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Is the U.S. Federal Reserve Setting the Stage for Hyperinflation?

The U.S. government wants to stimulate growth in the moribund economy by stoking the fires of inflation. But by leaving interest rates low and buying up bonds – a policy known as quantitative easing (QE) – the U.S. Federal Reserve risks debasing the dollar, which could lead to a prolonged period of hyperinflation that would send prices skyrocketing.

After their most recent meeting on Sept. 21, Fed policymakers said low inflation warranted looser monetary policy. Minutes from the meeting said central bankers were prepared to ease policy to boost inflation expectations "before long."

The Fed is seeking ways to boost the U.S. economy after keeping interest rates at record lows and buying in $1.7 trillion of U.S. securities. The next move may be another round of quantitative easing that would expand the Fed's balance sheet even further.

But as it feeds more and more money into the financial system, the central bank may very well be sowing the seeds of hyperinflation.

By bailing out big banks with the $700 billion Troubled Asset Relief Program (TARP), pursuing a $787 stimulus program to boost the economy, and launching a near $1 trillion rescue of government backed housing authorities, the government has racked up about $12.7 trillion in debt guarantees and spending.

Without enough hard assets – like gold – in storage to back those guarantees, the only way the government can meet its debt obligations is to print more money.

Money Morning Contributing Editor Martin Hutchinson thinks there's a chance the government could swamp the economy with stimulus and spark a round of hyperinflation.

"With the Fed pumping all that cash into the system, deficits of $1.3 trillion and additional QE of $1 trillion on the table, the odds are getting greater all the time that a bout of hyperinflation could be in the cards," Hutchinson said in an interview.

Hyperinflation can be simply defined as very high inflation, a condition in which prices increase rapidly as a currency loses its value. It usually occurs when monetary and fiscal authorities of a nation issue large quantities of money to pay for a large stream of government expenditures.

In numbers, hyperinflation could mean anything from a 100% cumulative inflation rate over three years to inflation exceeding 50% a month. For example, an inflation rate of 100% a month would reduce the value of a $20 bill to $2.50 in four months.

Hyperinflation can also be viewed as a form of taxation. The most serious consequence of hyperinflation is the reallocation of wealth. It transfers wealth from the general public, which holds money, to the government, which issues money.

Weimer Republic
Hyperinflation has occurred on several occasions in history. The most commonly known examples are:

  • Germany or the Weimar Republic went through its worst inflation in 1923. The highest currency issued was a 100,000,000,000,000 Mark note, which was the equivalent of about 25 U.S. dollars. The rate of inflation peaked at 346% per month, meaning prices doubled every two days. The main cause is believed to be the "London ultimatum" in May 1921, which demanded reparations in gold or foreign currency to be paid in annual installments of 2 billion gold marks plus 26% of the value of Germany's exports.
  • On July 22, 2008, the value of the Zimbabwe dollar had fallen to approximately 688 billion per U.S. dollar. After the country's independence, inflation was stable until Robert Mugabe began a program of land reforms that primarily focused on taking land from white farmers and redistributing those properties and assets to black farmers. Rampant hyperinflation ensued when this policy sent food production and revenues from exports of food plummeting.
  • Hyperinflation in post World War II Hungary may be the highest on record. In April 1946, prices zoomed higher by 195% every day, meaning they doubled every 15.6 hours. The war caused enormous costs and, later, even higher losses to the relatively small and open Hungarian economy. The national bank was practically under government control. The government spent more than it could raise in taxes and the central bank printed more paper money to finance the deficit.

But even though our economy shows some of these same symptoms, it doesn't mean hyperinflation is a foregone conclusion. Hutchinson says the Fed may be able to balance interest rates to keep runaway inflation in check.

"If prices only go up say 3-4% over a course of a year, the Fed can probably keep it in check with a gradual increase in interest rates," Hutchinson says. "But the problem with inflation is it tends to take off very quickly. If you get a 20% bubble in prices in a few short months, the Fed would have a hard time reacting quickly enough."

Investors can identify hyperinflation before it arrives by watching for a few reliable signs:

  • Hoarding (people will try to get rid of cash before it is devalued, by hoarding food and other commodities creating shortages of the hoarded objects).
  • Distortion of relative prices.
  • People prefer to keep their wealth in non-monetary assets or in a relatively stable foreign currency.
  • People regard monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that foreign currency.
  • Sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period.

So how do investors protect themselves from a bout of hyperinflation and the demise of their purchasing power?

Until government officials reverse their free-spending ways, Hutchinson says hard assets like commodities – such as gold, silver, and platinum – and the companies that mine them are the best bets. But seeking protection in those sectors can get tricky because even a bubble in hard assets will eventually burst.

"As hyperinflation becomes more and more apparent, prices for hard assets will also increase rapidly," Hutchinson says. "But investors will have to be especially nimble to avoid the ride back down. Even precious metals like gold and silver will eventually top out."

Join the conversation. Click here to jump to comments…

  1. db | October 25, 2010

    The "Hyper-inflation" argument has been run for the past 30+ years. It ususally is tied into suggestions that we buy (overpriced) gold coins & now "Survival Seeds".

    Inflation is too many dollars chasing too little "stuff", whether products, services, goods, or whatever. Hungary in '46 & Germany in '23 were bombed out husks of countries; without the ability to produce "stuff" to warrant the currency. The USA isn't in that position.

    No need to head to the survival bunker yet.

    • Tony | October 25, 2010

      By the time it is obvious that you should head for the survival bunker, it is too late. If you wait until it's obvious you should wire some money to an off-shore account, it's too late to open one and do so.

      Noah didn't wait for it to start raining before he built the ark.

      Consider what you "lose" by preparing:

      1. If you bought gold/silver a few years ago, you're a "bit" ahead.

      2. If you waited for sales and "stocked up" on food, you're a bit ahead.

      3. If you bought a portable generator, you're not ahead–unless you experienced some disaster such as flood, hurricane, tornado, massive power outage, etc

      4. If you planted a garden, you picked up some skills, had fresh food, and saved a few bucks

      5. If you learned to can, freeze, and/or dry food, you picked up some skills and ate well from your summer garden. You also saved a few bucks.

      6. If you bought some weapons, hopefully you didn't have to used them, but you ARE in a position to defend your home should it be necessary. If you DID use them for hunting, you had a good time and saved a few bucks [or killed a few bucks :) ] Same with fishing equipment.

      Hyper-inflation is just like any other disaster. You prepare for it and hope to heck you "wasted" your preparations. If you wait until it hits, it's generally too late to prepare.

      It's always amazing to me that with hurricane season a yearly phenomenon, folks wait until the day before it is predicted to hit to buy the materials to protect their home. Of course, when they get to the store, they find that all the materials are gone, having been bought out the day before.

      I haven't used my car/home insurance in the past 30 years. I haven't cancelled them either.


  2. Dan in Colorado | October 25, 2010

    Not time to head for the bunker yet….time to stock it!!
    The USA is not bombed out, yet. Wait until the useless eaters on welfare don't get their
    check on time, then you'll see burnt-out cities. A fiat money system will always collapse
    when the people no longer trust the worthless currency. You can go on eBay right now
    and buy a 100 Trillion dollar bill from Zimbabwe for $3.74, including shipping. The envelope
    that it will arrive in has postage worth more than the bill itself. I bought one just for fun!!
    I'm a Trillionaire!!
    The Book of Revelation says that a days wages will be a quart of barley….just enough to
    survive so you can work tomorrow…

  3. Kevin DiLuigi | October 25, 2010

    What "stuff" does the US make anymore that can warrent this kind of increase in M1? We might not be bombed out but US industrial capacity has been for all practical purposes eviscerated.

  4. Carl Lindfors | October 25, 2010

    True hyperinflation is a total lack of confidence in a fiat currency. Rapid price increases are only a symptom. It can literally happen overnight. There are already many laws in place attempting to prevent you to protect yourself -laws that make it difficult to move your assets offshore, for example. Also, treating the only real money (gold) as a collectible subject to sales taxes and income taxes is an attempt to prop up the fiat currency.

  5. archivesDave | October 25, 2010

    "Inflation is too many dollars chasing too little “stuff”, whether products, services, goods, or whatever. Hungary in ‘46 & Germany in ‘23 were bombed out husks of countries; without the ability to produce “stuff” to warrant the currency. The USA isn’t in that position.

    No need to head to the survival bunker yet."

    Just in case u hadn't noticed, most of the 'stuff' we used to produce has found its way to
    the Orient and other places.
    Don Miller has failed to mention the NUMEROUS other countries that have suffered a similar fate….History is replete with it and it is only a matter of WHEN, and not IF.
    I recommend that you search youtube for a fellow by the name of Salbuchi who has experienced all of this in Argentina and offers some very sage advice.

  6. Joe | October 26, 2010

    "No need to head to the survival bunker yet."

    Yes, but you better have one ready soon, just in case it will be needed.

  7. William Patalon III | October 26, 2010

    Thanks for taking the time to share your thoughts. This is what we like to see….whether readers agree with our stories or insights or not, taking the time to think about what we said and to offer thier own insights makes for some healthy and productive interaction. Everyone benefits.
    Hope to hear from you again.
    William Patalon III
    Executive Editor
    Money Morning

  8. Hal (GT) | October 26, 2010

    I don't know if we will see the hyper-inflation but I know we are currently seeing inflation in areas of the econ that to me is a signal of more difficult times to come.

    Add to that this huge mortgage fraud that has yet to shake out and will I imagine explode at some point because it's the cheaters that are prospering.

  9. topeka | November 21, 2010

    Hyperinflation or hurricane? Apt comparison in some ways, and poor in others. Hurricanes are only caused by their political enemies in the fevered imagine of loons. Hyperinflation, though, is a man-made phenomenon caused by those with hearts filled with indifference or worse. If no one can be blamed, a small group collectively must be responsible even if no one person is responsible and everyone has plausible deniability. Washington's spendthrift ways, collusion with the Fed, and with Wall Street, to protect the(ir) financial sectors means…. so what. They are transferring "wealth" on a massive scale. Those with political power and financial power continue feasting on the flesh of the golden goose?

    Even if the DC-Fed alliance ensures nothing more than prosperity for the selected few, the effect is a big nothing for the community. Wealth being transferred today has not been produced. Successfully transferring time and life and opportunity from those without power to those with power is not the same as exchanging time and life and opportunity between parties who mutually benefit. If the politicians and the bankers had to play the “Mark” in their shell game, the "crisis" would end – and investors could go back to buying securities of profitable businesses rather than worrying endlessly (and futilely) about gold, seeds, hyperinflation, or riots, or political earthquakes.

  10. Anthony | March 1, 2011

    So basically what we should be saying here is "buy nothing but guns, water and a few seeds. Plant those seeds. Kill the people that try to steal your crops…" What we're failing to include or realize is that the people you are murdering for tampering with your crops ARE in themselves an energy-packed, reliable food supply. Morbid as it may be, desperate times call for desperate measures…

  11. Sam Wright | March 16, 2012

    The Great Depression created a secular deflationary backdrop during the Roaring Twenties by encouraging credit expansion.

    They then crashed the collateral; the Great Crash of Oct 1929.

    The debt deflation then pulled back on Keynes' inflation string because stopping an inflation becoming a hyperinflation is like "pushing on a string".

    Then they inflated, devaluing the dollar from $20.67 per ounce of gold to $35. The second World war allowed even greater expansion of the monetary base by 500% under rationing despite America's agriculture being totally unaffected by the war.


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