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Hyperinflationary Depression Hitting the United States
Hyperinflationary Depression Definition
The term can come across as contradictory to the eyes of many people. Indeed, while scouring the Internet I have come across numerous definitions and abstract descriptions as to what is a hyperinflationary depression. If hyperinflation is the antonym of depression, then how can an economy at a given time contain both?
For the past two years, I've predicted that the United States would hyper-inflate, however this hasn't happened. I wouldn't consider what we're experiencing a healthy economy by any means, as there are too many uncertainties. We have volatile markets, high unemployment, unsustainable government debts, increases in the money supply, foreclosures, etc.
We're clearly not experiencing a depression, if we look at the increases in money supply and the price tag of some key items such a fuel and food, it's difficult to argue we're entering a depression any time soon. However, the prices of many items have actually decreased relative to purchasing power and available credit is low. All the while gold's and silver's value may remain elevated in contrast to say six years ago; the value of all precious metals as of late have been anywhere from stable to slowly declining. This isn't the making of a hyperinflation; more likely it represents a "failed move" and a correction away from hyperinflation.
So if we're experiencing neither a depression nor a hyperinflation; just where are we headed and what does that mean for people like you and me? Enter the term hyperinflationary depression. A term economists have difficulty describing as it has rarely happened throughout history. Suffice to say, we're entering uncharted waters. . .
Here's my attempt to define the term hyperinflation depression: An economic condition characterized by the increase in money supply and the hyperactivity of some key industries or assets; yet accompanied by a lack of overall economic activity due to a lack of confidence in the markets and the irrational belief that money is scarce, when in actuality money is abundant.
Economics - The Dismal Science
Economics has earned the reputation of being dubbed the dismal science, and for very good reasons. I would divide economics in general into two components. First components are the facts; second component are the human emotions that influence the results in spite of the facts. This is why economics has earned the reputation of being characterized as a dismal science. In traditional science, you drop a rock off a cliff and surely it hits the bottom. However, in economics, if you drop a rock off a cliff and enough people believe the rock will start floating in the air - the rock will start floating in the air for a time until the facts of gravity overcome the beliefs.
This is why economics falls into the Bachelor of Arts category rather than science. In science, the person who is the best at governing and utilizing the laws of science advances the highest in their field regardless of the thoughts and emotions of others. However, in art, the unfortunate reality is the best technical artist is rarely the most recognized. Success in art depends mostly on the perceptions of others - economics behaves much the same way. The only difference is unlike say a portrait on a painting, bad economics eventually comes to fruition regardless of what people feel, but it can take a long time. . .
So here we have a situation in the United States where the Federal Reserve has gone through three rounds of quantitative easing. Surely, we should be experiencing a hyperinflation after all of this money printing? Zimbabwe went through four rounds of easing and their entire currency collapsed. What makes the United States so different? There's no difference between the United States and Zimbabwe, the economic fundamentals are the same, it's just that economics in and of itself has a way of suspending science. When Zimbabwe dropped their currency, represented by a rock, off a cliff there wasn't a soul in the world who believed it would fly. However, when the United States dropped that same rock, there's more than enough souls around who believe the rock can fly - and so she flies - for now. . .
Mechanics of Hyperinflationary Depression
Let us look at an example using a small scale that describes a hyperinflationary depression: Let's say you have a farmer who sells food and a blacksmith who sells tools. Now obviously both parties could benefit from each other’s services, but there's a problem, neither party has any cash on hand. Granted, they could barter/trade directly in order to meet their needs, but this still doesn't solve the problem that neither side has any cash on hand. Because both the farmer and blacksmith have no money, neither will trade for anything but money. The irony is that in their perceived need to immediately have money, both sides destroy the possibility of initiating a trade that will help both parties, improve their productivity, and overall help the economy. This is the basic mechanics of a depression. . .
So this is when the government steps in and attempts to avoid the depression at all costs. The government sees that neither the farmer nor blacksmith are trading. The government believes that the cause of this problem is due to the scarcity of money. So the government prints money and hands (for the sake of argument) $1000 to the farmer and $1000 to the blacksmith. This is all in an effort to entice the farmer and blacksmith to trade and thus stimulate the economy. However, the farmer and blacksmith, rather than use this money to initiate the much needed trade, instead opt to save their money. They're concerned because just a few days ago money was scarce, the farmer and blacksmith feel they must keep this money in case of an emergency. They need to keep this money in case money runs scarce again. They lack the confidence that there will be an economic recovery; and in so doing they make their greatest fear a reality as the economy is paralyzed from their lack of activity.
To make matters worse, other businesses soon learn that both the farmer and blacksmith received what they perceive as "free money" from the government, so they too want the same handout. Why is farming and blacksmithing so special? What about us clothiers? So the government doles out that same $1000 to various businesses in various industries for the sake of being fair. Interestingly enough, some businesses realize that money is no longer scarce and start trading with each other immediately. They make beneficial trades that improve their efficiency and thus lower the prices of their products. They may have to hire more people to make these trades. However, most businesses take the view of the blacksmith and farmer that money is still scarce. They sit on their money and because none of their products are circulating within the economy, this creates an artificial scarcity causing a sudden rise in prices for the products they're offering. Their businesses are stagnant and hiring is frozen. They may suddenly have to remove workers or reduce their hours as demand goes down due to fewer people being able to afford their products.
While some sections of the economy are stimulating, the government comes to realize the first round of money printing has done little to stave off the depression. So they initiate a second round of money printing. Oddly enough, the majority of businesses still keep the majority of money nicely tucked away into their coffers. Only this time the problem is no longer that they perceive monetary scarcity, but irrational exuberance. They adopt the attitude; hey if we're getting all this money from the government by not even producing, why produce at all?! They then start speculating with the money, playing games, gambling, etc. with little fear of the consequences because they expect the government to give them another round come next year. The government makes the same mistake by initiating a third round of money printing hoping to entice the circulation of money, but instead the businesses continue to either sit on their money or gamble it away amongst each other. The consumer/tax payer is left holding the bag. The meagre savings rates that the workers have are starting to erode. People are starting to ask why so many businesses are shutting down despite what appears to be on paper record profits and activity in the stock market.
Finally, the entire situation is one gigantic time-bomb waiting to explode. If the businesses ever do "the right thing" and decide to start spending all that money on producing jobs and product, we would have a hyperinflation that would make the dollar worthless. Understand that the reason why the dollar hasn't been devalued as much as expected, is because all of the excess money being printed off hasn't circulated amongst the majority of the populace. Therefore we have no hyperinflation; we have the same conditions as a depression, except this time with an increased money supply. This is a hyperinflationary depression. This is exactly what is happening right now in the United States with all of the corporations "sitting on their money". . .
Hyperinflationary Depression Winning Foreign Approval
Another key reason that the United States hasn't ended up like Zimbabwe yet is not only has the surplus money not been circulated, but the United States has mysteriously won economic confidence from the entire world. Going back to my example of basic economics being a dismal science, not only do the majority of Americans believe the rock is floating in mid air, the rest of the world does as well. People from around the world are buying up US Treasuries. This signals that there's confidence in US dollars, and therefore the value remains stable, despite all of the quantitative easing. Perhaps this is because people view the US Dollar as a safe heaven compared to say the Euro. Perhaps it's because people don't feel safe investing their money into legitament businesses due to all the speculation going around, so instead there's a concensus to simply park the money into US Treasuries. Regardlessly of the erroneous perceptions, the United States has somehow managed to convince the rest of the world to mimic the exact same hyperinflationary behavior.
It's a case of who is the bigger idiot, the idiot or the idiot who follows the idiot? So what we have here is oddly enough another economic bubble in the United States. First we had the tech bubble, followed by the housing bubble, followed by the student loan bubble, and now we have the "my economy is crap, but not as crap as yours" bubble.
Eventually this will come to an end, because you can only build a strong economy off of your own succeses, not from the failure of others. Just because the United States is so far winning the marathon; doesn't change the fact that all of the runners are out of shape and will be breathless at the half way mark.
How This Will End. . . And Begin. . .
I can only see two ways this game of cards will finally come to an end:
A) The corporations say "screw it" and decide to start spending all of the money they're sitting on. This is a time bomb that goes off and causes a massive hyperinflation overnight. Come tomorrow morning, we'll all be equally poor as one trillion dollars is the equivalent value of one dollar because the dollar is worthless. I doubt this will happen as the rich are not about to commit a suicide pact. . .
B) Most likely the hyperinflationary depression remains and is drawn out over the span of many years. The rich, who are the benefactors of all this printed out money, continue to gamble until eventually they retreat into gated communities deep in the wilderness. Inevitably this creates a two-tier economy where we have "the rich specuvestors” on one side; and the people who have since disowned the dollar on the other. These people will be a part of a "gray market" and will create their own economy that is separate from corporate power. They will completely disown "the rich" and refuse to accept or acknowledge their money. Inevitably, what will happen is the healthy "gray market" economy, which actually produces material, will overtake the fake monetary economy.
"The rich" will soon discover they're not rich at all as they possess no skills and have produced nothing useful to society as their money is no longer respected. Yes, the mansion "the rich" have acquired in the past economy is nice, but it offers little defense once the majority learn to take care of themselves and "the rich" find themselves with little in the way of allies. This will not end well . . . for "the rich". . .
-Donovan D. Westhaver