US Dollar is the key to inflation/deflation debate

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rickets's picture
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US Dollar is the key to inflation/deflation debate

I would like some help from the CM community regarding information.  I would like to make some observations and then wrap up with my request.

I have taken considerable time in the past week analyzing the core of the inflation/deflation debate.  I have read all I can on both sides of the argument, and I think it all comes down to just a couple factors which all come down to predicting if/when there might be a partial or full currency crisis.  Its pretty clear no one thinks that we will see hyperinflation or huge inflation as a result of huge demand and a robust economy.  Rather, it would result from a crisis of confidence (this dollar is worthless as they print so much).  Many deflationists see the same financial difficulties ahead as hyper/normal inflationists but simply dont see the US dollar in jepordy for 1 - 5 years, and therefore think its more likely we get a deflationary wave first.

So, the root question is will that crisis in confidence in the US dollar happen in the next few years?

Blogs, govt data and MSM have hugely divergent views, numbers/stats, forward economic estimates.  As many of you know, I lean slightly toward the deflation camp and have been searching for good data on all this debt.  Because of this slant, I have been pushing the hyperinflationist for data and compelling links because I want to be wide open and maintain a neutral/adaptable mindset.

In the end, its amazing how both sides have similar predictions in the next 5 years:  1) housing continues to go down  2) unemployment stays high/goes higher  3) annual govt debt continues to increase  4) credit continues to contract.  The sole difference of opinion really comes down to how much (if any) the fed will print and whether that amount will create a crisis in currency.

Here is an interesting link.  Many of you will go nuts against the numbers and hate this guy (especially at the beginning)...but try to read through it.  The interesting thing is the idea to analyze how servicable the debt is for the next 5 years.  Further, even in rather pessimistic forecasts of tax revenues the debt remains quite servicable.  http://www.minyanville.com/businessmarkets/articles/public-debt-america-...

I am not as bullish as this guy by any means....however the point that we must look at how servicable debt is is key.  Further, the idea that the future is uncertain is key.  SS and medicade...etc...will change.  So, we need to decide how quickly things will unravel and decline (I think housing and the equity market is in for a rough time).  If the decline is HUGE and rapid, the I can see default/hyperinflation for sure.  But, if its just bad (or better) then the US has several years before trouble really arises.  If that happens, and credit continues to contract, then you have deflation.

So, my request:  Can you give me links/data that show specifically how or why you think there will be a currency crisis in the very near term (1-3 years)?  Same thing regarding failed treasury auctions or huge spike in interest rates.  PLEASE - do not send fluffy pieces/data that analyze cash flows without both sides of the story covered (inflows and outflows).  Also, if your analysis says there will be a crisis due to massive overleverage, please indicate what your forecast is in order for crisis to be so close at hand (-10% GDP, or housing collapsing 25% more in the next 2 years nationwide...etc).

I think the core reason there is so much inflation vs deflation is because the estimates have such a huge range.

Thanks for any comments.  Im leaning deflation but sitting on the fence (at least for this hour).

 

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Re: US Dollar is the key to inflation/deflation debate

Erik Sprott's most most recent interview on King World News - http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/7/20_Eric_Sprott.html

He makes the point that a severe deflationary event spurred by a financial crisis can cause people to lose faith in the banking system and pull out all of their money. If the deflation is severe enough, and supply chains get disrupted (as they most likely will - http://theautomaticearth.blogspot.com/2010/07/july-19-2010-rise-and-fall-of-trade.html), then people will have a lot of cash chasing a lot of essential goods, meaning hyperinflation for many essentials. He didn't really mention this last part but I assumed those are the lines along which he was thinking.

I thought this concept was quite interesting, even though I would still call myself a deflationist in the short to medium term. I'm pretty sure this type of quick, off the cuff analysis isn't what you were looking for, but I don't have much time now as I am out the door now.

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Re: US Dollar is the key to inflation/deflation debate

Well said rickets, Just an observation. I noticed that as time passes from the initial crises, the voices of acute and dire doom have subsided. From months to now years before the hyperinflation comes to fruition. The rest of your findings are the same as I have been reading.

http://www.financialsense.com/contributors/matthew-millar/what-do-we-know

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Re: US Dollar is the key to inflation/deflation debate

"then people will have a lot of cash chasing a lot of essential goods, meaning hyperinflation for many essentials. He didn't really mention this last part but I assumed those are the lines along which he was thinking."

There are roughly 500 billion in Fed Reserve Notes inside the US.  The amount of money on "deposit" is many times that amount.  Obviously a "bank run" would close the banks and many millions of people would have essentially no cash while a few would have some which would likely cause real cash to be highly desirable. Additionally in the event of a "bank holiday" it is possible that checks would not be accepted and even electronic transactions might be held as suspect.  I would actually think that inflation in even essentials would be non-existent and quite possibly deflating.  The notion that deflation would collapse supply lines is a concept I don't think anyone has ever seen in reality.  there can be hiccups as costs adjust all through the production chain. Deflation can be thought of as one day everyone gets up and crosses out the last zero on all their "money" - the profit motive still exists - just the numbers have changed.  However it is also fair to point out that in deflation the killer is debt service as revenues decline - low or no debt producers do fine, the others get weeded out.

Most people go through their day using nothing but electronic transactions.  They do know what cash is and probably consider it "real money" just as the gold bugs consider gold/silver as the "real money".  It should be noted that probably only a few people out of a hundred can tell you what the price of gold is - that is to say the vast majority of the population don't consider gold / silver to be money.  This is a far different world than the Great Depression era where gold and silver were real money in circulation alongside gold and silver certificates as well as other bank notes.

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Re: US Dollar is the key to inflation/deflation debate

First, there appears to be a definitional problem between the Minyanville article and numbers that make the Wikipedia analysis.  Minyanville carefully uses the phrase "held by the public" every time it cites a public debt number.

Quote:

1. According to the non-partisan Congressional Budget Office, US debt held by the public (public debt) was $7.54 trillion at the end of fiscal year 2009 and is projected to be $8.80 trillion by the end of fiscal year 2010.

OTOH, Wikipedia breaks public debt down into two categories, debt "held by the public", which agrees with Minyanville, and "intergovernmental debt" which, when added together, comes out to $13.182T.  Minyanville also adds in "intergovernmental debt", but does it in such a way that, at least to my unsophisticated eyes, it appears to be misleading:

Quote:

The US is currently paying a blended average interest rate of around 3.5% on the totality of US public debt held by the public -- note that this excludes interest payments on intergovernmental debt (see iShares Barclays 20+ Year Treas Bond (TLT) for long-term yields and iShares Barclays Short Treasury Bond (SHV) for short-term yields on US debt). On this basis, interest payments (not total debt service, which includes payment of principal) as a percent of GDP are equivalent to about 1.4% of GDP. Let me repeat: US government interest payments are only equivalent to roughly 1.4% of national income.

So, he's saying we're paying 3.5% on the $8.8T "held by the public" (which would be about $308 B/year) but then somehow figures in returns on a couple bond funds to arrive at a figure of 1.4% of GDP that we are paying on the debt.  Note, that is not the interest rate.  He switches terms and throws in some mumbo jumbo to confuse.  According to my back of the envelope figuring, Minyanville's figure is $196 B dollars we are adding to the annual federal budget in interest on the totality.  Clearly something here doesn't add up.  I think, as I said, it's a definitional problem.  According to the Minyanville article:

Quote:

Intergovernmental debt. This is one trick some analysts use to get the US public debt/GDP ratio up to 90%+. As of February 22, 2010, intergovernmental debt was $4.51 trillion. This is debt that various government agencies owe each other. It's clearly nonsense to include debt that the federal government owes itself as part of the total public debt.

Purely on a linguistic level, "inter" governmental would mean between governments.  IOW, those portions of the debt owned by other governments, i.e. China.  His definition would properly be defined as "intra" governmental, between parts of our own government.  I think he is either intentionally using confusing language or doesn't understand the differences himself.  In this case I would trust Wikipedias numbers, which are derived from governmental stats, before I would trust Minyanville's.  But, that's just my unsophisticated take.

What all this does to your overall thesis I'm not too sure.  It would take more time than I have to dedicate right now.

Find the Wikipedia analyses at these links:

http://en.wikipedia.org/wiki/United_States_public_debt

http://en.wikipedia.org/wiki/2010_United_States_federal_budget

Doug

edited to add links.

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Re: US Dollar is the key to inflation/deflation debate

Investorzzo - loved the line "Perhaps the saying "markets can remain irrational longer than you can remain solvent" should be modified to read "markets are irrational – don’t become insolvent."" in your link from financial sense.  I also appreciated that while many predicted the bubble, they were likely wrong for years (in 2004 many saw it coming, but may have missed a 20% move up in equities and 50 - 100% in homes before they rolled over and died!).  Timing and confirmation are key.

Along these lines, my favorite quote of all time re investing is from Livermore and goes sometihng like "in the markets, time is time and money is money.  Time is not money."  When things are moving in a way that contradicts your opinion - nothing wrong with staying on the sidelines.

Doug - great call on the inter vs intra.  While thats a big difference regarding what it does to our debt, I dont know it even matters over 3 - 5 years?  We can service it either way barring a very substantial decline in tax revenue (which I dont discount too much!).

The Kingworld link was great - as he details how more govt spending/bailout is now to the point where it has an immediate negative impact.  We are at the saturation point which makes printing/more debt expansion/etc insane and brings immediate negative reinforcement to policy makers. 

Thanks for the links/comments/ideas everyone.

 

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Re: US Dollar is the key to inflation/deflation debate

Thanks for starting this Rickets.  I am busy running a full analysis with a scenario model to figure out what sorts of conditions would be necessary to create a 'run away train' effect in the US budget vis a vis interest payments.

There's quite a bit to nit-pick in the article, which I read.  The inter vs. intra has already been caught.

1. According to the non-partisan Congressional Budget Office, US debt held by the public (public debt) was $7.54 trillion at the end of fiscal year 2009 and is projected to be $8.80 trillion by the end of fiscal year 2010.

This too is a bit off, but perhaps not by much.  Debt held by the public was already $8.633 trillion at the end of June.  With three more months to go at an average accumulation rate this year (excluding the month of April for obvious reasons...there's no April between here and Sept 30) of $203 billion a month we might guess that the end of FY 2010 will sport a figure closer to $9.23 trillion.

If, instead, we use the CBO estimate for the FY2010 deficit and add this to the ending debt level for FY 2009 we arrive at a figure of $9.08 trillion.

Like I said, nit-picking perhaps but these are easily discovered numbers and they are somewhat different from the $8.8 trillion number in the article.

The real key to this discussion relies on best guesses about the average rate of interest (which, by the way, happens to be 2.479% on debt held by the public - again, an easy number to pull from the Treasury website), and growth in receipts and outlays.

If outlays continue to grow by high single digits due to structural deficit elements, as I think is most likely, and receipts happen to remain stagnant (the CBO is counting on them rising by 18.6% and 14.0% in in 2011 and 2012 respectively), then we'll be piling up the debt at a far faster rate than implied by the article in Minyanville. Of course, the real kicker is what's the rate of interest going to be?  At 0% with complete roll-overs you can accumulate debt to infinity - there is no limit.

At 5% the US's financial world changes dramatically.  At Greece's rate of interest, it stops spinning entirely.

As I said, this will be the subject of an upcoming report for enrolled members because this will provide us with a set of handy rules to follow and items to track  that will give us a heads-up that an irreversible debt-service line has been crossed.

For now I agree with the assessment that we are not there yet.

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Re: US Dollar is the key to inflation/deflation debate

The MV article appears to completely overlook non-governmental/private debt.  Instead it focuses exclusively on US public debt. 

My only question is, since US Public debt must ultimately be paid by the taxpayer, does it not matter what other debts the taxpayer is on the hook for?

Well of course it does.  Any given economy can only support so much debt.  Looking only at Government debt and saying the economy is just fine, is a little short-sighted.

Also, examining only the interest portion of the total debt and concluding it's an insignificant and totally manageable amount, while not also addressing why the government continues to spend more than it receives, and how that could possibly be sustainable, does not leave a warm feeling in me.  Sure, with interest rates at all-time lows, the interest portion on the debt sure looks manageable.  And maybe that manageability is a wolf in sheep's clothing as it apparently leads the government to conclude that it can take on more debt, which it has. 

However, total debt cannot grow any further without a real increase in GDP, or a real lowering of interest rates.  Interest rates cannot get much lower, as I do not know of any government bonds that would attract bidders below 0%.  So it looks like there is maybe a little more downside to interest rates, but not a whole heck of a lot, and a hell of a lot of upside.  With interest rate cycles tytpically lasting 20-30 years, and this one already in it's 29th year, history does not bode well for our interest-rate future.

The collapse in 2008 proved that rising interest rates (as all sub-rpime borrowers learned upon their rate resets), are deadly for an economy that is already burdened by the maximum debt its GDP can service, and is also enjoying the lowest interest rates possible.  That is, things cannot get any better, only worse. 

The fact is, we are currently in the beginning stages of unwinding the biggest credit crunch in 290 years, since the Great South Sea Bubble of 1720.  Debt-financed GDP growth lasting 30 years reached its tipping point, whereby further debt did not add to GDP, but rather subtracted from it. 

Now two years into this "recession" and into the "stimulus", every economic indicator I know of is either falling off a cliff, or getting into "swan-dive" position.

The MV article fails to take into account total debt, and for that, it totally misses the boat.  It also only looks at the public debt picture in a snapshot of time, much like looking at a balance sheet statement.  It fails to take into account trends, especially interest rates (much like looking at your introductory interest rate offer of 0% for the first three months and ignoring the fact it jumps to 22% in month 4); the lack of any economic drivers that might lead to real GDP growth; the lack of government fiscal responsibility; the continuing need to borrow more than we spend; the continuing trade deficit; the political environment in the US which I would call the most dangerous on the planet (name another legislature that's passed 6,000 pages worth of new laws in one year, with or without reading them); a government which is doing everything to repel investment while doing nothing to attract it, and thereby jobs; a completely failed energy policy going back 30 years; a failed public education system (this one going back 50 years); a country beset and at many levels, especially city, county and State levels, literally controlled by, and governed for and by Public Unions and other special interests.

Rickets, I do not have anything other than gut instincts for when I think inflation will set in, but my current view, and one I've held for over a year now, is that we need to go through massive, destructive, unimaginable deflation first, and that has not happened.  Debt has not been destroyed - it's only been transferred from the private financial sector to the public sector.  And new money, i.e., QE, has been mostly injected into the private financial sector, to repair balance sheets, but has not made it into the economy.  Therefore, total debt has grown, GDP has not kept pace, and total debt to GDP has also grown.  We're playing the economic version of a combination of Russian Roulette and juggling.  It's Ben and Timmy juggling two dozen live grenades between the two of them, each squeezing the safety on each grab.  It's only a matter of time before one or the other drops one of them, or before this other guy, called The Real World, adds 100 more grenades to their juggling Russian Roulette fireshow. 

After we've had massive deflation, and people are taking torches and pitchforks to Washington, then the political and economic requirements for doing something extremely stupid will be in place, and we'll be on our way to inflation, probably the hyper kind.

 

 

 

 

 

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Re: US Dollar is the key to inflation/deflation debate

CM - great - would love to see any forecasting tools/ideas you can come up with.

Farmer Brown - I agree with you.  Not that you said differently, but I was trying to focus on government debt only to try and isolate when/if a currency crisis might occur, not whether/when an economic slide/puke out might occur.  The major difference of course is where to park extra money or risk money should other preps be accounted for.

In any event, enjoyed your points...thanks

oh, one last comment - Chris, your point re interest rates is the one that gets me worried.  An interest rate rise caused by selling of debt thats bigger than even the fed can handle would trigger an avalance.  Every tick up in interest rates changes everyones time frame/US dollar risk.  Each tick up triggers more bond sales, and more bond sales lead to more upticks in interest rates.  Thats the sudden shock  - the one that happens in a matter of days.  The one that moves the tipping point for the dollar from >10 years to <10 minutes.

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Re: US Dollar is the key to inflation/deflation debate

I agree with Patrick (FB) as well. I think it is most likely that we are going to have to see some deflation in order to create the political will for a hyperinflation. If not deflation per se, I think the spirit of Joe voter has not yet been broken by high unemployment, reduced growth prospects, high (unpayable) private and public debts, etc. Once the public's collective spirit is completely broken and everyone throws in the towel and becomes scared to death of a combination of high debts and low (or zero...) incomes, there will be strong political will to print like mad. The FED, and the politicians, having been used to headwinds in this area will likely be relieved to see the public supporting the inflation. The FED will have no trouble complying. Of course, the very early effects will look good and the public will demand even more. Then it could quickly break loose altogether.

One wildcard is the fact that so many dollars are held by foreigners. How will China react when they see the FED and the US public finally in alignment with their desires for inflation? This is a dangerous combo indeed.

Of course, there are alternatives and no one can see the future. But it is a fact that paper and empty promises have minimal to zero value. There is a sense of gravity that is slowly acting and drawing us closer and closer to currency collapse. And the value of the currency can collapse faster than the FED can print (believe it or not), though perhaps not as fast as the FED can digitally encode. I like an analogy that Chris used a while ago describing a school of fish all moving in unison. It is almost impossible to predict or even discern which fish started the turn the entire school takes. But all the others catch on very quickly.

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Re: US Dollar is the key to inflation/deflation debate

I've read in a number of locations that when our gov't debt reaches 90% of GDP we cross some kind of threshhold that is quite serious.  If, as the MV article postulates, the current debt is somewhere around the $8.8-9.0T we are in the 60% range as a percentage of GDP.  If, however, the so-called "intergovernmental debt" is added in we are very close to 90%.  I hope Chris's upcoming article clarifies how these numbers are calculated and what they mean.  I admit to a great deal of confusion on these issues.

Doug

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Re: US Dollar is the key to inflation/deflation debate
rickets wrote:

Farmer Brown - I agree with you.  Not that you said differently, but I was trying to focus on government debt only to try and isolate when/if a currency crisis might occur, not whether/when an economic slide/puke out might occur.  The major difference of course is where to park extra money or risk money should other preps be accounted for.

In any event, enjoyed your points...thanks

I guess part of my point is that the sustainability of government debt, or its trajectory, cannot be examined in a vacuum.  The sustainability of government debt, being financed by the same parties who are already saturated in private debt, has a future directly tied to what happens in the rest of the economy.  While we can project umpteen if/then scenarios based on the three factors of interest rates, government expenditures, and government revenues, they are incomplete without bringing the economy as a whole, and its debt picture as a whole (public and private) into the picture.

It is easy to project an outcome and even a precise funding crisis date based on current interest rates, projected expenditures and projected revenues.  It is not so easy to determine what precise effect the latest 6,000 pages of legislation will have on our economy in a numerical format, but it is probably a safe bet that on an intuitive binary scale of a) it will attract investment/jobs or b) it will repel investment and therefore jobs, the unequivocal answer is B.

This and innumerable other factors get in the way of simple mathematical models and this all gets extremely complicated and fuzzy since a change in one variable affects the behavior and the interrelationships of the others.  However, if we take a big-picture view and just focus on GDP, total debt, and interest rates, I believe we can simplify a lot.

Of the few things I think I've correctly absorbed from Steve Keen are that:

  • Given a known weighted average cost of money, we know the velocity of money must be greater than that weighted average cost of money in order for the economy to function without net defaults/debt destruction. 
  • If all lending and borrowing activities were confined to productive debt, then GDP (a direct multiple of money velocity) would never fail to keep pace with the money flows required by the debt level and its prevailing average weighted interest rate.
  • Given any amount of Ponzi borrowing/lending, GDP will eventually fail to keep pace with the money flows required by the debt level and its prevailing average weighted interest rate.

The following conclusions are mine, though not necessarily Mr. Keen's:

An economy whose debt requires money flows that can no longer be produced by its existing productive capacity utilization (because they are too large for the productive capacity of the economy – a direct result of excessive non-productive debt), only has a few choices:

A)      It can service, for some time, the debt flows required, by borrowing more and more money.  Obviously, this is unsustainable, because total debt increases and productivity stays the same (and therefore so does money velocity).  Whether the money is borrowed directly from the domestic economy, from foreigners, or from the Fed via thin-air printing, makes no difference in that all three of those venues add debt without increasing productivity/GDP/money velocity.  They postpone the fall, yet make the eventual fall ever greater.

B)     It can service, also for limited time, the debt flows required by printing more money of the un-borrowed variety.  Although this does not exist in our system, it would amount to a form a debt-default (option C below).  The difference between this and C is that in C, the default falls on the shoulders of the lender whereas in B, it gets distributed amongst the entire economy, hurting the prudent as well as the foolish.  This is not the only difference.  In C, unproductive loans get washed away, which is healthy, while productive loans, and their borrowers, mostly stay standing to pick up the pieces.  In B, all economic actors are hurt, making it more difficult for even productive borrowers to meet their obligations and quite likely destroying a lot of productive as well as unproductive debt. 

C)     It can do nothing, and allow the rule of law to render insolvent lenders and borrowers well, insolvent, and allowing the less-scarred economic actors to pick of those assets for pennies on the dollar, and hopefully putting them to productive uses.  This would reduce total debt, thereby alleviating the money flows required by the previously larger debt and would have the effect of taking a huge weight off the economy, while allowing the largest amount of pain to fall upon the most unproductive, therefore most expendable, economically speaking, actors.

There are no other options folks, so take your pick.

Now Rickets, back to your original question of timing, and of a currency crisis in specific:  I have no freakin’ idea!  But unless the public does what it almost never has done (1921 in the US is the only example I know of Option C being exercised) before in all humanity, A or B will come eventually!

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Re: US Dollar is the key to inflation/deflation debate

I can't see deflation happening. With the Fed printing trillions of dollars during the bailouts, inflation is the more likely scenario. Plus gold reaching as high as it has ever been, although lately it has dropped a little, inflation will come sooner than later. If deflation does come it will only be for a short period. Since the Federal Reserve Act, its been 100 years and the prices on everything has gone up. How can we even imagine the idea that we are not headed for inflation?

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Re: US Dollar is the key to inflation/deflation debate
etsan wrote:

How can we even imagine the idea that we are not headed for inflation?

Great question. While I commend Rickets for his research effort, I don't think the inflation/deflation debate is really a function of plugging numbers into economic variables. Rather, I think its a market phenomenon or trade, at least at this stage of the game. While the asset, commodity, and real estate markets do seem to be fueled by credit, the ultimate expression of that credit is a trade. Two types of trades have dominated the last decade:

  1. The Inflation Trade: Long positions in equities, commodities, paper gold, real estate, and selected currencies. Short positions in the credit currencies (such as the Yen and USD) and their bonds.
  2. The Deflation Trade : Short positions in equities, commodities, paper gold, real estate, and selected currencies. Long positions in the credit currencies (such as the Yen and USD), and US Treasuries Bonds (and German bonds).

The smart money, like (gulp) Goldman Sachs, simply plays one of these trades until exhaustion, and then sells their position to the public and buys into the opposite trade. Rinse and repeat, until Goldman Sachs leaves the table with all the chips. As long as the credit is flowing to the major market players, Inflation/Deflation have more to do with trading strategies than with macroeconomic factors. And this is the reason why you can't make a simple extrapolation of the future based on macroeconomic variables, at least not if you want to hold on to your capital.

 

 

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Domestic Debt and External Default

Back on topic,  Reinhart and Rogoff in This Time Is Different, conclude that Domestic Debt has been a key factor in episodes of hyperinflation throughout history. 

You can listen to Chapter 8 of their book here:

Domestic Debt- The Missing Link Explaining External Default (about 10 mins)

 

Here are a few of the charts that they reference:

 

 

 

 

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Re: US Dollar is the key to inflation/deflation debate
yobob1 wrote:

There are roughly 500 billion in Fed Reserve Notes inside the US.  The amount of money on "deposit" is many times that amount.  Obviously a "bank run" would close the banks and many millions of people would have essentially no cash while a few would have some which would likely cause real cash to be highly desirable. Additionally in the event of a "bank holiday" it is possible that checks would not be accepted and even electronic transactions might be held as suspect.  I would actually think that inflation in even essentials would be non-existent and quite possibly deflating.  The notion that deflation would collapse supply lines is a concept I don't think anyone has ever seen in reality.  there can be hiccups as costs adjust all through the production chain. Deflation can be thought of as one day everyone gets up and crosses out the last zero on all their "money" - the profit motive still exists - just the numbers have changed.  However it is also fair to point out that in deflation the killer is debt service as revenues decline - low or no debt producers do fine, the others get weeded out.

The article I linked to on TAE does a good job explaining why severe deflations can disrupt supply chains. Credit money is the source of liquidity in the global economy, and without this liquidity people (such as shippers and distributors) lose confidence in the ability of others to compensate for their services. Obviously in a deflation spurred by a financial crisis, credit evaporates extremely quickly. We can see economic indicators such as the Baltic Dry Index, which has declined for about 40 consecutive days now, indicating the impact of a credit contraction on global trade. This phenomenon was experienced in reality during the GD, when farmers were dumping perfectly good milk in ditches while other people were starving down the road, as there was a failure to connect supply with demand.

With regards to money in deposit with banks, I believe you are probably right about bank runs destroying a lot of wealth, which doesn't support the inflation case. Although I could see the UST and/or Fed going to extraordinary lengths (money printing) to make good on their fraudulent FDIC promises. We can see they have already retroactively increased the maximum deposit insurace coverage for depositors with money in banks that failed in 2008 - http://www.zerohedge.com/article/attempt-reliquify-economy-fdic-retroactively-pays-tens-thousands-dollars-9500-depositors-fai

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Posts: 294
Re: US Dollar is the key to inflation/deflation debate

This must be what is what like for the US before the collapse of Bretton Woods.    The main difference is in those days,  US dollars held by foreign central banks were redeemable in gold bullion at the FRBNY, which they exercised until Nixon had to renege on our agreement.   I believe that the foreigners are the X factor then as it is now.   All the scenarios conjured on this side of the pond is out the window unless you can calculate what the foreigners that hold massive amounts of US dollars and debt will actually do,  and the timing.

  They were not so stupid as to keep holding dollars that was being rapidly debased by the runaway spending of the US federal government.

If you were in their shoes (financially speaking)  what would you exchange for US dollars and would you do it before your neighbors head for the same exit?

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