Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Venezuela’s Hyperinflation Drags On For A Near Record—36 Months - 18th Nov 19
Intellectual Property as the New Guild System - 18th Nov 19
Gold Mining Stocks Q3’ 2019 Fundamentals - 18th Nov 19
The Best Way To Play The Coming Gold Boom - 18th Nov 19
What ECB’s Tiering Means for Gold - 17th Nov 19
DOJ Asked to Examine New Systemic Risk in Gold & Silver Markets - 17th Nov 19
Dow Jones Stock Market Cycle Update and are we there yet? - 17th Nov 19
When the Crude Oil Price Collapses Below $40 What Happens? PART III - 17th Nov 19
If History Repeats, Gold is Headed to $8,000 - 17th Nov 19
All You Need To Know About Cryptocurrency - 17th Nov 19
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19

Market Oracle FREE Newsletter

$4 Billion Golden Oppoerunity

Hyperinflation is Most Likely to Strike Amidst Real Deflation

Economics / HyperInflation Nov 24, 2010 - 01:17 PM GMT

By: Adrian_Ash

Economics

Best Financial Markets Analysis ArticleHyperinflation is not simply inflation times 10. It's most likely to strike – in fact – amidst a real deflation...

SO the FEDERAL RESERVE's second-round of quantitative easing, announced on November 3rd, was a shoo-in – a fait accompli – already decided when the policy team first sat down the previous day.


How come? As the minutes released this week show, Brian Sack – manager of the New York Fed's System Open Market Account (SOMA) – opened the meeting. And asked to judge the matter, he told the 64 other policy-wonks gathered in the Eccles Building that his team "could purchase additional longer-term Treasury securities at a pace of about $75 billion per month while avoiding disruptions in market functioning."

Moreover, "implementing a sizable increase in the System's holdings of Treasury securities most effectively likely would entail a temporary relaxation of the
35% per-issue limit on SOMA holdings under which the Desk had been operating."

Hey presto! The following day, and after apparently intensive debate, a monthly target of $75 billion in Treasury bond purchases – plus a relaxation of the 35% limit on Fed holdings of any particular bond issue – was announced.

Does that make the Fed meeting a sham? No matter. "It's not as if the Fed is doing anything radical," says Princeton professor Paul Krugman. It's simply looking "to boost the flow of economy-wide spending by changing the mix of privately-held assets," agrees Berkeley professor Brad DeLong.

"It buys government bonds that pay interest in exchange for cash that does not. That is totally standard."

But totally standard where, exactly?

Sure, buying and selling government debt in the open-market is how central banks control short-term interest rates. That's why the Fed Funds rate is a target, and the actual outcome in the marketplace is instead known as the Effective Fed Funds. Bidding short-term bills higher (or lower) in price, the New York Fed thus pushes down (or up) the interest rate paid on those bills. But stuffing the market with money, in contrast, is a very different aim. Not least when you do it by buying longer-term bonds. And by only buying, rather than fine-tuning purchases with sales. And by doing it amid the heaviest net issuance of government debt in history. And by doing it so hard that, despite that record issuance, you still need to break your own limit on the proportion of any individual maturity-date you're allowed to own.

So again, we ask here at BullionVault: Where in the world is such money creation "totally standard"...?

"I think using quantitative easing is a perfectly legitimate thing to do. And for heaven's sakes, it's not as if we're in any danger of inflation any time soon."
  – White House advisor and former director of the Congressional Budget Office, Alice Rivlin, speaking to CNBC on 15 November 2010

"We have no 'dangerous flood of paper'...On the contrary, our paper [money] circulation, though it shows a terrifying array of billions, is really not excessively high..."
  – Vossische Zietung newspaper, 16 August 1922

"Several [Fed policy] participants saw a risk that a further increase in the size of the...monetary base could cause an undesirably large increase in inflation. However, it was noted that the Committee had in place tools that would enable it to remove policy accommodation quickly if necessary."
 – Federal Reserve minutes from 3 November 2010

"Even if the quantity of money were three times its present size, it would constitute no real obstacle to stabilization..."
  – Berliner Börsener newspaper, 18 August 1922

Okay, so pasting a couple of quotes next to each other doesn't mean the United States is headed straight for wheel-barrows and stormtroopers. Like everyone agrees, 1,000,000% inflation looks a long way off right now. But no central bank ever began a hyper-inflationary policy because it feared inflation. Such disasters always come because of vanished credit and economic depression. And whether in Germany nine decades ago, or in Argentina twenty years back, or in Robert Mugabe's Zimbabwe around the turn of this century, stuff actually gets cheaper – not more expensive – in real terms during hyperinflation. It's just that the local currency falls in value faster still, turning the "money illusion" we're all prey to into a livid nightmare.

Hence the daily flood of French citizens across the border at Strasbourg each day during the early stages of the Weimar madness, emptying the stores with their highly-prized Francs. Hence the real-estate bargains snapped up by wily speculators during Argentina's last-but-one collapse. Hence the zero-change in inflation – net net – for US Dollar earners during the early phase of Zimbabwe's hyperinflation, followed by massive a deflation, in US Dollar terms, even as prices in the local currency soared.

On the ground, amidst these crises, it was monetary contraction – not soaring prices – that most worried policy-makers. "The lack of money [now] has a worse effect than the devaluation itself," said one Berlin newspaper in summer 1922, as the Weimar Republic began to run the presses 24/7. "The government printed notes to satisfy everyone," writes Adam Fergusson in his history of the disaster, When Money Dies, "telling itself that as the granting of credit...had so greatly decreased, the actual currency in circulation had to be so much greater."

But let's not get perverse. The latest flat-lining in America's official Consumer Price Index does not mean that hyperinflation is in fact underway. The critical factors to watch out for remain a collapse in tax revenues, plus demands for immediate payment from foreign creditors. It bears repeating nevertheless, however, that – contrary to the worldview presented by academic economists and professional wonks – demand-push inflation is not how hyperinflation begins. Real values in fact fall as a genuine currency crisis takes hold.

And the fact that the Federal Reserve is so dead-set on its "emergency" response that it scarcely needs to meet to agree it, doesn't mean the Fed actually knows what it's doing.

By Adrian Ash

BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2010

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules