Courtesy of Mish.
In response to Economist Fired for Expressing Opinions on Max Keiser Show; Errors in Observation where I stated “The Fed Cannot Realistically Cause Hyperinflation” I received a couple of emails worth reviewing.
Reader Philip writes …
I do not understand how you could say that the Fed cannot cause hyperinflation. The government has a huge debt. The debt is manageable at super low rates. But, if rates rise due to some inflation or even just caution from abroad then the government starts paying a very large sum in interest. That takes away from its obligations even more than the current deficit amount. Either the Fed has to step in and monetize the debt by printing more and more money spiraling out of control.
Definition of Terms
As always, before one can have a rational discussion, one must agree on definitions. Hyperinflation is a complete loss of faith in currency. In other words, currency becomes worthless in a short period of time.
Is there a risk of high interest rates? Yes. But I do not think that risk is high in the near future. Even assuming I am wrong, high rates are not the same as hyperinflation.
The US dollar is not headed to zero given the US has the largest stash of gold of any country. That alone would preclude hyperinflation. There are many other reasons that I have touched upon that suggest interest rates are not going up fast.
The Fed has tried to revive the credit markets but has essentially failed, except for student loans. Making debt slaves out of students is actually a hugely deflationary force.
Moreover and as I have stated many times, the Fed cannot give money away, spend it, or force anyone to spend it. That is a very tough battle for the Fed with attitudes where they are (and as I have mentioned, attitudes are very important).
Banks do not want to lend, credit-worthy businesses do not want to borrow, and consumers are still deleveraging. Those are extremely deflationary forces.
Would Printing $50 Trillion Tomorrow Do Anything?
Ignoring interest on excess reserves (a proviso I mentioned), printing $50 trillion dollars tomorrow might not do anything….