How Hyperinflationary Hell – and Commodity Heaven – Will Happen Before the End of 2011!

The Fed is terrified of the U.S. economy falling into a deflationary death-spiral [whereby] lack of liquidity leads to lower prices, leading to unemployment, leading to lower consumption, leading to still lower prices, the entire economy grinding down to a halt… Both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy”—stimulus on the one hand, liquidity injections on the other – but it’s those very fixes that are pulling us closer to the edge, [not to the deflationary drain, but a hyperinflationary spiral]. Words: 3040

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Gonzalo Lira’s (http://gonzalolira.blogspot.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Lira goes on to say:

Why? Because the economy is in no better shape than it was in September 2008—and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left after [spending] trillions in stimulus and trillions more in balance sheet expansion. [The only thing] they have accomplished… is to undermine Treasuries… [to make] Treasuries… the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.

[The above being the case,] the Fed has bought up assets of all kinds, in order to inject liquidity into the system, and bouy asset price levels so as to prevent this deflationary deep-freeze… but this Fed policy—call it “money-printing”, call it “liquidity injections”, call it “asset price stabilization”—has been overwhelmed by the credit contraction… [in spite of] expanding its balance sheet from some $900 billion in the Fall of ’08, to about $2.3 trillion today. [While it is true that] the Fed has been able to alleviate the worst effects of the deflation, it has not turned the deflationary environment into anything resembling inflation. Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”. Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right? Wrong! I would argue that the next step down… will be hyperinflation.

Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and right-wing survivalists drool about. In fact, most sensible people don’t even bother arguing the issue at all – everyone knows that only fools bother arguing with a bigger fool. [Nevertheless,] a minority actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment where commodity prices are more or less stable – there are downward pressures on wages, asset prices are falling, and credit markets are shrinking – inflation is impossible [and,] therefore, hyperinflation is even more impossible.

What Hyperinflation is NOT
The [above] outlook seems sensible if we fall for the trap of thinking that hyperinflation is an extention of inflation. If we think that hyperinflation is simply inflation on steroids… then it would seem to be the case that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous [to even contemplate] but hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same because in both cases the currency loses its purchasing power but they are not the same.

What (Hyper)inflation IS
Inflation is when the economy overheats. It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money [but that] they want less of the currency [and, as such,] they will pay anything for a good which is not the currency.

The Current Situation
Right now, the U.S. government is indebted to about 100% of GDP, with a yearly fiscal deficit of about 10% of GDP, and no end in sight. For its part, the Federal Reserve is purchasing Treasuries, in order to finance the fiscal shortfall, both directly (the recently unveiled QE-lite) and indirectly (through the Too-Big-To-Fail banks). The Fed is satisfying two objectives: One, supporting the government in its efforts to maintain aggregate demand levels, and two, supporting asset prices, and thereby prevent further deflationary erosion. The Fed is calculating that either path—increase in aggregate demand levels or increase in aggregate asset values—leads to the same thing: A recovery in the economy.

A recovery [in the economy] is not going to happen—that’s the news we’ve been getting as of late. Amid all this hopeful talk about “avoiding a double-dip”, it turns out that we didn’t avoid a double-dip—we never really managed to claw our way out of the first dip. No matter all the stimulus, no matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that the economy has been, and is, headed down.

How Hyperinflation Will Happen
1. One day… there will be a commodities burp – a slight but sudden rise in the price of a necessary commodity, such as oil.

2. This will jiggle Treasury yields, as asset managers reduce their Treasury allocations and go into the pressured commodity, in order to catch a profit. (Actually it won’t even be the asset managers – it will be their programmed trades – and these asset managers will sell Treasuries because, effectively, it has become the principal asset they have to sell.)

3. Bernanke and the Fed will… (To continue reading this article please go here.)

*http://gonzalolira.blogspot.com/2010/08/how-hyperinflation-will-happen.html To read his follow-up article (unedited) on the subject see: http://gonzalolira.blogspot.com/2010/08/hyperinflation-part-ii-what-it-will.html#more

– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
– Permission to reprint, in whole or in part, is granted provided full credit is given as per paragraph two above.