Sunday, October 11, 2009

Hyperinflation on the Horizon?

Though I don't make much of any one indicator or statistic, I thought this was interesting (from John Mauldin's weekly newsletter):
"There have been 28 episodes of hyperinflation of national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz (Professor Emeritus of Economics in the Center for Economics and Business (WWZ) at the University of Basel, Switzerland) has spent his career examining the intertwined worlds of politics and economics with special attention given to money. In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government's deficit exceed 40% of its expenditures.

"According to the current Office of Management and Budget (OMB) projections, US federal expenditures are projected to be $3.653 trillion in FY 2009 and $3.766 trillion in FY 2010, with unified deficits of $1.580 trillion and $1.502 trillion, respectively. These projections imply that the US will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively. To put it simply, roughly 40% of what our government is spending has to be borrowed.


Blogger Galileo Blogs said...

Disturbing. The prospect of inflation is the over-arching issue that will affect the value of our investments, in fact all of our assets, debts, and the direction of the economy.

My own opinion has not fully formed on this issue. It is very complicated, but the cited data does speak, along with much other data: the declining value of the dollar, the rise in gold, etc.

The tricky part is that much of this is reversible if the government does the right thing. Will it?

If not, in a worst case the consequences could get much worse than rising prices and a devalued dollar. In the 1970s President Nixon imposed wage-price controls in response to inflation. If one thinks that can't happen again here, consider that the government now intends to control the pay of thousands of top bankers across the country. If the government can do that, I do not think the Supreme Court would stand in the way of a desperate move to control *all* wages and prices.

In the 1930s, the Federal government confiscated and outlawed the private ownership of gold. Could this happen here if gold keeps rising, and calls attention to the debased value of the dollar?

5:54 AM  
Blogger Paul Hsieh said...

Thanks for alerting us to this, Amit!

I've blogged about this piece (referencing you) at NoodleFood:

8:26 AM  
Blogger W.C. Varones said...

Good stuff. I've linked you as well.

12:04 AM  

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