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Thursday, January 1, 2015

Hyperinflation Alert! Has the Fed pulled the trigger?


There is a reason we haven't seen massive inflation in the U.S., yet. Sure, there has been some inflation over the past few years -- more than we've been told in official reports. But it hasn't been as catastrophic as many would have expected.

Consider the reasons we might expect catastrophic -- possibly even hyper -- inflation:

1. The federal government is running a massive deficit. This generally means there's a lot of money in circulation from government spending. And if there's more money in circulation, then there's a greater supply of dollars than there otherwise would be. Shouldn't an increase in the supply of dollars mean that its purchasing power should be diminishing?

2. Interest rates have been near zero for over half a decade. When the Fed keeps interest rates low, it generally makes it easier for people to get loans. This can also have the effect of increasing the amount of money in circulation -- and more inflationary pressure. So, with interest rates near zero year after year, you would think that they are putting a lot of inflationary pressure on the dollar, right? They aren't going to pay you to take loans, after all. So this is about as much pressure as we can expect from interest rates, no?

3. There were several rounds of quantitative easing. Basically, the Fed was "printing" massive amounts of money by purchasing government bonds -- again, increasing the amount of money in circulation. (related article)

So, where is the inflation?

Understanding how inflation works

While each of the above-mentioned things can cause inflation, this will only happen if the money is actually loaned out and spent.

Suppose $1 trillion dollars is given to people. But they don't use it. Instead, they put it under their mattresses. That money isn't really in circulation. It is hanging out under mattresses and has no real impact on day to day transactions and prices.

Why is this important? Despite the fact that the government and news outlets were talking up a recovery for the past several years, most people didn't buy it. Either they're unemployed or underemployed, or people they know are. And they're earning less than they did a few years back, anyway. So, instead of borrowing money and spending a lot, they're paying off debt and trying not to lose their homes with the money they get.

In other words, all the Fed's efforts to get the economy booming again failed. But that doesn't mean that the money it created and the low interest rates will never do anything. At some point, all of this may actually find its way into circulation.

When might that happen? What will be the trigger?

When people actually start to believe they're in a recovery, and feel like they have some money to spend. When businesses start to believe that it is safe to take out loans, hire new people, and aggressively grow.

When that happens, all of this money that's been made available at low interest rates may actually end up in circulation.

And that's when the trouble could start. That's what could trigger the problems. Enormous amounts of money could move into circulation in a relatively short time, leading to rapid inflation -- possibly even hyperinflation, if the right conditions are met.

How soon will this happen? ....


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