Hyperinflation is a psychological and monetary event. It is not an economic or financial market event. It occurs during and because of an economic and financial market collapse which includes catastrophic ongoing asset deflation.
Antal E. Fekete, in his latest article, discounts the Quantity Theory of Money (QTM), stating...
I maintain that the Federal Reserve banks are not creating money out of the thin air.
He goes on to say...
The QTM is a linear model that may be valid as a first approximation, but fails in most cases as the real world is highly non-linear. My own theory predicts that it is not hyperinflation but a vicious deflation which is in store for the dollar. Here is the argument.
While prices of primary products such as crude oil and foodstuffs may initially rise, there is no purchasing power in the hands of the consumers... It turns out that the price rises are unsustainable as the consumer is unable to pay them. They will have to be rescinded. Retail merchants will start a damaging price war underbidding one another...
Apparently we won't be buying food if prices rise.
He then tells us that our dollars will continue increasing in value...
No longer can it be taken for granted that the denouement of unlimited money-creation will be hyperinflation with the Federal Reserve notes rapidly losing purchasing power. On the contrary, it could be an unprecedented deflation with the Federal Reserve notes being hoarded by the people, firms, and institutions as their purchasing power is actually increasing...
This is good news for Congress, that all those stimulus dollars will continually buy more and more real goods!
And finally he ends with...
The QTM, the corner stone of Milton Friedman’s monetarism, is the wrong prognosticating tool. The marginal productivity of debt is superior as it focuses on deflation rather than inflation.
The financial and economic collapse of the past two years must be seen as part of the progressive disintegration of Western civilization that started with the sabotaging of the gold standard by governments exactly one hundred years ago when in France and in Germany paper money was made legal tender...
Fed Chairman Ben Bernanke, who should have been fired by the new president on the day after Inauguration for his part in causing the cataclysm, a couple of years ago foolishly boasted that the government has given him a tool, the printing press, with which he can fight off deflations and depressions, now and forever. The reference to the QTM is obvious.
Now Bernanke has the honor to administer the coup de grâce to our civilization.
I have a few thoughts on this as you probably guessed. First of all, notice that Fekete is talking about "financial and economic collapse of the past two years". This is what precedes hyperinflations. But he ignores the psychological event that will follow and, as I stated at the top, he discounts and dismisses the monetary event.
From what I can tell, this is in contrast to his writings prior to a few months ago. Back then he focused on the psychological event that was "backwardation" in the gold market.
From June 3, 2006...
People from around the world keep asking me what advance warning for the collapse of our international monetary system, based as it is on irredeemable promises to pay, they should be looking for. My answer invariably is: "watch for the last contango in silver".
It takes a little bit of explaining what this cryptic message means. Contango is that condition whereby more distant futures prices are at a premium over the nearby. The opposite is called backwardation which obtains when the nearby futures sell at a premium and the more distant futures are at a discount. When contango gives way to backwardation in all contract spreads, never again to return, it is a foolproof indication that no deliverable monetary silver exists. People with inside information have snapped it up in anticipation of an imminent monetary crisis.
From August 30, 2008...
That will be the most dramatic event in the entire history of money, an event that I have, tongue in cheek, called "The Last Contango in Washington". The basis will give you an early warning signal...
...The basis will tell you well in advance when all the offers to sell real gold or silver are about to be withdrawn in all the markets of the world. Once that happens, infinite demand will confront zero supply. Don't say it can't happen here. It has happened locally in France in 1796, in Germany in 1923, in China in 1947, to mention but three episodes. This time it will happen globally.
What happened "in France in 1796, in Germany in 1923, in China in 1947"?? Oh yeah, hyperinflation happened! (to mention but three episodes)
Then, on December 14, 2008, Fekete appeared defensive with Mish, writing...
Backwardation in gold has nothing to do with the opening salvo for hyperinflation. "Gold is not for sale at any price" is not the same thing as a runaway gold price. Rather, it is an indication that it has dawned on people how foolish it is to accept irredeemable promises to pay in exchange for gold, the ultimate means of payment.
What Mish seems to be missing is that it is not unthinkable that gold futures trading stops altogether for want of deliverable material, while the price of oil, grains, and other highly marketable commodities keep falling along with the rate of interest -- symptoms of deflation. This is precisely the problem that needs to be researched, but no university or government think-tank is doing it.
Mish says that the United States is not Zimbabwe. Who said it was? However, the United States dollar and the Zimbabwe dollar are no different in principle, if not yet in practice. They are both an irredeemable currency. Managers of the U.S. dollar are just making the first tentative steps to join the managers of the Zimbabwe dollar in Dante's Inferno. The eighth of the nine circles in Hell is reserved for perpetrators of fraud and false pretenses, among others, the managers of irredeemable currencies. As Dante describes it, their punishment is to be kept submerged in a cesspit full of excrement. Honestly, they don't deserve to be washed clean by Mish or anybody else.
This may have been Fekete's first encounter with Mish. And as we know, Mish and Karl Denninger are practically synonymous when it comes to deflationist bloggers. So it seems that Fekete spent 3 1/2 months reading Mish and at some point also started reading Denninger. Then, on March 30, 2009, Fekete published The Marginal Productivity of Debt in which he not only sounded exactly like Denninger, but he referenced Denninger twice, quoted him, and included a link to the Market Ticker at the bottom.
Now I suspect that Fekete took some direct criticism for this apparent credulity toward Denninger, because the article has now been deleted from Fekete's own site. [UPDATE 4/15: The article is back on Fekete's site today] And he has since written two more articles which don't mention Denninger once. I find this quite interesting.
Back to Fekete's latest article. He is still making the same mistakes that all "the deflationists" are making. He is seeing "asset deflation" and calling it deflation. He fails to differentiate between assets and necessities. He fails to differentiate between inflation and hyperinflation (which is really just asset deflation combined with monetary collapse). He fails to recognize that "financial and economic collapse" and asset deflation are not only compatible with hyperinflation, but they are prerequisites of it. And he fails to acknowledge that the monetary portion of hyperinflation is already baked into the cake, and all that is missing now is the psychological trigger. Previously Fekete had an acute awareness of this trigger, in his writings about backwardation. But now he seems to be backing away from that Thought and backing into something which fits the deflation he thinks he is seeing and reading about on the Market Ticker.
Remember, hyperinflation by any other name is still hyperinflation.
The following is a very good excerpt from Chris Laird of the Prudent Squirrel. He is not exactly a "hyperinflationist". But look at how he describes what he sees coming...
Huge tax deficits from a weak economy – higher taxes and likely targeting the huge pool of tax deferred accounts for revenue. Even possible nationalization of retirement funds – IE being forced to hold US T bonds. All it takes is an economic emergency for Congress to do all this – or a Presidential executive order. In other countries, just substitute your own country’s Treasury bonds for the US T bonds. Probably all the same things will happen in your country.
After that happens in the initial Bond market heart attack for US Ts, we get to phase two – effects on the USD and USD system…
This phase begins with a bond revolt and will either be an immediate cause of instant emergency tax hikes, and likely government nationalization or at least big tax hikes on tax deferred account withdrawals. The government does all this rapidly with little debate, as in last Fall 08, rapidly pushing through emergency measures.
The USD likely will start devaluing immediately if there is a bond revolt. Depending on when this bond revolt comes, the USD can devalue either orderly or rapidly and chaotically. Hopefully it is orderly. Think of an initial halving of your purchasing power, say over a period of a year.
Prices double or triple on everything essential in a year.
(Remember, we mentioned this is possibly going to happen in a few years, I am not talking in ten or twenty).
If the US bond market rebels on US Ts, expect foreign exchange restrictions. Expect your retirement accounts to have restrictions placed on them. On withdrawals, limits put on, etc. You will not be able to legally take money out of the US (or your own country).
In phase 3, the US fiscal deficits rapidly multiply to $4 or 5 trillion. Now the world holds its breath. Estimated time of this to happen is 2 years out max.
Phase 3 marks the beginning of the actual end of the USD and final devaluation of its remaining value. Hopefully, this is an orderly process. The likelihood is it’s not orderly, but chaotic.
OK, if the USD at this point is halving in value, prices doubling or tripling, we will have shortages. If prices cannot be raised fast enough, supply lines stop being refilled.
Once the USD starts its final decent, expect severe shortages in stores and even gas stations.
After all the chaos and so on, a new currency is started, probably one that is global or has global components.
I hate to say this but a typical revaluation of a totally collapsed currency will drop two to three zeroes off its denomination – devaluing your money by a factor of 1000 in purchasing power.
If the revaluation number is two zeroes, then if you have 10,000 USD today, when the new currency comes in – call it NewDollar – you will receive $100 in new dollars, 100 ND for your $10,000.
If you have not already put your wealth into paid off real things, and not relying only on financial accounts, you will lose your savings either through taxation or devaluations.
None of us in the West have seen anything like this, although there are a few older people who lived through the Depression who saw it, but then the USD did not collapse. This time it is going to collapse. Hard to say just when, but it’s already baked into the mix.
Sounds like hyperinflation to me.