Could the Weimar Hyperinflation Happen Again in America?

[poborsky]

http://eclipptv.com/viewVideo.php?video_id=8055

 

[Atilla]

http://eclipptv.com/viewVideo.php?video_id=8055

There seems to be incredulity at the fall of the dollar.

To expect the dollar to regain its previous top position on the world stage is unreasonable imo without some factual evidence. I'm not sure anybody knows even if the USA can compete in a global market place as it used to let alone catch up on its defecit.

Even if interest rates rise it will be a momentary factor causing exchange rates to rise. As long term it can only be its ability to export goods and services beyond its imports that will determine the value of the dollar.

Anything else is hear say fiction.

What possible change can take place within the global economy that can change trading patterns based on the last 20 years??? On the contrary with the development of Asian economies BRIC countries situ will deteriate coupled with energy, mineral and agricultural shortages.

Latin American countries at one point were using all export values to pay for interest payments on loans. Servicing debt can become all consuming... Bankruptcy and zero value of the dollar is not beyond a plausible outcome if corrective action is not taken soon.

 

[poborsky]

http://www.mcclatchydc.com/227/story/77791.html

 

[poborsky]

http://www.ft.com/cms/s/9a5b3216-c7...04-2ffa-11da-ba9f-00000e2511c8,print=yes.html

 

[poborsky]

http://www.youtube.com/watch?v=6X4q2qJ1cUM&feature=player_embedded

 

[SAINT]

I really doubt that a bankrupt and zero value dollar would result in the BRIC economies carrying on as normal and picking up the baton. The destruction of wealth and inter-connected deals/loans etc would have far-reaching consequences.

China for example, would lose the bulk of its reserves, its main trading partner(s) with the knock-on effect of decreased public spending. Savings wiped out in dollar assets, would also see hot money repatriated from China/Brazil etc to patch up zero value finances back home, popping bubbles in housing and stocks in the process.

Everyone is watching the dollar but it may not be the first to go. Hot money has been flowing into risk assets against the dollar. ETFs and carry trades have fuelled speculative crowding in stocks, currencies, commodities. All of this is still at risk from a game changing event. Japan is arguably in a worse state than the U.S. Where are the calls for a zero value Yen? Although $12 trillion sounds a big number, it's still less in percentage GDP terms than Japan.

It's only 9 months since the lows of March and yet markets assume they can accurately price risk, economics and geopolitical events once again. History tells us otherwise.

 

[poborsky]

 

[Benton D Struckcheon]

I actually thought someone would post a link to this amazing post from Steve Keen on his Debt Watch blog, but as no one did, allow me:

The Roving Cavaliers of Credit

This section from the post is exactly how the world works. I used to work supporting the Fed Funds desk of a massively global bank, and this is exactly how they did business:

The standard money multiplier model’s assumption that banks wait passively for deposits before starting to lend is false. Rather than bankers sitting back passively, waiting for depositors to give them excess reserves that they can then on-lend,

“In the real world, banks extend credit, creating deposits in the process, and look for reserves later”.[5]

Thus loans come first—simultaneously creating deposits—and at a later stage the reserves are found. The main mechanism behind this are the “lines of credit” that major corporations have arranged with banks that enable them to expand their loans from whatever they are now up to a specified limit.

If a firm accesses its line of credit to, for example, buy a new piece of machinery, then its debt to the bank rises by the price of the machine, and the deposit account of the machine’s manufacturer rises by the same amount. If the bank that issued the line of credit was already at its own limit in terms of its reserve requirements, then it will borrow that amount, either from the Federal Reserve or from other sources.

If the entire banking system is at its reserve requirement limit, then the Federal Reserve has three choices:

* refuse to issue new reserves and cause a credit crunch;
* create new reserves; or
* relax the reserve ratio.

Since the main role of the Federal Reserve is to try to ensure the smooth functioning of the credit system, option one is out—so it either adds Base Money to the system, or relaxes the reserve requirements, or both.

The bolded part is the important part.
We used to run a report, one that for all I know is still being run, to alert the traders at the Fed Funds desk as to when the bank either had a major deposit coming in, which of course would mean it would have to get lent out to earn as much interest as possible, or a major loan being originated, in which case that money would need to be found, somewhere.
For banks, money is "bought" (deposits taken in) or "sold" (loans going out). Banking is a business, and money is what is being bought and sold. It's bought at a lower rate, and sold at a higher rate, no different than clothing or computers. And if a major customer comes in and says he needs more of what you're selling, you don't tell him you're out, not if you can help it. Instead, you give him as much of what he needs as you can manage, at of course a price that would make it profitable. Banks are no different than any other business in this regard.
What this means to monetary policy and inflation is summarized by this brilliant economist thusly:

Bernanke’s increase in Base Money goes from being heroic to trivial. Not only does the scale of credit-created money greatly exceed government-created money, but debt in turn greatly exceeds even the broadest measure of the money stock—the M3 series that the Fed some years ago decided to discontinue...To make a serious dent in debt levels, and thus enable the increase in base money to affect the aggregate money stock and hence cause inflation, Bernanke would need to not merely double M0, but to increase it by a factor of, say, 25 from pre-intervention levels. That US$20 trillion truckload of greenbacks might enable Americans to repay, say, one quarter of outstanding debt with one half—thus reducing the debt to GDP ratio about 200% (roughly what it was during the DotCom bubble and, coincidentally, 1931)—and get back to some serious inflationary spending with the other (of course, in the context of a seriously depreciating currency). But with anything less than that, his attempts to reflate the American economy will sink in the ocean of debt created by America’s modern-day “Roving Cavaliers of Credit"

The redoubtable N Rothschild is far closer to the truth than anyone else on here, IMO, with the possible exception of that guy sitting on the French Riviera.
Oh yes, TIC by the way, is the US Treasury International Capital report.
Commenting on the current account deficit without knowing what this report is and what the data means is, I don't know, seriously weird or something.

 

[N Rothschild]

hows all those pro hyperinflation short dollar positions going, good?

 

[N Rothschild]

dont be shy...

 

[virtuos0]

The whole premise of the thread makes no sense, monetary and fiscal policy allows the choice between the two paths of inflation and deflation. So COULD it happen? Yes of course.

The real question is, which of the two paths of inflation and deflation allow for the government to maintain power and avoid blame..

 

[Benton D Struckcheon]

The whole premise of the thread makes no sense, monetary and fiscal policy allows the choice between the two paths of inflation and deflation. So COULD it happen? Yes of course.

The real question is, which of the two paths of inflation and deflation allow for the government to maintain power and avoid blame..

The government (actually governments in the plural) are helpless.
That was the point of what I posted from Steve Keen. What's going to happen is going to happen, regardless of what the governments of the world do. All they can do is keep the pain from destroying civil society.
That was a challenge in the Thirties, and it will again be a challenge over the course of the next ten to twenty years.
If they listen to the folks who focus solely on government fiscal deficits or central banks "printing money", as if that matters in times like this, civil society will be destroyed. If not, not. That was what Keynes figured out in the Depression, and it's still true.

 

[virtuos0]

The government (actually governments in the plural) are helpless.
That was the point of what I posted from Steve Keen. What's going to happen is going to happen, regardless of what the governments of the world do. All they can do is keep the pain from destroying civil society.
That was a challenge in the Thirties, and it will again be a challenge over the course of the next ten to twenty years.
If they listen to the folks who focus solely on government fiscal deficits or central banks "printing money", as if that matters in times like this, civil society will be destroyed. If not, not. That was what Keynes figured out in the Depression, and it's still true.

Governments are not helpless when it comes to the choice between deflation and inflation. Post Lehman the UK and US have chosen to avoid deflation via fiscal policy (reducing the rate of VAT in the UK, cash for clunkers) and via monetary policy (QE and lower interest rates), what they have tried to achieve is to cancel out the private sector deleveraging, to arrive back at 0-2% inflation as we had pre-crisis. This was the middle way.

The other two choices were either to let things run their course and allow deflation, or to keep monetising debt and using loose fiscal policy to creat high or even hyper inflation.

Of course as the debt to GDP increases fiscal and monetary policy becomes more and more difficult to wield for various reasons (zero real bound on interest rates, difficulty in selling debt) but if the government really wants to it can ALWAYS inflate out of a looming deflation as debt monetisation has no upper bound.

 

[Atilla]

Interesting comments from Blanchflower and pretty much similar to what a number of bloggers on this site have been saying.


Inflation accelerates to 3.5% in the UK

I would repeat the main solution out of this mess is

1. low interest rates - monetary side
2. higher taxation - fiscal side

policies to stimulate investment and curtail inflationary pressures...

In the process modest inflation in our scenario is likely to be beneficial.

Without higher taxes, with continued growth impact of low interest rates and higher fuel prices will mean inflation kisses 2% goodbye...

As for credit - we now have negative interest rates - which means bring your purchase decision forward.

GBP is likely to fall with respect to other currencies.


imo - In the absence of tax rises - I would raise interest rates in April for sure...


As for the contras out there - it is unfathomable how anyone can state (and gloat ) we are in deflation at +3.5% inflation with falling money supply...

 

[N Rothschild]

once again attilla your lack of observation has failed you. this thread is about america not the uk....

 

[Benton D Struckcheon]

Governments are not helpless when it comes to the choice between deflation and inflation. Post Lehman the UK and US have chosen to avoid deflation via fiscal policy (reducing the rate of VAT in the UK, cash for clunkers) and via monetary policy (QE and lower interest rates), what they have tried to achieve is to cancel out the private sector deleveraging, to arrive back at 0-2% inflation as we had pre-crisis. This was the middle way.

The other two choices were either to let things run their course and allow deflation, or to keep monetising debt and using loose fiscal policy to creat high or even hyper inflation.

Of course as the debt to GDP increases fiscal and monetary policy becomes more and more difficult to wield for various reasons (zero real bound on interest rates, difficulty in selling debt) but if the government really wants to it can ALWAYS inflate out of a looming deflation as debt monetisation has no upper bound.

That last is what you might call Bernanke's Helicopter Hypothesis, which is being tested in real time by all of this. My bet is he's wrong, for the reasons Steve Keen lays out, and which conform to my experience of how banking actually works.
Keen flays Bernanke pretty severely for his alleged expertise on the Great Depression, btw. You should go over there and have a look.

 

[Atilla]

once again attilla your lack of observation has failed you. this thread is about america not the uk....

Thank you for pointing that out I am aware. May I counter by stating that if you look carefully on your keyboard you will find a CAPS LOCKS key or if your are reasonably coordinated a shift key that will allow you to use capital letters for names of countries like America and the UK.

Lack of observation and effort leaves a lot to be desired from the the same old Genics with chip on his shoulder - who lacks typing skills and comprehension...

However, I'm sure that is the last of your problems considering your grammer with one sentence attention defecit disorder...


Read the thread from the beginning and see how many references there are to the UK. Then tell me when you woke up to the fact this thread is only about the US??? :whistling


As for that matter - US and UK economies facing same old issues; budget & BoP defecits, massive government debt - two countries at war with aging popullation and impending health crises.


How is your homework come along?

 

[virtuos0]

Of course ultimately a true HYPERinflation can only really be caused by a complete loss of confidence in the currency causing a popualtion to attempt to shift entirely into 'real' assets. Or in other words a drop in the demand for money (hoarding) to zero or almost zero, causing the price of money (purchasing power) to fall to zero.

 

[Atilla]

Of course ultimately a true HYPERinflation can only really be caused by a complete loss of confidence in the currency causing a popualtion to attempt to shift entirely into 'real' assets. Or in other words a drop in the demand for money (hoarding) to zero or almost zero, causing the price of money (purchasing power) to fall to zero.

I think that questioned posed was more to underline the fact that with the twin budget and mass bailout of the banks - likely cause would be the loss of the dollar standard.

Some people were arguing for deflation was at work whilst others were pointing out the likely consequences to be inflation.

As it often happens one goes to polar extremes to underline a point... :cheesy:


I do think it is significant however, that Moody's Warns U.S. Could Lose Triple-A Rating was denied by "Geithner: U.S. Will Not Lose AAA Bond Rating".

Who could have have thought such an event was conceivable...

If Greece government debt issue is not resolved promptly - imo - more than PIGS will be followed to the slaughter of trying to finance government debt and by whom???

Then HyperInflation or Deflation will be a toss of the coin... :whistling

 

[Benton D Struckcheon]

I think that questioned posed was more to underline the fact that with the twin budget and mass bailout of the banks - likely cause would be the loss of the dollar standard.

Some people were arguing for deflation was at work whilst others were pointing out the likely consequences to be inflation.

As it often happens one goes to polar extremes to underline a point... :cheesy:


I do think it is significant however, that Moody's Warns U.S. Could Lose Triple-A Rating was denied by "Geithner: U.S. Will Not Lose AAA Bond Rating".

Who could have have thought such an event was conceivable...

If Greece government debt issue is not resolved promptly - imo - more than PIGS will be followed to the slaughter of trying to finance government debt and by whom???

Then HyperInflation or Deflation will be a toss of the coin... :whistling

In the Thirties, the dollar was deliberately devalued by 40%, a partial default by anyone's standard, and there was deflation anyway. Not mutually exclusive. It all depends on the economic context.