The Hyperinflation Express

2009-06-06

In my recent post about the train wreck of hyperinflation vs. deflation, I said that policy-makers in the U.S. would soon face a choice between those two unpalatable alternatives. I forgot to mention that they already have made their decision, as illustrated by the following chart of the "adjusted monetary base" that's easily available on the website of the St. Louis Federal Reserve Bank:

As you can plainly see, hyperinflation is in progress at the monetary level. It's only a matter of time before this ultra-extreme and historically unprecedented monetary inflation shows up in the form of price inflation. The fun part is that we'll probably experience inflation in the prices of most "consumables" -- food, energy, clothing, etc. -- at the very same time that we'll continue to experience deflation in the prices of our major assets, especially real estate (thus after 4 or 5 weeks of almost-continual reading about the economy perhaps I've returned to my early conclusion that we face a form of stagflation). This is almost the exact opposite of what we've experienced over the last 20-25 years, which was a period in which people's assets experienced inflation so that they were able to do things like refinance their homes or take out second mortgages and lines of credit for continued consumption. Now people will struggle to pay off the debts associated with their major assets while paying more for everything they'd love to consume. Ouch. Your typical imprudent, spoiled American will not find this experience pleasant in the least. Either folks will adjust their habits and their morality to once again learn the values of hard work, frugality, and delayed gratification, or they will simply seek to evade the reality of the situation by walking away from their assets (personal bankruptcy on a massive scale) and petition the government for handouts at the expense of those who have been fiscally conservative.

Interesting times!


Peter Saint-Andre > Journal