Can We Get Deflation, Inflation - Even Hyperinflaiton - at the Same Time?
Hyperinflation isn't discussed much these days. Mostly we hear about deflation. So when I recently started researching hyperinflation - it's history, causes, how it affected people in the past, etc. - I was struck by some things I want to share with you, starting today.
Let's start with all the current talk about deflation. The U.S. money supply exploded in 2008-2009. All of a sudden, it now seems to be contracting. This surprised a lot of people. Why should you care?
Let's start with an expanding money supply. When the money supply expands, that can mean inflation in our future. The last time the U.S. experienced serious (high) inflation was the 1970's. You have to be over forty to really remember what that was like. So a lot of people have no clue.
Inflation basically means your money will be worth less in the future. So does that mean that in the 1970's, our money started losing value. Well, yes and no.
In fact, it's been decreasing in value for almost 100 years. Ever since the Fed was created in 1913 - about 97 years ago - the value of the U.S. dollar has decreased about 95%. If 97 years is too long for you to wrap your mind around, try a mere 40 years. Since 1970 (when our last bout of serious inflation starting heating up), the value of the U.S. dollar has fallen about 93%. The dollar buys less stuff now that it did in 1970.
Now, what about deflation - a contracting money supply? Well, the opposite holds. When the money supply shrinks, it can indicate that we're going to experience deflation. With deflation, you get the opposite problem. As the money supply contracts, every dollar you have should buy more stuff. (Think about it: fewer dollars chasing the same number of goods.)
So what's the big deal. Isn't that good? Shouldn't we want deflation? Well, the thing about the kind of deflation people worry about is just this: when people think their money is going to be worth more tomorrow, they don't buy things today. They wait until tomorrow. And tomorrow can sometimes be a long way off - if it ever comes. And when no one's spending, well just imagine what that might do to the economy.
That's how a falling U.S. money supply might threaten you. It's not that you personally lose purchasing power over time - your money actually gains purchasing power. But if the economy tanks (worse than it already has), you can imagine why that's not really in your interest.
Of course, we don't want to forget the little matter of what the Fed might - or should I say will certainly do - if we really do get any kind of serious, lasting deflation. They'll start printing money like there's not tomorrow.
See, deflation is the one thing the government can't deal with, and so will not tolerate. Why? Well, you all know how much debt the government has - and how they're piling up more and more of it every year, especially since all the "bailout" programs were put in place. (The bailouts didn't use money the government already had to spend. The government runs a deficit every year. The government has no "extra" money to spend. It has to borrow money for new programs. And the bailout programs were, well, gargantuan - so the government's borrowings were gargantuan.)
Now, when you issue debt (in the case of the government, that means U.S. treasuries), you're borrowing from someone. And you have to offer to pay some kind of interest to get them to borrow from you.
So, in the government's case, by issuing all this new debt, they've got more and more interest they've got to pay out every year. That interest they pay out, they pay out in U.S. dollars - the same dollars you and I earn and spend.
And what's that we said about the value of the dollar when there's deflation? Right, it increases in value.
So that will mean that the U.S. debt will grow - increase in value - simply because it's made up of debt that consists of U.S dollars. And those interest payments will become more expensive because they have to be made in those same dollars that are increasing in value when you have deflation.
And that's why the government will print more money like there's no tomorrow. Because they can't afford to have the dollar increase in value. They have to force the dollar to become more and more worthless just so they can pay interest on their debt, never mind try to pay it off someday (which, by the way they never will - a subject for another time).
So in this kind of perverse way, deflation (if it ever really takes hold) will probably cause inflation. And, logically, inflation - if it gets out of hand - can turn into hyperinflation.
See how much fun money can be - especially when money is being spent by those responsible folks in Congress...and when our government's budget is in the hands of those prudent ladies and gents at the U.S. Treasury Department...and when the policy of money management is created and administered by those whizzes at the Federal Reserve.
So relax. What's to worry? You're in good hands, right?
Let's start with all the current talk about deflation. The U.S. money supply exploded in 2008-2009. All of a sudden, it now seems to be contracting. This surprised a lot of people. Why should you care?
Let's start with an expanding money supply. When the money supply expands, that can mean inflation in our future. The last time the U.S. experienced serious (high) inflation was the 1970's. You have to be over forty to really remember what that was like. So a lot of people have no clue.
Inflation basically means your money will be worth less in the future. So does that mean that in the 1970's, our money started losing value. Well, yes and no.
In fact, it's been decreasing in value for almost 100 years. Ever since the Fed was created in 1913 - about 97 years ago - the value of the U.S. dollar has decreased about 95%. If 97 years is too long for you to wrap your mind around, try a mere 40 years. Since 1970 (when our last bout of serious inflation starting heating up), the value of the U.S. dollar has fallen about 93%. The dollar buys less stuff now that it did in 1970.
Now, what about deflation - a contracting money supply? Well, the opposite holds. When the money supply shrinks, it can indicate that we're going to experience deflation. With deflation, you get the opposite problem. As the money supply contracts, every dollar you have should buy more stuff. (Think about it: fewer dollars chasing the same number of goods.)
So what's the big deal. Isn't that good? Shouldn't we want deflation? Well, the thing about the kind of deflation people worry about is just this: when people think their money is going to be worth more tomorrow, they don't buy things today. They wait until tomorrow. And tomorrow can sometimes be a long way off - if it ever comes. And when no one's spending, well just imagine what that might do to the economy.
That's how a falling U.S. money supply might threaten you. It's not that you personally lose purchasing power over time - your money actually gains purchasing power. But if the economy tanks (worse than it already has), you can imagine why that's not really in your interest.
Of course, we don't want to forget the little matter of what the Fed might - or should I say will certainly do - if we really do get any kind of serious, lasting deflation. They'll start printing money like there's not tomorrow.
See, deflation is the one thing the government can't deal with, and so will not tolerate. Why? Well, you all know how much debt the government has - and how they're piling up more and more of it every year, especially since all the "bailout" programs were put in place. (The bailouts didn't use money the government already had to spend. The government runs a deficit every year. The government has no "extra" money to spend. It has to borrow money for new programs. And the bailout programs were, well, gargantuan - so the government's borrowings were gargantuan.)
Now, when you issue debt (in the case of the government, that means U.S. treasuries), you're borrowing from someone. And you have to offer to pay some kind of interest to get them to borrow from you.
So, in the government's case, by issuing all this new debt, they've got more and more interest they've got to pay out every year. That interest they pay out, they pay out in U.S. dollars - the same dollars you and I earn and spend.
And what's that we said about the value of the dollar when there's deflation? Right, it increases in value.
So that will mean that the U.S. debt will grow - increase in value - simply because it's made up of debt that consists of U.S dollars. And those interest payments will become more expensive because they have to be made in those same dollars that are increasing in value when you have deflation.
And that's why the government will print more money like there's no tomorrow. Because they can't afford to have the dollar increase in value. They have to force the dollar to become more and more worthless just so they can pay interest on their debt, never mind try to pay it off someday (which, by the way they never will - a subject for another time).
So in this kind of perverse way, deflation (if it ever really takes hold) will probably cause inflation. And, logically, inflation - if it gets out of hand - can turn into hyperinflation.
See how much fun money can be - especially when money is being spent by those responsible folks in Congress...and when our government's budget is in the hands of those prudent ladies and gents at the U.S. Treasury Department...and when the policy of money management is created and administered by those whizzes at the Federal Reserve.
So relax. What's to worry? You're in good hands, right?
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