Bond Market Crash Is ‘Inevitable’ And Hyperinflation Will Happen: Hyperinflation Happens When Government Debt Is Over 80% Of GNP & The Deficit Is Over 40% Of Government Spending. The US Is At Or Near These Numbers.

Frequently Asked Questions on Hyperinflation

The following are frequently asked questions or objections common among hyperinflation skeptics. The statements or questions in bold below are things hyperinflation skeptics say and my responses follow.

How is hyperinflation defined?

The International Accounting Standard of IAS 29 says there is hyperinflation when “the cumulative inflation rate over three years approaches, or exceeds, 100%.” This works out to 26% per year. There are many other definitions for hyperinflation but they almost all have something like “inflation over X per year” or “inflation over Y per month.” People pick some level of price inflation as the cutoff between regular inflation and hyperinflation. It is just the values for X or Y that differ. Note that hyperinflation is not defined in terms of the moneysupply alone, since the velocity of money and GNP are also key factors in the price level during hyperinflation. Hyperinflation is a process, a positive feedback loop, that once entered is very hard to get out of. This process can go on for years.

Is there a real chance the US dollar could get hyperinflation?

Hyperinflation happens when government debt is over 80% of GNP and the deficit is over 40% of government spending. The US is at or near these numbers, so the danger of hyperinflation is real. What happens is that the more the central bank prints money and buys bonds the less other people want to hold bonds. But the less other people hold bonds, the more the central bank has to buy them so the government has enough money to spend. You get a positive feedback loop or death spiral.

The government or central bank would never decide to have hyperinflation.

In over 100 cases of hyperinflation I don’t believe there has ever been a single “decision to have hyperinflation”. Hyperinflation is when things get out of control. It is not something central banks or government voted on. No group in government or a central bank has had a show of hands like “all in favor of hyperinflation raise your hands”. Not the way hyperinflation happens. Hyperinflation is a market response to government debt over 80% of GNP and deficit over 40% of spending when the central bank starts printing money and buying up government debt. Everyone thinks they just need to print a bit more money to make it through the next week or month and there is nothing else they can do since the government needs money to keep in operation. Nobody votes for hyperinflation. Nobody wants it. It just happens.

Why would the Fed suddenly print trillions of dollars?

There can be a panic to get out of bonds. There may be $3 trillion in bonds coming due in the next 12 months that might not get rolled over if people started not trusting bonds (I am trying to nail down how much short term the public holds, separate from the Fed and Social Security). There is also the “excess reserves” of around $2 trillion that are earning interest, much like government bonds really. The current deficit of around $1 trillion would also have to be financed with new money if nobody but the Fed was buying bonds. Altogether this would be something like $6 trillion over 12 months.

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Hyperinflation would never happen in America!

There were cases of hyperinflation in America’s colonial period. There was hyperinflation during the Revolutionary War. Remember, “not worth a Continental”? There was hyperinflation in the South during the Civil War. I also think that if the US had not made it illegal to own gold in 1933 that the Fed would have gone bankrupt, because they did not really have enough gold to back all of the notes they had issued, and that paper money would have become worthless then too. Hyperinflation is more common than most people realize. The time periods from the Revolutionary War hyperinflation, to the Civil War hyperinflation, to the 1930s currency crisis, to now, are all similar. To me this looks like some major currency crisis cycle is about due.



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CNBC: David Einhorn Blasts Bernanke’s ‘Never-Ending QE’

Bernanke’s Jelly Donut Policy

“What once looked like a purchasing spree of unimaginable proportions is now just the Fed’s monthly budget.”

Runs 1 minute.  Summary of Einhorn’s remarks from CNBC’s Kate Kelly.  Einhorn who manages almost $8 billion at his fund Greenlight Capital, spoke yesterday at the Buttonwood Investment Conference.

David Einhorn Quotes

“We would be way better off if we did pretty much the opposite of the current monetary policy.”

“When the next recession comes, it is very likely we will enter it prior to the Fed having ‘normalized’ monetary policy, and we’ll have a large fiscal deficit to boot.  If the Fed is willing to deploy this new set of desperate measures in these frustrating, but non-desperate times, what will it do then?”

Einhorn said allocating a large part of a portfolio to gold still seemed like a “a very good idea.”

Besides Bernanke, central bankers in Japan, the United Kingdom and the European Unionhave been on a “money printing spree” Einhorn said.

While the ink may be endless, the market’s tolerance is not (though there is no sign that is nearly exhausted).”


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