Will Congress be the trigger for hyperinflation?

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Caasi's picture
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Joined: Aug 17 2008
Posts: 23
Will Congress be the trigger for hyperinflation?

It is curious that we are experiencing deflation without indications of severe future inflation. It would usually take 18-24 months for the inflationary effects to become obvious on the street, but shouldn't we see signs? Is credit contracting so much faster than the Fed is printing money that it overwhelms the inflationary aspects? Mish seems to think so, but what is happening to the money being created?

We know that much if not effectively all of it is on the Fed books as bank deposits, ie the excess of deposits beyond required reserves is extreme. The Fed is paying interest on these deposits now, which makes this a very desirable place to park these dollars, making a little interest and avoiding the risk while rebuilding balance sheets. It seems that the Fed knows that keeping the money it is printing out of circulation is the way to avoid the inflationary impact of these dollars, and they have structured their plans to accomplish that.

As more debt must be issued, expect this to continue. Banks get new money in exchange for low quality debt held, then they deposit that new money with the Fed. They can as an alternative buy Treasury debt with the new money and repo those back to the Fed, again depositing the funds as excess reserves. The Fed balance sheet grows. Interest on the treasuries which goes to the holder, the Fed, is returned by the Fed to the Treasury as always. The Fed pays a small interest on the reserves they hold(more new money to pay this). So long as this money does not reach circulation, there is no inflationary impact. All the bank-held sub-prime GSE [email protected]#$ is treated the same way and ends up in Fed "Assets". For example, China and others unload their GSE generated AAA junk to a bank or the Fed, and then buy treasuries with the proceeds. The leakage which doesn't make it back to the Fed provides some inflationary pressure, but again that depends upon who gets the dollars and how the dollars are used. A search on "GSE debt held by China" shows that they have been unloading their holdings throughout 2008. So have other countries, eg Japan. But largely, these dollars have been flowing back into treasuries. Are the foreign central banks working together on this? Likely. Just look at


China held almost $66B more treasuries in Oct than in Sep of 2008. The largest 1-month increase in the past year. Most of the other large foreign holders of treasuries would likely be willing to work with the US and not dump $ holdings. Even many of the oil exporters, Saudi Arabia, UAE, Kuwait, etc. look likely to cooperate, both their central banks and their Sovereign Wealth Funds.

If by some miracle, enough of the junk the Fed is taking onto its balance sheet should actually start to perform, it could be moved back to the banks for money held in excess reserves , and the created money would never actually circulate. Do you think that's likely to succeed? I don't, but it seems to be the plan. As Mish reported on Bernanke's speech this morning,


"banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base. At this point, with global economic activity weak and commodity prices at low levels, we see little risk of inflation in the near term; indeed, we expect inflation to continue to moderate."

So, maybe we have a little more time.

The biggest danger may lie with Congress. They don't just want to save a sinking financial system by risking the world's reserve currency, they want to "Laissez Les Bon Temps Roulette," just like a drunk at Mardi Gras. They are looking to legislatively force the banks to lend the bailout money. In spite of their protestations to the contrary, both the Fed and the Treasury, have applied the money in such a way that we are not experiencing hyperinflation symptoms, yet! Congress may be the lead indicator. They could panic foreign holders and force the hyperinflationary use of the funds. Does this seem plausible? If so, perhaps Ben and Hank might not be the looting @#$%'s I had thought. I don't think they can pull it off, but they might not be intentionally malicious. Anyway, it should be interesting to watch futures etc. as Congress determines the details of their plan. (Aside, tax cuts which are now coming up should be less inflationary 'now' than spending created money now for stimulating the economy and though less stimulative, it's being floated by the Obama team. Maybe Hank and Ben spoke to someone.)



SamLinder's picture
Status: Diamond Member (Offline)
Joined: Jul 10 2008
Posts: 1499
Re: Will Congress be the trigger for hyperinflation?


While your scenario sounds interesting and may, indeed, be plausible, it seems to me that the original intent of TARP and other huge injections of funds was to get money back out into the economy to get this country moving again - or so we were originally told.

Congress, and the public at large, are rightly annoyed that the money seems to be locked up in a closed little system and nobody is saying what's been done with it. It is still inconceivable to me that Congress would turn loose of $350 billion and not make sure they had an accounting of where it went! They must think they're playing Monopoly up there!

If the scenario described above was Paulson/Bernanke's intent in the first place, then they should have shared that with Congress (and the public) to start with. Instead, we've been fed one lie after another from day one about what the money would be used for.

If hyper-inflation is the outcome, then there will be plenty of blame to go around. The powers that be (Paulson & Bernanke & Congress) thoroughly screwed this up in the first place by not letting the investment banks and weak commercial banks fail in the first place.

Instead of a moderate amount of relatively short-term pain, this country will face severe long-term pain down the road.

mpelchat's picture
Status: Silver Member (Offline)
Joined: Sep 10 2008
Posts: 214
Re: Will Congress be the trigger for hyperinflation?


I believe what you are saying, however the 6 of the top 10 campaign contributors for our government are the 6 banks or bank holding companies that got the lions share of the bank bail out money.

The puppeteers are not letting go.

SamLinder's picture
Status: Diamond Member (Offline)
Joined: Jul 10 2008
Posts: 1499
Re: Will Congress be the trigger for hyperinflation?

I hear you, mpelchat. Sometimes I feel that those of us out here are like fleas on a large dogs back - slightly annoying but not an impedance in any way. Sigh.................... Frown

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