View Full Version : Economics Prepare for Hyper-Inflation

05-19-2009, 08:54 AM
To quote Robert J. Samuelson:

From 2010 to 2019, Obama projects annual deficits totaling $7.1 trillion; that's atop the $1.8 trillion deficit for 2009. By 2019, the ratio of publicly held federal debt to gross domestic product (GDP, or the economy) would reach 70 percent, up from 41 percent in 2008. That would be the highest since 1950 (80 percent). The Congressional Budget Office, using less optimistic economic forecasts, raises these estimates. The 2010-19 deficits would total $9.3 trillion; the debt-to-GDP ratio in 2019 would be 82 percent.
But wait: Even these totals may be understated. By various estimates, Obama's health plan might cost $1.2 trillion over a decade; Obama has budgeted only $635 billion. Next, the huge deficits occur despite a pronounced squeeze of defense spending. From 2008 to 2019, total federal spending would rise 75 percent, but defense spending would increase only 17 percent. Unless foreign threats recede, military spending and deficits might both grow.


By insisting on bailing out bank bondholders to the tune of 100 cents on the dollar, John Hussman says, the government has crowded out $1 trillion of private investment and almost guaranteed double-digit future inflation.

Hussman's weekly note explains the crowding-out part in detail (it's complex, but important). Here's a quick summary:

Bailed-out banks are not pumping new cash into the economy. They are dumping crap assets onto the Fed's balance sheet in exchange for cash, which they are then using to buy newly-issued Treasuries. The banks don't have any more cash than before: They just have safer balance sheets than before. No new cash is being put to productive use in the economy. The government is just borrowing more to bail out bank bondholders who gave the banks money to blow in the first place.

So what does this mean?

The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured.

But by transferring wealth from those who did not finance reckless loans to those who did providing monetary compensation without economic production the bureaucrats at the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery.

What will that inflation look like? A couple of years of uncomfortably high 5%-6% per year? Nope.

[T]he bailout ensures that any incipient recovery will be cut short, because the only reason that our economy is able to absorb the present supply of government liabilities is extreme risk aversion that creates a demand for default-free instruments. If that risk aversion abates, it will quickly be replaced by higher short term interest rates, higher monetary velocity, and inflation that can be expected to be quite difficult to control. At that point all the Fed will be able to do is to swap one government liability (monetary base) for another (Treasury securities). The genie will not easily go back into the bottle.

[T]he attempt to save bank bondholders from losses to provide monetary compensation without economic production is not sound economic policy but is instead a grand monetary experiment that has never been tried in the developed world except in Germany circa 1921.

This policy can only have one of two effects: either it will crowd out over $1 trillion of gross domestic investment that would otherwise have occurred if the appropriate losses had been wiped off the ledger (instead of making bank bondholders whole), or it will result in a stunning and durable increase in the quantity of base money, which will ultimately be accompanied not by a year or two of 5-6% inflation, but most probably by a near-doubling of the U.S. price level over the next decade.

The other way of saying "a near-doubling of the U.S. price level over the next decade" is "The value of your savings will be cut in half over the next 10 years."

Skyrocketing inflation is generally not conducive to bull markets in stocks (see the 1970s). Stocks are, however, real assets, and as such, they will eventually shield you from the the impact of inflation.


KC native
05-19-2009, 08:58 AM
Don't waste your time with Blodget's article and go to the source. Dr Hussman is a great writer and to get a better picture of his argument read his column.


05-19-2009, 10:11 AM
Yey, we get to pay $5-6 dollars for a loaf of bread!! I was thinking things were getting too cheap anyway. Change you can believe in, in your pocket. :D

05-19-2009, 10:29 AM
Yey, we get to pay $5-6 dollars for a loaf of bread!! I was thinking things were getting too cheap anyway. Change you can believe in, in your pocket. :D

It's ok, we'll just raise the minimum wage to $16/hour.

05-19-2009, 10:34 AM
It's ok, we'll just raise the minimum wage to $16/hour.

And print up some more money!


05-19-2009, 03:37 PM
Well, banyon has often said that our ideas are like the Congo or Zimbawe....so here we come with the Zimbawan solution. Heh!