Five Things: We Have the Means; the Motive Is Missing
If the dollar is doomed, what replaces it? That's where things get messy...
"It is our belief that the monetary policies of the Federal Reserve and United States Treasury will soon put an end to this deflationary phase, and we will see massive inflation in the U.S. that could ultimately lead to Zimbabwe-style Hyperinflation."
- National Inflation Association
Going back to 1934, whenever the Federal Reserve has made credit available the world has accepted it. While it is true, as those anticipating hyperinflation argue, the Fed and global central banks are making record amounts of credit available, that is only one side of the credit equation.
The assumption is that this record-breaking credit expansion means risk assets (stocks, commodities, etc.) will all skyrocket and the U.S. dollar will get destroyed. But what hyperinflationists fail to realize is that for an inflation (of either the tame or hyper variety) to take place, one must have both the means (credit from the fed and banks) and the motive (the desire to take on more debt) for credit expansion). For going on two years now we have had record amounts of the former, but none of the latter.
2. It's All Relative; or, Give Me Just One Good Economy
In order for hyperinflation to even be a remote possibility here there would have to be at least one economy that is both stronger than the U.S.'s during a global economic downturn, and larger in size than the state of Ohio's or even California's economy. Just one. That's all I ask for, one.
Let's start with California. Were California it's own sovereign nation, and not merely one of the largest of the 50 U.S. states, it would rank just behind the economies of Japan, China, Germany, France, the United Kingdom and Italy in terms of nominal Gross Domestic Product (2008 annual figures). Russia? Spain? Brazil? Canada? Close, but all rank behind California.
Perhaps Ohio is a better benchmark for size. Given the severity of the economic downturn in Ohio, the fact that unemployment statewide has increased from 7.4% to nearly 11% in less than six months, and that manufacturing remains the largest sector of the state's economy - and that nearly 70% of manufacturing is durable goods output - it is likely that the Ohio sovereign currency, if it existed - we'll call it the Buckeye - would be in dire straits. Being asked to accept Buckeyes in payment for goods and services would be a bitter pill to swallow. But it's not. It's only the eighth-largest economy among the U.S. 50 states, and globally, behind Saudi Arabia, Sweden, Belgium and Indonesia.
Ironically, while smaller emerging markets could potentially find themselves facing a Zimbabwe-esque hyperinflation, that would only make the U.S. dollar and U.S. debt more attractive and secure. Emerging markets are at this point the only place where it seems a possibility that credit could find a willing home and debt an eager taker, but even that is not a certainty. It is more likely that the creeping protectionism that is developing, as countries begin to wake up to the fact that the global system is too big to save, results in a more severe credit contraction globally.
Make no mistake, this is not to say that we won't again experience inflation. We most assuredly will. But there are two critical errors being made by those currently warning of either aggressive inflation or hyperinflation; one, a failure to recognize the severity of the deflationary forces at work and, two, a failure to appreciate the duration of this deflationary debt unwind. And lastly, inflation is a far, far cry from hyperinflation.
3. Heir of Familiarity?
Of course, this downturn is indeed far more severe, and different, than any other we've experienced... at least, this is true in my lifetime. But it's always helpful to go back and get some historical perspective. We'll save the Depression era reach backs. Those have been trotted out endlessly over the past 18 months. Instead, let's go back to 1951.
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