The Road to Hyperinflation

welcome_to_zimbabweThe interim will feel like deflation, but that will only last until the day it doesn’t. We aren’t likely to see a re-emergence of bubble inflation any time soon but when the mass printing of dollars by the Federal Reserve causes people to doubt the usefulness of paper currency to store their purchasing power, look out. The poor may be hungry, but the rich will find the whole world scrambling to allocate their freshly created paper bills to assets perceived as safe. Right now, that’s treasuries, but eventually that bubble will burst and all that cash will look for another home. With manufacturers bankrupt and commodity producers unable to finance exploration due to falling prices, the supply of goods will be extremely tight at precisely the moment the supply of dollars will be at its height.

Picture a giant tower of cash leaning over a few pieces of cheese being fought over by mice. We could go straight from a deflation-like environment to hyper-inflation with very little notice. And if that occurs, don’t pretend for a moment raising interest rates or selling bonds at higher yields will stop it. Hyperinflation is as much psychological as monetary.

Nobody knows how long it will take for people to lose confidence in paper currency, or what event will do the trick, but the unholy alliance of Keynes’ ghost, money-printer Bernanke and big-spender Obama may make it inevitable.

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As I’ve said before, I am sure that Ben Bernanke thinks he can control the situation and head off hyperinflation before it takes root. I just don’t have any faith in Helicopter Ben “I and others were mistaken early on in saying that the subprime crisis would be contained,”  Bernanke.

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