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Re: Hyperinflation Podcasts – Shedlock vs. Lira, etc./ The …

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  • Sun, Sep 12, 2010 - 02:15pm

    #11
    Peak Prosperity Admin

    Peak Prosperity Admin

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    Re: Hyperinflation Podcasts – Shedlock vs. Lira, etc./ The …

Thanks for the comment, ashvinp.

“what about the debt? When treasuries are dumped and commodities are bid up, making energy, food, etc. less affordable for consumers, what will happen to the trillions in debt still owed by individuals, corporations and governments? Usually in times of hyperinflation, creditors lose out because people pay back their debts with devalued currency.”

The conventional answers are:

+ In a severe deflation, many or most debts are defaulted upon, and not repaid

+ In a hyperinflation, they may get paid back, but with dollars of much lessor value

+ In the LDC crisis of the 1970’s, they got repaid, but only after stiff haircuts, and with a “Brady process” where the principal was backed with US treasuries

All of the above are still open possibilities IMHO, although the third one is rarely discussed.

“As GL put it, the hyperinflation would burn itself out. People often talk about hyperinflation as a loss of confidence in the currency as a store of wealth, which it certainly is, but maybe the loss of confidence in the economy will overwhelm that in the short-term, since cash is still a liquid means of exchange..”

Indeed.  I suppose under the “haircuts” scenario, the creditors lose confidence in the borrowers ability to pay (as happened with the LDC’s in the 70’s) and the creditors welcome a negotiated process where they take a haircut, while the borrowers take certain sensible steps to reign in reckless economic policies.