Hyperinflation – Even The Best Case Scenarios Look Bad

Posted by Jason | Posted in Economics, Government | Posted on 11-12-2009

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Bob Murphy has a article on The American Conservative basically outlining how he sees our currency being destroyed and possibly ushering in the Amero. While the entire article is pretty scary, the part about the current bank reserves really popped out at me.

Monetary Catastrophe

Since the start of the present financial crisis, the Federal Reserve has implemented extraordinary programs to rescue large institutions from the horrible investments they made during the bubble years. Because of these programs, the Fed’s balance sheet more than doubled from September 2008 to the end of the year, as Bernanke acquired more than a trillion dollars in new holdings in just a few months.

If Bernanke has been so aggressive in creating new money, why haven’t prices skyrocketed at the grocery store? The answer is that banks have chosen to let their reserves with the Fed grow well above the legal minimum. In other words, banks have the legal ability to make new loans to customers, but for various reasons they are choosing not to do so. This chart from the Federal Reserve shows these “excess reserves” in their historical context.

U.S. depository institutions have typically lent out their excess reserves in order to earn interest from their customers. Yet currently the banks are sitting on some $850 billion in excess reserves, because (a) the Fed began paying interest on reserves in October 2008, and (b) the economic outlook is so uncertain that financial institutions wish to remain extremely liquid.

The chart explains why Faber and others are warning about massive price inflation. If and when the banks begin lending out their excess reserves, they will have the legal ability to create up to $8.5 trillion in new money. To understand how significant that number is, consider that right now the monetary aggregate M1—which includes physical currency, traveler’s checks, checking accounts, and other very liquid assets—is a mere $1.7 trillion.

What does all this mean? Quite simply, it means that if Bernanke sits back and does nothing more, he has already injected enough reserves into the financial system to quintuple the money supply held by the public. Even if Bernanke does the politically difficult thing, jacking up interest rates and sucking out half of the excess reserves, there would still be enough slack in the system to triple the money supply.

via The American Conservative » Killing the Currency.

If the currency doubled over night and the goods and services of the country did not grow, prices would quickly double as well.  While this is a drastic example, it will not work much different if it happened over a longer period of time. It just wouldn’t be as obvious. The problem here as Bob points out is even if Bernanke manages to pull out half the reserves, you’d have the money supply possibly tripling in a short period of time. Obviously, our goods and services would not triple in a short period of time, so you would have inflation that no living American has ever experienced.

What happens in situations like that? Well, look at the Argentina.

It never ceases to amaze me the arrogance we have been programmed to believe. America is a great country, but it cannot defy history just because it’s America. I’ve heard countless pundits just over the past couple weeks pooh, pooh all the “crazy talk” about the economy by saying “We’re Americans. We’ll figure our way out of this.” Why do we believe being American has anything to do with our odds? If we do the same things that were done historically, we will get the same results. It’s as simple as that. This very arrogance is even manifest in the history of decline civilizations. Do you think Rome didn’t believe they were special and could keep going as they were? How about the Soviet Union? We spent all the money in the 80s to bankrupt the Soviet Union, because Reagan knew that was the best and easiest way to destroy it. Here we are 20 years later following the same path of destruction that led to the collapse of the Soviet Union. Are we that stupid and arrogant to think because we are Americans, it will be different?

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Comments (4)

to answer your last question – no we’re not. We know that things will be different this time because we have the almighty American gov’t. They will prevent the same results that have occurred elsewhere from occurring here.

I’m being sarcastic. Not about people’s hope in our gov, but in their ability to anything but screw this country and it’s residents. I fear for my 2 children and the world they’ll be living in when they grow up.

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Wow. I never knew the banks were sitting on that much capital. I knew it was a lot, just not 5 times the current money supply.

25$ cheeseburgers, 60$ 6 packs, and 40$ packs of cigarettes. And that’s IF they’ll be available.

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[...] and enters the economy. I wouldn’t call that a case for optimism. As I highlighted in a previous blog, even the best case inflation scenario is not too comforting. If not severely contracted, [...]

…wahhhh wahnhhh wahnhhhBernanke slahed my savings account rateswaaaahhh wahnhhh wahhhhyou dipshits couldn’t care less about the economy or anyone’s well being. it’s all about me, me, me.DaveO said…Listen, asshole,How do you know he is an asshole?having a society where people save money and only buy things that they can afford makes for a STABLE economy, which is good for EVERYONE’s well being in the LONG TERM. He didn’t say it wasn’t. He just said you were selfish and self-absorbed.We’re selfish and self-absorbed because we don’t want people who were diligent with their money to suffer at the expense of the irresponsible? Because we want a better economy for our future generations? Because we don’t want short-term solutions to mess up the long-term economy? How exactly are we selfish?If you had a friend that was a cocaine addict would you say that by not giving him more cocaine, that would be selfish? It’s the same thing as having a friend who foolishly spends money and doesn’t save it for when they need it. By not giving them money now (i.e. a short-term fix) and forcing them to learn the harsh reality of financial prudence (long-term), that’s being selfish?Why the hell should we encourage financially irresponsible behavior, which hurts the economy in the LONG TERM, just to save irresponsible dimwits in the short term? He didn’t say this either.By saying that we’re upset that Bernanke slashed savings rates, he implied that those of us who do wish to have the fed encourage saving rather than spending are being selfish. He doesn’t see the big picture, which is that encouraging saving rather than getting into unnecessary debt is better for individuals and the nation’s economy in the long term.I care about the economy in THE LONG TERM! And you think we’re the greedy ones? He didn’t say you were greedy. He said you were selfish and self absorbed. The greedy part comes from you. Are you?We’re greedy because we don’t want a society where people spend more than they save, encouraged by a federal reserve that refuses to put a stop to the easy-money (i.e. super-low interest rate) train? Because we discourage our society from getting into more debt when we already have too much debt to begin with? Explain how that is greedy.It sounds like all you care about is band-aid solutions for those that should have known better and got way in over their head.He didn’t talk about band-aids either. You made this up.The “band-aid” that I refer to is slashing interest rates to encourage people from taking on more debt. I never said that he directly talked about band-aid solutions but he implied it with his infantile “wahnhhh Bernanke slahed my savings account rates waaaahhh” comment.The sooner we clean up this horrible mess, by letting bubbles (which are unsustainable ipso facto) burst quickly, the sooner we can have a good long-term economy.Neither you nor the HP’ers aregoing to clean up any messes. Too busy in here routing for the destruction of the country.Are you really that stupid? By “we”, I meant our nation as a whole, not just us at HP. Encouraging a society where housing prices are commensurate with incomes (as was the case before this decade), though it will cause pain in the short term, is tantamount to “routing for the destruction of the country”? Explain how Bernanke’s rate-slashing is going to help rather than hurt our country in the long-term.Which would you rather encourage, a positive savings rate or a negative savings rate?Now you have changed the subject.A positive savings rate is one where people overall save more than they spend; a negative savings rate is just the opposite. Low fed rates encourage the latter. How is talking about savings rates off-topic when they are affected by the fed rates?

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