Thursday, August 30, 2012

Mish on Hyperinflation

As opposed to his views on deflation, for the most part I agree with Mish’s views on the likelihood of hyperinflation in the United States.  In the subject article, Mish lays out a good case for why he believes hyperinflation is not in our future. 

This is not to say I agree fully with him on this issue.  Mish believes the Fed would not create hyperinflation, and could not even if desired.  While I concur that the Fed would not create hyperinflation, I do not agree that the Fed is powerless to create hyperinflation.  Mish summarizes his view with the following:

I do not think the Fed itself can cause hyperinflation and more importantly I am sure they would not if they could. The reason is "Hyperinflation Would End The Game"

•Hyperinflation by definition would destroy the currency and thus the banks
•Hyperinflation would destroy the wealthy and all their corporate bond holding
•Hyperinflation would destroy the Fed
•Hyperinflation would destroy the wealthy political class

More so, hyperinflation will not solve the problem.  Hyperinflation does nothing to reduce the burden of unfunded liabilities.  Why would the Fed take the nuclear option when it would do nothing to solve the fiscal problem, still in place and not addressed?  Hyperinflation would end the game.  The Fed’s job is to protect the banks, and hyperinflation will destroy them. 

However, the Fed absolutely can cause hyperinflation if it chooses to do so.  It is one thing to say that the Fed likely will not, and to explain the reasons why.  But it is inaccurate to state the Fed is powerless to do so:

At this stage in the cycle, and in sharp contrast to what most believe, the Fed is essentially powerless…

I say the following not because I believe the Fed will do it, but to counter the notion that the Fed is powerless:

  • The Fed can buy any assets for any amount it desires.  There is no limit to what the Fed can buy if it decides to do so – auto loans, student loans, the S&P 500, derivative contracts, etc.  Fill in the multi-trillions.
  • The Fed absolutely can charge interest to banks for holding excess reserves. 
  • Theoretically, the banks can hold excess reserves as cash in the vault.  Practically, the banks cannot get enough $100 bills into their vaults to avoid holding excess reserves with the Fed.
  • The Fed can charge enough interest for holding excess reserves to cause the banks to look at any breathing American as a good credit risk relative to the cost of holding excess reserves. 
  • At some point, the banks will lend.  Is it at a 2% charge?  5%?  20%?  50%? 

Again, I do not believe any such offer will be forthcoming; however the Fed absolutely can cause hyperinflation if it desires.

There are many reasons why the Fed will not pursue such a policy, but this does not equate to the Fed not being able to pursue such a policy.

However, if Congress ever gets its hands on the central bank or on the ability to create a new version of greenbacks, the odds of hyperinflation will increase noticeably.


  1. I too have a post titled "Mish on Hyperinflation" this past week. :-)

  2. "Why would the Fed take the nuclear option (Hyperinflation) when it would do nothing to solve the fiscal problem..."
    -They have no "Intention" to Solve it..

    "Hyperinflation would end the game."
    -Yes, but they have looted enough and are all Revved up and ready to go...

    "The Fed’s job is to protect the banks"
    -Thats what they have done, The OWNERS of the banks that is...


    1. I suspect this is possible. However, the destruction caused by such a hyper-inflation would result in outcomes unpredictable to the elite.

      Until there is some evidence - the reality of a new currency system to replace the current one, this option is too risky. I believe the carbon-tax credit regime was the planned replacement. This blew up when someone hacked a few emails, it seems.

      But, if the end game is this hyper-inflation / nuclear solution (with all the risks and consequences that come along), I suspect it won't do any of us much good to work on how to avoid the fallout....