March 17, 2011

Hyperinflation by 2012?

Consider the following article from FinancialSense, documenting the research done on the causes leading to hyperinflation.
Bernholz examined 12 of the 29 hyperinflationary episodes where significant data exist. Every hyperinflation looked the same. “Hyperinflations are always caused by public budget deficits which are largely financed by money creation.” But even more interestingly, Bernholz identified the level at which hyperinflations can start. He concluded that “the figures demonstrate clearly that deficits amounting to 40 percent or more of expenditures cannot be maintained. They lead to high inflation and hyperinflations. . . .” Interestingly, even lower levels of government deficits can cause inflation. For example, 20 percent deficits were behind all but four cases of hyperinflation.

Stay with us here, because this is an important point. Most analysts quote government deficits as a percentage of GDP. They’ll say, “The United States has a government deficit of 10 percent of GDP.” While this measure makes some sense, it doesn’t tell you how big the deficit is relative to expenditures. The deficit may be 10 percent of the size of the U.S. economy; currently the U.S. deficit is over 30 percent of all government spending. That is a big difference.

Figure 8.5 shows the level of deficits relative to expenditures before hyperinflationary periods.

Interestingly, currently Japan and the United States are not far from levels that have preceded hyperinflations. The big difference between Japan or the United States and countries that have experienced hyperinflations is that the central banks are not monetizing most of the deficit. If they were to do that, then we would be one step away from paying quadrillions of dollars for a stamp or a sandwich (see Figure 8.6). It is extremely important to note Bernholz’s conclusion. Hyperinflations are not caused by aggressive central banks. They are caused by

budget deficits prehyperinflation

us japanese deficits

irresponsible and profligate legislatures that spend far beyond their means and by accommodating central banks that lend a helping hand to governments.

This data does not bode well for the USA. Notice the chart ends in 2009, which does not include the 1.5T deficit in 2010 and 2011. The Fed has stepped in an bought nearly 100% of our debt at some of the most recent T-bond auctions. If not for foreigners stepping in and buying some of our bonds during the last year, they might have monetized our debt completely. The deficit for 2010 was approximately 1.5 Trillion, which out of a 3.5 Trillion dollar budget, puts the the USA's percentage of expenditures financed by interest/printing of money near 40%--the exact number in which every economy that has reached has eventually descended into hyperinflation.

Here's the glide path the US is on:

•By 2025, Medicare, Medicaid, Social Security, and interest on the federal debt would claim all federal revenues.

•Interest on the national debt would rise to nearly $1 trillion nine years from now, up from $200 billion today.

•US debt held by the public would grow to 185 percent of the national economy by 2035, driving up interest rates and lowering growth and living standards.

America does not have much time left. The time to prepare is now.

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