- Turning Inflation Into Hyperinflation

This is a good piece from Andrew Stuttaford.

I’m convinced that this is the central political issue of the next decade – who pays. Andrew’s reference to those “broken on inflation’s wheel” is pretty compelling. Unfortunately, those same people here in America lie directly in the path of least resistance for our legislators. Inflation can be blamed on speculators and foreign interests so it’s easier than coping with new taxes. Better to twist Ben Bernanke’s arm than your campaign contributors after you raise theirs. That means the deficit and debt will be paid by those people he mentions - the non unionized middle class – the savers – the people living on fixed incomes.

But while I think inflation will be high – higher than we would like, I’m confident that we won’t see hyperinflation. Hyperinflation is caused by a lack of confidence. It’s not a rational phenomenon created by functioning markets. It’s a breakdown – a collapse. And as dysfunctional as our economy may be at the moment it’s functioning more than well enough to prevent hyperinflation.

My point is, the thing that would make our inflation into hyperinflation is not the Fed or QE8 or whatever. It won’t be caused by an increase in the money supply because however big that number may be, it will be finite. And because that's so, the fair value of it will be calculable. So long as we have the time to do the neccesary math we can continue to operate without danger of going over the cliff, even with high double digit inflation.

But if we have political circumstances that create increased volatility – then the whole thing is at risk. If an Iranian nuclear weapon were to go off in Long Beach California, or if one of the biggest pension funds like CALPERS were forced to liquidate assets by some idiot judge without notifying the fed. That liquidity driven event could cause a cascade and send the value of the dollar over the edge driving it toward zero. Then the Fed couldn’t possibly keep up.

But I doubt that will happen. We’ll have lots more pain in the next decade along with more bailouts and more QE. That will eventually lead to double digit inflation which we’ll be slow to address because it helps the indebted (the federal government). But so long as we move slow enough and steady enough to keep from frightening the herd, and we address the longer term systemic issue when and as we can, I don’t believe we’ll see hyperinflation.