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Urgent Stock Market Message

Can We Give The Hyperinflation Thing a Rest?

Economics / HyperInflation Apr 27, 2011 - 06:20 AM GMT

By: Mike_Whitney


Best Financial Markets Analysis ArticleThe Federal Reserve is not going to push the economy into Zimbabwean hyperinflation. That's pure bunkum. The Fed's plan is to weaken the dollar to boost exports and to force China to let its currency appreciate to its fair-market value. The policy should help to lower the US's bulging current account deficit. By purchasing $600 billion in US Treasuries (QE2), the Fed effectively reduces the supply of risk-free assets, which sends investors into riskier assets like stocks and commodities. Is there an element of class warfare in the policy?

You bet, there is. It's a direct subsidy to the investment class while workers are left to face higher prices on everything from gasoline to corn flakes. It's a royal screwjob. But while Ben Bernanke may be a prevaricating class warrior and a charlatan, he's not insane. He's not going to print the country into Wiemar-type oblivion or shower the nation with increasingly-worthless greenbacks like they were confetti. Even so, that's the kind of blabber that one reads on the Internet every day. It's just baseless scaremongering from people who don't know what they're talking about.

Inflation is NOT the problem. We're in the middle of a Depression. And, yet, every day more and more ominous-sounding articles pop up warning of "The End of America" or "Gold to Soar to $10,000 per ounce" or some other such nonsense. It's ridiculous. Gloom and Doom has become a cottage industry employing a thriving class of worrywarts who all preach from the very same songbook. It's always some portentous bulletin about the machinations of the "bank cabal" conspiring to enslave the populous by "debasing" the currency. Good grief.

Memo to Inflationists: The economy is dead. Not moving. Not breathing. Dead. Yes, the Fed can tie QE strings around the hands and feet and make them move like a marionette, but it's all make-believe. Without the props and the support-system, the economy would drop to its knees, gasp for air, and expire. Dead.

Have you noticed that 1st Quarter GDP has been revised-down to 2 percent and could be headed lower still? (Maybe even negative!) Have you noticed that unemployment is stuck at 8.8 percent and underemployment at 16.2 percent with more people falling off the rolls and into abject poverty every day? Did you see that manufacturing is starting to slip and "the production index, a key measure of state manufacturing conditions, fell from 24 to 8, indicating slower growth in output." Do you realize that the downturn in housing is getting more ferocious even after falling steadily for 5 years straight? Have you considered the fact that the government and Fed have pumped trillions of dollars of monetary and fiscal stimulus into the financial system with just about nothing to show for it? And, do you know why? Because we're in a Depression and the economy is pushing up daisies, that's why.

It's ridiculous to wail about "money supply" when velocity is zilch. It's pointless to crybaby over "bank reserves" when people are broke. It's crazy to yelp about "printing presses" when lending is down, credit is contracting and the economy is mired in the most vicious slump in 80 years. We're in a liquidity trap where normal monetary policy doesn't work. This is old territory, Keynes figured it out more than 60 years ago. But because Bernanke is so much smarter than Keynes, we get to relearn it all over again. Now that QE2 is ending, the verdict is in. And what have we learned? That monetary policy doesn't work in a liquidity trap. What a revelation!

All the hullabaloo about inflation is just plain kooky. China's not going to dump its $3 trillion stockpile of mainly USD and US Treasuries. Who started that cockamamie story? China's doing everything it can just to keep its currency cheap just so to keep its people working. Are they suddenly going to do an about-face and commit economic harikari just to strike a blow against Uncle Sam? Get real.

And, now the gloomsters are worried that no one will buy Treasuries when QE2 ends in June. Sheesh. We just leapfrog from one paranoid fantasy to the next. Here's a blurp from the Wall Street Journal that explains what's likely to happen in June:

"The direction of interest rates after the Fed ends its bond-buying program is crucial for the economy. The issue will be in sharp focus this week, when Fed policy makers hold a two-day policy meeting, starting Tuesday, to discuss their efforts to steer the economy between the shoals of recession and inflation.

They face an economy that has shown signs of losing momentum in recent months, with first-quarter economic growth now widely believed to be less than 2% annualized....

One yardstick for the immediate future of Treasury yields after QE2 could be QE1, which included a $1.25 trillion Fed buying spree of mortgage bonds from late 2008 to March 2010. The mortgage-bond market felt barely a ripple when the Fed stopped buying. Treasurys, some observers reason, may follow the same path.

Treasury yields "moved up significantly at the onset of QE1 but then fell precipitously when it ended," Mr. Rieder says. "So it's not a given that Treasury yields will rise this time either." ("Fund Giants Take Competing Stands On US Bond Outlook", Wall Street Journal)

True, that doesn't guarantee that yields won't rise when QE2 ends, but how high can they go when the economy is still stuck in the mud?

Not very high. And, who's going to buy the Treasuries? The same people who always buy them when the economy starts to crater; investors looking for a "safe harbor" from deflation. Don't worry, there will be buyers. It's just a matter of price.

So, forget about inflation. It just diverts attention from the real issue, which is finding a way to dig out of the mess we're in and put people back to work. QE2 has been a total flop; we know that now. It's time to return to traditional fiscal policies that have a proven track record of success.

And, most of all, it's time to stop scaremongering about hyperinflation. For good or bad, the dollar's going to be with us for a while longer. Deal with it.

By Mike Whitney


Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2011 Copyright Mike Whitney - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis.
Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


27 Apr 11, 13:01
The Holy Grail Or The Roosevelt Juggernaut?

You're right on the money Mike. All that these confused pundits seem to know is just to spread fear, panic and mayhem. Moreover, the common denominator of all of this lunacy always seems to center on gold, silver and other imitations of the Holy Grail.

There was certainly no shortage of frenzied speculators in the 1930's who also jumped on the gold and silver (Rothschild) bandwagon, and only to be cast under the wheels by the Roosevelt juggernaut (Gold & silver confiscation).

Yes, the smart money will be found in U.S. treasuries (and specifically in inflation-protected securities), and nowhere else.

28 Apr 11, 07:18
US treasuries

If the smart money is in U.S Tresuries, why is Bill Gross of PIMCO getting out of them?

28 Apr 11, 09:43

Rick said, "Yes, the smart money will be found in U.S. treasuries..."


Don't you ever give up, Rick? Never heard of busted bonds? :D

28 Apr 11, 13:34
U.S. Treasuries

Job: I'm not sure as I do not pretend to be Mr. Gross, but I would suspect that Mr. Gross may not be sure either (as to where to steer his fund now).

Anonymous: Just what was I supposed to be giving up? Yes, I've heard of "busted bonds", but I believe that I specifically mentioned U.S. inflation-protected securities (with a preference towards U.S. Series I Bonds).

28 Apr 11, 16:46
Paper's worth about what it's printed on

Rick, you never give up promoting paper over PMs. Do you work for the Fed? Look, there will come a point, it may be as little as a year from now, when the Fed can't even honour its obligations on fixed term paper, let alone the index-linked stuff. And remember that index-linked junk is only linked to grossly phony figures, just like it is in all the major central banks around the world. Check out for the shocking truth. (I have NO connection nor commercial interest).

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