Five Things Podcast, The Transcript: Hyperinflation vs. Deflation-Minyanville

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Five Things Podcast, The Transcript: Hyperinflation vs. Deflation

Kevin Depew Oct 24, 2008 4:10 pm

Five Things Podcast, The Transcript: Hyperinflation vs. Deflation


		It's just like the Five Things You Need to Know Podcast, only quieter.

Editor's Note: What follows is a transcript of the Five Things You Need to Know Podcast, featuring Professor Kevin Depew and Cory Bortnicker.

Cory Bortnicker: Welcome to 5 Things You Need To Know: The Podcast. I’m Cory Bortnicker, and joining me, as always, is Minyanville Columnist and Executive Editor Kevin Depew.

Kevin Depew: How are you?

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Cory Bortnicker: Today we’re going to take a look at five distinct topics, and let’s start out with hyperinflation versus deflation. There’s a lot of talk right now about people trying to discover whether or not we’re experiencing hyperinflation or deflation. Before we get into that, Kevin, can you just kind of talk briefly about what hyperinflation is and what deflation is?

Kevin Depew: Sure. Hyperinflation is an aggressive -- it’s essentially an out-of-control inflation. Economists usually use benchmarks of around, say, 50 percent per month inflation, if you can possibly believe that, or an extended period, say three years, where the inflation rate annualized is around 100 percent.

And those are difficult to imagine. But one of the reasons I wanted to bring this up and talk about it today is because there continues to be a lot of these words bandied about in the media and the feeling that, well, the Federal Reserve is creating all this new credit to give to banks, some 2 trillion dollars so far in bail-outs, and extending FDIC coverage to $250,000 for deposits, and all this is going to require a considerable amount of debt issuance in order for the country to pay for it.

And so there’s this ongoing fear, I think, where everybody’s looking for the currency to collapse. They’re looking for at least very aggressive inflation, if not outright hyperinflation, in some cases. And I just don’t think that is going to happen.

Cory Bortnicker: If this is going to increase the amount of debt, I mean, debt is what sort of got us into this crisis to start with; is that right?

Kevin Depew: Well, the USA is a debtor nation. All of our activities are financed by others, mostly Chinese and Japanese investors. So let’s just think about it for a moment and take these economic terms out of the picture and think about what’s going to happen.

The dollar is not backed by gold or anything other than the government’s ability to tax. That’s what gives the dollar its value is that the government has the ability to issue these notes. We use those to conduct transactions out in the real economy because you can’t go pay for anything with gold. And so the only thing backing that dollar is a promise that the paper is going to be good. Now, how do we get that promise? Because there’s no gold or silver backing the dollar; it’s simply the ability of the government to take tax revenues in.

So if we think about what’s going to happen, if we’re going to be spending all these dollars to bail out banks and the government’s creating all this new debt to bail out banks, and maybe GM and who knows what else, how are they going to finance that? Well, they’re going to have to go to issue debt in the market. And that means that they’re going to make Treasuries for sale for other investors to invest in the debt of the government.

So what happens if everyone sees that, hey, these guys in the , they cannot -- they’re not conducting their economy in any kind of a normal way; they’re taking on more debt than we think they can handle? Well, they’re going to demand a higher interest rate in return for financing that debt. The same way if you or I want to go buy a car and somebody views us as a poor credit risk. We’re going to have to pay a higher interest rate.

So let’s look at what happens. If interest rates skyrocket, say, because no one wants to finance government debt, and they go up from -- the ten-year right now is around 3.6%. So let’s say it goes to 5%, 8%, 10%. What that’s doing is collapsing bond prices. And when you have a collapse in bond prices, virtually, by definition, you have a shrinkage in the amount of credit outstanding. And that’s deflation.

So, on the other side of this, eventually, there may be a point when everyone is so disenchanted and has such an utter lack of faith and confidence in the US dollar that eventually we may get to the point where there is hyperinflation. But just to clarify, hyperinflation is when someone wants to get rid of dollars. They would rather put their money in anything else other than dollars.


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Comments (13)

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Dan Keys

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10-25-2008, 10:38 am
With the distinction of savings and investment being blurred ( craziness like FDIC guarantees of MM funds), how do we know if the money we put in the bank isn't being invested- I.e. we are taking the same risk as buying investments like comerc Read More

Jeff Burke

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10-25-2008, 10:18 pm
Take the S&P highs from years when things were 'normal', before inflation and financial shenanigans, 1965 to 1983 and extrapolate them: S&P 576. Read More

Michael C

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10-26-2008, 5:58 am
As I understand it, you can reach a point where the helicopter approach doesn't work because you give people money and they don't spend it, they save it. If you think prices are going to be lower tomorrow you won't spend or invest t Read More

Gerry Turner

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10-26-2008, 11:53 pm
Great educational article! I just got a Credit Union loan for a car. They have strict rules of lending and seem very prudent. Keeping my money with them feels secure vs. under the mattress. I closed the Wells Fargo accounts as the per Read More

William Ramseyer

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10-27-2008, 11:12 am
Kevin shows again that he is one of the finest commentators on the web, with a tremendous knowledge of history, philosophy, economics, and the â��real worldâ�� of today. I have some questions for Kevin and any commentators, and while I h Read More


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