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Hyperinflation? Don’t Bet on It

By: Rick Ackerman, Rick's Picks


-- Posted Thursday, 29 May 2008 | Digg This ArticleDigg It! | Source: GoldSeek.com

Rick’s Picks

Thursday, May 29, 2008

“Phenomenally accurate forecasts” 

Is the dollar in the initial stages of a hyperinflation?  We very strongly doubt it, although we would no longer assert categorically that such an outcome is impossible. Even so, there is only one course of political action we can conceive of that would put the U.S. economy on a hyperinflationary path, and it is not one that we have heard discussed. Indeed, while inflationists have always insisted the Fed would do “whatever it takes” to avoid deflation, they’ve always fudged the details. And even when details were forthcoming, the scenarios they described were preposterous – such as that wage inflation was about to come on full-bore.  Does anyone actually believe that United Airlines, Chrysler, Beazer Homes et al. will somehow find a way to pay their employees enough to scrape by in hyperinflationary times?

Another crackpot vision of the inflationists has Helicopter Ben dropping $100 dollar bills from whirlybirds. This tableau was metaphorically appealing but implausible, since the only legal and legitimate way to put fresh money into people’s hands is to get them to borrow it. And by the way, this is true even of the stimulus checks the IRS recently mailed to taxpayers. It may have seemed as though the money dropped from the sky, but in reality the hundreds of billions of dollars worth of free lunches disbursed by the Treasury Department will increase the federal deficit and therefore the amount for which taxpayers are ultimately on the hook.

No Need to Speculate

In light of the above, what options does the Fed have to fend off deflation?  Actually, we needn’t speculate any longer, since, by its recent attempts to arrest the collapse of America’s financial system, the central bank showed us exactly what it would – and will -- do.  Recall that the Fed did not simply fork over hundreds of billions of dollars to the banks; rather, Bernanke & Co. employed subterfuge to make a still-bottomless bailout look like a series of business loans. Banks simply “exchanged” their dubious mortgage paper for superficially less-dubious Treasury paper – “new lamps for old!” -- and that was that.

All of this, by the way, was well within the intentions of the Monetary Control Act of 1980, which gave the Federal Reserve emergency authority to acquire the bonds of, say, a bankrupt auto manufacturer, a poultry distributor, or a municipal stadium. In practice, though, we see that the Fed has done nothing so transparent as purchase assets outright; rather, it has swapped Treasury paper for subprime confetti, enabling the banks who were warehousing the confetti to pass muster with regulators who are all in on the con.

These sham transactions have given the banks the temporary appearance of solvency, but, as is becoming increasingly obvious, the loans have done nothing to stimulate the consumer economy or the housing market. Taken together, however, the measures could be seen as a template for a future, potentially hyperinflationary, bailout at the household/consumer level. Surely nothing less than that will suffice to get consumers spending again, and that is why we might expect the government’s so-far token aid to a relative handful of down-and-out homeowners to expand as real estate deflation begins to asphyxiate more and more neighborhoods across the nation. 

Lenders Matter

But we shouldn’t confuse such a course of action with a deliberate strategy to hyperinflate, since any political decision to do so would have grave and presumably unacceptable consequences -- not only for savers as a class, but for all of the institutional conduits and repositories of savings. Think of an economy operating without credit or bond markets for perhaps a generation and you begin to see the devastation that hyperinflating the dollar would cause. After all, who would be willing to lend even a dime to the U.S., or to U.S.-based businesses, if hyperinflation had screwed them out of tens of trillions of dollars worth of interest and principal?  Pensioners and widows would be wiped out too, since their nest eggs and life insurance annuities would be rendered effectively valueless.

It is at that point, perhaps, that debtors might collectively begin to understand that by walking away from those whom they owe, they would only be screwing themselves. It happened easily enough in Germany, you say?  True enough.  But anyone who cites the Weimar hyperinflation of 1923 as a reason for why it could happen here has contrived to ignore the crucial fact that post-War Germany, physically in ruins and economically devastated, had relatively little to lose. Americans, on the other hand, have everything to lose, since we would be plunging from a civilizational pinnacle of affluence into destitution. Under the circumstances, a vote for Total Debtor Relief – for hyperinflation, that is – would be a vote to destroy any chance of the “good life” returning for decades. A deflationary course would at least have the moral virtue of visiting pain on sinners more or less in proportion to their sins of borrowing.

Real Estate Vortex

So how could a hyperinflation occur in this country if it is politically out of the question? The answer is that we would get sucked into it -- slowly at first, but then inescapably as the vortex of real estate failures accelerated. In such desperate times, bailout measures could grow increasingly reckless, until they reached a point where the government effectively assumed all of Americans’ mortgage debts. The sums involved would dwarf the Treasury paper currently held as rescue reserves by the Fed, so that the government would wind up literally printing money to take over the bailout where the central bank had left off.

Compared to a wholesale bailout of America’s home “owners,” the government’s measures so far to prop up the banking system have been timid and opaque. In the end, we doubt Congress will have the stomach to tell mortgage lenders they will have to accept confetti as payment. And that is why the housing-sector bailout is unlikely to reach the vortex stage. More likely is that real estate deflation will at some point become precipitous, outstripping any rescue package that Congress might be able to throw together. Ruinous deflation would be a fait accompli by then and there would be little point in effecting a hyperinflationary rescue. Deflation would simply be allowed to run its course, with the government restructuring mortgage contracts so that each of us would continue to make monthly payments commensurate with our means.

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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com 


-- Posted Thursday, 29 May 2008 | Digg This Article | Source: GoldSeek.com




 



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