Short Article: How Deflation Creates Hyperinflation
DriftingByTheStorm
Posts: 8,684
Check out this article, as it is VERY informative, especially for those who would consider themselves to be Monetary Dunces. 
One of the key points here is to understand that, from a TECHNICAL standpoint, the Weimar Republic NEVER (NEVER EVER EVER) entered a period of TRUE MONETARY DEFLATION ... but only because of a period of market collapse (like we are now having in America and across the world) ... IT APPEARED THAT THEY WERE HAVING DEFLATION ... which in reality was only ASSET PRICE COLLAPSE ... in fact, gold collapsed by a near FORTY PERCENT against the mark ... for a period of about 8 months (some charts say only four) ... and then, BAM ... the actual printing of money, along with the increased velocity of money, decreased real output, and finally the fact that asset prices had fully collapsed (there was no more downside in prices to "offset" real inflation) ... HYPERINFLATION.
It should be noted, that if we were trying to compare THIS crisis to 1920 Weimar doom, WE ARE PROBABLY NEARING THE END OF ASSET COLLAPSE. I think the markets could fall another 40% from here, but gold has already rebounded to nearly it's highs. Maybe they will FORCE a further asset collapse, and also flood the market with gold in order to MASK the inflation, but it is coming. There is only SO MUCH more downside in REAL ASSET prices, and then THERE WILL BE NOTHING TO COVER UP THE VERY REAL MONETARY INFLATION.
How Deflation Creates Hyperinflation
by Eric deCarbonnel
I keep reading about the dollar being a "new multi-year bull market" and that the US is headed for "Japan style deflation". Frankly, it is a little tiring. The people making these arguments should know better.
Deflation VS Hyperinflation
Yes, there is debt deflation, and the overall money supply is shrinking as a result. However, those calling for "multi-year bull market" for the US dollar are insane. These individuals need to review basic monetary theory. The money supply is only one of three factors that determine whether prices rise or fall. The other two are the changes in the velocity of money and the real output of the economy. The danger of hyperinflation lies in a dramatic increase in the velocity of money due to a loss of confidence, not in changes in the money supply.
Confidence and the velocity of money
When confidence in an issuing authority crumbles, money starts flowing through the economy at a feverish pace. For example, in normal, noninflationary times the money supply might be equivalent to three months of output, but in a period of hyperinflation it might drop to two weeks worth of output. Since increases in the velocity of money have the same impact on prices as increases in the money supply, a 1000% increase in the velocity of money (typical in any period of hyperinflation) is equivalent to a 1000% increase in the money supply. Due to its effects on the velocity of money, the ebb and flow of confidence have a much greater impact on the short-term trend of prices then changes in the money supply.
Deflation can create Hyperinflation
It is no accident that many of the worst periods of hyperinflation are preceded by deflation. In fiat currencies with high levels of government debt, severe cases of deflation cause a loss of confidence in the nation's currency by shrinking the economy and making the government's debt appear increasingly unsustainable. The loss of confidence then causes the flow of money to speed up as individuals become desperate to exchange cash for real goods as fast as possible, producing hyperinflation.
As an example of deflation leading to hyperinflation, consider the case of the Weimar Republic. In 1920, Germany experienced a deflationary collapse, with the average citizen finding it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks, and businesses were strapped for cash to buy materials and meet payroll. Fearing a collapse that would throw millions of workers out on the street, the German government desperately printed money in an attempt to re-inflate the economy. During this period, despite the government's money printing, the mark actually gained in value against foreign currencies, so that prices of imported goods fell by some 50%.
Eventually, as a result of the money supply's rapid expansion, the nation's massive foreign debt, and the shrinking economy, German citizens lost all confidence in their currency, and the Weimar Republic experienced one of the worst cases of hyperinflation in modern economic history. Billions of hoarded marks came out of hiding and entered the marketplace. The chart below tells the rest of the story.
How deflation creates hyperinflation
1) Deflation slows the speed of money to crawl due to fears about the deteriorating economy. The public hoards cash, or, in the case of the US, short term treasuries.
2) The slowing speed of money and debt destruction force the government to create huge quantities of cash to prevent prices and the economy from collapsing. However, because the public is hoarding cash (or short term treasuries), most of the money doesn't reach the real economy, which leads the central bank to print even more money. In essence, cash hoarding acts as a dam, preventing the enormous quantities of printed money from affecting prices.
3) Deflation weakens economy until it leads to a loss of confidence. With doubts about the government's solvency growing, the velocity of money quickly picks up speed, and a flood of hoarded cash comes out of hiding, entering the marketplace all at once and creating hyperinflation.
US stands on the verge of hyperinflation
Gold Backwardation signals that the next phase of the economic crisis, a rapid acceleration in the velocity of money, is about to begin. Right now, the flow of money through the economy is basically frozen: everyone is panicking into treasuries due to deflation fears. Negative yields on the 3 month treasuries are a sign of this.
Despite the glacial rate money is moving through the economy, the dollar has started to fall again, and gold has begun to rally. As this continues, investors will begin to questions the safety of treasuries, and sell them off. The money coming out of treasuries will add fuel to gold's rise and the dollar's fall. Once the dollar hits new lows and gold breaks convincingly over $1000, Investors expecting deflation will begin to panic, and a flood of money will come out of treasuries. It is then that hyperinflation will begin in earnest.
One of the key points here is to understand that, from a TECHNICAL standpoint, the Weimar Republic NEVER (NEVER EVER EVER) entered a period of TRUE MONETARY DEFLATION ... but only because of a period of market collapse (like we are now having in America and across the world) ... IT APPEARED THAT THEY WERE HAVING DEFLATION ... which in reality was only ASSET PRICE COLLAPSE ... in fact, gold collapsed by a near FORTY PERCENT against the mark ... for a period of about 8 months (some charts say only four) ... and then, BAM ... the actual printing of money, along with the increased velocity of money, decreased real output, and finally the fact that asset prices had fully collapsed (there was no more downside in prices to "offset" real inflation) ... HYPERINFLATION.
It should be noted, that if we were trying to compare THIS crisis to 1920 Weimar doom, WE ARE PROBABLY NEARING THE END OF ASSET COLLAPSE. I think the markets could fall another 40% from here, but gold has already rebounded to nearly it's highs. Maybe they will FORCE a further asset collapse, and also flood the market with gold in order to MASK the inflation, but it is coming. There is only SO MUCH more downside in REAL ASSET prices, and then THERE WILL BE NOTHING TO COVER UP THE VERY REAL MONETARY INFLATION.
How Deflation Creates Hyperinflation
by Eric deCarbonnel
I keep reading about the dollar being a "new multi-year bull market" and that the US is headed for "Japan style deflation". Frankly, it is a little tiring. The people making these arguments should know better.
Deflation VS Hyperinflation
Yes, there is debt deflation, and the overall money supply is shrinking as a result. However, those calling for "multi-year bull market" for the US dollar are insane. These individuals need to review basic monetary theory. The money supply is only one of three factors that determine whether prices rise or fall. The other two are the changes in the velocity of money and the real output of the economy. The danger of hyperinflation lies in a dramatic increase in the velocity of money due to a loss of confidence, not in changes in the money supply.
Confidence and the velocity of money
When confidence in an issuing authority crumbles, money starts flowing through the economy at a feverish pace. For example, in normal, noninflationary times the money supply might be equivalent to three months of output, but in a period of hyperinflation it might drop to two weeks worth of output. Since increases in the velocity of money have the same impact on prices as increases in the money supply, a 1000% increase in the velocity of money (typical in any period of hyperinflation) is equivalent to a 1000% increase in the money supply. Due to its effects on the velocity of money, the ebb and flow of confidence have a much greater impact on the short-term trend of prices then changes in the money supply.
Deflation can create Hyperinflation
It is no accident that many of the worst periods of hyperinflation are preceded by deflation. In fiat currencies with high levels of government debt, severe cases of deflation cause a loss of confidence in the nation's currency by shrinking the economy and making the government's debt appear increasingly unsustainable. The loss of confidence then causes the flow of money to speed up as individuals become desperate to exchange cash for real goods as fast as possible, producing hyperinflation.
As an example of deflation leading to hyperinflation, consider the case of the Weimar Republic. In 1920, Germany experienced a deflationary collapse, with the average citizen finding it harder and harder to get enough money for necessities. Banks, short of money, could not honor checks, and businesses were strapped for cash to buy materials and meet payroll. Fearing a collapse that would throw millions of workers out on the street, the German government desperately printed money in an attempt to re-inflate the economy. During this period, despite the government's money printing, the mark actually gained in value against foreign currencies, so that prices of imported goods fell by some 50%.
Eventually, as a result of the money supply's rapid expansion, the nation's massive foreign debt, and the shrinking economy, German citizens lost all confidence in their currency, and the Weimar Republic experienced one of the worst cases of hyperinflation in modern economic history. Billions of hoarded marks came out of hiding and entered the marketplace. The chart below tells the rest of the story.
How deflation creates hyperinflation
1) Deflation slows the speed of money to crawl due to fears about the deteriorating economy. The public hoards cash, or, in the case of the US, short term treasuries.
2) The slowing speed of money and debt destruction force the government to create huge quantities of cash to prevent prices and the economy from collapsing. However, because the public is hoarding cash (or short term treasuries), most of the money doesn't reach the real economy, which leads the central bank to print even more money. In essence, cash hoarding acts as a dam, preventing the enormous quantities of printed money from affecting prices.
3) Deflation weakens economy until it leads to a loss of confidence. With doubts about the government's solvency growing, the velocity of money quickly picks up speed, and a flood of hoarded cash comes out of hiding, entering the marketplace all at once and creating hyperinflation.
US stands on the verge of hyperinflation
Gold Backwardation signals that the next phase of the economic crisis, a rapid acceleration in the velocity of money, is about to begin. Right now, the flow of money through the economy is basically frozen: everyone is panicking into treasuries due to deflation fears. Negative yields on the 3 month treasuries are a sign of this.
Despite the glacial rate money is moving through the economy, the dollar has started to fall again, and gold has begun to rally. As this continues, investors will begin to questions the safety of treasuries, and sell them off. The money coming out of treasuries will add fuel to gold's rise and the dollar's fall. Once the dollar hits new lows and gold breaks convincingly over $1000, Investors expecting deflation will begin to panic, and a flood of money will come out of treasuries. It is then that hyperinflation will begin in earnest.
If I was to smile and I held out my hand
If I opened it now would you not understand?
If I opened it now would you not understand?
Post edited by Unknown User on
0
Comments
all I know is, it seems hording = bad, saving = good...
late 2007 was the time to purchase gold.
now is risky.
while there are those that say gold is going to $2300 by 2010,
there is also the possibility that the cornered animal (the international bankers) will simply flood the market with their hoarded reserves of gold to depress the price, or alternately, that they will remonitize gold at significantly lower than current market values, and people who bought high will get screwed.
I don't know how likely EITHER of those is to occur, but it bears scrutiny and lots of due dilligence by anyone, if they are going to dive headlong in to gold at $950 an ounce.
If you wanted to be more "conservative", silver might be a better bet at this point.
However, even silver was only $5 an ounce 4 years ago, and now is back up to about $14 an ounce.
I dunno, man.
I wouldn't say it is the dumbest idea in the world to own some of either,
but it is hard to say with ANY certainty what the future will hold, at this point.
If I opened it now would you not understand?
Hey man,
i don't know if you are just being "cutesie" with me or not,
but i typed you a long ass response and the stupid fucking board logged me out when i hit "submit", asked me to log in again, and totally tossed my reply down the internet whole.
Long story short,
saving and hoarding are TECHNICALY the same thing,
but the CONNOTATION associated with them is a psychological one.
There IS a real difference though, and i will try to explain it briefly (since i am now miffed about wasting 30 minutes on a garbage can response) ...
Saving is ONLY good if SOMEONE is going to BORROW.
In case you didn't catch any of the banker CEO testimony before congress, they were all bitching that DEMAND FOR BORROWING HAD DECLINED.
If EVERYONE is "saving", you may as well call it "hording" since saving only "serves" the economy as a vehicle for fractional reserve lenders to pyramid the money supply through LOANS ("investment") ... if no one is "investing" in business through borrowing, the money just sits in the banks.
Economies yo-yo in good times and bad, and a swing in one direction can trigger a violent swing in the exact opposite direction. If asset prices are falling sharply, and the value of the dollar is INCREASING in kind, it can trigger a "panic reaction" where the population starts to look at the "big picture" by saying "wholly shit, our government is in MASSIVE debt, and that debt is growing MORE EXPENSIVE by the day" ... "more expensive" meaning the value of each dollar is increasing, so therefore the COST of each dollar of debt is accordingly more expensive.
This can, and DOES trigger violent short term reactions in the velocity of money, where the citizenry basicaly surmises the following, "ah fuck. our government is doomed. our debt is unsustainable and everything is going to fall apart. I MAY AS WELL SPEND ALL MY MONEY NOW WHILE IT IS STILL WORTH A LICK".
This reaction (increased velocity of money through panic spending by the private sector), combined with the billions (or trillions in the case of Weimar or Zimbabwe) created and circulated by the government can (and does) cause hyperinflation.
Again,
i already typed a huge response that got eaten by the internet fairies,
so i'm cutting this short.
Any questions?
If I opened it now would you not understand?
Thanks for the info. I wasn't being cutesy, my question was honest.
I'm just trying to wrap my head around this information of inflation, and hyperinflation, and deflation and stagflation (which was the buzz theory a couple months ago)....
Let me see if I got this time: If no one is borrowing, be it business or consumer, savings turns into hording when the factors of not spending the savings is added to the equation...
as for hyperinflation: in layman terms, people fear their money will be worthless soon, thus they unload that money, thus devaluing value of the money by flooding the system....kinda like a self fulfilling prophecy...and adding more printed money to the mix means we're all screwed...because if a 1 dollar is worth less, adding more to the pool, makes it worth even less...
I think you've restated it in so many words, generally.
To be honest, I am not sure why the author kept referring to it as "hoarding", but i suspect he was simply trying to convey the irrational psychological element at the crux of the issue. In other words, it is "hoarding" because it is not being done with the intention of saving for normal purposes -- thus it is "hoarding", or an irrational clinging to money that permeates throughout the economy as more and more people become afraid that tomorrow will be worse than today and are thus afraid to spend money.
Of course, you are also trying to wrap your head around the seeming paradox of a bad situation causing irrational "hoarding" to the same bad situation getting even worse and causing irrational spending!
??? I know. its CRAZY. ???
The other problem you are probably facing (and so is EVERYONE, top economists included) is that THIS IS ALL NEW. This is NOT The Great Depression Part 2 ... this is something entirely new ... almost all of the underlying statistics are different this time around ... and only some of the fundamental laws remain the same (and many aren't even sure about THAT) ... AND this is also all VERY COMPLEX and INTERRELATED. It isn't just A causes B. It is A and B can Cause C but a little bit more of A and a little bit less of B can cause D and D could be the exact opposite of C and if you keep adding more A (or say you STOP adding A) then C turns back in to D ...
economics is a really bizarre interconnected machine and different parts do different things in different combinations and speeds.
Shit.
I'd love to stay and babble longer,
but i have to make off to my CPA for TAXES.
woo hoo!
Anyone paying attention to the market?
We are just a little more than 100 Dow points away from testing the intraday lows from 2008.
THIS WEEK IS GOING TO BE BRUTAL
and I for one do NOT expect the intraday lows to hold!
Many folks ARE HOPING they do, but I personally wouldn't be too bright and cheery about the outlook.
Maybe it holds for THIS week, but I knew something bad was coming today after the slide in Asia yesterday along with the huge spike in metals in the Euro-zone as well.
JLew -- don't start buying this as a great bottom either.
If I opened it now would you not understand?