In response to Economist Fired for Expressing Opinions on Max Keiser Show; Errors in Observation where I stated "The Fed Cannot Realistically Cause Hyperinflation" I received a couple of emails worth reviewing.

Reader Philip writes ...

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Mike Shedlock

Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.

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AD15 Wrote: Sep 04, 2012 6:34 PM
You have some holes in your logic. What the Fed will do with the money is to use it to buy the Tbills that come due. That means they will be giving China a great amount of freshly printed money. What do you suppose these Chinese will do with all that paper? Put it in the bank? What for? No, they will come looking for ANYTHING they can buy. And they will buy up America.

What will cause the public to lose confidence in the dollar. Well, it will simply happen when OPEC stops taking dollars for crude and demands a whale of a lot more of value for the oil they sell.

Now we have hyperinflation. Gas prices will skyrocket. And the cost of EVERYTHING ELSE will tag along with it. They will soar until the economy comes to a screec
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AD15 Wrote: Sep 04, 2012 6:36 PM
hing halt. Small business will close. Large businesses will cut back severely. But the price of oil will not come down. And prices will continue to climb.

Open your eyes. Oil is the driving force.
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David4 Wrote: Aug 31, 2012 11:01 PM
Agreed, you have made a good case that the USA won't have hyperinflation in the foreseeable future.

Now, what are the chances that the USA will get into Latin American style chronic 15-30% yearly inflation? It seems that all it would take is some irresponsible government spending.
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Blair31 Wrote: Aug 31, 2012 6:44 PM
No, it wouldn't. We need what the states have___a rainy day fund.
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The Obama Timeline author Wrote: Aug 31, 2012 3:07 PM
"In contrast to a Fed that cannot spend money..."

What? It spends money all the time by buying U.S. debt!
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The Obama Timeline author Wrote: Aug 31, 2012 3:05 PM
"Since printing $2 trillion did not spur credit expansion, pray tell why would $50 trillion?"

You are missing the point. Granted, that extra $2 trillion does not cause price hikes while it sits unspent and unloaned. But at some point it will enter the economy. THAT is when we will see the price hikes. The cash won't sit around unused forever.
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The Obama Timeline author Wrote: Aug 31, 2012 3:03 PM
Having gold does not prevent hyperinflation. Germany and Austrian had gold, and look what happened there in the 1920s.

The government is certainly capable of creating hyperinflation because it can pay off debt with cheaper dollars. But the bankers (and the Federal Reserve) would prefer a default to hyperinflation because they want to remain wealth.
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Joseph64 Wrote: Aug 31, 2012 8:07 PM
Germany and Austria did NOT have gold and that was the problem. All their gold went to pay reparations to the countries they invaded in World War 1 and they weren't allowed to pay the reparations in German Marks. They had to pay it in either gold or do a currency exchange and pay the countries they owed in their own currency. Please learn history before you post things you obviously know nothing about.
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The Obama Timeline author Wrote: Aug 31, 2012 3:01 PM
"The US dollar is not headed to zero given the US has the largest stash of gold of any country. That alone would preclude hyperinflation."

With all due respect, the United States does not have that much gold. There is probably only a few hundred billion in gold in Fort Knox. Even counting whatever the Federal Reserve has stashed away, the grand total is probably less than $1 trillion. Regardless, the government is not about to exchange its gold for paper currency.
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Joseph64 Wrote: Aug 31, 2012 8:08 PM
How cute. You actually believe there is gold in Fort Knox. All the gold is safely locked away in the underground vaults of the Federal Reserve Bank branches and the United States does not own any of it.
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Paulus Textor Wrote: Aug 31, 2012 2:55 PM
In the days before the evil FDR, companies doing large transactions would often state, in contracts, that payment was to be made "in gold." These contractual obligations had the effect of braking Federal Reserve counterfeiting; the more counterfeit paper in circulation, the more the market would "discount" it by writing contracts to be paid in gold. FDR, through illegal executive order, unilaterally abrogated all contracts written with such "gold clauses."

I don't know if "gold clauses" are STILL illegal, but even if they are, it would be good to see the market reassert itself, and start writing them anyway.
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Paulus Textor Wrote: Aug 31, 2012 2:57 PM
In those days, it was legal to say, "I'll sell you X for 100 dollars in gold, or 120 dollars in paper."
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Paulus Textor Wrote: Aug 31, 2012 2:50 PM
One reason prices at the consumer level are rising LESS than one would expect (although the government far understates those price increases), is that the dollar is still the currency of choice for international trade, which allows the US to essentially "export" its inflation.

In effect, the dollar is healthier than other sick currencies, much as a man with only two broken legs is much "healthier" than a dozen other people who have bubonic plague.

BUT, when the day comes that foreign countries realize they are being ripped off by being paid in collapsing dollars, they will turn to other currencies, or perhaps even gold. When that happens, all those exported dollars come back home, and prices explode upwards.
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David16953 Wrote: Aug 31, 2012 2:26 PM
Mike,
The US has printed so much money in the last 3.5 years that some sort of large inflation is necessary to balance the economy.
Every economy produces goods of various types, those goods have value. Money only has the value of how much goods can be purchased for a given amount of money. If you increase the amount of money without any increase in goods you get inflation. You have more money in circulation to purchase the same amount of goods. However in the US this is modified by the tremendous amount of unemployment. High unemployemnt and cautious spending by the employed has kept inflation in check. When the economy recovers we will have massive inflation.
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Joseph64 Wrote: Aug 31, 2012 8:11 PM
And this is what the Keynesians will never learn. It is not loss of faith that causes a currency to decline in value, it is having more money in circulation than the economy can put to productive use which causes the decline and THAT leads to a loss of faith in the currency. The decline comes BEFORE the loss of faith.
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Jerome49 Wrote: Aug 31, 2012 11:19 AM
Putting $50 trillion of new currency into circulation would make our currency worthless. It would create hyperinflation and raise the prices of all commodities so high no one could afford them. We need to make our currency more valuable and to do that we need to pull more of it out of circulation. One way to do this is to raise interest rates to a modest level..

The Fed may be more concerned about deflation instead of inflation. During a period of deflation, people hold off buying goods in the hopes that prices continue to fall. This in turn increases inventories, reduces factory orders and puts more people out of work. The fed walks a tightrope, leaning too far in one direction can result in disaster.
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BETTY383 Wrote: Aug 31, 2012 11:12 AM
NOT WITH THE BUNCH IN THE WHITE HOUSE NOW. THATS WHY WE HAVE TO KICK THEM ALL OUT
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essie2 Wrote: Aug 31, 2012 10:34 AM
"Would Printing $50 Trillion Tomorrow Do Anything?"

Yep. It would waste a lot of paper and ink.
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cchuba Wrote: Aug 31, 2012 9:56 AM
Using his definition, the Fed cannot cause hyperinflation but the gov't can by getting itself painted into a corner following the status quo. When our debt load gets so high that we cannot the interest or repay bonds then the Treasury under influence of the president and Congress can simply repay the debt in dollars printed out of thin air. The gov't has the authority to print money and give it away in the form of bond and interest rate payments. This would be very much analogous to Germany printing money to pay back reparations.
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Joseph64 Wrote: Aug 31, 2012 8:15 PM
Germany didn't pay reparations in printed money. The Treaty of Versailles forced them to pay in either gold or the currency of the country the money was owed to. That's why they had the hyperinflation. They did print money to pay the reparations in a sense, but when they exchanged it for gold or foreign currency on the open market the exchange rate got worse and worse because they had to keep printing more and more and they weren't allowed to export their inflation and the brunt of all the printing fell squarely on the German people and it will fall on us if the dollar is allowed to go into freefall and investors stop buying them.
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Paulus Textor Wrote: Aug 31, 2012 8:37 AM
Shedlock makes the odd assertion that the US cannot have hyperinflation, because the US has so much gold. He gives no further explanation why this would be the case; I cannot understand how owning lots of gold prevents hyperinflation, especially considering gold is not (yet) used as money.

Now, if that gold were used to back the currency (that is, paper dollars could be exchanged for gold coins), that gold would be bought up very quickly, if the Fed priced its gold too low. If it priced its gold too high, then the gold would just sit in the vaults.
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David238 Wrote: Aug 31, 2012 1:09 PM
I no longer put much stock in Shedlock's analysis. To think that there isn't a correlation between the worth of money and the amount of money is just beyond stupid. Of course the Fed can cause hyperinflation.
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Joseph64 Wrote: Aug 31, 2012 8:17 PM
Shedlock suffers from the same delusion that most people do that the United States actually owns any gold. Isn't he cute?
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Paulus Textor Wrote: Aug 31, 2012 8:32 AM
As Shedlock says, before you can have a rational discussion, you have to agree on definitions.

One of the biggest problems in modern discussions of economics is conflating the terms "inflation" and "price increase." It is possible to have price increases without inflation, and it is possible to have inflation without price increases.

"Inflation" is defined as an increase in the supply of money. Whether or not inflation LEADS to price increases depends on many factors.
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Joseph64 Wrote: Aug 31, 2012 8:22 PM
Prices increase when costs rise and costs rise because suppliers and workers demand more money to cover their own costs because the money they were getting paid yesterday is no longer adequate to cover the bills of today. THAT IS INFLATION. You cannot separate the two.
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Greg1084 Wrote: Aug 31, 2012 8:13 AM
The hyperinflation in Zimbabwe was initially political and based on economic ignorance, but after it began, those in power noticed that they could enrich themselves and consolidate gains made by corruption. They discovered that those who touch the money first can exchange it for more than it will be worth shortly. So they bought assets both at home and abroad, and exchanged the currency for harder foreign notes that would keep their worth long after the Zimdollars had become worthless. It was only after the leadership of the party in control could no longer profit from the fraud that the fraud stopped. It had nothing to do with economics or the public good. Mugabe=Evil.
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RW-in-DC Wrote: Aug 31, 2012 5:14 AM
After reading the article and reflecting on the current political climate, the author has not convinced me that we won't face a socialist hyperinflation including regulatory overreach. Besides the Federal Government, there are also local / State entities, including a city that's a hybrid entity: e.g., Washington DC itself (not the Capitol, but the city of residents that live in the Constitutional enclave of Congressional oversight). With the triple threat of Federal, State and local government regulation, the poor voter generally groans under burden and finds elections a choice between the lesser of two weevils.
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Dr_Zinj Wrote: Aug 31, 2012 8:11 AM
I have to agree.
Considering the amount of debt we're currently carrying, I can't see a realistic means of paying it off, short of inflating our way out of it. And that would be like tossing a snowball at the top of the ski slope at Vail. Starts small and slow, but when it hits the town, it's going Mach 1 and buries it.
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