Mike Shedlock

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 ...

I do not understand how you could say that the Fed cannot cause hyperinflation. The government has a huge debt. The debt is manageable at super low rates. But, if rates rise due to some inflation or even just caution from abroad then the government starts paying a very large sum in interest. That takes away from its obligations even more than the current deficit amount. Either the Fed has to step in and monetize the debt by printing more and more money spiraling out of control.

Definition of Terms

As always, before one can have a rational discussion, one must agree on definitions. Hyperinflation is a complete loss of faith in currency. In other words, currency becomes worthless in a short period of time.

Is there a risk of high interest rates? Yes. But I do not think that risk is high in the near future. Even assuming I am wrong, high rates are not the same as hyperinflation.



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. There are many other reasons that I have touched upon that suggest interest rates are not going up fast.

Credit Markets

The Fed has tried to revive the credit markets but has essentially failed, except for student loans. Making debt slaves out of students is actually a hugely deflationary force.

Moreover and as I have stated many times, the Fed cannot give money away, spend it, or force anyone to spend it. That is a very tough battle for the Fed with attitudes where they are (and as I have mentioned, attitudes are very important).

Banks do not want to lend, credit-worthy businesses do not want to borrow, and consumers are still deleveraging. Those are extremely deflationary forces.

Would Printing $50 Trillion Tomorrow Do Anything?

Ignoring interest on excess reserves (a proviso I mentioned), printing $50 trillion dollars tomorrow might not do anything.

Indeed, if $50 trillion printed tomorrow sat as excess reserves (the most likely event), it would have the same effect as if it was buried in the ground, or not printed at all. Such is the nature of a credit-based economy, and a point that has caused hugely inaccurate inflation forecasts from many Austrian economists.

As previously mentioned, such massive printing might briefly cause a temporary attitude change accompanied by a brief asset bubble of some sort (especially in long-dated treasuries given banks would put some of it to that use).

However, massive printing would collapse treasury rates, further destroying those on fixed income, and make it even harder for pension plans to meet assumptions.

Since printing $2 trillion did not spur credit expansion, pray tell why would $50 trillion?

Theory vs. Practice

Certainly we are guessing as to what printing $50 trillion might do. As a practical matter, the odds of finding out are essentially zero. The Fed is not going to print $50 trillion tomorrow.

More realistically, would printing $2 trillion a year for the next 10 years cause hyperinflation?

No, it won't.

So where is Fed induced hyperinflation going to come from? The answer is it isn't.

Government vs. the Fed

At this stage in the cycle, and in sharp contrast to what most believe, the Fed is essentially powerless (which is exactly why Bernanke is begging Congress to act)

In contrast to a Fed that cannot spend money (except to meet its payroll and expenses and pay interest on reserves, etc), the federal government could actually spend $50 trillion tomorrow. But it won't.

Hyperinflation? Even from a monetary aspect hyperinflation is nowhere in sight.

Hyperinflation is a Political Event, Not a Monetary Event

It's important to note that hyperinflation is not really a monetary event in the first place. Rather, hyperinflation is a political event caused by governments.

I responded that way in an email to reader Peter who replied "Sorry, but your theory is not based on the data. Read the literature on high and hyperinflation episodes."

Well, I have read countless excerpts and Peter is badly mistaken.

Please consider Hyperinflation Nonsense in Multiple Places.

The entire post is worth a look for some remarkably silly predictions, but for the debate at hand, here is the pertinent snip:

Jeff Harding at the Daily Capitalist asks Why Does Hyperinflation Occur?

In every modern case of hyperinflation the decision to inflate was a political one, not an economic one. In almost every case hyperinflation followed a war or a coup or some massive political change such as the end of the Soviet empire or the rise of a dictator or a populist-socialist takeover, and other political unrest.

In the 20th Century there were quite a number of hyperinflationary events. I used the Wikipedia list of modern hyperinflations (Since WWI) and researched the political circumstances of each country. The circumstances can be put into three rough categories: post-war disruption, post-Soviet collapse, and socialist-populist regimes.



For example we all know what happened in Germany during after WWI when politicians, mostly socialists, blamed all their problems on reparations and continued to print so much money that it resulted in the famous cash-in-a-wheelbarrow photos. They literally had no clue what they were doing.

The post-Soviet empire collapse is easier to understand as former communist/socialist regimes fought for power and struggled with economic policy. Many of these countries have reformed or were forced to reform their monetary and fiscal policies.

Many of the socialist-Marxist regimes were Latin American populist governments who employed “revolutionary” anti-capitalist nostrums for economic policy. Chile (Allende) and Argentina are good examples. Argentina has had years of high inflation to hyperinflation since 1980. In Africa most countries were a mixture of strongmen with socialist-Marxist policies. I am not suggesting that these were pure socialist governments, but rather the typical situation where the government seizes or controls large parts of industry and issues regulations controlling much economic activity.

These hyperinflations all had one common denominator: during a period of instability, spending was used as a political tool and it got out of hand. I understand that the circumstances of each country were different and that it is perhaps unfair to say, lump Israel in with Argentina. But each country faced political factors that created instability or a national crisis; the government spent heavily to gain popular support, and resorted to the printing presses to pay for their spending.

Harding is correct. This is how I further elaborated...

Zimbabwe vs. Weimar

In Zimbabwe, the Mugabe government initiated a "land reform" program intended to correct the inequitable land distribution created by colonial rule. Ultimately, Mugabe's attempt to to bail out the poor at the expense of the wealthy is what triggered capital flight and loss of faith of the currency.

His reforms not only caused a flight of capital and human capital (the wealthy), they also led to sanctions by the US and Europe. In response, Mugabe turned on the printing presses but the loss of faith in the currency had already occurred.

In Weimar Germany, printing for war reparations kicked off hyperinflation. Wikipedia provides a good accounting in
Inflation in the Weimar Republic.

It is certainly not impossible for there to be a complete loss of faith in the US dollar, however there odds are extremely remote.

Can The Fed Cause Hyperinflation?

I do not think the Fed itself can cause hyperinflation and more importantly I am sure they would not if they could. The reason is "Hyperinflation Would End The Game"

  • Hyperinflation by definition would destroy the currency and thus the banks
  • Hyperinflation would destroy the wealthy and all their corporate bond holding
  • Hyperinflation would destroy the Fed
  • Hyperinflation would destroy the wealthy political class


To understand how powerless the Fed is, one needs to understand the difference between credit and money, how much the former dwarfs the latter, and what the Fed's role is in getting banks to lend.

Hyperinflation Model is Complete Silliness

Those calling for hyperinflation are extremely misguided. It is not going to happen in any timeframe worth discussing.

On the political side, no country is going to force war reparations on the US. The US is not going to peg its currency to another, the Fed is not going to print $50 trillion (and it would not matter anyway unless Congress spent that much), government is not going to confiscate land to the point of causing massive human and capital flight, etc. etc.

Moreover, the US's gold holding, the fact the US has the largest capital and bond markets in the world coupled with ease in starting a business vs. nearly anyplace else in the world, absolutely 100% precludes a hyperinflationary outcome for the foreseeable future.

The hyperinflation model is absolute complete silliness.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com


Mike Shedlock

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