we might see it happen again. But there is a line of credit. That calms depositors.

The creditor – Congress – is the world's biggest debtor. Congress is running a $1.2 trillion deficit each year. But it has central banks to cover the debt: Japan's, China's, America's. So, the depositors believe that Congress can save the FDIC, which will save the banks. They leave their money in banks. If they pull money out of bank A, they deposit it in bank B. The system does not lose deposits. There is no deflation. The fractional reserve system survives.

The system has worked for a long time. The day of ultimate reckoning has been delayed. I think this has given central bankers a sense of confidence. They will think that one more refusal to go to hyperinflation will succeed. They will not believe that the refusal to pump new digital money into the system will bring on Great Depression 2. They will believe in their ability to manipulate the system one more time.

The system overcame the collapse of Lehman Brothers. They will assume that credit liquidation will be orderly. If it isn't, they can intervene one more time.

Read the rest here.


  1. This is crap.

    There are no "ands" or "ifs".

    First, these morons print or borrow 56 cents of every buck spent. To all the idiots who say we can cut social welfare - think again. Social welfare and war are economies in and upon themselves.

    Second: This is written like we are in 1930 again. We're not. This is global.

    It won't be a currency crisis. It'll be currency crises (plural).

    3,800 Fiat currencies have gone to 0, the average lifespan of one is 39 years. It is the way of the world.

  2. I had an economics professor say in response to a paper I submitted about a potential inflationary depression: "There is no such thing, and stop trying to sound so smart." God help us

  3. The bankers always win. If there is a deflationary depression, they will lose as everyone defaults, including the government. If the fed prints and monazites most debt, bankers will win. Bankers are closest to the printing press and will turn the newly created money into real assets. It of course will start out slow, but quickly get out of control and then the dollar will be replaced. Hopefully by silver, but I doubt it.

    Another thing... to act like the government can't/won't influence the fed is laughable as. As the FDIC implodes when rates rise there will be a move disguised as a way to fix our problem to print money debt free to replace everything to banks have lost. The monetary base will explode and m2 will grow exponentially.