On April 27, 2010, Standard & Poor’s downgraded Greece’s credit rating to junk status – meaning that it is unlikely Greece can pay back its creditors, which means that it is not worth it for the hypothetical investor to invest in Greece.
The same day, the USD spiked and the Euro and other currencies fell a bit as there was a bit of a rush to that so-called “safety” that is said to be perceived in the USD. But even though the USD spiked, it still fell against gold.
This means that the currency deemed to be “the best of the bunch” still fell against gold on the very day when it saw a short-term rise in strength.
According to some, this is a definitive sign that markets realize and are pricing in the ultimate problem with fiat money, if not merely with the USD itself (the country most likely to inflate its way out of its debt obligations, according to Willem Buiter at Citi).
The First Stage of Hyperinflation
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One commenter believes that we (i.e., the U.S.) are already in the first stage of hyperinflation. Importantly, he explains that hyperinflation doesn’t have to do with “more inflation,” but rather with a loss of confidence in the currency. As more people drop USD for higher paying or more stable investments, dollars will flood the market and their value will drop.
Admittedly, it’s a bold claim, but if hyperinflation ever happens, there will, at some point, have to be a “first stage” of it. Will we recognize it? How would we recognize the first stages of hyperinflation? Admittedly, if it is all about a major loss of confidence in the currency, this has already begun to happen, with Russia and China actively diversifying their reserves away from the USD and ceasing to buy the same amount of long-term US bonds.
The commenter thinks we could see a major loss of confidence in the USD during 2011.
Get Ready For Double-Digit Inflation
New Challenges For US Fundamentals
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First question: does it even make sense anymore to speak of U.S. fundamentals, if U.S. exceptionalism extends to its being able to monetize as much debt as it wants (”print” money, quantitative easing, whatever you prefer)?
Recently a whack of crazy financial plans as well as unexpected expenditures have been dropped on the U.S. doorstep. First, for some imprudent reason, Obama wants to begin a new push for space travel to Mars. That won’t cost very much – maybe it will even provide some hopeful distractions from the real problems, right?
Second, going hand in hand with the Mission to Mars theme, Obama is pushing for the development of new space weaponry. Well, almost. This week’s development is that the US military now has a gun capable of shooting anywhere in the world within an hour’s time. Wonder how much that cost? And will cost? Add in Stephen Hawking’s shockingly unexpected stance on extraterrestrial life and the Americans are back to playing cowboys and Indians, I guess.
Third: the Deepwater Horizon oil spill, currently wasting at least 5,000 barrels of oil a day, requiring at least 7100 workers to help clean it up and prevent further damage, the energy costs of the vessels and planes that have to fly in, plus the energy needed to drill a “relief hole” on the ocean floor. Don’t even get me started on the crime against non-human animals this is.
What happens when all the other sovereign currency issues subside for a while? The “safe-haven” bubble will start to deflate and make commodities more expensive for the U.S. This will be great for Canada, Brazil, Australia and China. It remains to be seen what more long-term consequences the oil spill will have on oil prices.
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{ 6 comments… read them below or add one }
The central bank can always stop inflation—including hyperinflation—by stabilizing the money supply, if the board of governors have the nads to accept the resulting recession. A weak board will sometimes tolerate a level of inflation that’s quite harmful to the economy—10% or even 15%—rather than take the abuse that results if they do what it takes to grind inflation out of the economy.
Hyperinflation, though, usually has a different cause. Mere reluctance to tolerate a recession usually gives way when the inflation rate gets high enough to inflict real pain on ordinary voters. Hyperinflation results when the government loses both fiscal control and the trust of their borrowers. If they can neither hold the line on spending nor fund the spending through taxes, nor borrow the money, the only remaining choice is to print the money—and that ruins the currency very quickly. (It makes me glad that California and Illinois don’t have their own currencies.)
It may be foolish of me, but I have considerable confidence that the US will be able to bring its budget adequately into balance to prevent hyperinflation.
I’m rather more worried about the big burst of ordinary inflation due once the economy improves enough that the excess bank reserves created to address the panic start flowing into the economy. Solving that would kick us right back into a recession, and I see no sign that the board of governors of the Federal Reserve has what it takes to do what it takes.
I also don’t think actual hyperinflation will occur in the US for as long as the USD is still the major world reserve currency. But I agree with you that nevertheless the big bout of “ordinary inflation” is going to be on its way no matter what. Just a question of when it really kicks in. Australia, India, China, Canada and Brazil, certainly, are already seeing at least the usual normal levels of inflation again – Australia’s real estate market has shot up by 20% in the past year alone and it will probably be raising rates again next month.
The US market is different, of course. But there are waves of excess liquidity sitting in store at the banks which have not trickled out into the broader economy yet. As I understand it, the Fed is actually paying the banks interest on this money, so the banks don’t have the same incentive to lend it out yet.
Paying interest on excess reserves is the Fed’s plan for keeping those reserves from gushing into the money supply. (Along with a few other things—they can also start selling the trillion or so in mortgage-backed securities, if the market for those stabilizes to the point that doing so won’t crush the banks or housing.)
The Fed seems very sure that it’ll work, but it’ll only work if the Fed is willing to pay almost as much as an ordinary borrower. Why should the bank lend to the Fed at 2% or 3% when it can make a mortgage, car loan, or credit card loan at 6%, 12%, 22% or whatever? And if the Fed will pay, let’s say, 6% to keep the reserves from turning into money, that’ll mean that anyone else who wants money will have to pay more. That’ll just crush the economy.
Between a rock and a hard place… I don’t think the Fed will be raising rates this year. And with the escalated levels of the perceived Euro crisis, the ECB probably won’t be, either. That might mean a lot of inflation in the pipeline…
Greece and Spain won’t pay back. The only thing Germans can do is:
REPOSES 170 Leopard 2AEX Battle Tanks from Greece, and 190 Leopard 2A6E Battle Tanks from Spain.
U.S.A must REPOSES 170 F-16 Jet Fighters from Greece, … the rest is gone with the wind …forever …
Greece must stop paying lucrative pensions with borrowed money, reform the free health care system, and cut down, 4 times the military budged.
@blue monkey – yes, if it is true that over a third of the Greek population is all public sector, that does seem high. But cutting back on the military budget – if they have one – well, the U.S. would do well to heed that advice first.