Inflation Versus Hyperinflation, The Crucial Difference

Is it possible we will see hyperinflation in the United States? Yes, but not by the route you might think...

"Hyperinflation." You've heard the word. You may have talked about it on the golf course or at the dinner table. (Or even in the grocery store.)

There is a difference, though, between inflation and hyperinflation. They are not the same thing. And for the most part, there is no gradual path from one to the other. To wind up with true hyperinflation, some very bad things have to happen. The government has to completely lose control... the populace has to completely lose faith in the system... or both at the same time.

Consider the era of the late 1970s, a time of severe inflation in the United States. That was a bad scene. But did it count as hyperinflation? No, not anywhere near it. Federal Reserve Chairman Paul Volcker, aka "Tall Paul," came in and nipped that problem in the bud.

America had to undergo severe economic pain as a result of the Volcker interest rate hikes. But the point is that America had the ability to endure it -- to solve the problem with the right leadership. Things had not gotten so far gone that the populace lost faith, or the government lost control.

Faith in the system is another very important concept. And it is very hard to kill. By faith I don't mean liking what the government is doing, or being happy about where the direction of the country is going. I mean basic things, like keeping your money in the bank.

Here are a few simple questions to determine whether you still have "faith" or not:

Do you rely on electronic payment systems (credit cards, bill pay etc.) for most of your transactions?

Are you still comfortable with your employer paying you in legal tender -- or, if you own a business, with your customers paying in same?

Does the percentage of your net worth tied up in physical hard assets, i.e. metal bars you can drop on your foot, count as less than 50%?

If you answered yes to the above questions, then guess what -- you are still invested in the functioning financial system as we know it. You still have "faith"... not in your heart but in your deeds.

Don't feel bad about this, by the way. I still have faith in the financial system too, as based on my day-to-day habits.

This is only rational after all. Do you know what a pain it is to REALLY go cold turkey? The only way to well and truly go "off the grid" involves physical barter and organic farming. (Not to mention guns and ammo.)

High inflation, even double-digit inflation, can be handled within the confines of the system. The unofficial inflation rate in Argentina is somewhere around 25% right now, and people aren't even rioting in the streets. They aren't super-happy, obviously, but they are adjusting. (The government is pumping up wages, so that may have something to do with it.)

Hyperinflation, in contrast, means that all hell has broken loose. To get true hyperinflation, the economic engine has to break down... or there has to be a clear sense the government has lost all control.

This is why hyperinflation tends to come in the aftermath of wars, or at the tail end of badly mismanaged regimes where the economy has been going from bad to worse for a very long time.

The possibility of rapidly accelerating inflation in the United States is very real. When talking about sticker-shock effects like $7 for a gallon of gas, or a triple in the price of a gallon of milk, that is inflation run rampant.

But hyperinflation is a much darker prospect. To get to that point, cash has to be seen as not just undesirable, but worthless.

And not just worthless in an abstract "look what the currency is doing" sense either, but real-life nitty-gritty panic mode: Making an emergency trip to the grocery store as soon as the paycheck hits on Friday, knowing that prices will go up again on Saturday. Buying two months of food at a time... fighting for the last loaf of bread on the shelf... turning off the heat because the gas bill is double the rent.

I would argue yes, but neither quickly nor easily. Americans won't just wake up one day and say "Gosh, look at that."

In fact, to get to U.S. hyperinflation, I believe something else would have to happen first -- the onset of a new Great Depression scenario, even worse than the last one.

Already the deficit hawks are yelling and screaming. In respect to high inflation risk, voices of great concern are increasingly being heard. In Washington, this is playing out as dramatic lip service to austerity. They are talking about massive budget cuts again, and the timetable for raising interest rates.

So here is the thing: If the inflation problem becomes too serious for the hawks to be ignored, eventually the Federal Reserve will be forced to cave in. Someone, somehow, will pull a "Volcker" and hit the inflation mule over the head with a sledgehammer.

This "Volcker action" could then trigger a collapse in the value of paper assets, as all the rebuilt Ponzi schemes pumped with Federal Reserve money come tumbling down again. The underpinnings of the U.S. economy were much stronger in Volcker's day. There was far less debt and leverage built into the system.

Or, in the absence of a Volcker-style austerity move from Washington, the stock market could crash on its own, as investors realize the stimulus rainbow has delivered them to the edge of a cliff. Either way, some aggressive action will be taken to stop the build-up of inflation, be it through Washington policy backlash or the organic effects of another Wall Street meltdown.

(As a side note, China and the Middle East are two other strong candidates for "meltdown catalyst." If the China miracle implodes, the global economy goes with it. If the Middle East goes up in flames, oil becomes the $200 a barrel grim reaper.)

When this happens -- some inflation-stopping event dropping the recovery in its tracks -- positive sentiment will quickly collapse. Recovery stats will then collapse along with sentiment. The dreaded "D" word, deflation, will be back on everyone's lips.

That is one of the great ironies at this juncture of financial history. The deflation monster still has not been vanquished! It is simply hiding under the bed, biding its time until the Fed-and-China-created stimulus bubble pops.

And when that bubble DOES pop, that's when things get really frightening. When the global economy endures some domino chain combination of Japan/Middle East/China/America implosion, the threat of Great Depression 2.0 comes roaring back, bigger and uglier than before (as all the extend and pretend actions taken until now have only made the problems worse).

That is the point where true panic comes in... when the attempt to stop "normal" inflation triggers an economic collapse that rivals Great Depression conditions. At that juncture, it will be apparent to all that the Federal Reserve has run out of bullets... that "more stimulus" simply cannot work... that trillions have already been thrown down the drain.

It is then, when the monetary authorities wet their pants in the face of a new deflationary panic, that the real threat of hyperinflation returns to the fore. If all hope becomes lost in a hopeless situation, we could see the Fed desperately propose something like QE2 times 10, on the order of not $600 billion but $6 trillion. That is when the real horror would begin.

Editor's Note: Not since the Civil War has there been a crisis serious enough to tear families apart at the seams... But we believe this one will turn brother against brother.

I wish I was as optimistic as this writer. The plain fact is that the Fed is already dialing hyper-inflation into our future and it is coming like a freight train.

Congress has to cut spending immediately, massively, and yet using judgement. If the Debt Ceiling is increased, the Fed will just do QE3 because they don't have any choice. They don't have a choice because no one is going to lend them $100 Billion per month because QE2 already poisoned the well. The results of QE2 will create Hyper-Inflation this year and it cannot be stopped. See the Chart below. This is the Commodities Future Index and the first of the 6 month futures from September 2010 are just coming due, so April will start showing this in the month to month inflation numbers, of which we just had a taste in the shocking March numbers.

CRB Index for the last 6 months.. (Future Freepers Sorry, this is a snapshot URL) this post won't make sense a month after the current date.)

This exactly matches the chart presented by Russ Winter at Minyanville.

The last 40 years have nothing to do with the current situation because folks had the good sense to go Ape Sh%$t when Nixon gave up the Gold Standard. What they are doing now.. the BASELESS STANDARD, the NOT EVEN GREEN ANYMORE.. standard.. heck.. it isn't even paper. Just electrons representing lies that our children have to make real by living in bondage.

If the Debt Ceiling is increased, the Fed will do QE3 to keep Treasury auctions from failing. Something immediate and substantial needs to be done, and Congress just punted.

Some say, "If interest rates on Treasuries skyrocket then everyone, including China and Saudi will jump back into dollars with wild abandon." But, more likely, there will be no takers for $100 Billion per month.. but the interest rates may rise anyway.. rather... it is much more likely that QE3 occurs for the same reasons as QE2 but the situation is more desperate.

The problem with that.. is that the US is deep into short term borrowing which means that the Deficit will balloon insanely the minute interest rates begin to rise..

You get into a trap, there is no interest rate high enough that overcomes the real likelihood of loss of the original principle. Equity works because it based on the analysis of the risk vs reward of appreciation or loss of the capital investment. Bond work on the assurance that the capital invested is safe, over a certain level of risk, they are considered junk because they are inherently not safe.

What foreign companies will do is use the fake dollars we have given them to purchase real US assets leaving us in an inflationary spiral and vassals in our own land. They will at some point soon, months, insist that all of our borrowing be done in their currency rather than ours and this is when our goose is cooked.

This is a story as old as Joseph, the Pharaoh and the 7 years of famine. It ended with all of Egypt in Slavery including the Israelites whom only God could save.

What is sick is that Beck warned of this 6 months ago and we just couldn't see it back then.. but now it is obvious.. and yet we are not doing anything to stop it.

There comes a point in every PONZIE scheme where the new members cannot sustain the deal and it all comes tumbling down. Social Security is the Ponzie scheme and we all know it. It has failed we are selling our very lives and putting our children into the fire of slavery and death and oppression. This has to end worse than Greece and Obama and crowd know it and are cheering with the torches in their hands. This is the Clovin-Pevin crisis they have been working for, but we don't have to go there willingly.

In case you have any doubt in your heart..

Chart h/t Doug Ross

Goodbye, AmeriCorps. Hello, FoodStampCorps.
By Michelle Malkin • April 15, 2011 10:14 AM

So much for the new era of fiscal responsibility. The federal government’s dependency drones have been spared the chopping block. After vowing to eliminate funding for President Obama’s bloated $6 billion AmeriCorps social justice army, House Republicans retreated — and will shrink the AmeriCorps budget by a minuscule 6.7 percent.

Yes, across the Internet, the feds are recruiting AmeriCorps VISTA (“Volunteers in Service to America”) workers to apply for jobs as publicists for the welfare state. Their mission: to sign up as many people to federal food stamp rolls as possible. Because, you know, the record-breaking 12 million that have been added since Obama took office is apparently not good enough.

These people are serious and using Cloward-Piven like a Bible and they are on a mission.

First and foremost, people have been lied to and they are not ready for dealing with the reality of this. Beck and Palin see Trump's big mouth as a distraction but people are sick of lies. I am.

It starts here first. We quit lying to ourselves. I saw the charts that I posted here this weekend and they made me sick. The guy at www.endofamerica93.com has seen this for a while.. and unfortunately decided to make this a sales pitch with a 20 minute clouded presentation at the beginning.

The crisis doesn't come from "Bankruptcy" as Hannity keeps saying.. but the loss of "Reserve Currency Status" and the meetings are going on around the world to get this accomplished. I am sure they would like to do this without destroying the value of the dollars they already have.. but QE3 will destroy this value anyway.. so after June 2011, a crisis is assured soon no matter what if the DEBT CEILING IS INCREASED without substantial immediate and draconian cutting and a mechanism to absolutely end the deficit borrowing in 24 months.

Go outside, look around, do we love this country? If we do, we have only about 2 months to do something.

I wonder if that ‘shock’ hasn’t already happened - we have yet to see the full financial/economic fallout (if you’ll pardon the expression in this context) of the Japan Disaster....

This certainly hasn't helped things and if someone thought they might be able to finance even a few more months at $100B per month, having Japan solidly out of the market really should make them think differently.

This is ultimately the import of the diagrams I posted. If the Debt Ceiling is increased, the Fed will print more money and it will cause Hyper-inflation, QE2 already takes us to the brink of this and perhaps beyond, but each month has added an additional 5% to the commodities index, by June the butcher's bill is 45%, in a few months (by September this is 60%)

The Republican Budget does nothing to forestall this, Obama's "Taxes" will only make things worse by actually reducing revenue and slowing growth all the more.. and encouraging more retirements that just inflate the obligation.

Worse, the administration has boots on the ground signing up every human who can be put on the government dole as fast as possible pushing this crisis. Pushing it for everything they can because this is their way to the nirvana of REVOLUTION. They are almost as bad as those who wish for chaos to bring back the 12th Imam, except for they have the nations' checkbook and they are busy writing that last few checks before the whole scheme ends under its own weight.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.