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There are a lot of Chicken Littles running around these days warning us all of the coming hyperinflation.  They range from vile fear mongers like Glenn Beck, to radio host sell-outs that are peddling gold, to idiotic wall street "analysts" who actually believe their own bullshit.  The basis for their fear is based on government deficit spending.  The fact that they think that deficit spending in the wake of a financial and unemployment crises is going to somehow lead to hyperinflation shows a stunning amount of ignorance on the topic.

There are so many angles of stupid when it comes to worrying about hyperinflation at a time like this that it can't possibly fit into one diary.  Instead, I'm going to concentrate on the most important and most common aspects.  That way when your right-wing friends, family members, or co-workers bring up the topic, you can be ready to demolish them using pure logic.

Hyperinflation is not a monetary event.
The first and most important concept to understand is that hyperinflation isn't just inflation "big time".  It's understandable that most people think this since both lead to higher prices and wages.  However, that is where the similarities start and end.  Likening the two is like comparing your car to a NASA rocket.  They share the similarity in that they both get you from point A to point B using an endothermic reaction, but that is where the useful comparisons stop.  Where inflation is a monetary event of more money chasing fewer goods, hyperinflation is a rejection of the currency.  Inflation is mostly a monetary and fiscal event, hyperinflation is more of a psychological event.  Inflation occurs when the amount of goods in the economy cannot keep pace with the amount of money in the economy.  Hyperinflation occurs when people no longer wish to accumulate or save a currency.  When people reject a currency, they try to get rid of it as soon as possible.  This increases the velocity of money which contributes to rising prices.

Inflation and government deficits do not, by themselves, lead to Hyperinflation
This is probably the scariest claim made by hyperinflation hyperventilators.  It is also wrong.  While federal spending can lead to inflation, deficit spending alone cannot cause hyperinflation.  The increasing amount of money necessary to lead to hyperinflation would have to double whatever the gdp is to get to the point where we have 100% inflation or more.  The reason that is so difficult is because not only would the government have to spend the equivalent of the previous year's gdp, it would also have to spend even more to maintain the same level of deficit spending, because it would start getting some of the money it spends back in the form of tax revenue.  Further, if deficit spending by itself caused hyperinflation, then cutting off spending - by itself - would stop it.  If the government spent 20$ trillion in one year(most of it deficit spent), and then spent the same amount the next year, the inflation rate would go down because the increase in tax revenue would mean less of it was deficit spent.

Hyperinflation follows a non-monetary event
Hyperinflation always follows some external event.  The external event can be war, famine, ecological disaster, a loss of faith in government, or some other external event that destroys an economy.

In the case of Weimer Germany(hyperventilators goto scary scenario) wasn't just caused by external debts.  Germany did inflate its currency to try and pay off its debt, but that alone didn't cause the extended hyperinflation. In fact, after Germany made it's first payment, it's inflation rate started going down.  What did cause it's prolongment was when England started stealing Germany's exports, and France & Belgium occupied the Rhur.  The Rhur contained 80% of germany's productive capacity.  The German government, started paying it's citizens to not work rather than cooperate.  Well, when you suddenly lose 80% of your production, you no longer can provide for yourself, and when your exports are stolen you have no way of trading for what you need.  The result is either starvation or hyperinflation.

Speaking of starvation, that brings us to the latest hyperinflation scare example: Zimbabwe.  Zimbabwe had a corrupt government.  The corrupt government threw all the farmer's off their farms and gave it to it's cronies.  Unfortunately, those cronies didn't know how to farm very well.  That led to massive drop in farm output.  Since food was such an important part of Zimbabwe's economy, the government had to make a choice.  Mass starvation, or inflate the currency.  As corrupt as it was, they chose to hyperinflate it's currency so that it could import food for its citizens.

In both these cases, the hyperinflation followed a massive disruption of the countries' economies.  You will often find this in other, lesser-known, examples of hyperinflation.  In other cases, you'll find that hyperinflation followed when people no longer believed the government issuing the currency would exist(a loss of faith in the government).  Poland between WW1 and WW2 is an example of this.  The last known cause of hyperinflation is when a government becomes incapable of collecting taxes.  The confederacy during the civil war.  The confederacy had trouble collecting taxes.  They were both unwilling to levy heavy taxes and unable to collect the taxes it did levy.  Often people would avoid tax collectors and the confederacy couldn't devote the resources to chase them down.  Therefore, the confederates found themselves creating money that no one wanted - or needed.  Near the end of the war, they had the same problem as Poland.  The people lost faith in the government.

Hyperinflation is not coming to America
*America has not lost it's productive capacity - in fact it's increasing.
*America can still collect taxes
*Neither Americans nor Foreigners are rejecting the currency
I will be writing a longer post on this topic.  I'll go further in depth in how I know each of these is true, and how its evidence against hyperinflation occurring.

Much of this analysis is based on Modern Monetary Theory (MMT). It's a (relatively) new "Post-Keynesian" economic school of thought.  If you're interested in learning more, please follow our group, Money and Public Purpose.  Also, there is a small, but growing MMT wiki that is worth checking out.

Originally posted to Money and Public Purpose on Tue Jun 07, 2011 at 06:30 AM PDT.

Also republished by Community Spotlight.

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Comment Preferences

  •  Has anyone been talking about hyperinflation (1+ / 0-)
    Recommended by:
    ladybug53

    or even inflation (outside of oil and food prices) lately?

    Right now we've got very high unemployment, downward pressure on wages (deflationary, even), and a still-collapsing housing market making people's savings (what they had in terms of savings) worth even less.

    Happy little moron, Lucky little man.
    I wish I was a moron, MY GOD, Perhaps I am!
    -Spike Milligan

    by polecat on Tue Jun 07, 2011 at 06:43:42 AM PDT

    •  no one credible (9+ / 0-)

      No one credible is talking about it, but that still leaves a lot of right wingers.

      Our Dime Understanding the U.S. Budget

      by maddogg on Tue Jun 07, 2011 at 07:00:43 AM PDT

      [ Parent ]

      •  No one credible, but lot's of (0+ / 0-)

        otherwise intelligent rank-and-file Americans. In fact, it's one of the background arguments behind the current deficit/austerity hysteria.

        I shudder when I hear my brothers, both college graduates, MBA's with good paying jobs who voted for Obama, assure me in solemn tones that the deficit is the biggest crisis facing America today.

        "The smartest man in the room is not always right." -Richard Holbrooke

        by Demi Moaned on Tue Jun 07, 2011 at 01:06:56 PM PDT

        [ Parent ]

    •  Wait a minute (4+ / 0-)
      (outside of oil and food prices)

      Sorry, but this is elitist bullshit.  For most working families, oil and food prices are a huge part of the household budget.  If you're barely making ends meet and your monthly food bill doubles, well, it rings hollow when some economist with "credibility" announces from their ivory tower that inflation is not a problem.

      The only reason the dollar hasn't tanked completely is that other hard currencies have weakened so substantially.

      When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

      by CharlieHipHop on Tue Jun 07, 2011 at 09:38:26 AM PDT

      [ Parent ]

      •  I only bring this up because the reality... (5+ / 0-)

        ... is that working people see their paychecks stretched thin.  When we deny this reality, it provides fuel to the Glen Becks and Ron Pauls of the world.

        We need to face this issue head-on.  The Republicans have a point about the deficit.  We should remind them of how good things were last time we had a balanced budget, under Clinton when the rich were taxed at a higher rate and military spending was dropping as a percentage of GDP.

        Call them on their bullshit, don't play into it.

        When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

        by CharlieHipHop on Tue Jun 07, 2011 at 09:41:57 AM PDT

        [ Parent ]

      •  Inflation isn't the issue (4+ / 0-)

        "The only reason the dollar hasn't tanked completely is that other hard currencies have weakened so substantially."
        The reason food and oil prices are rising is because food and oil prices are rising.  It has nothing to do with inflation.  Oil is going up for a number of reasons, and food prices are heavily dependent on oil.  Oil prices aren't high because we've suffered 150% inflation since April 2009.

        Our Dime Understanding the U.S. Budget

        by maddogg on Tue Jun 07, 2011 at 09:45:22 AM PDT

        [ Parent ]

        •  Definition of inflation (1+ / 0-)
          Recommended by:
          pollwatcher

          Rising prices.  

          Oil prices are inflating, you might say.

          Make all the excuses and semantic plays you want.  Glen Beck will love you for it.

          When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

          by CharlieHipHop on Tue Jun 07, 2011 at 09:49:05 AM PDT

          [ Parent ]

          •  Definition of inflation (6+ / 0-)

            If the price of couches went up 150% would you call that inflation too, or would you accept that the price of couches went up relative to other items?

            I define inflation as a General rise in prices.  Emphasis on General.  If you want to define inflation as an increase in any prices, feel free, but that definition isn't going to be very helpful when looking at a macro-economy.

            Our Dime Understanding the U.S. Budget

            by maddogg on Tue Jun 07, 2011 at 10:08:03 AM PDT

            [ Parent ]

            •  Core inflation vs. commodity price volatility (0+ / 0-)

              Keep up the good work, you're exactly right. Commodity prices are volatile because of fluctuations in supply and demand. These are not monetary issues.

              As Paul Krugman points out, people who point to rising commodity prices as evidence of inflation don't point to drops in commodity prices (and we've had plenty in the last few years) as evidence of deflation.

              "The smartest man in the room is not always right." -Richard Holbrooke

              by Demi Moaned on Tue Jun 07, 2011 at 01:12:19 PM PDT

              [ Parent ]

          •  Housing prices are DEFLATING. /nt (1+ / 0-)
            Recommended by:
            Demi Moaned

            Happy little moron, Lucky little man.
            I wish I was a moron, MY GOD, Perhaps I am!
            -Spike Milligan

            by polecat on Tue Jun 07, 2011 at 10:58:10 AM PDT

            [ Parent ]

          •  the difference between inflation and appreciation (0+ / 0-)

            I'm going to guess someone else has already pointed out to you that your definition of "inflation" has some overlap with "appreciation"

            But for shits and giggles:

            Inflation and appreciation are when prices rise, the difference being appreciation is when prices rise on something you want to sell, and inflation  is when prices rise on something you want to buy. :-P

            In all seriousness,
            Monetary inflation is when prices rise across the board. If prices rise on one section of assets but lower on another, (gas prices versus housing costs) it's not monetary inflation.

            While this may seem like  arcane gibberish, it has important policy ramifications. For instance, what in the world does the price of gas have to do with the price of a house? After all, if the price of gas goes up, doesn't it make it harder to build houses and the price of a house goes up? But what ends up happening is that the capital that was previously set aside looking for a return on real estate investment is now being thrown at future contracts in oil.
            There is also supply-shock inflation (weimar germany and zimbabwe- there were literally fewer goods)  and I believe a counter-part to it involving the demand side of the equation.  

        •  And as long as we're at this, let me point out... (0+ / 0-)

          ... that you made a big error in your diary with regard to demand for the dollar:

          *Neither Americans nor Foreigners are rejecting the currency

          1.  When investors and central banks buy gold, as they have been, they are, in effect, rejecting the currency.
          2.  When the biggest buyer of U.S. Treasuries (aka, the deficit) is the Federal Reserve, we have a problem.  In fact, the world has been rejecting the currency in a very big way for quite some time.

          http://www.chinadaily.com.cn/...

          http://www.bloomberg.com/...

          By way of personal analogy, I will just say that many merchants in Hong Kong will no longer take U.S. dollars.  You have to change them for yen or euro.

          When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

          by CharlieHipHop on Tue Jun 07, 2011 at 09:58:29 AM PDT

          [ Parent ]

          •  And again... (2+ / 0-)
            Recommended by:
            SingleVoter, Eugene Fitzherbert

            ... the politically bold and wise move would be to jiu-jitsu the Republicans on the deficit.  Acknowledge the problem and offer higher taxes on the rich and lower military spending as the solution.

            This "keep raising the debt ceiling forever" fantasy is a losing strategy in more ways than one.

            When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

            by CharlieHipHop on Tue Jun 07, 2011 at 10:03:10 AM PDT

            [ Parent ]

            •  Politically bold (2+ / 0-)
              Recommended by:
              psyched, 207wickedgood

              The politically bold move is to reject the whole notion that federal debt is in and of itself, a problem.  The federal budget is constrained only by inflation, not revenue.  And calling ANY rise in prices(like oil) Inflation is going to cause us to react to the true, underlying problems counter-productively.

              Our Dime Understanding the U.S. Budget

              by maddogg on Tue Jun 07, 2011 at 10:17:53 AM PDT

              [ Parent ]

              •  You can declare it an non-problem... (0+ / 0-)

                ... until the cows come home, but that doesn't change the fact that the devaluation of the dollar is a direct result of its overproduction.

                If it's not a problem, why not just issue a few trillion in Treasuries tomorrow and pump them into the economy? (Yes, that is rhetorical.)  I mean, that would solve all our problems, right?  We could create millions of jobs with one wave of the magic dollar wand.

                I mean, if that's what you're calling for, call for it.  But I will maintain that the Repugs have a point where the deficit is concerned.

                We're letting them get away with not taxing the rich and with reckless waste in defense spending by continually raising the limit.  Surely you can see that.

                When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

                by CharlieHipHop on Tue Jun 07, 2011 at 11:18:48 AM PDT

                [ Parent ]

                •  The dollar (3+ / 0-)

                  is overvalued at the top end of the economy, and undervalued at the bottom end.  What I mean by this is that the top end of the economy is hoarding dollars.  The total reserves held by U.S. depository institutions has topped $1.5 trillion, where only five years ago that number was under $100 billion.  Those dollars aren't doing anything except blowing bubbles in markets.

                  The bottom end of the economy, on the other hand, is dumping dollars just as fast as they can get them in favor of unwinding their debt load (largely) and buying real goods and services so they can meet their human needs and wants.

                  The problem I think a lot of MMTers have when explaining themselves is that they focus on the wrong issue because they assume other people are focused on the wrong issue.  It's not that the deficit doesn't matter.  It's that the deficit doesn't matter in the way we think it does.  Understanding MMT means understanding that it matters where the money is spent, not where it comes from, and understanding the capacity of the economy to respond by either increasing production or by raising prices.  

                  From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

                  by Nellebracht on Tue Jun 07, 2011 at 12:08:45 PM PDT

                  [ Parent ]

                  •  Yes, absolutely (2+ / 0-)
                    Recommended by:
                    pstoller78, 207wickedgood

                    We need to get that enormous, stagnant pool of dollars flowing through the economy.

                    The way to do that is not to print more dollars but to tax the people holding those dollars OR force them to invest/spend them.  I would choose the first option.

                    When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

                    by CharlieHipHop on Tue Jun 07, 2011 at 01:19:48 PM PDT

                    [ Parent ]

                    •  Inflation can do the same thing (1+ / 0-)
                      Recommended by:
                      pstoller78

                      It's true that taxation removes dollars from the economy that can then be "redistributed" to those more likely to spend them, stimulating production and employment.  But the same thing can be done by merely deficit spending stimulating production and employment.  The resulting inflation, if any occurs at all, is only damaging so long as wages don't keep up.  If wages do keep up, only fortunes built on the back of increasing returns on investment are harmed.  As long as government spending is stimulating consumption over investment, the employment rate and the wage rate will grow as the economy expands capacity to meet the demand.

                      From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

                      by Nellebracht on Tue Jun 07, 2011 at 02:52:40 PM PDT

                      [ Parent ]

                •  You can declare it to be a problem.. (2+ / 0-)
                  Recommended by:
                  psyched, pstoller78

                  ... until the cows come home, but that doesn't change the fact that we have 9% unemployment leading to a lack of demand.  Dollar devaluation on the world wide market is due to trade imbalance, not budget deficits.

                  I don't know why you would want to issue a few trillion in treasuries to fix the economy.  Treasuries can only be bought in dollars.  It would temporarily take dollars out of circulation and cause deflation.

                  On the other hand if you want to pump some dollars into the economy by say, improving infrastructure, education, and technological research.  - Then yes, I would be for that.  Even if it was all deficit spending.

                  In a time of 9% unemployment, the repubs have no good point about worrying about a budget deficit.

                  Our Dime Understanding the U.S. Budget

                  by maddogg on Tue Jun 07, 2011 at 12:14:56 PM PDT

                  [ Parent ]

                  •  Dude, (0+ / 0-)

                    Sorry, but this is an utterly asinine statement:

                    I don't know why you would want to issue a few trillion in treasuries to fix the economy.  Treasuries can only be bought in dollars.  It would temporarily take dollars out of circulation and cause deflation.

                    Treasuries are dollars.  Just as babies don't come from storks, dollars don't come from some magical printing press -- dollars are put into circulation when treasuries are issued.

                    Oh, yes, a very small percentage of dollars are actually printed on presses, but the rest of them are created in the form of t-bills.  There are approximately $1 trillion cash dollars (M0 if you want to be an economist about it) in the world.  The rest exist in the form of deposits and loans of various kinds.

                    Period.  End of discussion.  You clearly have no idea what you're talking about.

                    When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

                    by CharlieHipHop on Tue Jun 07, 2011 at 01:18:12 PM PDT

                    [ Parent ]

                    •  Dollars ARE treasuries? (2+ / 0-)
                      Recommended by:
                      psyched, pstoller78

                      Treasuries are not dollars.  The government, by law, not by necessity, issues treasuries when it creates money.  There is no reason the government HAS to issue treasuries to create money.  It is a left-over vestige of the gold standard and needs to be eliminated so we don't have these stupid debt-ceiling fights.

                      When you said "why not just issue a few trillion in Treasuries tomorrow and pump them into the economy? (Yes, that is rhetorical.)  I mean, that would solve all our problems, right?" - I thought you were proposing doing that by itself would somehow fix the economy.  

                      If, what you meant was why don't we deficit spend some money, then you should've said that.  Because that is what I think needs to be done, as I said above "On the other hand if you want to pump some dollars into the economy by say, improving infrastructure, education, and technological research.  - Then yes, I would be for that.  Even if it was all deficit spending."

                      I understand your point about taxing the uber rich.  However, when current inflation is so low, there is no need to increase taxes.  If inflation starts getting high, then I would agree with your proposal to increase taxes on very high earners.

                      You sound like a very intelligent and passionate person.  I think we have a lot to agree on.  It seems that our area of disagreement is on whether or not further deficit spending will cause high inflation.  If I understanding you correctly, I think your position is that any government deficit spending will be inflationary.  I disagree.  I believe that the government can maintain these deficits without causing high inflation(I define high as 4% a year or more) until our high unemployment goes down.  There is a lot of unused capacity in the economy that I think the government can tap into.

                      Our Dime Understanding the U.S. Budget

                      by maddogg on Tue Jun 07, 2011 at 01:34:59 PM PDT

                      [ Parent ]

          •  Not Really... (1+ / 0-)
            Recommended by:
            psyched

            Let me define "rejecting".  When I say "rejecting", I mean refuse to accept as payment.  That's what happens in hyperinflation.

            >>In fact, the world has been rejecting the currency in a very big way for quite some time.
            http://www.chinadaily.com.cn/....

            Wrong, who has been buying the chinese debt?  It's been other foreign and domestic entities.

            As for the fed,  2 things.  Why is it a problem for the fed to buy U.S. debt?  The other, is that the Fed is buying debt from other private investors in exchange for(wait for it) DOLLARS!!!!  So people apparently are still taking dollars.

            >>You have to change them for yen or euro.
            I don't care if many merchants in Iceland or Kenya don't accept dollars.  I'll be concerned about hyperinflation when you can no longer exchange them for the local currency.

            Our Dime Understanding the U.S. Budget

            by maddogg on Tue Jun 07, 2011 at 10:16:10 AM PDT

            [ Parent ]

            •  I agree that hyperinflation... (0+ / 0-)

              ... is not an immediate danger, though we're setting things up for it in the bigger picture.

              It is a problem for the Fed to buy U.S. debt because the Fed is a quasi-public institution, a part of the U.S. government and a very important part.  You can't lend money to yourself.  It just doesn't work that way.

              When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

              by CharlieHipHop on Tue Jun 07, 2011 at 11:21:25 AM PDT

              [ Parent ]

              •  It is not a danger in the forseable future. (3+ / 0-)
                Recommended by:
                psyched, pstoller78, Nellebracht

                Hyperinflation is not caused solely by deficit spending.  There is not danger of total currency rejection here, or on the global money exchange market.  There is danger of devaluation, but devaluation doesn't lead to hyperinflation.

                Our Dime Understanding the U.S. Budget

                by maddogg on Tue Jun 07, 2011 at 11:54:31 AM PDT

                [ Parent ]

              •  Which essentially means (3+ / 0-)
                Recommended by:
                maddogg, psyched, pstoller78

                That the government is printing money when it borrows from the Fed.  There is nothing wrong with printing money, it's part of the government's legitimate role  in the economy.  The problem lies with where that printed money goes.  If it's used to finance bond-buybacks, we get increased speculation in markets and bubbles; essentially stagflation.

                If it's used to stimulate consumption spending as opposed to investment spending, then the economy grows (i.e. increases output) until it is incapable of growing any further, at which point it inflates.  And this sort of inflation is true inflation, rising prices include wages, maintaining the purchasing power of wage-earners, while depleting the purchasing power (for both consumption and investment) of return earners.

                From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

                by Nellebracht on Tue Jun 07, 2011 at 11:58:29 AM PDT

                [ Parent ]

                •  Sure (0+ / 0-)

                  The government can print all the money it wants, but it will lead to inflation.  If you are denying that, this discussion is over as far as I'm concerned.

                  When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

                  by CharlieHipHop on Tue Jun 07, 2011 at 01:05:15 PM PDT

                  [ Parent ]

                  •  Inflation fears (3+ / 0-)
                    Recommended by:
                    psyched, Nellebracht, pstoller78

                    When the economy has 9% unemployment it will be met with very little, if any inflation.  Now, if money is created beyond "full" employment it will cause inflation.

                    Our Dime Understanding the U.S. Budget

                    by maddogg on Tue Jun 07, 2011 at 01:12:17 PM PDT

                    [ Parent ]

                    •  That depends (1+ / 0-)
                      Recommended by:
                      Eugene Fitzherbert

                      It depends on where the new money is spent.  If the government spends that new money on unemployment benefits, job retraining programs, or directly hiring the unemployed, then no inflation will occur.  In fact, given the economic multipliers, such spending might even be deflationary.

                      If the government spends its new money buying back bonds and offering low or no-interest loans to banks and investment houses, then commodity and asset prices will inflate and go all volatile, unemployment will grow, and wages will be left behind.  Such spending might not be strictly speaking inflationary, but it is "stagflationary."

                      In my mind, the fundamental message of MMT is not that deficits don't matter for a sovereign nation issuing its own currency.  Of course such a nation is not fiscally constrained in its own currency.  But it is really constrained in the effectiveness or detriment to the economy in the deficits it runs.  The fundamental message of MMT is that it matters where the government spends its money.  Whether it runs a deficit, a surplus or a balanced budget, and given different conditions in the overall economy, i.e. the balance sheets of the private and external sectors, any one of those three budget conditions can be alternately necessary, impossible, sustainable, unsustainable, beneficial or harmful, to the economy as a whole.  

                      In other words, the state of the budget is not the priority, the priorities of the budget is the priority.

                      From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

                      by Nellebracht on Tue Jun 07, 2011 at 02:45:46 PM PDT

                      [ Parent ]

                  •  If you want to be close-minded (0+ / 0-)

                    then fine.  I doubt you make economic policy, so consequences of not convincing you of the truth is not that great.  

                    The simple economic fact is that if the economy is  capable of producing more goods and services, and those new dollars are spent into the economy by the government in such a way as to stimulate demand for those goods and services, then the economy will produce those goods and services and inflation will not occur because the overall ratio of money to real goods and services will have remained unchanged.

                    Think about it this way, if the economy increases its production of goods and services, but the money supply that can provide effective demand for those services remains the same, what happens to prices?  

                    From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

                    by Nellebracht on Tue Jun 07, 2011 at 02:32:18 PM PDT

                    [ Parent ]

              •  Lending-borrowing (3+ / 0-)
                Recommended by:
                stunster, psyched, pstoller78

                Let me ask you this question.  The United States is the sole issuer of US dollars.  Why DOES it need to borrow money at all?

                If it wasn't for the federal government, no one would have ANY dollars.  If the government truly needed to borrow or tax money before spending it, where do the citizens get the original money from?

                This is why there is no US debt problem.  The whole concept of "borrowing" is a leftover vestige of gold convertibility.

                Our Dime Understanding the U.S. Budget

                by maddogg on Tue Jun 07, 2011 at 12:21:48 PM PDT

                [ Parent ]

                •  Do you understand what a dollar is? (0+ / 0-)

                  A dollar has no value other than as a promissory note.  It is an IOU, not a magical store of value.  If it were, we could simply print dollars and give them to everyone and the economic crisis would be over, but that's not what would happen.  In that case, hyperinflation would be the result.

                  Since we've gone off the gold standard, every dollar in circulation is borrowed, and I'm not saying that's fundamentally a bad thing.  It is, however, something that needs to be carefully reined in.

                  When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

                  by CharlieHipHop on Tue Jun 07, 2011 at 01:08:00 PM PDT

                  [ Parent ]

                  •  Giving money (3+ / 0-)
                    Recommended by:
                    psyched, Nellebracht, pstoller78

                    I am not proposing that we give money away.  Rather that the federal government use it to put people to work.  I want to pump some dollars into the economy by say, improving infrastructure, education, and technological research.  Get some value for the dollar.

                    If inflation becomes a problem, then we can rein it in at that time.  However, inflation isn't going to be a problem as long at 9% unemployment is dragging down aggregate demand.

                    Our Dime Understanding the U.S. Budget

                    by maddogg on Tue Jun 07, 2011 at 01:15:22 PM PDT

                    [ Parent ]

                    •  I'm with you on that (1+ / 0-)
                      Recommended by:
                      maddogg

                      The government should be spending more money putting people to work, but it shouldn't be borrowing/printing more money to do it.

                      Instead of making the poor pay through a devalued dollar, we should be taking that $1.5 trillion in cash the rich are hoarding.

                      When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

                      by CharlieHipHop on Tue Jun 07, 2011 at 01:36:54 PM PDT

                      [ Parent ]

                      •  I think this is the crux of the issue. (2+ / 0-)
                        Recommended by:
                        Nellebracht, pstoller78

                        I don't believe that the mere existence of dollars is going to lower it's value.  That's the quantity theory of money in a nutshell.  I of course disagree.  For instance if you created a trillion dollars and then buried it, it wouldn't decrease the value of all other dollars.

                        As you stated, the rich are hoarding 1.5 trillion and not doing anything with it.  The fact that they are hoarding the money and not doing anything with it is equivalent to taking that money out of circulation even "burying it".  That can cause deflation.  The only difference is that they may, one day, unbury it.

                        With that in mind, as a short-run matter, it doesn't matter whether or not the money is created or "unburied" from the stockpiles of the rich, it's going to have the same effect on inflation in the short-run.  The only difference in the "created money" scenario is that the rich may unbury their money once the economy picks up and will cause inflation at that point - that, to me, will be the appropriate time to tax them.

                        Our Dime Understanding the U.S. Budget

                        by maddogg on Tue Jun 07, 2011 at 02:03:20 PM PDT

                        [ Parent ]

                        •  Actually, no (0+ / 0-)

                          "Unburying" the money won't cause inflation because that money already exists.  It's already on the books, accounted for.

                          "Unburying" (i.e., taxing) it puts no new money in circulation, it just gets the money circulating.  If anything, it will reduce the threat of inflation because balancing the government's books will strengthen the dollar.  More financially responsible monetary policy -> stronger dollar -> dollar buys more -> less inflation

                          Less responsible monetary policy -> weaker dollar -> dollar busy less -> higher prices for globally traded commodities like oil, food, and precious metals (call it inflation if you want).  This is what happened under Bush, call it reality:

                          The wealthy got a massive tax break.  That money which had been in productive use by the government now had to be borrowed.  The deficit ballooned.  The dollar weakened.  The poor and middle class paid in the form of higher prices.  

                          Higher deficits are a stealth tax on the middle and working class.  That's why Repugs (secretly) love them so much.

                          The solution is not to devalue the dollar in the poor man's pocket but to ask the rich man to pay his fair share.

                          When the power of love overcomes the love of power, there will be peace. - Jimi Hendrix

                          by CharlieHipHop on Tue Jun 07, 2011 at 03:50:50 PM PDT

                          [ Parent ]

                          •  Not following me... (1+ / 0-)
                            Recommended by:
                            psyched

                            >>It's already on the books, accounted for.
                            No it is not.  That's the point of cash, it is not on the books or accounted for.  If 1 trillion in cash was burned, never to return, would you still say that it's "on the books" and "accounted for?"

                            You make the assumption that a balanced budget will automatically make the dollar more stable.  That is not always the case.  That's what I'm trying to get you to see.  We've been told this idea so many time and so often that many people take this to be an unassailable fact.  However, if you start peeling back the mountain of assumptions it is based on you'll see that this is not necessarily true.

                            Our Dime Understanding the U.S. Budget

                            by maddogg on Wed Jun 08, 2011 at 08:25:31 AM PDT

                            [ Parent ]

          •  The last paragraph is so wrong. (3+ / 0-)
            Recommended by:
            maddogg, SingleVoter, psyched

            By that standard Chinese currency is in terrible shape b/c almost no country outside of China will accent yuans.

          •  I take issue with this (3+ / 0-)

            "By way of personal analogy, I will just say that many merchants in Hong Kong will no longer take U.S. dollars.  You have to change them for yen or euro."

            This is not currency rejection.  Merchants here in Athens wont accept Canadian dollars  either, are we "rejecting" their currency?

            It would only be rejection if you couldnt find a currency trader who wouldnt change your dollars to yen or euro.   You're off base here.... sorry.

      •  If I might chime in here (4+ / 0-)

        There is a sense in which the rising food and gas prices are a form of inflation, in that they are a response to the monetary policy response to the crisis, and to managing the economy in general.

        Having been captured by monetarists, the government believes that it injects money into an economy by buying back bonds, and that it removes money by selling bonds, and that it can overall control the money supply by participating in open bond market operations.

        Buying back bonds essentially gives more money to those who already have more money than they know what to do with (as evidenced by the fact that they have bonds, instead of being invested in some other business or asset).  Those people will then seek the best return on their new money.  Some proportion of that will go right back into buying bonds, the rest will seek returns in the market.

        Of the injected money that seeks a return in the market, there is a choice between investing in some productive business that one believes to be expanding, and going "fishing" in commodities and asset markets trying to make a profit off of pricing volatility.  An investor is going to invest in a business when spending in that business's market is increasing.  If no market has increasing spending at the levels to justify investment, investors will choose the latter option.

        So CharlieHipHop has a point.  Bubbly asset and commodities markets, which tend to generate price increases in those markets until they leave for some other market, precipitating a price crash, are a result of the monetary policy focus to managing the economy, as opposed to using sound fiscal policy to increase spending.

        Your point to Charlie would have been better made if you'd noted that inflation is not a detriment to the balance-sheets of wage-earning households as long as wages are included in the inflation.  Monetary policy allows investors to constrain inflation to individual markets without all price levels throughout the economy rising.  Labor, as a commodity, will be consistently left out of the bubble-blowers cycle of markets in which to speculate.  So the danger of running deficits that are administered using monetary policy is not inflation so much as stagflation (general inflation in most assets and commodities leaving out wages).

        From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

        by Nellebracht on Tue Jun 07, 2011 at 11:26:11 AM PDT

        [ Parent ]

      •  No. (1+ / 0-)
        Recommended by:
        Nellebracht

        The only reason the dollar hasn't tanked completely is that other hard currencies have weakened so substantially.

        So all the hard currencies are facing hyperinflation? That doesn't even make sense.

      •  Yes food and fuel are important (1+ / 0-)
        Recommended by:
        Nellebracht

        But the salient point is that those rises do not represent demand pull inflation (inflation coming form too much spending money in peoples hands relative to productive capacity) those rises are mostly due to commodities traders driving up the prices of the goods because they are chasing a profitable investment.  Those speculative rises do have a tipping point and there will be a reversion to mean in those areas as the  market adjusts more people start betting on the short side.

        Your point about the dollar not tanking should give you pause. Talking about the value of the dollar is a pretty meaningless term these days under our monetary regime.  One must always  be explicit and talk about its value relative to something else.  In gold standard days devalued currency had some universal meaning but not anymore.

        It is demand pull and currency debasement inflation that has the hyperventialtors all worked up, neither of which is operative at the present.

    •  People are talking about inflation. (0+ / 0-)

      This morning

      Inflation Target Should Be Set to Spur U.S. Recovery, Fed’s Lockhart Says
      It is a tool that will begin to resurface and for thos who grew up in the excessively inflationary '70s and are now on fixed incomes it can engender pushback or even panic.
      Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank should set an explicit goal for inflation to invigorate the “halting” economic recovery.

      “Now is a good time to reaffirm in explicit terms the central bank’s commitment to delivering its piece of the package of fundamentals needed to assure a durable and lasting recovery,” Lockhart said today in prepared remarks for a speech in Charlotte, North Carolina. It was his first call for the adoption of an inflation target.

      Fed Chairman Ben S. Bernanke and other Fed officials such as Philadelphia Fed President Charles Plosser and Cleveland’s Sandra Pianalto have advocated adopting an inflation target to more clearly signal their goals to the public. Unlike many central banks that focus primarily on inflation, the Fed has a dual mandate to maintain stable prices and promote maximum employment.

       

      Eliminate the Bush tax cuts Eliminate Afghan and Iraq wars Do these things first before considering any cuts

      by kck on Tue Jun 07, 2011 at 11:41:05 AM PDT

      [ Parent ]

    •  Oh yes (1+ / 0-)
      Recommended by:
      maddogg

      Pretty much the entire Ron Paul/Alex Jones crowd has been on about this, and they're very happy to ignore any evidence that they're idiots. We can surmise that this is, to some degree, a projection of their racist fears that a black President will bungle the United States into third-world status.

  •  Libertarians and Ron Paul supporters.... (2+ / 0-)
    Recommended by:
    psyched, ontheleftcoast

    ....are also bizarrely fixated on inflation, too. One friend of mine who is a huge believer in this said that all major economists were all in on the "scam" whatever that may be.

    •  The Paulites are "hard currency" zealots (1+ / 0-)
      Recommended by:
      metal prophet

      If you believe paper money is a lie in the first place then you must believe that changing its value is part of the scam. Of course they toss in a little anti-Semitism for good measure (blaming much of the current monetary policy on the Rothschilds and their enablers). It makes for a toxic blend of stupid and hate. In other words, modern Republicans.

      As soon as you have people telling other people how to live/think/behave because "god gave them authority" you effectively get dictators in funny looking hats.

      by ontheleftcoast on Tue Jun 07, 2011 at 08:50:16 AM PDT

      [ Parent ]

      •  My favorite example (0+ / 0-)

        is Sue Lowden trying to replace fiat currency with the 'Chicken Standard"

        Growth for the sake of growth is the ideology of the cancer cell. ~Edward Abbey

        by martinjedlicka on Tue Jun 07, 2011 at 09:23:29 AM PDT

        [ Parent ]

      •  Inflation bugs (4+ / 0-)

        The inflation bug's mind works on the basis of fear; specifically the fear that rising prices deter and ultimately destroy savings and investment.

        And the inflation bug is 100 percent correct.

        To see this, all we need to do is to compare the price level for consumer goods and services today with level prevailing in 1933.   Yes, that's right; prices today are much higher than they were in 1933.

        And what has been the effect? Yes, just as the inflation bugs predicted, investment has plunged dramatically in the last 75 years, rendering the U.S. a byword for staggering economic decline.

        And those living on fixed incomes or from savings have, en masse, been forced to beg whatever crumbs they can garner from illegal immigrants working as crop pickers or car washers. The creation of Social Security merely exacerbated the pauperism that our decades-long monetary inflation has wrought.

        The only exceptions are those wise and fortunate souls who have hoarded gold.

        If only we as a nation had not inflated our currency starting in 1933, our children and grandchildren would have enjoyed all the marvellous pre-1933 era blessings afforded by Sound Money policies.

        But the inflation bug at least can be consoled by the KNOWLEDGE that he was RIGHT, and that the inflationists were wrong.

        Now, there are some who will say the right-wing inflation-haters are merely absurd cranks, or absolutely whacko crackpots, or indescribably moronic simpletons, who are fed these stupendously erroneous ideas about monetary economics by the propaganda machine that serves the interests of the ruling plutocracy. But as the simple, clear, and dramatic analysis of the facts which I have provided above PROVES BEYOND ALL DOUBT, these idiotic douchebags actually have the facts on their side. Not, to be sure, the liberal-socialist-collectivist so-called facts, but the facts as derived from the ridiculous, off-the-wall, fruitloop worldview of the inflation bug.

        QED

  •  Venezuela (0+ / 0-)

    While it's not hyper-inflation, what is driving their high inflation, since their central banks seem committed to backing government spending?  I've read that Venezuela's monetary deficit financing is over 10 per cent GDP and inflation is high.  As a petro-economy, their productive capacity should still be strong.

     

    Growth for the sake of growth is the ideology of the cancer cell. ~Edward Abbey

    by martinjedlicka on Tue Jun 07, 2011 at 08:52:30 AM PDT

    •  Venezuela inflation (4+ / 0-)

      As you said, Venezuela doesn't have hyperinflation.  They do have a debt problem because their debt is denominated in a foreign currency(US$) instead of it's own currency.  This a real problem as opposed to US debt which is denominated only in our own currency.

      While this may lead to very high inflation, it would require a lot of bad luck and bad decisions for this to lead to a prolonged hyper-inflationary period.

      The United States and other non-Euro nations don't have to worry about this scenario as long as their Sovereign debt is denominated in their own currency.

      Our Dime Understanding the U.S. Budget

      by maddogg on Tue Jun 07, 2011 at 10:03:17 AM PDT

      [ Parent ]

  •  Hyperinflation is a buzzword designed to do one (3+ / 0-)
    Recommended by:
    semiot, psyched, kck

    thing: scare people about normal inflation. And the reason for that is normal inflation with wage increases matching eats away at the amassed wealth of the oligarchy. They have to keep earning money instead of just sitting on their vast mountains of it. At a modest 3-4% annual inflation a $20,000/yr job would be a $40,000/yr job in twenty years. No biggie. But a billionaire would effectively lose $500,000,000 in worth over the same time period. That is unless they kept putting their money into the system and earning value and, gasp, paying taxes on those earnings. And in reality we probably could use something like a sustained 10%-15% inflation rate for a decade or more and that thought gives them nightmares. They'd have to work and pay taxes for the next decade or so, the horror!

    As soon as you have people telling other people how to live/think/behave because "god gave them authority" you effectively get dictators in funny looking hats.

    by ontheleftcoast on Tue Jun 07, 2011 at 09:03:58 AM PDT

    •  Most retirement plans use an inflation contingency (1+ / 0-)
      Recommended by:
      ontheleftcoast

      ...factor, mine is 4%. If inflation starts getting higher than that it will begin to eat "away at the amassed wealth of oligarchy average Americans who saved enough for their retirement years.

      I agree the fear-mongers are run amuck so what is needed are facts and clarity rather than dismissal.

      Eliminate the Bush tax cuts Eliminate Afghan and Iraq wars Do these things first before considering any cuts

      by kck on Tue Jun 07, 2011 at 11:47:49 AM PDT

      [ Parent ]

      •  Not the same thing at all (3+ / 0-)
        Recommended by:
        maddogg, kck, psyched

        Your retirement could lose some value. But if it's being actively invested and it's earnings are tax-defered or even tax-free you could come out ahead. If you put your money in a sock then you'll have the same problem as the oligarchy. And there could even be some crazy scheme where the governent takes a portion of your earnings, invests them, and pays them back with interest to you when you retire. Damn, that would be a cool idea. Maybe someone will come up with it.

        As soon as you have people telling other people how to live/think/behave because "god gave them authority" you effectively get dictators in funny looking hats.

        by ontheleftcoast on Tue Jun 07, 2011 at 11:55:25 AM PDT

        [ Parent ]

  •  Nitpick (0+ / 0-)

    Every single word in the English language that ends in S does NOT require an apostrophe.  ;)

    •  lol (0+ / 0-)

      You're now the second person to note that I tend to do that.  I'd better start doing better proofing.  :)

      Our Dime Understanding the U.S. Budget

      by maddogg on Tue Jun 07, 2011 at 09:51:38 AM PDT

      [ Parent ]

    •  Also (1+ / 0-)
      Recommended by:
      maddogg

      It's the Ruhr, not the Rhur.

      Hige sceal þe heardra, heorte þe cenre, mod sceal þe mare, þe ure mægen lytlað

      by milkbone on Tue Jun 07, 2011 at 10:24:25 AM PDT

      [ Parent ]

    •  And one non-typographical quibble: (0+ / 0-)
      Likening the two is like comparing your car to a NASA rocket.  They share the similarity in that they both get you from point A to point B using an endothermic reaction, but that is where the useful comparisons stop.
      Exothermic, not endothermic. Exothermic reactions release energy which can then be imparted to the vehicle in the form of motion; endothermic reactions suck energy out of the system.

      I presume you know more about monetary policy than about thermodynamics...?

      snarcolepsy, n: a condition in which the sufferer responds to any comment with a smartass comeback.

      by Uncle Cosmo on Tue Jun 07, 2011 at 11:23:56 AM PDT

      [ Parent ]

      •  Love Daily Kos (0+ / 0-)

        This is why I love Daily Kos.  All the readers are from such broad backgrounds that you can catch all these things.

        I'm kicking myself for this one.  This is stuff I knew and just screwed up because I got lazy and skipped over my proofreading.  Thanks for the correction :)

        Our Dime Understanding the U.S. Budget

        by maddogg on Tue Jun 07, 2011 at 12:17:43 PM PDT

        [ Parent ]

  •  THANKS!!! (3+ / 0-)
    Recommended by:
    ontheleftcoast, maddogg, psyched

    I get overwhelmed by my teabagger brother on this shit...

    This will help me have a "discussion" with him and try to talk him off the ledge...

    He makes chicken-little look like a coma patient.

    Thanks again.

    Radical Activist Homosexual Agenda: 1. Equality 2. See #1

    by skip945 on Tue Jun 07, 2011 at 09:46:02 AM PDT

  •  Great diary. However, there are situations (1+ / 0-)
    Recommended by:
    maddogg

    when you have high inflation but not quite hyperinflation (most of former USSR and Central Europe at some points in the 90s, for example). There you had partial rejection of currency, as you noted. But it was also coupled with government revenue being too low (due to corruption and economic collapse) to support its expenses. Not that there is a serious threat of that here so it's pretty theoretical.

  •  currency rejection (0+ / 0-)

    A few years ago, the then new Japanese Prime Minister said Japan would continue to lend to the US, but that the debt would have to be denominated in Yen. I suspect they still use dollars.

    A somewhat related link:
    http://www.usgoldcoins.com/...

  •  In 2008 American tourists (0+ / 0-)

    in the Netherlands found that the dollar was dropping in value so fast that small businesspeople who couldn't off-load them fast wouldn't accept dollars:

    http://www.reuters.com/...

    •  3 years ago (2+ / 0-)
      Recommended by:
      psyched, pstoller78

      And what happened after that?  Deflation occurred in the united states in followed by very low inflation the next 2 years.

      Again, when you can't exchange dollars for the local currency, call me about hyperinflation.  When you can't spend your dollars on American soil, call me about hyperinflation.

      Our Dime Understanding the U.S. Budget

      by maddogg on Tue Jun 07, 2011 at 11:50:51 AM PDT

      [ Parent ]

  •  Just curious, but how did Britain (0+ / 0-)

    "start stealing Germany's exports"--? Serious question--I've never run across that claim before.

    snarcolepsy, n: a condition in which the sufferer responds to any comment with a smartass comeback.

    by Uncle Cosmo on Tue Jun 07, 2011 at 11:26:11 AM PDT

  •  Good diary - I completely agree. (4+ / 0-)

    my favorite example of inflation being near-dead - Treasuries.

    Why would sophisticated investors tie money up for 10 years at 2.6% when inflation is coming?

    Its not, of course.  No one but the Beckerheads think that.

    And my diary Saturday on Ron Paul is a sharp rebuke of his insane ideas.

    "The way to see by faith is to shut the eye of reason." - Thomas Paine

    by shrike on Tue Jun 07, 2011 at 12:27:23 PM PDT

  •  with the exception of stunster .... (0+ / 0-)

    I am not happy with the quality of the debate on this posting.  Maybe some definitions from shadowstats.com in their paper titled "Hyperinflation Special Report" would help.
    www.shadowstats.com/article/hyp

    Defining the Components of a Hyperinflationary Great Depression

    Deflation, Inflation and Hyperinflation. Inflation generally is defined in terms of a rise in general prices due to an increase in the amount of money in circulation. The inflation/deflation issues defined and discussed here are as applied to goods and services, not to the pricing of financial assets.

    In terms of hyperinflation, there have been a variety of definitions used over time. The circumstance envisioned ahead is not one of double- or triple- digit annual inflation, but more along the lines of seven- to 10-digit inflation seen in other circumstances during the last century. Under such circumstances, the currency in question becomes worthless, as seen in Germany (Weimar Republic) in the early 1920s, in Hungary after World War II and in the dismembered Yugoslavia of the early 1990s.

    The historical culprit generally has been the use of fiat currencies — currencies with no asset backing such as gold — and the resulting massive printing of currency that the issuing authority needed to support its system, when it did not have the ability, otherwise, to raise enough money for its perceived needs, through taxes or other means.

    Foster (see recommended further reading at the end of this issue) details the history of fiat paper currencies from 11th century Szechwan, China, to date, and their consistent collapses, time-after-time, due to what appears to be the inevitable, irresistible urge of issuing authorities to print too much of a good thing. The United States is no exception, already having obligated itself to liabilities well beyond its ability ever to pay off.

    Here are the definitions:

    Deflation. A decrease in the prices of goods and services, usually tied to a contraction of money in circulation.

    Inflation. An increase in the prices of goods and services, usually tied to an increase of money in circulation.

    Hyperinflation: Extreme inflation, minimally in excess of four-digit annual percent change, where the involved currency becomes worthless. A fairly crude definition of hyperinflation is a circumstance, where, due to extremely rapid price increases, the largest pre-hyperinflation bank note ($100 bill in the United States) becomes worth more as functional toilet paper/tissue than as currency.

    As discussed in the section Historical U.S. Inflation: Why Hyperinflation Instead of Deflation, the domestic economy has been through periods of both major inflation and deflation, usually tied to wars and their aftermaths. Such, however, preceded the U.S. going off the gold standard in 1933. The era of the modern fiat dollar generally has been one of persistent and slowly debilitating inflation.

    I am concerned that Kosacks would so easily dismiss the value of gold as insurance for their portfolio. Yes the right wing talks about gold and hyperinflation. I have lobbied my union to seek change in our members pension plan to include bullion as an asset class that we can invest in, so far without success. Loss of confidence in a currency can happen incredibly fast as was the case with Weimar. I am concerned with a default of the US dollar. Its crash will cause a collapse of all G20 currencies, including my Canadian dollar.

    The hottest places in hell are reserved for those who remain neutral in time of great moral crisis

    by dolphindude on Tue Jun 07, 2011 at 02:09:34 PM PDT

    •  US personal net wealth experienced the broadest (5+ / 0-)

      contraction of all time in 2008 - some $14 trillion.

      The increase in US currency since is dwarfed by that amount.  Without looking again it again it has been some $400 billion.

      There will be no significant inflation until housing and labor fill available supply and with millions of empty homes and 15 million unemployed that will not happen for at least 10-12 years.

      "The way to see by faith is to shut the eye of reason." - Thomas Paine

      by shrike on Tue Jun 07, 2011 at 02:21:07 PM PDT

      [ Parent ]

    •  That's an incomplete picture (4+ / 0-)
      Recommended by:
      shrike, psyched, pstoller78, maddogg

      Governments have no desire to make their currency worthless.  In virtually every case I can find of hyperinflation defined as inflation over the period of one year greater than 100%, it was preceded by large, and in some cases devastating losses in productive capacity and real production.  Gold will never return to back money, and neither will any single asset class.  Fiat currencies allow the currency to be backed by the entire economy and can be much more easily expanded and contracted in response to a rapidly changing economy.

      Even with our government running deficits for the past 98 years out of 100, and spending that money in perhaps the worst ways possible, our inflation rate has never topped 25% annual inflation, and because of the stupid way our government has spent its money, most of that has been in the way of asset and commodity bubbles, leaving wages relatively untouched.

      To claim that fiat currencies always give way to hyperinflation is absurd on its face.

      From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

      by Nellebracht on Tue Jun 07, 2011 at 03:06:52 PM PDT

      [ Parent ]

      •  Gold and silver tell a different story (0+ / 0-)

        Why are gold and silver rising in price? Because people all over the world are voting for hard money, not fiat paper that will not store value.

        The hottest places in hell are reserved for those who remain neutral in time of great moral crisis

        by dolphindude on Tue Jun 07, 2011 at 03:22:39 PM PDT

        [ Parent ]

        •  perhaps they are in a demand bubble aided by (3+ / 0-)
          Recommended by:
          psyched, pstoller78, virginislandsguy

          populist fear.

          You saw silver fall 30% in a week I'm sure.  Commodities can experience spectacular falls.

          Someday the Fed will tighten and gold will get hammered.  When that will be?  Who knows?

          "The way to see by faith is to shut the eye of reason." - Thomas Paine

          by shrike on Tue Jun 07, 2011 at 03:32:24 PM PDT

          [ Parent ]

          •  Fear of seeing their savings being eroded (0+ / 0-)

            Is the populist fear. The U.S. Dollar has spectacularly failed to preserve value, one of the key jobs that money is supposed to do. In no way is gold and silver in a bubble when you look at the fact that a fraction of one per cent of pension funds own it. In your previous posting regarding "incomplete picture" you failed to consider the advantage to the U.S. Dollar of being the world's reserve currency, an advantage that has bought some time, but will likely not continue in that role in the future. What happens when all those dollars come home? I am being historically accurate when I say that all fiat currencies last about two generations before they fail, it will be no different with the U.S. dollar that lost it's gold backing under Nixon.

            The hottest places in hell are reserved for those who remain neutral in time of great moral crisis

            by dolphindude on Tue Jun 07, 2011 at 03:59:01 PM PDT

            [ Parent ]

        •  Gold and Silver are not currencies (3+ / 0-)
          Recommended by:
          psyched, pstoller78, shrike

          and have not been for a long time.  The only real demand for gold and silver come from the jewelry and electronics markets.  The rest of the demand comes from the fact that gold and silver have historically been used as currencies, so investors either retreat to them when inflation is a worry or to bonds when it is not.  They are only useful as such a retreat because other investors treat them as such.  As soon as the economy picks up, the price of gold and silver will moderate.  Basically, gold and silver prices are rising for the same reason oil and food commodities are rising.  Investors are speculating and manipulating pricing in those commodity markets because they don't have any good idea of what else to do with their money.

          And gold and silver currencies experience inflation, hyperinflation and deflation as well, and for the same reasons fiat currencies do.  The problem they have is that the creation or withdrawal of money from the economy in order to control inflation/deflation and attain maximum production is much more difficult in a gold currency than in a fiat currency.  You've essentially got a currency whose production is largely unconnected to economic activity in other quarters and whose total potential production is limited by the amount of accessible gold in the Earth's crust, while economic growth is in principle unlimited because the human capacity to value is in principle unlimited.  Going back to gold means trying to devise a growing economy that's constantly experiencing deflation.  I don't know how to do that, and as far as I know, neither does anybody else.

          From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

          by Nellebracht on Tue Jun 07, 2011 at 03:43:36 PM PDT

          [ Parent ]

          •  Sorry, investment demand dwarfs (0+ / 0-)

            Jewelry and electronics. It's true they have been demonitized, so as not to compete with paper money. But gold is held by your treasury and central banks and listed as a monetary asset and swapped with other governments and banks.

            Inflation is a deliberate policy of government. It is a means by which the Banks transfer wealth from the many to the privileged few. It is like a hidden tax, and few people can connect the dots.

            Kings and governments throughout history have debased their currencies to find the funds to wage war and imperialism. Today is no different. We are entering into a currency war - competitive devaluation - all G20 currencies will be devalued to maintain exports.

            I know that by the arguments you are using that I won't convince you, and really I don't care. As a result of investing heavily in precious metals since 2006, I have significantly increased the value of my pension while at the same time giving myself a raise above what I was making when I was working.

            The debate between us will be resolved by events in the near future (August) such as QE 3, fraud in the
            COMEX, U.S. Debt ceiling, and status of world's reserve currency.

            The hottest places in hell are reserved for those who remain neutral in time of great moral crisis

            by dolphindude on Tue Jun 07, 2011 at 04:34:28 PM PDT

            [ Parent ]

            •  Thank you (1+ / 0-)
              Recommended by:
              pstoller78

              You've just conceded the argument, though I doubt you realize it.  

              Of course investment demand dwarfs demand for gold and silver as productive commodities.  But this investment demand only exists because investors expect other investors to demand gold for investment.  In other words, gold and silver only have such a high investment value because investors have faith that other investors will act the way they expect.  This is exactly the same kind of faith savers have or fail to have in the dollar.  If you object to a currency whose value is only supported by faith, then you have no reason to support gold and silver as currency over fiat currencies.  Leaving out their uses in electronics and jewelry, gold and silver are inherently worthless.  That's part of what made them such good currencies in the first place.  They're not now.

              Please name one example of where a government or dictator debased the value of their currency in order to finance some imperialist military venture that resulted in hyperinflation where there was not also a destruction in the ability of that nation to produce real goods and services.

              From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

              by Nellebracht on Wed Jun 08, 2011 at 07:37:46 AM PDT

              [ Parent ]

              •  no thanks (1+ / 0-)
                Recommended by:
                Latins for Peace

                I never said in any of my postings that governments debase currencies strictly to finance an imperialist military venture. That is one of many possible reasons. Other reasons might be to bail out their banks or to finance oil purchases.  So much for that straw dog.

                (From Wikipedia)
                “As inflation allows a government to devalue their spending and displace (or avoid) a tax increase, governments have sometimes resorted to excessively loose monetary policy to meet their expenses. Inflation is effectively a regressive consumption tax, but less overt than levied taxes and therefore harder to understand by ordinary citizens. Inflation can obscure quantitative assessments of the true cost of living, as published price indices only look at data in retrospect, so may increase only months or years later. Monetary inflation can become hyperinflation if monetary authorities fail to fund increasing government expenses from taxes, government debt, cost cutting, or by other means, because either
                • during the time between recording or levying taxable transactions and collecting the taxes due, the value of the taxes collected falls in real value to a small fraction of the original taxes receivable; or
                • government debt issues fail to find buyers except at very deep discounts; or
                • a combination of the above.”

                You asked for it.
                Some examples of hyperinflation that don’t include a war or destruction impairing that nation to produce real goods and services include  Argentina 1975- 1991; Belarus 1994-2002; Boliva 1984-1986; Brazil 1986-1994; Bulgaria 1996; Georgia 1994; Mexico 1970; Peru 1988-1990; Poland 1921-24; Poland 1989-1991; Zaire 1989-1996, etc.  (source Wikipedia).

                The hottest places in hell are reserved for those who remain neutral in time of great moral crisis

                by dolphindude on Wed Jun 08, 2011 at 12:27:11 PM PDT

                [ Parent ]

                •  Currency Pegs and foreign denominated debt. (1+ / 0-)
                  Recommended by:
                  psyched

                  A lot of those occurred because the currency was pegged to a foreign currency.  Like Mexico and Argentina.  I'd have to look up the rest of them, but I'm sure you'll find that in every case either the currency was artificially pegged to a metal or foreign currency(like dollar or british pound), their was a sever supply shock, they owed money in a foreign currency, or the country was about to cease to exist(Like 1920s Poland), or the government couldn't enforce it's own taxes(like most of the former soviet republics right after the USSR dissolved).

                  I won't go into the details of every case in this comment, but I will in a future diary.  I'll invite you to subscribe to our group and we can continue this discussion there.  Thanks for reading.

                  Our Dime Understanding the U.S. Budget

                  by maddogg on Thu Jun 09, 2011 at 08:06:59 AM PDT

                  [ Parent ]

                  •  Thanks ... Very gracious response (0+ / 0-)

                    I will watch for your next diary, but as far as joining your group, I will either drive you folks nuts or you will drive me nuts.

                    We are wide apart. I am concerned about savers (pensions of union members and the middle class) getting hammered by a loss of purchasing power because their fiat money does not store value. Are you willing to sacrifice them? Do you want the (Ron) Paulites to own this issue? Americans have to go beyond their university economics classes of monetarism to study Ludwig Von Mises and the Austrian School of Economics.

                    If you can print money (debt) to solve your problems you will be tempted to go back to that well over and over and your monetary discipline will go to hell. I am not advocating a return to the Gold Standard. Recent thinking of hard money advocates have gone beyond that notion to something called "Free Gold." Although it would require more explanation than I can muster at the moment, it means that the gold price would not be fixed and the Mints would be open to coin citizen's gold.

                    For your upcoming dairy, I encourage you to visit a few web sites that have excellent information on the history of money. I quoted John Williams of Shadow Government Statistics. He is very highly regarded on his analysis of the monetary predicament we are now in. Also google FOFOA and Dollar Collapse, two more useful sites that will give you insight into what so many on DKos are blindly dismissing as that "barbarous relic." Do not turn your back on savers in favor of the Banks that profit from inflation.

                    The hottest places in hell are reserved for those who remain neutral in time of great moral crisis

                    by dolphindude on Thu Jun 09, 2011 at 07:45:04 PM PDT

                    [ Parent ]

                    •  Price Stability (0+ / 0-)

                      Well, I certainly don't want the other side to dominate the conversation of price stability.  The policy prescriptions for MMT(Modern Monetary Theory) is meant to produce Full Employment AND price stability.  In fact, many MMTers claim that they can make long-term inflation 0% -something not even the gold standard can claim doing.  Personally, I admit that in theory it sounds like we could, but I wouldn't want to promise it without seeing it in practice.

                      In any case, I don't think we necessarily would want exactly 0% long term inflation.  I think what we want is very low, predictable inflation.  When inflation is predictable you always know how to account for it in interest rates.  As long as it's very low, you don't have other problems like constantly adjusting menu prices.

                      Now, all that said about inflation, it's not something I'm particularly worried about.  If I was, I wouldn't invest in Gold, I would simply invest in TIPS(treasury inflation protected securities)

                      Our Dime Understanding the U.S. Budget

                      by maddogg on Thu Jun 09, 2011 at 10:53:24 PM PDT

                      [ Parent ]

  •  "America has not lost (it’s) productive capacity"? (1+ / 0-)
    Recommended by:
    Notreadytobenice

    "America has not lost (it’s) productive capacity"?
    Yeah, the dishwashers are getting faster.
    Man, has this country been raped—gangbanged.

    Nudniks need not apply.

    by killermiller on Tue Jun 07, 2011 at 05:14:58 PM PDT

    •  That Diarist quote made we wonder too.... (0+ / 0-)

      "dishwashers are getting faster" - snarkily sad. say I.

    •  We have lost some productive capacity (1+ / 0-)
      Recommended by:
      psyched

      Especially in the manufacturing sector.  But the point is that even though we've lost some productive capacity, the economy is still not producing at the levels it is capable of.  Productive capacity is our potential to produce, real production is how much we actually produce.  The basic point is that we are not living up to our potential, and the best (and really only) way to gain more potential is to attempt to continually live up to the potential we currently have.

      From such crooked wood as that which man is made of, nothing straight can be fashioned. -Immanuel Kant

      by Nellebracht on Wed Jun 08, 2011 at 07:42:48 AM PDT

      [ Parent ]

    •  U.S. Manufacturing (0+ / 0-)

      It's a surprise to many, but U.S. manufacturing is alive and well.  We've increased efficiency and productivity.

      http://bonddad.blogspot.com/...

      Our Dime Understanding the U.S. Budget

      by maddogg on Wed Jun 08, 2011 at 08:20:19 AM PDT

      [ Parent ]

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