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Deflation is a necessary precursor to hyperinflation

The more the economy goes down, the more likely hyperinflation becomes.  Central bankers don’t hit the panic button and burn the village without provocation.  They do it because they have no other option.

The worse the economy gets, the closer we are to a break out on the gold price that will, inevitably, go parabolic.  From LRC:

Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative) – in short, everything screams “deflation”.

Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right?

Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.

Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about. In fact, most sensible people don’t even bother arguing the issue at all – everyone knows that only fools bother arguing with a bigger fool…

But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same – because in both cases, the currency loses its purchasing power – but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money – they want less of the currency: So they will pay anything for a good which is not the currency.

This recovery is not going to happen – that’s the news we’ve been getting as of late. Amid all this hopeful talk about “avoiding a double-dip”, it turns out that we didn’t avoid a double-dip – we never really managed to claw our way out of the first dip. No matter all the stimulus, no matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that the economy has been – and is headed – down.

But both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy” – stimulus on the one hand, liquidity injections on the other. (See my discussion of The Deficit here.)

It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008 – and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left…

In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd – yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.

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