EC Global Inflation Watch

Hyperinflation of the dollar is here

It is now impossible to envisage the US Government and the Fed limiting further monetary expansions. Their Keynesian creed tells them that to do so would be disastrous for the economy. By relying on macroeconomic beliefs upon which they base their policy decisions they cannot come up with an answer that ultimately saves the currency and the economy. They do not appear to realise that by transferring wealth to a generally non-productive government sector, monetary inflation impoverishes the productive capacity of the economy.

It is against this background that having seen one enormous budget-busting stimulus package from the US Government, we shall shortly see another. Apart from the unconventional cryptocurrency sector and perhaps equity markets, there is little evidence that markets are discounting the inflationary effects of a second package yet — they are awaiting the shape of the next inflationary stimulus. The gold price, having risen by about a fifth since 20 March, is certainly not yet reflecting hyperinflation.

But it is worth looking at US Government finances since March, when the COVID response commenced, leading to a fall in tax revenue and an increase in government spending. This is shown in Figure 2.[i]

Screen Shot 2020 11 27 at 7.05.15 AM

The numbers in the table reflect the US Government’s financing of federal expenditure following the Fed’s decision to implement limitless QE, and so covers the period of the first wave of coronavirus. From it, we can see that government spending rocketed to 2.12 times tax revenue. This is not so obvious in the annualized CBO figures, where the additional expenditure is spread over the whole fiscal year to September 2020. But with a second half deficit over twice government spending, government financing is roughly one-third by tax revenue and two-thirds by money printing. And this is not going to be a one-off event.

Along with the rest of the world, America has entered a second wave of infections, which will oblige the government to deploy a second similar, or even greater stimulus. The second COVID wave is likely to lead to a further fall in tax revenues, as a result of bankruptcies from the initial coronavirus wave combining with the effects of the second. There is also a growing realization that the economic problems from the virus alone will continue beyond the second wave. This fear is beginning to be reflected in the US Treasury bond market, with yields threatening to rise significantly, as illustrated in Figure 3.

Screen Shot 2020 11 27 at 7.05.28 AM

The evidence from technical analysis strongly suggests the low point for the 10-year US Treasury bond yield has now passed and yields are set to rise significantly. That being the case, the Fed will find itself isolated as the only significant buyer as investors increasingly abandon Treasuries as a safe haven investment. And that is before we consider the position of foreign holders of US Treasuries and agency debt, with some of these key players having begun to reduce their holdings.

A further consideration concerning the purchasing power of the next tranche of monetary expansion will come into play. While it is yet to be reflected in consumer prices, with the dollar already diluted by over 30% of additional M1 money between March and September, for the government to obtain the same effect from debasing the currency the expansion of M1 money supply will have to increase by roughly 40% on the expanded base. An aphorism that states for every debasement, a larger one for the same effect will follow, applies. It is the other side of the transfer of wealth from the productive economy to the government which is consistently ignored by macroeconomists. And the more wealth is transferred from the productive private sector to a generally unproductive government, the less there is to transfer. And far from serving to stimulate the economy, these monetary transfers are impoverishing the economy and reducing the government’s tax base at an accelerating pace. The ratio of tax income to inflationary financing illustrated in Figure 2 then rapidly deteriorates from three of inflation to one of tax revenue.

The US Government’s dependency on inflationary financing is already a commitment with no palatable escape. Politicians are trapped by their earlier electoral promises. Assuming Biden is confirmed as the next US President, his left-leaning socialistic policies can only accelerate the debasement process.

As has been the case in many other advanced economies, the US financial system has predominantly supported zombie companies since the Lehman crisis. The increase in unproductive debt has been widely noted. A final collapse of the hampered economy simply cannot be avoided, only deferred. But assuming attempts will continue to be made to defer this outcome, the Fed and the Treasury between them will have to underwrite commercial bank loans and the bank credit extended to businesses that would otherwise collapse. Instead of an understanding of the consequences for hyperinflation of the money supply from COVID-19 lockdowns, it will be the realization that currency debasement must continue to prevent widespread bankruptcies of unproductive, labor intensive businesses that finally awakens the general public to the likely collapse of its government’s money.

The fallacy of the deflation argument

Keynesian economists who see global economic activity badly undermined by COVID lockdowns will be confused by the tendency for prices of commodities to rise, because demand for them must be falling. They are almost certain to argue that price rises are probably a short-term aberration, and that lack of consumer demand and oversupply of products will begin to deflate prices. This is reflected in statements from leading central bankers. They envisage that without the support of increasing money supply, the failure of businesses in a deflationary environment will lead to the thirties-type deflation, which fed into multiple bank failures and record levels of unemployment. In other words, they believe there is a growing danger of a self-feeding deflationary slump.

The underlying mistake in the deflation argument was made long ago by dismissing Say’s law. Say’s law points out that we produce through the division of our labor in order to consume. Therefore, in approximate terms an increase in unemployment is matched by loss of production, so the supply and demand of consumer goods broadly remain in balance, but at a lower level of economic activity. The Keynesians only account for falling consumer demand without realizing production also declines.

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William K. 3 months ago Member's comment

Interesting while also quite depressing. And while it appears to all be correct, I would vainly wish that it were all wrong. But wishing does not make things true, no matter what Jim Moore thinks.

The irksome part of it all is that the flaws of promoting inflation were clear to me as a 16 year old high school sophomore back in 1963. Why couldn't thoe federal bankers see the truth??? Or has it been "cony capitalism" all this time, doing what helps the friends who already have a lot? And now the smell of it all is becoming overwhealming.

Gary Anderson 3 months ago Contributor's comment

There is a cult of inflation warriors. I think their legitimacy is uncertain.

Laurent Eliane 3 months ago Member's comment

Unfortunately, central banks have become the credit card of the kids (politicians) who put the responsabilities of disaster to the voters. As long as politicians are not accountable for their actions, they will not grow up (see the debate Trump Bidden).

As long as central bankcan print oaper gold, there is no insurance that they arenot printing more paper than the gold they have ( see the diif.of Germany to reappatriate a part of their solid gold.

This week was a perfect view of manipulation by central banks feeling, like this article, that hyperinflation is inevitable. So sharp discouragement of buyers, inflate zombie companies like Tulipe Musk with a horde of hypernationflagspeculator of irrealistic economic view. Tesla is not the only car but it is the "tulip" of our time.

Government with higher rate will bankrupt in no time. It is not an option for them. Hyperinflation is the only outcome with a collapse of the politics as we know today. Cash, like physical gold will be banned first as gov. cannot see who has what snd what they do with it. We enter totalitarian governments lead by corporates. The value of individual is reduce to numbers. No more, no less.

Lets go back to small villages nearly in autarcy where everybody help each other. This will survive.

Gary Anderson 3 months ago Contributor's comment

Like a boy calling wolf, inflation warnings lose power when they are continually published. Many just don't see inflation as a big threat anymore.