We've walked you through the steps of what happens when governments indulge in inflationary meddling with the business cycle, and why governments – especially representative ones – are prone to do it. The end result of 'inflationary cushions' on the business cycle, trying to smooth out recessions, is that when the inevitable market correction comes, it's bad. Very bad.

The US Government, when doing proper accounting, has been running budget deficits to the tune of 4 to 5 trillion per year, on a federal tax base of about 3 trillion per year. The reported figures are lower than this – the talk is that the TARP program will cost the US taxpayer nearly 800 billion dollars, and the Obama 2009 stimulus bill will cost the tax payers near 1.3 trillion dollars – but this is nothing compared to the unfunded liabilities known as the Social Security program and Medicaid.

To put this into perspective, if the US government seized every dollar earned in wages and profits for all US businesses to meet its obligations, it would still show a deficit. If it stopped paying for any services other than Social Security and Medicaid, it would still show a deficit. The US Government is bankrupt, and is playing a game of charades with phony numbers to avoid showing how bad things are.

The official government indicators for how bad inflation is (the consumer price index or CPI) has been fiddled with every three years since the Reagan administration to keep it from reporting numbers that would cause a panic. The M3 (the aggregate money created index) hasn't been reported in over a decade, having been deemed 'obsolete', though recreations from the raw data show that it's far from obsolete; the numbers were not published to avoid causing a panic.

Seeing a pattern here?

But wait, there's more. The Obama Stimulus Package was geared to boost consumer and state level confidence, to give it a shot in the arm. It turned into the most expensive piece of legislature ever signed, as every Congress member attempted to stuff something into the bill for their constituents, knowing full well that by using the same accounting standards imposed by Sarbanes-Oxley, that the government's total liabilities come to nearly 65 trillion dollars. The end result of this is going to have the government have nothing to spend beyond servicing its debts – which will be politically untenable – repudiating the debts – which is politically untenable – or letting the currency devalue and triggering hyperinflation, which, while politically feasible, is functionally the same thing.

Most of the US government's debt is held by foreign investors, due to quirks of market timing and the Japanese Lost Decade (where the Japanese economy went through a housing bubble and bust, coupled with bank failures, similar to what we're going through now. The US Dollar is the reserve currency of the world, meaning that everything in the world is priced first in dollars, and then conversions from dollars to anything else are done.

When the US devaluation happens, and hyperinflation strikes, most of the people holding US debt are going to lose the value of their investment. A $1,000 treasury bill earning 4% isn't worth much when the cost of a loaf of bread is $5,000….and with hyperinflation, the cost of a loaf of bread may only be at $5,000 for a short period of time, before the price rises again.

Whenever prices cannot be counted on to be stable – either rising daily or falling daily by more than about 5%, the effective value of the currency used for those prices as a medium of exchange is zero. When confidence in the medium of exchange for goods and services falters, it stops being used; barter economies start up. When this happens domestically, foreign trade partners stop trading goods with that country. The US relies on imported goods for its economy to function…and the rest of the world relies on US demand for goods to keep their own economies going.

When the US goes into hyperinflation, it's going to bring down the economies of nearly every country on the face of the earth, and the current recession will turn into a Great Depression. When will that Great Depression happen?

2010 to 2012.

This is one article of a five part series on the economy. Please use the links below to view the other economic articles in this series.

• Economic Recession
  
• Inflation
  
• Hyperinflation

© 2009 Robert Lee, all rights reserved