When Fear Takes Over: The Prospect of Hyperinflation

What’s the big news? Every headline you read implies the same thing. All eyes are on Ben Bernanke.

“Bernanke expected to announce hundreds of billions in new QE,” says one headline.

“Investors counting on support from the Fed,” says another.

“Fed easing could push stocks higher,” says a third.

The man is supposed to announce a program of quantitative easing. He’s supposed to do it next week. And if he announces too little of it, investors are going to sell risky investments – including stocks and commodities. In the meantime, investors are guessing.

Yesterday, the betting went against a big push into QE. Investors figured that maybe they’d over-estimated Ben Bernanke’s commitment to chicanery. They worried that the announcement next week might fall short of expectations.

The Dow retreated 43 points yesterday. Gold dropped back $16.

What will it do tomorrow? Who knows? The whole investment world has gone a little crazy. It’s all speculation now…speculation on how much new money the Fed will add to the system.

Investors aren’t buying in anticipation of higher earnings or looking forward to a healthier economy. They’re not padding their retirement nests with great stocks at great prices, or participating in the growth and prosperity of 21st century America by buying equities. Instead, they’re gambling that the economy will get worse…and that Bernanke will be forced to go boldly where only fools and morons have gone before….

..that is, on the road to hyperinflation.

Remember. There’s inflation. And there’s hyperinflation. Normal inflation is caused when people have more money to spend and less to spend it on. They bid up prices.

Hyperinflation is different. It comes not from an increase in demand for things…not from greed, that is…but from FEAR…raw, naked, unadulterated fear that paper money is losing its value.

What touches off hyperinflation? Sometimes the cause is obvious. Central banks print up bills with lots of zeros on them. Everyone knows the currency has become “funny money.” Everyone rushes to get rid of it.

Typically, this causes a collapse in the economy…which convinces the central bank to add more zeros!

The US central bank is not adding zeros – not yet. It is just threatening to add more currency. Will this new currency lead to inflation? Probably not much. The money will get into the hands of speculators at the big banks – those that can borrow from the Fed. It won’t get into the hands of small businesses and householders. So, most people will not really feel richer; they will not want to borrow. They will not want to spend. Demand will not increase. Prices won’t go up appreciably.

But while this new money probably will not create inflation, it could well create hyperinflation. We don’t know how it works…not exactly. There are so few examples in history that we have no sure model to show us. But speculators could suddenly lose faith in the US dollar. They could sell it off – in favor of land, stocks, collectibles or gold. Dollar-holders – large, institutional holders – might panic, realizing that their dollars are losing value fast. Householders might follow…desperate to get rid of dollars before the next nightly news report tells them that they have lost another 10% of their value.

All Hell could break loose.

But that is still in the future. Maybe 6 months ahead. Maybe a year ahead.

In the meantime, we are still at the beginning of a Great Correction. We have a long way to go. And we should expect high unemployment, low or negative growth, bankruptcies, bear markets, foreclosures…

The big trend is still biased in favor of generally low consumer and asset prices…maybe even deflating prices. Until Bernanke gets his cash machine running hot…that is…

Then, who knows what will happen?

And more thoughts…

While the world wonders about Ben Bernanke – will he, or won’t he – the Great Correction continues…driven by more fundamental trends…trends the Fed chief can’t do anything about. The New York Times describes one of them:

FIRST the good news: We’re living longer, healthier lives than ever before.
We’re already so used to the idea of greater longevity, in fact, that it may seem ho-hum to learn that boys and girls born in 2008 in the United States have life expectancies of 75 and 81, respectively.

Those life spans, however, represent a bonus of about three decades, compared with Americans born in 1900, according to a report last year from the Census Bureau. And, by the way, Spain, Greece and Austria fared even better, proportionally: Life expectancies in those countries doubled over the course of the 20th century.

Now for the bad news: At this rate, we can’t afford to live so long.

And by “we,” I don’t just mean you, me and our often insufficient long- term-care insurance policies. I mean “we the people.” I mean the bureaucratic “we.”

For the first time in human history, people aged 65 and over are about to outnumber children under 5. In many countries, older people entitled to government-funded pensions, health services and long-term care will soon outnumber the work force whose taxes help finance those benefits. This demographic shift also means that the number of people living with dementia, whose treatment is estimated to cost $604 billion worldwide this year, is expected to more than triple, to 115 million, by 2050, according to a report this year by Alzheimer’s Disease International, a group representing 73 Alzheimer’s associations around the world.

No other force is as likely to shape the future of national economic health, public finances and national policies, according to a new analysis on global aging from Standard & Poor’s, as the “irreversible rate at which the population is growing older.

If the status quo continues, the report projects, the median government debt in the most advanced economies could soar to 329 percent of gross domestic product by 2050. By contrast, Britain’s debt represented only 252 percent of GDP in 1946, in the aftermath of World War II, the report said.

*** “Report Suspicious Activity. 1-800-XXX-XXXX”

“Terror Tips. Call 1-800-XXX-XXXX”

Hmmm… What to make of it?

The War on Terror has been pushed out of the headlines by the war on the financial crisis. Besides, everyone was beginning to see that the war on terror was a fraud. You’re never going to win a war against a tactic. And spending beaucoup money trying to win the hearts and minds of fanatics is a losing proposition.

But the war lives on. We have seen these signs at least 10 times in the last three days. They are up over 1-95 and US495 around Washington. What purpose do they serve? Has anyone ever called?

We would have called ourselves…and asked for a tip. But we were afraid of getting on a suspect list.

It is hard to imagine that we will see anything that looks suspicious. First, because terrorists in the Washington area are rarer than honest Congressmen. Second, because they would hardly drive along in pickup trucks wearing Arab headdresses and carrying 55 gallon drums of gasoline in the back. In other words, we wouldn’t see them because they don’t exist and if they did exist they would be the last people to make us suspicious.

We conclude that the advertising is merely to keep the lumpen voters hyped up for war…imagining that they are under attack and that they must pay big money for someone to protect them…and accustomed to snitching on their neighbors in the name of national security.


Bill Bonner
For Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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1 Comment on "When Fear Takes Over: The Prospect of Hyperinflation"

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Will Blink

Well, seems to me that we should be studying history more. You seem to have studied it a bit.

If you want to see what’s going to happen, just look at what has already happened.

But do people do this? Do they learn from past mistakes?


And that is why we are doomed. Doomed to boom and bust. Doomed to suffer. Doomed to repeat the past failures.

We, I’m sorry to say, will *never* learn. Never.

We are doomed.

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