“It is after a trend has been reversed that the full effect of the preceding excesses is felt.” -George Soros

For the last 5+ years we have seen a massive attempt by global central banks to prop up asset prices. The Federal Reserve has spearheaded the effort, increasing their balance sheet from less than $1 trillion in 2007 to over $4 trillion today. One of the main threats that QE allegedly posed was that printing trillions of dollars would lead to runaway inflation, the complete collapse of fiat currency. Now obviously that hasn’t happened, in fact we’ve seen almost the exact opposite. Check out the chart below which graphs Google searches for “hyperinflation.” You’ll notice that fear is abating.

Consider that in 2013, 18 of the 21 biggest economies in the world had inflation rates of less than 2%. Who could have predicted that after 3 rounds of easing and one twist, people would be more worried about deflation than inflation? Bernanke has done a masterful job no doubt; Ray Dalio has gone as far to say that America is experiencing a “beautiful deleveraging.”

The fed is now of the mind that the economy can stand on its own and Janet has begun peeling the band aid off. The market has thus far welcomed the scaling back with open arms; the S&P 500 is up ~6% since December 18 when Bernanke unleashed the Taper.

Asset prices have inflated to be certain, the S&P 500 is up around 115% since the Fed’s first round of “Quantitative Easing”, fine collectors are back collecting, and $80M diamonds are being auctioned off. A key ingredient that has been missing from this recovery is wage growth.

But alas, just last week we saw average hourly earnings increased 0.4%, more than double expectations and up 2.2% y/o/y. Check out the chart below from Deutsche Bank.

In 1987 George Soros said “It is after a trend has been reversed that the full effect of the preceding excesses is felt.” Wouldn’t it be something if we only start to smell inflation after QE has been reversed, after all the hyper inflationistas have crawled back into their cave? Markets have a unique ability to forecast the future, don’t look now you guys, but the CRB commodity index is up 10% YTD.

Category: Economy, Federal Reserve, Inflation, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “The Fed and Hyperinflation”

  1. DeDude says:

    Amazing how many people think that if the Fed increase money supply it’s a “law of nature” that inflation must follow. I usually ask such people the question: “If the government printed one thousand “$ trillion” bills and placed them in a vault in Fort Knox, how would that destroy the currency and cause hyperinflation?

    Any fiat currency that is not circulating, is just a piece of paper. To be inflationary the currency must have velocity. The inflationary effect of fiat money comes from monetary “momentum” (money “mass” x money velocity), not from the amount of money

    In 2008 when companies and consumers stopped spending (reducing money velocity), the Fed tried to retain monetary momentum by printing a lot of money. As long as they don’t overdo it and as long as they pull back that money when velocity begin to increase – then there will be no hyperinflation. For all we know about the history of the Fed and who they serve, the first of the two mandates to be thrown under the bus in a crisis is employment.

    • tbergerson says:

      Which is why if rates rise, and banks can earn something on their excess reserves by lending them out, you will then see an explosion in money in the economy and inflation will then pick up, and if loss of faith in the currency occurs then and only then hyperinflation. Perversely it is rising rates that will fuel the inflation dynamic. Rising wages are good and will help restore some balance. But are not necessary to experience inflation. See Zimbabwe and Venezuela and perhaps Argentina which had inflation that was not wage based.

      Alternately, the Fed can keep that money as reserves if it pays more than banks can earn on it. But then you have the ugly spectacle of the Fed shoveling lots of money into banks and the huge and obscene bonuses that go with it. That might present a painful political problem. And as for the Fed dumping trillions in securities to reduce the balance sheet and mop up the money? Imagine the rate rise then and the effect on the US budget problem and interest cost. One shudders.

  2. RW says:

    Commodity shock (oil) inflation is so 70′s.

    We can only wish the hyperinflationistas would crawl back into their cave — they’ve polluted policy discourse for nearly six years and are still dumping more of their scat in the media and in front of congress (they just eat that stuff up in Washington apparently) — all of which has been utterly refuted by six years of history but has served very nicely as a diversion from the decades-long looting of America.

    But enough of that.

    There is a big difference between normal ranges of inflation and anything that could be considered “hyperinflation” and some wage inflation these days would really be good news because it would mean labor was regaining some of the economic participation it has lost over the past four decades and an inflation rate somewhere between 2 and 4% would mean the economy was really growing again rather than just taking up slack.

    Whatever bet this “guest author” wants to make on the imminence of hyperinflation (defined as well above that level) is a bet I will take.

  3. farmera1 says:

    The Velocity of Money


    This graph gives an idea of what has happened to the velocity of money. The velocity has dropped pretty much steadily since 1959 from 1.7 down to 1.1 today. There is a rather large uptick in the mid 90s but it came back down to the longer term trend. Do note that the Fed stopped publishing the M3 money supply somewhere around 2005-2006 (reportedly to save money and no one used the numbers). So the graph since that time has been based on private estimates of M3.

  4. Well, first, I’m not sure why rank-and-file would be too worried about a period of above-trend wage growth, especially when it would have to sustain for a significant amount of time to undo the recent skewing of wealth accumulation in the hands of the 0.1%.

    Of course the final point of this post is sound, in that surely the effects of this policy might be delayed. There is no way to disprove that conjecture. The conjecture itself may not seem very compelling to me, but I cannot remove it from the space of possible outcomes.

    The only thing that bothers me about the post is the assertion up top regarding QE as the mechanism that has propped up “asset prices” as a whole over the globe. Now, I get that the QE policy is a direct method to prop up the price of government bonds, and I do understand that there is a transmission mechanism from interest rates to valuation metrics for equities, but this transmission mechanism surely does not produce a one-to-one correlation (i.e., many other factors go into the ultimate determination of equity prices).

    In fact, to press this point a little further with regard to QE (and not necessarily with this post specifically), I see a lot of…well I don’t want to use the word hysteria…how about ‘unstructured concern’…when the topic is addressed.

    I would like someone to elucidate the mechanics of how QE is even the most significant driver of asset price inflation. I remain doubtful, as you can tell.

    I think Michael Pettis, in his latest post (http://blog.mpettis.com/2014/03/economic-consequences-of-income-inequality/), has compelling reasons to think income inequality may be far more to blame than QE.

    Something I would like to see addressed is how we had two massive bubbles in asset prices in the last twenty years, and both occurred without QE. I completely understand that this fact does not confirm my hypothesis–it does not mean the current rise in asset prices is totally unrelated to QE. Yet at the same time, just because someone points to a correlation over the last three years between asset price inflation and QE, it’s just thin gruel to serve as any sort of proof of causation. I would like at least some plausible story of causation that doesn’t break down upon just the merest glances at the literature or logic.

  5. sellstop says:

    In past decades the U.S. economy and the western European economies were the “world”. Now the world economy is much expanded, and the U.S. and Europe are not the drivers that they once were. Many expected inflation to sustain in the late 2000′s as the appetite for basic materials in Asia was evident. The deflationary tendencies of the last couple decades seem to be related to the effect on wages of Asia and China in particular on manufacturing. Just as China is getting to a place where they may depend on the purchasing power of their own consumers to sustain their manufacturing we have rumors of debt problems in that country.
    As long as inflation in dependent on consumer earnings and spending, and therefore the velocity of money is dependent on those things, Chinese workers and their wage power will determine world rates of inflation. And asset prices will be dependent on easy money available to the top of the food chain.
    Can the world actually wean itself off of low interest rates and can world central banks resist the urge to devaluate currencies as a means to generate domestic employment?
    We can’t all be net exporters.
    And as far as that chart of wage increases goes, to me it looks like a rounded top pattern. The highs aren’t quite getting as high, and the lows are dipping lower. We may need more data…

    just rambling,

  6. gloeschi says:

    Markets “unique ability to forecast the future” was best seen in October 2007, when the S&P 500 made fresh new all-time highs. Mere six weeks before the worst recession in over 80 years. FAIL!

  7. kaleberg says:

    Unlike a command economy, a market economy uses prices as signals, That means that inflation is a necessary result of economic growth. If there is a need for buying more capital goods or hiring more workers, then there will be inflation. That’s Economics 101. Fed policy since the late 1970s has been to suppress economic growth, and in that it has been successful.

    When the economy is stagnant and inflation is consequently low, there is little reason for buying equipment and hiring new workers. We’ve seen this: return on investment has been falling for decades. So, where can you park your money when there is nothing to invest in? That’s easy, you buy assets like stocks, art, and real estate.

    So, yes, the Fed does pump up asset bubbles, but it does so as a consequence of its growth suppression policy.

  8. odnalro zeraus says:

    It has happened that when a government prints money to pay its debts: social security, wages; etc. it will bring about a % price increase similar to the % increase in the government debt for that time period.
    Obviously if it puts the issued money it in a vault the chances are that it may not have an effect on prices, but it could psychologically.

  9. Louis Woodhill says:

    The reason that there has been no inflation is that, since 10/6/08, the Fed has been paying interest on reserves (IOR) at a rate above the 90-day T-bill rate. IOR makes QE deflationary, rather than inflationary. With IOR, all that QE does is to exchange one interest-bearing risk-free asset for another. The reason that QE is mildly deflationary is that T-bonds are more useful to the banking system for the kinds of transactions that create M3 than are the interest-paying bank reserves.

    Bottom line: The Fed is not “printing money,” it is printing 1-day T-bills (that pay way above market). Given this, what we have seen in the markets makes perfect sense.