It Looks Like Inflation or Hyperinflation Ahead

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Ultimately the debate as to whether this crisis ends in a deflationary or inflationary collapse will be decided by the outplay of several forces. While it is impossible to determine which way this drama plays out (it could go either way), there are reasons to believe either position. Ultimately which side one takes depends on whether one believes:

  • that economic forces will be allowed to play themselves out or
  • that political intervention will occur to attempt to prevent these forces from working.

In a truly free market, the sorry existing state of affairs could never have developed. Massive political interventions enabled matters to get to this advanced state.  The political motivation was not to cause a crisis but to prevent prior smaller ones from occurring. The belief that government could eliminate, or at least dampen business cycles, is false. All government accomplished was a cover up of problems, deferring them to a later periods when they resurfaced in bigger and more threatening fashion. After decades of this behavior, it appears we have run out of cover-ups. The problems now are too large to be contained without massive additional interventions.

If you believe that government will refrain from taking action, then you should believe that we will have a deflationary Depression. If you believe they will continue to try and play the game of “extend and pretend,” you must believe there will be high inflation ahead, probably culminating in a hyperinflationary Depression. Both alternatives end in Depression.

It appears naive to believe that suddenly intervention will stop. Indeed, interventionary efforts have only increased as evidenced by the exploding balance sheets of all central banks. And this continuing expansion is at a time when the authorities want you to believe that they are not engaged in quantitative easing.

Does anyone truly believe that politicians will stand by and allow another Great Depression to occur? That is what deflation means in this grossly exaggerated, Alice-in-Wonderland, over-leveraged world. No, in a fiat money system, it is too easy to run the printing presses. To see an explanation of how easy and the mechanics of doing so, see this article “How Deflationary Forces Will Be Turned into Inflation” by Thorsten Polleit at Mises.org.

In a fiat money system, inflation is always a political decision. It is not the outcome of proper economic policy. It is the last refuge of political cowards. It will not improve matters. Ultimately it will wipe out the middle class by destroying their savings. Then a Depression will occur, one which the population will be in substantially worse shape entering than the one in the 1930s.

Here is a take from The McAlvany Commentary. Especially relevant is the part where John Williams is interviewed. It begins around the 8:30 minute mark. Note a key point: The government cannot fund its operations. The option is to cut spending drastically or to print money! Which one do you believe is about to happen?

 

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5 Comments

  1. So far I’ve not seen any extrapolation of what happens in the US after the collapse – whether we get there via inflation or deflation. I hear rumors of civil war but no commentator has dared go there to project the struggle or the possible outcomes.

    What are the precedents? The Russian revolution? The Chinese revolution? In neither case did the pre-collapse military play a role. They both lost control early-on and the command structure disintegrated along with the political administrations. New armies using new ideologies were formed and fought.

    One unique facet I see is how such a contest would affect world trade. First the collapse of the US and then its internal struggles will siphon off most of the US demand for imports and labor unrest may make it difficult to continue exports. Could that invite foreign intervention (UN fronting China or Russia?) in the name of stabilizing trade as a cover for a new world order? Americans are probably not in the mood for such intervention. It will just prolong chaotic civil/military struggle. Maybe cities could be pacified by being destroyed, but the nation’s territory is too big to completely suppress. Also, the populace is heavily armed with small arms that are ideal for gorilla war.

    As a result problems with damaged infrastructure, minimal disposable income and continuing social unrest would prevent to US returning to major trade roles as an importer/exporter.

    With the rest of the world economies similarly weakened, a civil collapse in the US is the coupe de grace for world trade. That’s my guess about what happens after the US collapse. Chillingly, this kind of collapse of trade has happened before in the past in the Mediterranean (the then known world) when the Roman Empire collapsed. As we all know, the following era was known as the Dark Ages and lasted about 1000 years.

    Experts, please disprove my arguments.

    1. B Harvey,

      Your comments are quite plausible. The article which followed the one to which you responded, “Time Can Run Back” discusses the fact that civilization is a fragile and complex thing. Tinkering with it always produces unintended or unforeseen consequences. Progress is not a birthright, but a product of social cooperation and initiative. So yes, we could very well go into a period which would might be looked at from future historians as The Economic Dark Ages. Economic problems usually produce war. It is not impossible that we are entering a period which will be known as the prequel to “Planet of the Apes.”

      Monty

  2. The federal government and the governments of the EU cannot afford deflation. That, to me, pretty well says that inflation will the default political choice. It has taken longer than I expected but it is happening.

    QE3 is coming. It may be wearing a Groucho Marx disguise and carrying a fake ID, but it seems inevitable.

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