How Hyperinflation will Happen

chimpanchu · Dec 16, 2010

http://gonzalolira.blogspot.com/2010/08/how-hyperinflation-will-happen.html

This is a rather lengthy article, but a very good read if you want to understand why and how we get from Deflation into Hyperinflation. I agree with pretty much everything Gonzalo is saying in this article, and alot of analysts Marc Faber, Don Mcalvany, Bob Chapman, etc been saying the same thing as well. It's just that this article is exceptionally well written and easy to understand.

So here's the summary:

Right now, we are in the middle of deflation. The Global Depression we are experiencing has squeezed both aggregate demand levels and aggregate asset prices as never before. Since the credit crunch of September 2008, the U.S. and world economies have been slowly circling the deflationary drain.

To counter this, the U.S. government has been running massive deficits, as it seeks to prop up aggregate demand levels by way of fiscal "stimulus" spendingthe classic Keynesian move, the same old prescription since donkey's ears.

But the stimulus, apart from being slow and inefficient, has simply not been enough to offset the fall in consumer spending.

For its part, the Federal Reserve has been busy propping up all assetsincluding Treasuriesby way of "quantitative easing".

If we think that hyperinflation is simply inflation on steroidsinflation-plusinflation with ballsthen 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.

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 moneythey want less of the currency: So they will pay anything for a good which is not the currency.

So this is how hyperinflation will happen:

One daywhen nothing much is going on in the markets, but general nervousness is running like a low-grade fever (as has been the case for a while now)there will be a commodities burp: A slight but sudden rise in the price of a necessary commodity, such as oil.

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

So the TBTF banks, on seeing this run on Treasuries, will add to the panic by acting in their own best interests: They will be among the first to step off Treasuries. They will be the bleeding edge of the wave.

Here the panic phase of the event begins: Asset managerson seeing this massive Fed buy of Treasuries, and the American Zombies selling Treasuries, all of this happening within days of a largish Treasury auctionwill dump their own Treasuries en masse. They will be aware how precarious the U.S. economy is, how over-indebted the government is, how U.S. Treasuries look a lot like Greek debt. They're not stupid: Everyone is aware of the idea of a "Treasury bubble" making the rounds. A lot of peoplemyself includedthink that the Fed, the Treasury and the American Zombies are colluding in a triangular trade in Treasury bonds, carrying out a de facto Stealth Monetization: The Treasury issues the debt to finance fiscal spending, the TBTF banks buy them, with money provided to them by the Fed.

Note how it will not be China or Japan who all of a sudden decide to get out of Treasuriesthose two countries will actually be left holding the bag. Rather, it will be American and (depending on the time of day when the event happens) European asset managers who get out of Treasuries first. It will be a flash panicmuch like the flash-crash of last May. The events I describe above will happen in a very short span of timeless than an hour, probably. But unlike the event in May, there will be no rebound.
Click to expand...

rbaggio · Dec 16, 2010

http://forums.silverstackers.com/topic-2663-interesting-hyperinflation-article.html

THUCYDIDES79 · Dec 16, 2010

Wholesome article...

" The events I describe above will happen in a very short span of timeless than an hour, probably. "

The sentence above was a pearl.

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How Hyperinflation will Happen

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