Oct 202012
 October 20, 2012  Posted by at 10:29 pm Finance

It's time we do away with the notion behind the incessant flow of stories and warnings about upcoming hyperinflation in the US. It can't and therefore won't happen, at least not for years into the future. It would be a lot more constructive – and necessary – to focus on the reality we see before us than on such a purely mythological tale. Because that's all it is. Bubbles, and yes, that includes credit bubbles, have their own internal dynamics: they MUST pop when they reach critical mass.

Trying to prevent the pop, or even increase that mass, is futile. And even though that may be more about physics than about finance, why it is so hard to understand is beyond me. The deleveraging, a.k.a. debt deflation, has hardly begun, and it for now remains largely hidden behind a veil of QEs. That doesn't negate the fact that ultimately QE is powerless to stop it, even as it sure manages to fool a lot of people into thinking it can.

But don't take my word for it. You could start with – even – the IMF saying European banks will need to sell $4.5 trillion in assets through 2013. And then try to explain how that could possibly link to hyperinflation. For now: never mind.

Puru Saxena wrote a good piece on the topic recently, here are a few excerpts:

The Age of Deleveraging

The world’s major economies are struggling and their private-sector is deleveraging (paying off debt). If history is any guide, this deflationary process is likely to continue for several years.

You will recall that heading into the global financial crisis, corporations and households in the developed world were leveraged to the hilt. During the pre-crisis era, debt was considered a birth right and for decades, the private-sector leveraged its balance-sheet. Unfortunately, when the US housing market peaked and Lehman went bust, asset values plummeted but the liabilities remain unchanged. Thus, for the first time in their lives, people in the developed world experienced the wrath of excessive leverage.

Today, the private-sector in the West is struggling and for the vast majority of households, their liabilities now exceed their assets. Furthermore, incomes have also declined (or vanished), thereby making the debt servicing even more difficult. Consequently, in order to avoid bankruptcy, the private-sector in the developed world is now trying its best to reduce its debt overhang. Instead of getting excited by near-zero interest rates and taking on even more debt, it is now doing the unthinkable and paying off its liabilities.

Figure 1 shows that despite the Federal Reserve’s carrot of almost free credit, the private-sector in the US is deleveraging. As you can see, since the bursting of the housing bubble, America’s companies and households have been accumulating large surpluses. Make no mistake, it is this deleveraging which is responsible for the sluggish economic activity in much of the developed world. Furthermore, this urge to repay debt is the real reason why monetary policy in the West has become ineffective.


Figure 1: America’s private-sector is not playing Mr. Bernanke’s game. Source: Nomura

If you review data, you will note that in addition to the US, most nations in Western Europe are also deleveraging and this explains why the continent’s economy is on its knees.

The truth is that such periods of deleveraging continue for several years and when the private-sector decides to repay debt, interest rates remain subdued and monetary policy becomes ineffective. Remember, during a normal business cycle, monetary easing succeeds in igniting another wave of leverage. However, when the private-sector is already leveraged to the hilt and it is dealing with negative equity, low interest rates fail to kick start another credit binge.

As much as Mr. Bernanke would like to ignore this reality, it is clear to us that this is where the developed world stands today. Furthermore, this ongoing deleveraging is the primary reason why the Federal Reserve’s stimulus has failed to increase America’s money supply or unleash high inflation. Figure 2 shows that over the past 4 years, the US monetary base has grown exponentially, yet this has not translated into money supply or loan growth.


Figure 2: Liquidity injections have failed to increase US money supply. Source: Nomura

At this stage, it is difficult to forecast when the ongoing deleveraging will end. However, we suspect that the private-sector may continue to pay off debt for at least another 4-5 years. In our view, unless the US housing market improves and real-estate prices rise significantly, American households will not be lured by record-low borrowing costs. Furthermore, given the fact that tens of millions of baby boomers are approaching retirement age, we believe that the ongoing deleveraging will not end anytime soon. Due to this rare aversion to debt, interest rates in the West will probably remain low for several years. [..]

Once you realize just how enormous that gap is (see that last graph) between the monetary base vs the money supply, and the seemingly smaller gap between monetary base vs loans and leases, maybe then you see a light a-shinin'. Maybe you never thought about things that way before, or maybe you never saw it in a graph, and you needed to see that. It surely carries a very large argument against hyperinflation.

Puru Saxena thinks there are positive signs in US housing numbers, that there's a bottom, and he's certainly not the only one; that's one train everyone seems to be eager to jump on.

I’m sorry, but I think the recent alleged US housing recovery is a proverbial soap bubble. In the article below, Tyler Durden at ZH calls it a "subsidized bounce". He also says: "two concurrent housing bubbles can not happen", and he may well be right, but if he is, it means that perhaps what we see is a bubble within a bubble, a mother and child bubble, instead of two concurrent ones. Durden brings interesting numbers and developments to the forefront. It would be good if more people digest them, and only then decide whether this is a recovery or not.

US households are not merely deleveraging, and taken as a whole you could perhaps make a point that they're not at all. They go one step beyond deleveraging: they're simply and plainly defaulting.

US Households Are Not "Deleveraging" – They Are Simply Defaulting In Bulk

Lately there has been an amusing and very spurious, not to mention wrong, argument among both the "serious media" and the various tabloids, that US households have delevered to the tune of $1 trillion, primarily as a result of mortgage debt reductions (not to be confused with total consumer debt which month after month hits new record highs, primarily due to soaring student and GM auto loans). The implication here is that unlike in year past, US households are finally doing the responsible thing and are actively deleveraging of their own free will.

This couldn't be further from the truth, and to put baseless rumors of this nature to rest once and for all, below we have compiled a simple chart using the NY Fed's own data, showing the total change in mortgage debt, and what portion of it is due to discharges (aka defaults) of 1st and 2nd lien debt. In a nutshell: based on NYFed calculations, there has been $800 billion in mortgage debt deleveraging since the end of 2007. This has been due to $1.2 trillion in discharges (the amount is greater than the total first lien mortgages, due to the increasing use of HELOCs and 2nd lien mortgages before the housing bubble popped).

In other words, instead of actual responsible behavior of paying down debt, the primary if not only reason there has been any "deleveraging" at all at the US household level, is because of excess debt which became insurmountable, not because it was being paid down, the result of which is that more and more Americans are simply handing their keys in to the bank and walking away, and also explains why the US banking system is now practicing Foreclosure Stuffing, as defined first here, as the banks know too well, if all the housing inventory which is currently in the default pipeline were unleashed, it would rip off any floor below the US housing "recovery" which is not a recovery at all, but merely a subsidized bounce, as millions of units are held on the banks' books in hopes that what limited inventory there is gets bid up so high the second housing bubble can be inflated before the first one has even fully burst.


Naturally, two concurrent housing bubbles can not happen, Bernanke's fondest wishes to the contrary notwithstanding, especially since as shown above, US households do not delever unless they actually file for bankruptcy, and in the process destroy their credit rating for years, making them ineligible for future debt for at least five years.

It is thus safe to say that all the other increasingly poorer US households [..] are merely adding on more and more debt in hopes of going out in a bankrupt blaze of glory just like everyone else: from their neighbors, to all "developed world" governments. And why not: after all this behavior is being endorsed by the Fed with both hands and feet.

The following graph from TD Securities ( through Sam Ro at BI ) makes a good case for the "subsidized bounce" definition Durden applies to the present US housing market. It's no secret there's a huge shadow inventory overhanging US housing, and now it comes out that those great new home numbers are not what everybody would like to think they are.

Many more houses are built than sold. And get shoved on top of the pile that's already there, both the shadow inventory and the out of the closet one. Which begs the question: how long does a home stay in the "new" category? Does it take 1 year of staying empty for it to move to "existing"? 2 years, 3 years? 5? For one thing, builders and developers certainly have a huge incentive to continue to advertise it as new.

A graph from the same source:


How this constitutes a recovery I just can't fathom. I think that is just something people would like so much to see that they actually see it. Moreover, there remains the issue that it's very hard for most to comprehend what debt deflation is, what its dynamics are, and what consequences it has.

We have lived through the by far biggest credit bubble in history. It should be clear to everyone that this bubble has not fully – been – deflated yet (and if it's not, good luck). Until it has, economic recovery and housing recovery are pipedreams. And so is hyperinflation, though that may be more of a pipe nightmare. There is no way QE, or money printing, or whatever you name it, can cause hyperinflation against the tide of a deflating bubble. Once a bubble has fully burst, it is a possibility. But only then. And only if and when a country has become unable to borrow in international debt markets. Greece perhaps soon, but for the US it's years away, if ever.

Darrel Whitten at iStockAnalyst has more:

QE Not Preventing Slowest Growth Since 2009 Recession

QE Ad Infinitum: Why QE is Not Reviving Growth

In a speech in November of 2002, Fed chairman Ben Bernanke made the now infamous statement, "the U.S. government has a technology, called the printing press, that allows it to produce as many U.S. dollars as it wishes essentially at no cost," thus earning the nickname "Helicopter Ben". Then, he was "confident that the Fed would take whatever means necessary to prevent significant deflation", while admitting that "the effectiveness of anti-deflation policy would be significantly enhanced by cooperation between the monetary AND fiscal authorities."

Five years after the 2008 financial crisis, Helicopter Ben undoubtedly has a greater appreciation for the issues the BoJ faced in the 1990s. The US 10-year treasury bond (as well as global bond) yields have been in a secular decline since 1980 and hit new historical lows after the crisis. What the bond market has been telling us even before the QE era is that bond investors expect even lower sustainable growth as well as ongoing disinflation/deflation, something that Helicopter Ben has been unable to eradicate despite unprecedented Fed balance sheet deployment.

A Broken Monetary Transfer Mechanism

Effective monetary policy is dependent on the function of what central bankers call the Monetary Transmission Mechanism, where "central bank policy-induced changes in the nominal money stock or the short-term nominal interest rate impact real economy variables such as aggregate output and employment, through the effects this monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and corporate balance sheets."

Yet two monetary indicators, i.e., the money multiplier and the velocity of money clearly demonstrate that the plumbing of this monetary transmission mechanism is dysfunctional. In reality, the modern economy is driven by demand-determined credit, where money supply (M1, M2, M3) is just an arbitrary reflection of the credit circuit. As long as expectations in the real economy are not affected, increases in Fed-supplied money will simply be a swap of one zero-interest asset for another, no matter how much the monetary base increases. Thus the volume of credit is the real variable, not the size of QE or the monetary base.

Prior to 2001, the Bank of Japan repeatedly argued against quantitative easing, arguing that it would be ineffective in that the excess liquidity would simply be held by banks as excess reserves. They were forced into adopting QE between 2001 and 2006 through the greater expedient of ensuring the stability of the Japanese banking system. Japan's QE did function to stabilize the banking system, but did not have any visible favorable impact on the real economy in terms of demand for credit. Despite a massive increase in bank reserves at the BoJ and a corresponding increase in base money, lending in the Japanese banking system did not increase because: a) Japanese banks were using the excess liquidity to repair their balance sheets and b) because both the banks and their corporate clients were trying to de-lever their balance sheets.

Further, instead of creating inflation, Japan experienced deflation, and these deflationary pressures continue today amidst tepid economic growth. This process of debt de-leveraging morphing into tepid long-term, deflationary growth with rapidly rising government debt is now referred to as "Japanification".

Two Measures of Monetary Policy Effectiveness

(1) The Money Multiplier. The money multiplier is a measure of the maximum amount of commercial bank money (money in the economy) that can be created by a given unit of central bank money, i.e., the total amount of loans that commercial banks extend/create. Theoretically, it is the reciprocal of the reserve ratio, or the amount of total funds the banks are required to keep on hand to provide for possible deposit withdrawals.

Since September 2008, the quantity of reserves in the U.S. banking system has grown dramatically. Prior to the onset of the financial crisis, required reserves were about $40 billion and excess reserves were roughly $1.5 billion. Following the collapse of Lehman Brothers, excess reserves exploded, climbing to $1.6 trillion, or over 10X "normal" levels. While required reserves also over this period, this change was dwarfed by the large and unprecedented rise in excess reserves. In other words, because the monetary transfer mechanism plumbing is stopped-up, monetary stimulus merely results in a huge build-up of bank reserves held at the central bank.


If banks lend out close to the maximum allowed by their reserves, then the amount of commercial bank money equals the amount of central bank money provided times the money multiplier. However, if banks lend less than the maximum allowable according to their reserve ratio, they accumulate "excess" reserves, meaning the amount of commercial bank money being created is less than the central bank money being created. As is shown in the following FRED chart, the money multiplier collapsed during the 2008 financial crisis, plunging from from 1.5 to less than 0.8.

Further, there has been a consistent decline in the money multiplier from the mid-1980s prior to its collapse in 2008, which is similar to what happened in Japan. In Japan, this long-term decline in the money multiplier was attributable to a) deflationary expectations, and b) a rise in the ratio of cash in the non-financial sector. The gradual downtrend of the multiplier since 1980 has been a one-way street, reflecting a 20+ year dis-inflationary trend in the U.S. that turned into outright deflation in 2008.


(2) The Velocity of Money. The velocity of money is a measurement of the amount of economic activity associated with a given money supply, i.e., total Gross Domestic Product (GDP) divided by the Money Supply. This measurement also shows a marked slowdown in the amount of activity in the U.S. economy for the given amount of M2 money supply, i.e., increasingly more money is chasing the same level of output. During times of high inflation and prosperity, the velocity of money is high as the money supply is recycled from savings to loans to capital investment and consumption.

During periods of recession, the velocity of money falls as people and companies start saving and conserving. The FRED chart below also shows that the velocity of money in the U.S. has been consistently declining since before the IT bubble burst in January 2000—i.e., all the liquidity pumped into the system by the Fed from Y2K scare onward has basically been chasing its tail, leaving banks and corporates with more and more excess, unused cash that was not being re-cycled into the real economy.


Monetary Base Explosion Not Offsetting Collapsing Money Multiplier and Velocity

The wonkish explanation is BmV = PY, (where B = the monetary base, m = the money multiplier, V = velocity of money), PY is nominal GDP. In other words, the massive amounts of central bank monetary stimulus provided by the Fed and other central banks since the 2008 financial crisis have merely worked to offset the deflationary/recessionary impact of a collapsing money multiplier and velocity of money, but have not had a significant, lasting impact on nominal GDP or unemployment.

The only verifiable beneficial impact of QE, as in the case of Japan over a decade ago and the U.S. today is the stabilization of the banking system. But it is clear from the above measures and overall economic activity that monetary policy actions have been far less effective, and may even have been detrimental in terms of deflationary pressures by encouraging excess bank reserves. Until the money multiplier and velocity of money begin to re-expand, there will be no sustainable growth of credit, jobs, consumption, housing; i.e., real economic activity. By the same token, the speed of the recovery is dependent upon how rapidly the private sector cleanses their balance sheets of toxic assets.

QE falls into a black hole. And it leads into an – if possible even larger – black hole. Ben Bernanke and Mario Draghi have neither the power nor the tools to stop deleveraging and debt deflation. That's just a myth they, and many with them who stand to benefit from that myth, like you to continue believing. It makes it all that much easier for them.

That surge in excess bank reserves (see the second graph above) comes from QE. It is your money, everyone's money. And it does nothing to "heal" the economy you live in and depend on for your survival; it just takes away more of it all the time. That is the one thing Ben and Mario have power over: they can give money away that you will have to pay for down the line. They can lend it out to banks knowing that it will never be repaid, and not care one inch. Knowing meanwhile that you won't either, because you don't look at what's down the line, you look at today, and today everything looks fine. Except for that graph, perhaps, but hey, how many people are there who understand what it says?

One thing Ben and Mario can not do, however, is create hyperinflation. They can't even truly create any type of real inflation (which is money/credit supply x velocity vs goods and services), for that matter. They're stuck as much as you yourself are in the dynamics of this bursting bubble.

At The Automatic Earth, Nicole – Stoneleigh – Foss and I have been saying for years that deleveraging and debt deflation are an inevitable consequence of what went before and an equally inevitable precursor of anything that may come after. And I have often said that the deleveraging will be so severe that what may come after is only moderately interesting, since you won't hardly recognize your world once deflation has run its course. Apparently this is hard to understand, the hyperinflation myth just won't die. What can I say? Time to get serious.


Home Forums US Hyperinflation Is A Myth

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    It's time we do away with the notion behind the incessant flow of stories and warnings about upcoming hyperinflation in the US. It can't and t
    [See the full post at: US Hyperinflation Is A Myth]


    “And I have often said that the deleveraging will be so severe that what may come after is only moderately interesting, since you won’t hardly recognize your world once deflation has run its course.”

    I’d expand that to: you will hardly recognize yourself once deflation has started in its earnest, let alone run its course.

    Viscount St. Albans

    Feeling tense? There there, let out those tears. Feeling better? Good, Let me offer a you an oily rub along with a nip and tuck.

    This recovery will be long and slow. I know you’re still sore, but rest assured that you’re getting better.

    It’s really up to the media.
    You don’t change the subject during August vacations (see 2008).
    And you don’t change the subject during the run-up to a re-election.

    The power of mass media to guide public behavior has been stunning.
    Sumner R. works the lights, Rupert M. plays the music, and Barry D. paints your toenails. Now then, who’s ready for a bit of blackjack?


    ZH now has a nostalgic article “How I Caused the 1987 Crash” by Bruce Krasting. Back in 1987 I was not really paying much attention, and it did not have an immediate effect on my life.

    What might serve as a bottom for the current crash? One would think that there would be some level … I’m trying to picture a broken money system and unable to bring it into focus.

    John Day

    Thanks Ilargi,

    This is fine work on your part, yet again…

    Golden Oxen

    Puru Saxena and Tyler Durden? My preference is for John Williams, his numbers say hyperinflation is inevitable, and he is correct IMHO.

    Clouding the issue of unabashed fiat creation with economic mumbo jumbo only serves to muddy the waters.

    The path chosen by the Fed and its cohorts in Europe is inflation and currency debasement on a grand scale, standing in their way used to be called “Fighting City Hall” back in the good old days when being wealthy meant having the mortgage on your Ten thousand dollar home paid off.


    The people near me don’t care about the massive debt bubble. That is because they can still buy whatever they want with a credit card or cash. They don’t think it necessary to prepare for anything or read informative articles. Only when this massive bubble bursts, and people will not be able to get what they want, then maybe they will figure it out.


    “Clouding the issue of unabashed fiat creation with economic mumbo jumbo only serves to muddy the waters. “

    Labeling this article and the quotes in it ‘mumbo jumbo’ is not conducive to a good discussion. If you have to resort to that, you’ve already lost most of the argument right there.

    The velocity of money, which is at its lowest point since 1959 at the very least, is a decisive indicator. As is the – closely connected – huge gap between the monetary base and the money supply.

    How one would arrive at (hyper-)inflation in view of these indicators is, to put it mildly, not obvious.


    I understand the deflation and inflation, as you have so often explained.

    The deleveraging, a.k.a. ]bdebt deflation, has hardly begun,[/b] and it for now remains largely hidden behind a veil of QEs. That doesn’t negate the fact that ultimately QE is powerless to stop it, even as it sure manages to fool a lot of people into thinking it can.

    What I see, going forward, is a continuation of the momentous battle between the 01.0%. Those who have cash and access to the printing press against those who are forced to sell or must take a haircut and/or relinquish their claim on an asset.

    the IMF saying European banks will need to sell $4.5 trillion in assets through 2013.

    Those entities that could not pay their interest on their loans or pay out a dividend are the dominoes that caused the crash when they were asked to return the capital to the lenders. ( Letting the market decide the winners and the losers. ie. Lehman bros.)
    Letting the market decide the winners and the losers would end the financial system.
    Sooooo …
    The ponzi financial system is now kept growing and stabilized by having the gov.printing press substituting and replacing the cash flow that would normally be generated by the printing press of the banks. (lending money that they don’t have so that they could get a cash flow from assets.)

    Having an asset, such as a house that has been abandoned, rotting and not generating a cash flow is perfect for a bank that is receiving a substitute cash flow from the gov. printing press. This keeps everyone who happens to be relying of that cash flow continuing with their life style as if nothing has changed. Checks for pensions, dividends, U.I., S.S., keep right on coming just like they have been for the last 30 years.

    The problem has now moved to include the governments. If a government cannot print money to continue replacing the cash flow of the banks then their only options is to reduce the cash flow to their own population, austerity, (Services and Checks for pensions, dividends, U.I., S.S. and health care).

    That is the one thing Ben and Mario have power over: they can give money away that you will have to pay for down the line. They can lend it out to banks knowing that it will never be repaid, and not care one inch. Knowing meanwhile that you won’t either, because you don’t look at what’s down the line, you look at today, and today everything looks fine. Except for that graph, perhaps, but hey, how many people are there who understand what it says?

    Saving the big banks means saving the financial system which means saving the ability of government to continue giving Services and Checks for pensions, dividends, U.I., S.S. and health care.

    At The Automatic Earth, Nicole – Stoneleigh – Foss and I have been saying for years that deleveraging and debt deflation are an inevitable consequence of what went before and an equally inevitable precursor of anything that may come after. And I have often said that the deleveraging will be so severe that what may come after is only moderately interesting, since you won’t hardly recognize your world once deflation has run its course.

    As long as governments can keep printing to keep the cash flow going, deleveraging will continue at a slow pace.

    Players, in the 1.0%, in the game can make the system destroy itself by buying gold and waiting for a profit due to hyperinflation.
    There will have to be many more Greece before hyperinflation hits the USA.
    Meanwhile, I’ll cut my own hair and only get a haircut for special occasions.


    I haven’t laughed so hard in a while. It got really confusing towards the end, with Greece and hyperinflation in the US, but it was epic. Good one! I wish I has some karma to give you.
    Stabilizing Ponzi…my jaws hurt. 😆


    Laughter is better than gold.

    Did I earn an haircut?


    I enjoy this article and all your others, well thought out. However, what I fail to understand if all this end game has been planned, either if it ends up as a deflationary spiral or not, which country benefits the most or will use this to their own self-interest. It seems to me that to increase the velocity of money and releasing large amount of credit to the private sector, something political must happen first. No one seems to be addressing this as on the books there are new technolgies ready to come to the market ( ie. the latest is a cardboard bike for $20). Is this the end game and the only window of opportunity for the US to control China before China becomes self-sufficient with a large middle-class?


    I have it on good authority (My Republican co-workers and Sean Hannity) that this is all the fault of the Community Reinvestment Act.
    If the Democrats just hadn’t twisted the arms of the bankers to make all those sketchy loans, we’d all be rich by now.
    And probably have pockets full of gold coins.


    If the IMF is saying that European banks will need to sell $4.5 trillion in assets through 2013, I don’t really need to know any more. I mean, that is around $10,000 per person in Europe.

    Where is the money coming from Golden Oxen? Selling gold? Or is this also “economic mumbo jumbo” 🙂

    Viscount St. Albans

    The terror of the crowd.


    The first 30 seconds is all you need.

    The charisma has not yet arrived. But the train has left the station.


    Golden Oxen –

    I have to say I liked many of those charts Ilargi posted, and the linkage with Japan makes sense to me since the situation is post Gold Standard and thus directly relevant. QE has an effect certainly, its just not the one many people imagine it is. Slowing money velocity – interesting stuff, worth watching. One cause of hyperinflation is rapidly increasing money velocity, and we’re seeing the opposite here.

    Likewise, its totally clear to me that homeowners and small business are reducing their overall debt, for the first time – well ever, at least according to my Fed data. Reducing debt, in our money system, is deflationary whether accomplished via default or by paying it down. And they’ve been doing this since Q2 2008. And if you even bothered to glance at the data series, you’d see just how unprecedented this is.

    The recent housing price bounce is (most likely) due to the massive reduction in interest rates; most homebuyers with mortgages buy with an eye only on monthly payments. As interest rates drop, payments decline, and they can get more home for the same payment. Mark Hanson calculated that over the past 12 months purchasing power went up by about 15%. All else being equal, that should have raised prices by that same amount. It didn’t. But the really amusing bit is, overall mortgage balances dropped over that same period. Deleveraging continued – a quite solid indicator for the deflationary trend! Rates at 3.5% didn’t bring buyers out of the woodwork. Do we imagine rates at 2.5% will magically do this?

    Simply asserting Ilargi’s evidence is “mumbo jumbo” says to me that either you don’t understand the case being made, or that you don’t have a valid counter-argument.

    Since you believe so strongly in Williams, why not find and post some compelling case (the stuff you call mumbo jumbo) that he has produced to explain the hyperinflation that is just waiting to burst forth – specifically how gobs of new money will be created without an influx of willing borrowers. Which do not seem to exist, and haven’t since 2008. Or why money velocity will suddenly increase. Which it hasn’t.

    Certainly, trends can change, but we need to first have a clear understanding of the trend currently in place, and evidence (data series) that help to show us where we are and what the direction has been are quite valuable to furthering that understanding.

    We can keep an eye on velocity and if that situation changes, then we might have to revisit. I really like having numbers that we can watch to see the evolution of thesis.

    Sometimes I think that people with “faith” in an outcome feel no need to actually prove their case (or show their work). “Whatever it is you’re saying, why, it has to be wrong, because its import runs counter to my article of faith.” That might work among co-religionists or members of the choir, but it doesn’t play so well among people who prefer cases to be proven based on facts and evidence.


    First time poster here but really enjoy the articles Ilgari.

    I’m a deflationist at heart but have come to believe this unnatural inflation will be the rule by hook or by crook.

    My two cents on housing (my wife in a top agent in our market and we know many realtors in other Western markets). Seems the big change in housing hasn’t neccessarily been lower rates (though that can’t hurt) but the Fed’s actions of last April to allow banks/Fan/Fred (etc.) to hold REO and rent it for 5yrs and up to 10yrs if needed. Seems this move coincides with the slowdown of distressed sales and subsequent low to now ultra low inventories. Buyers are getting “buyers fever” again…not quite like ’06 but still multi bids over asking.

    I’m antithetical to this ongoing market manipulation…but I don’t know of any impending reason for the distressed-less inventory to continue…and thus a continued squeeze up in prices. Call it baby bubble or echo-bubble but I fear the Fed may have won this housing round (for how long I don’t know) but if housing (at the margin) can be turned, our stagflation could be turned to inflation nearly everywhere but wages (the mothers milk of true growth).
    I actually believe if the Fed has turned housing that this RE bubble will stand alongside bubbles in equities, bonds…this bubble coupled with nations inability to slow deficits or face the music is the underpinnings of hyperinflationary tendencies. Not saying it will happen but that the environment of deleveraging (austerity, paying down debt, etc.) is being “debunked” by Spain, Greece, etc. on international level and by Fed on national level (QE infinity is an infinite put on leverage).
    Glad to know why I’m wrong…serious.


    Hambone –

    Not being in the RE industry I must rely on what others say. Most of my data comes from Mark Hanson.

    The foreclosure pipeline requires some large number of months to completely execute; varies by state but its anywhere from 6 months to years. There was a foreclosure moratorium put in place last year (due to the wholesale fraud in foreclosure documentation finally being acknowledged), and I’m guessing that’s a big chunk of what is causing the dry-up in distressed property today.

    I’d guess allowing the banks to keep REO around and rent it out contributes to this as well. Of course it also allows the banks to avoid recognizing losses too, which is always helpful if you are particularly focused on bank welfare.

    For me, real estate will be “turned around” once interest rates return back to a more normal 6.5%, when the US government stops borrowing 10% of GDP every year, when the Fed stops monetizing the debt, and when Fannie & Freddie are no longer 90% of the mortgage market. Prior to this happening, what we’re seeing is just the result of stimulus and not sustainable.

    I think that in some areas where rents exceed payments by a good margin, RE might be a decent buy. But – I’m cautious. What happens when rates go back to 6.5%? A 30% drop in home prices? How much fun would that be if you’ve put 20% down?

    Do we imagine the Fed will be able to keep rates at 3.5% in perpetuity?

    Golden Oxen

    Members, I was referring to my prior stated beliefs that hyperinflation was a currency confidence event that had nothing to do with the strength or weakness of the economies involved at the time of the Hyperinflation.
    May I reference Argentina, China, Germany,Mexico, Zimbabwe, and countless others. Their economic situation was hardly a healthy growing one at the time of the upheaval.

    Excuse me for my poor choice of words. I consider the authors at TAE to be the best and hold them in the highest regards.

    My views on inflation have been instilled in me, a senior citizen, by over 60 years of relentless inflation and my current trips to the grocery store and gas station since the great credit contraction started have done little to change my view of it’s continuance.

    My deepest apologies to all I have offended with My Mumbo Jumbo remark, it was intended differently but I can see it was a poor choice of words. Regards GO

    tall tom

    Nice graphics. Too bad it is wrong.

    Inflation Deflation phenomenoa are RELATIVE. As with all phenomenoa which is relative there is no PRRFERRED Frame of Reference.

    Imagine two concentric bubbles with you…the observer…standing on the surface of the inner one. Defate the bubble that you are standing on. The exterior bubble appears to be inflating.

    Now…instead of defating your bubble you inflate it. The exterior bubble appears to be deflating. In both examples the exterior bubble size was held constant.

    So yes you can experience a hyperinflation during a massive deleveraging. It matters upon perspective.

    Until you can understand this you will have little clue as to what is about to overwhelm you.

    Tall Tom
    I Cor 13


    Sometimes the belief that something “can’t” happen is the impetus for something that “shouldn’t” happen actually happening.

    The belief that housing couldn’t go down nationally set the stage for “unimaginable” losses on positions that had no margin of error factored in. It is precisely that no margin was factored (AAA) that caused such leverage and therefor allowed the boat to become so grossly listing to one side.

    The reserve currency and treasuries has likewise been abused precisely because it is “impossible” for a currency crisis to happen. It is precisely this paradigm that sets the stage for the gross abuse of this privelege and allows the conditionality for what “can’t” happen to do just that.


    It is USA deflation that is the myth. We don’t need theory to tell us what deflation looks like in the modern, post Breton Woods, pure fiat era, since we have a real world example, Japan. So what does a ‘real’ deflation look like?

    For starters, the currency of the deflating country STRENGTENS, by 100%, over its main rival over the 6 year period from the point of bubble collapse. Then it meanders sideways for at least another 17 years, with any loss in buying power quickly regained.

    The primary stock market index puts in wave after wave of new lows, and after 23 years finds itself still over 75% down from the top. Similar real estate behavior.

    That is not even close to what we have in the USA. Whether you call the top of the bubble as being March 2000, or some time in 2007 or 2008, it doesn’t matter, our indicators are much closer to the ‘hyper inflation’ set up, not deflation.

    Is it possible we could get the deflation outcome? Certainly. But very unlikely. The USA is slowly losing World Reserve Currency status, and this is inflationary.

    We’re running a GAAP deficit of $5 trillion at the federal govt. level. Within two or three years it will be well over $7 trillion, approaching 50% of GDP!!! I think John Williams is rushing it a bit with his 2013 call for hyper inflation. I would say 2014 or 2015.


    tall tom post=5773 wrote: Until you can understand this you will have little clue as to what is about to overwhelm you.

    tall tom, I can understand imaginary bubbles, but not how they relate to reality. Could you put your example into more real context? In particular, what would correspond in reality to the bubble your hypothetical observer is standing on?



    Here is a fix.

    It matters upon [strike]perspective[/strike].

    It matters only if you can finish the month with some money left in your pocket after having obtained the necessities of life.

    You should get your prospective from the “entitled” poor, not the “entitled” rich.

    Does anyone remember the price of a “Shave and a Haircut”?


    jal post=5777 wrote: Here is a fix.

    It matters only if you can finish the month with some money left in your pocket after having obtained the necessities of life.

    What on Earth are you talking about, Jal? In both deflationary (e.g. USA 1933) and hyper inflationary (Germany 1923) outcomes, people have nothing left over after obtaining necessities of life. In fact, in both outcomes a lot of folks starve to death, since they don’t get enough to eat.

    When economies are distorted by government or quasi govt. actions, capital gets misallocated and the economy experiences booms and busts that more extreme than if the economy were allowed to self correct without govt. interference.

    Once the asset bubble reaches a certain size, deflation OR hyper inflation is inevitable. (read Ludwick von Mises) The one you get depends on the government response. In the present case, we are headed full steam for hyper inflation. Of course there could be a fascist or communist coup, and the new leaders may opt for deflation. It is naive to think a democratically elected regime would do so, though.


    Hyperinflation is happening in Syria and not in Canada or USA.
    Here your 1 dollar can still buy a head of cabbage.
    If it was Hyperinflation than your 1 dollar would have the value of 1 cent.
    Nobody uses the word Hyperinflation to describe our current environment.
    It is either deflation or inflation.


    You’re missing the point, Jack. When you have an asset bubble the size of the NasDAQ tech wreck, or the USA housing bubble, you are going to get a devastating deflation OR hyper inflation. It just depends on the govt. policy response. The fact that they have been able to kick the can down the road this far shows you the power of having the world’s reserve currency. But this only delays the inevitable.


    Hi pipefit!
    The kicking of the can down the road can go on for several years.
    Maybe 4-5 years or more,nobody knows exactly how long it can last.
    Japan has been doing it for over a decade.
    It will eventually end but in the mean time the dollar still has the same value.

    Also the laws of economics does not seem to be applying to this system because we are dealing with master swindler’s.

    They have manipulated all commodities and most currencies.



    I think you’re too focused on the US alone. And the US is so dependent on and addicted to international debt markets that hyperinflation is not possible for that reason alone. That’s also why what Japan goes through is not a good example, not in the way you bring it up. There’ll be no long slug for America, like Japan’s had over the past 20 years. Japan has been able to sell its products and debt into a thriving world economy (thriving on debt, but still), and cushion its deflationary fall that way.

    For the US, that’s – obviously – not in the cards. But what the US can still do is sell its debt, and with ease (look at those yields!). The bond markets, however, will keep a very tight watch on that; too much and rates will skyrocket. As for why that hasn’t happened yet – a question many people will ask -, look at the graph depicting the gap between monetary base and money supply in my article.

    (Hyper) inflation requires both 1) a strong and rapid increase in the money supply and 2) a strong and rapid increase in the velocity of money. Neither of these requirements are in the cards in the US today. Not at all. Something would have to trigger both, and there’s nothing out there that looks like a candidate.

    In my view, this line from Puru Saxena says a lot: “As long as expectations in the real economy are not affected, increases in Fed-supplied money will simply be a swap of one zero-interest asset for another”. The whole financial world is gasping for breath, not about to jump up and go all ADHD on us. The opposite is happening. Less and less money is in motion. Injecting more credit is not about to change that overnight, there’s far too much inertia.



    If you look at worldwide debt as one big block, it is obviously still growing wildly, with USA federal (GAAP) debt increasing $5 trillion/yr alone. We know this debt will not get paid in today’s dollars.

    I see three possible outcomes. The one you seem to be arguing is that bits and pieces get defaulted upon, one by one, in a positive feedback loop of economic contraction. Perhaps social security might be defaulted upon by increasing to the retirement age to absurd levels (85 years old?), as one example.

    The textbook hyper inflation argument would be that the nanny state would bail just about everybody out, certainly itself and all the big players. They are already at this stage in Europe, and I agree with you that it isn’t proceeding very well.

    The most likely outcome, I think, is some sort of debt jubilee. I don’t know the exact form(s) it could take, or even what would trigger the end game. I think it would be in conjunction with a one world currency being imposed on the planet by whoever it is that is in charge. It is quite apparent that no one is leaving the Euro, that is one clue we have to work with.

    This would not be a text book hyper inflation, but close enough. You wake up one Sunday morning, and the news is that your paper money must be exchanged for the new currency, and bank accounts are frozen until they are converted. In effect, if you are a creditor, you get 10% of what you had, and if you are a debtor, most (if not all) of your debt is forgiven. If you are a saver, you get to keep 10% of your buying power.

    The advantage of this ‘solution’ to the folks in charge is that it solves the problem of unpayable debt in a manner that enhances their power greatly. The other two solutions will lead to anarchy.


    So I am not sure you are addressing what I have seen most as the reason for hyperinflation. Several nations have indicated they intend to refuse trade in American currency adjusting who is the world currency of trade.

    China has not been vague about this, they have been very direct. We will not trade in US dollars and have a 10 transition period. As a planned economy and not democratically elected. This is not a threat but a statement intended for preparation. After this they enacted the Pacific Trade Pac, placing a special trade agreement between China, Russia, and India primary with others in the peripheral. There is no intent in the future to trade with anything less than a pegged currency of this group. Indicated was the fact trade of manufactured goods will not be a point of interest for China in this period.

    Knowing communist countries long term plan carefully. Knowing communist countries care through a plan relentlessly despite harm caused to people to reach a goal. Knowing the trade pac carefully takes care of the needs of the core and doesn’t need the US.

    Knowing the American currency will not be the pegged international trade dollar, knowing all the current trade dollars will then be dumped back into the American economy, knowing this is not just the sentiments of the Pacific Trade Pac but also has been spoken of by the EU and also OPEC. Knowing this threat would this cause hyperinflation?

    Not possible? Why should any country accept worthless currency in trade? Why shouldn’t the economies of real physical production, containing most of the world’s population, be the new pegged world currency?

    Why should a minority half way across the world be the trade currency?

    When the US is not the world trade currency do you expect hyper inflation?

    Golden Oxen

    @ reply pipefit, I certainly am in sympathy with your point of the new currency for the old, but holders of dollars will never accept an instant 90% drop in their saved wealth to save the debtors, preposterous

    Prefer sticking to the time tested workable solution of constant never ending inflation. Five years of a very workable 10% inflation rate will do wonders in the screwing of the saver and will make debtors smart again. The increased revenue to the tax man via the inflation will make his Social security bills and others manageable.

    Of course bonds would crack open sooner or later in that scenario, but another round of drunken orgies in the stock market, commodity markets, and of course the real estate crowd will mute it’s effect and we can continue in our paper world of make believe for a while longer.

    If Ilargi is correct, and we get a deflationary bust instead, then the question arises of how long are 7 billion people going to stand in a soup line, and how do you get out of that problem, everyone starting their own garden?


    “Recession. It’s baked in the cake and the oven timer is about to ring.”


    Nicole Foss


    Japan is not a good example of how deflation typically plays out. As Ilargi points out, they were an exporting powerhouse exporting into the biggest consumption boom the world has ever seen. They also had a very large pile of money to burn through building their four lane highways from nowhere to nowhere, since they were the world’s largest creditor when their bubble burst in 1989. This is clearly not our situation.

    No one will be exporting their way out of a global economic depression. In contrast, exporters are going to feel the pain big time as their markets dry up. We can expect trade wars and protectionism to abound. Take note Germany, Scandinavia, Australia, New Zealand etc etc.

    We have had the inflation, only instead of a currency hyperinflation, we experienced a 30 year credit hyper-expansion. Either one amounts to an expansion of money plus credit compared to available goods and services, and is therefore inflation. Credit is equivalent to money on the way up, but not on the way down. Credit loses ‘moneyness’ and credit infstruments are massively devalued in a great deleveraging. This is deflation by definition and it is already underway. Debt monetization is nothing in comparison with the scale of the excess claims to underlying real wealth that stand to be eliminated.

    I agree that the currency of a deflating nation strengthens. This is exactly why we have been writing about the value of the US dollar increasing, which it has done. The bottom came in a long time ago, and despite the set backs that are an integral part of a fractal market, the trend is up, and will be for some time. That’s not to say it will be for the long term – far from it in fact – but for now that is the case. We have made it clear that cash is a short term bet (of the order of a few years), and that the longer term strategy is to move into hard goods at the point when one can reasonably afford to do so with no debt.

    Some could do so now, while others would have to wait for prices to fall, as they inevitably do in a deflation, but not immediately. Price movements follow changes in the money supply. We have been in a counter-trend reflation since 2009, and prices have risen as a result. They may continue to do so for a while after the reflation is clearly over, but then the trend will reverse. Prices will fall, but purchasing power will fall faster, meaning that prices will rise in real terms for most people. Those who have preserved capital as liquidity will find their purchasing power enormously increased, but most other will lose purchasing power because they will have nop access to credit, highly unfavourable employment cirumstances, rising property taxes and very little actual money.

    The fiat currency regime will eventually descend into chaos as beggar they neighbour devaluations become the norm, but not everyone can devalue at will or at once. The market will decide relative values for the next while. Money will go from where the fear is to where the fear is not. It will be leaving the European periphery, and increasingly the entire eurozone, and flooding into currencies like the USD, the Swiss franc, the Swedish krona, and temporarily the British pound. It doesn’t matter if the US is downgraded. Market participants will ignore the ratings agencies and vote with their feet on a kneejerk flight to safety.

    You say that the US indicators are much closer to the hyperinflation set up than to deflation. I would disagree of course, for reasons Ilargi has explained (plummeting velocity of money for instance). I would also point out that the conditions you describe simply reflect the top of the rally. People extrapolate the trend of the last three years forward, but fail to anticipate trend changes. We are in one. Many markets have topped already (gold, silver, commodities, oil etc), and the rolling top of the last year or so is about to claim the American stock market as well.

    The rollover in the markets will drag the real economy down with it, with a time lag, since the time constant for changes in the real economy is much longer than for the financial world where value is virtual. We are headed into the teeth of the Greatest Depression, or at least the most significant one since the fourteenth century.

    Hyperinflation is simply not on the cards any time soon. The depression will proceed for many years before that becomes a serious risk, unless you live in the European periphery that is, where currency reissue is a very real risk in the relatively short term. In those currencies, loss of faith in New Drachmas, New Pesetas or New Lira is very likely, and the countries will be cut off from international debt financing, with hyperinflationary results. That is not the situation in the US at all, and won’t be for quite a long time. Eventually, when international debt financing is dead and buried, then printing will be a risk and a loss of faith in the erstwhile reserve currency could be expected.

    In the meantime, debts defaults are going to skyrocket, each one doing its bit to destroy the value of credit instruments, and substract from the effective money supply. This is already underway, and the great asset grab has begun as a result. Witness the asset stripping of Greece for instance.

    In Europe, endless bailouts of sovereigns and the well-connected are doing nothing to increase the money supply or the velocity of money. In contrast, the ineffectuality of governments is doing nothing more than feeding the cycle of fear by demonstrating their ineffectuality time after time. They are trying to over come contraction, but are fighting an irresistable headwind. It is not going to work. Europe is already in contraction, and as fear will be increasingly in the ascendancy, that will only get worse.

    Government obligations will be shed right, left and centre (by governments of the right, left and centre) because they will have no choice. Yes, this will lead to anarchic unrest, and yes this will be met with a heavy-handed repressive response. Social polarization is very much on the cards – governments vs people, haves vs have-nots, natives vs immigrants, employers vs workers, unionized vs non-unionized, Us vs Them in general terms. This will not be pretty, to say the least. Just because it is a bad thing does not mean that it cannot happen, or that government, by their actions, can make any difference to the outcome.

    Bailouts are never for the little guy. The creditors hold the political power and write the rules. They will not allow debtors off the hook. Instead of repayment in money, they will take people’s freedom instead, making debt slavery much more real than it is today. Debts will not be forgiven, but sold on to more aggressive debt collectors. This is already happening in the US, where debt collection is becoming increasingly unconscionable. Debts will only be effectively forgiven when people have nothing useful to repay, not even their labour. By then the middle classes will probably be living in latter day Hoovervilles, like the Villas Miserias populated by the formerly middle class Argentines.

    Savers will have all the buying power, IF they have managed to get their savings away from dependence on the solvency of middle men. Otherwise they will likely disappear in a giant black hole of credit destruction, as yet more excess claims to underlying real wealth.



    I actually agree with most of your points, and I think that a deflation of the type you discuss is a possibility. I think, in the fairly near future, say within six months, we should have a lot more clear cut idea where this is going. For example, by February or March we will be near the end of the annual favorable period for gold. Obviously, last year’s gold performance supported your argument. Two years in a row would give it a lot more credence. By February we should know how the ‘fiscal cliff’ will be managed as well.

    As the USA economy contracts, the GAAP (and cash) deficit will continue to increase wildly. The two things supporting the USA dollar as world reserve currency are USA consumer consumption and the USA military presence worldwide. So military spending cannot be cut. But with imports dropping, the consumer side of the equasion will weaken. So we will be in the awkward situation of having to maintain military spending for a smaller and smaller role for the international dollar. The consequence, then, with fewer trade dollars to recycle, the QE-x process will be an increasingly bigger part of US Treasury sales.

    We are really in new territory with our GAAP deficit at $5 trillion, or over 30% of GDP per year, and rising rapidly. There is a limit out there, and it is approaching rapidly. I think this is what forces the end game. Again, we have to wait and see what the policy response is. It could be deflationary of inflationary. In terms of social security, it has been a mixture: cutting social security taxes-inflationary, and lowballing COLA increases-deflationary.


    You are saying hyperinflation or even high inflation isn’t on the horizon and deflation and a strong dollar is. Does that mean all the US and European folks buying gold will be burned?

    Viscount St. Albans

    @ Stoneleigh.
    Can you define Reflation?

    We have been in a counter-trend reflation since 2009, and prices have risen as a result. They may continue to do so for a while after the reflation is clearly over

    I know what deflation is.
    I know what inflation is.
    No idea what reflation is.

    Nicole Foss


    Yes, many people buying gold are going to get burned. The spot price will fall a long way, but most people won’t get the spot price anyway. They’ll be desperate enough to sell their gold for a loaf of bread and half a dozen eggs at some point. Too many people buying gold are not taking care of more important things first, like holding to debt, holding liquidity (cash) and having some control over the essential of their own existence. Gold is an insurance policy to buy after you’ve done all that, and even then it’s no panacea. You can expect to have to sit on it for many years without having to rely on the value it represents, and it will not be safe to buy and sell it, perhaps for the rest of your life. Owning that concentrated a source of value has its price.

    Nicole Foss

    Viscount St Albans,

    Reflation is a temporary return to an inflationary mode within a larger deflationary trend – a rally in other words. No market ever moves in one direction. Confidence, and therefore liquidity, ebbs and flows.

    Deflation does not mean the money supply is contracting all the time until it reaches bottom. It looks more like a jagged lightning bolt, with strong down period interrupted by weaker up periods to a recovery high, but not a new high. Deflation plays out as five steps down and three steps up (at all degrees of trend simultaneously). In other words, the pattern is fractal. The larger trend is down when rallies lead to lower highs and lower lows over a long period of time.

    Viscount St. Albans

    Then by that definition….

    We’ve been experiencing inflation (i.e. “inflationary mode”) since 2009?
    What’s the difference between inflation and an “inflationary mode” ? This language sounds dangerously close to cookie inflation.

    I thought it was an either or proposition. Deflation or inflation. You don’t do both at the same time. The rise in stock and commodity markets was due to temporary return to suspension of disbelief…..not an actual change in the dynamics of credit creation.

    The central banks were pissing into the wind of a larger hurricane force trend…..etc.

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