Welcome to Hyperinflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Yesterday ZIRP (zero interest rate policy) became a reality in the United States. The Fed cut its overnight funds rate to a range of zero to 0.25 percent. The New York Investing meetup predicted such a possibility in the fall of 2007, when I first said that if things became bad enough the Fed would lower interest rates to zero. In our December 4th meeting two weeks ago, we predicted that 2009 would be the year of ZIRP with the Fed lowering interest rates to around zero and keeping them there. Things apparently have become bad enough.

Yesterday, the Fed bluntly announced that it would print as much money as necessary to deal with the current economic contraction (read depression). And this has allowed the American press to finally acknowledge in its articles that the Fed has been printing money to cope with the credit crisis - something that I have been repeating like an obsessive-compulsive parrot for more than a year. Since this September alone the Fed's balance sheet has more than doubled (that's in only 3 months... think about that) from around $900 billion to more than $2 trillion. With its new programs to buy up worthless mortgage-backed securities that number will be up to $3 trillion. You may safely assume it will go much higher after that.

The authorities and their allies in the mass media assure us that we needn't worry about the obvious (hyper)inflationary implications of the Fed's moves. It is claimed that deflation is the big problem facing us (and War is Peace and Hate is Love, etc. see Orwell's novel 1984 for similar government assertions). The facts, as well as simple common sense, indicate otherwise. The government's own highly manipulated numbers which grossly understate inflation, still indicate prices are going up. The big drop in price increases can be traced to falling oil prices and literally nothing else. Since commodities can only fall to their cost of production, oil is not likely to fall much further and the 'deflation' threat could disappear overnight. The market will then have to deal with a mountain of government printed money instead.

Apparently we needn't worry about that either. While the economic establishment admits that the Fed's actions are potentially dangerous, former Fed Vice Chair Alan Blinder himself said yesterday "If that much money is left in the monetary base, it would be extremely inflationary", it claims the money can be withdrawn as the economy recovers and then everything will be fine. The German authorities said the same thing about their money printing in the early 1920s. But every time they tried to stop it, there was an immediate negative reaction in the economy, so they restarted it again immediately. The U.S. Fed in the 2000s will be no different. Money printing is a form of addiction and addicts will do anything to maintain their high until they hit bottom.

NEXT: The Truth About Deflation - A Crude Analysis

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Inflation Versus Deflation Argument - Part 4

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

While it is true that the U.S. experienced consumer price deflation in the 1930s and Japan did so in the 1990s and both experienced sharp drops in bank credit, there are few if any other similarities to the current situation in the United States in 2008. The situation in the 1930s U.S. and 1990s Japan is also a bit more nuanced that the deflationists would have you believe. In the late 1920s, the U.S. did see a big rise in money supply and credit, just as occurred in the U.S. in the early 2000s. According to the deflationists, this should have resulted in rising U.S. consumer prices at some point. It did not. Prices actually fell between 1926 and 1929. A similar thing happened in Japan in 1986. While consumer price deflation did appear in Japan after its banking system literally fell apart, it didn't show up consistently until 1999, nine years after the Japanese asset bubble began to burst. Based on these observations, the relationship between consumer prices and money supply and credit seem to be rather tenuous at best.

The deflations in the 1930s U.S. and 1990s Japan did have an important element in common that does not exist today - dropping commodity prices. As early as the spring of 1929, farm commodities in the U.S. experienced a sharp drop. All commodities declined in the crash month of October and then they crashed themselves in the spring of 1930 . While commodity prices didn't crash in the 1990s, they were weak throughout the decade. Oil reached its price low of just over $10 a barrel in 1998. Ten years later it would be almost 15 times higher. Not only were commodities not declining in the 2000s, but they were experiencing major price increases resulting in significant inflation in the U.S. and most of the world. The commodity picture in the 2000s was just the opposite of the early 1930s U.S. and 1990s Japan.

The import/export and deficit picture has no similarity to the contemporary U.S. either. In the late 1920s, the U.S. had a massive trade surplus and was the biggest creditor nation in the world. Its boom had been built on exports as was the case for Japan in the later twentieth century. Drops in exports damaged both economies. On the other hand, the U.S. in the 2000s was the biggest debtor nation in the world having both a massive trade deficit and government debt, which required heavy borrowing and had inflationary implications. Japan in the 1980s was similar to the U.S. in the 1920s and both were very dissimilar to the U.S. in the 2000s.

Currency also plays a different role in all three scenarios. The U.S. was on the gold standard until 1933 and even after that the currency didn't float. The Japanese yen traded relatively flat during the 1990s. In neither case, did currency have a significant deflationary or inflationary effect, in contrast to the U.S. in 2008 where currency played an inflationary role. The U.S. dollar dropped to all time lows in late 2007 because of the Federal Reserves easy money policy. Since the U.S. imported much more than it exported, this raised import prices and had a bigger inflationary impact than it would have had otherwise.

NEXT: The Inflation Versus the Deflation Argument - Part 5

For notes related to this talk, please see, 'Inflation vs Deflation Argument' at:
http://investing.meetup.com/21/Files

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

For more about us, please see our web site: http://investing.meetup.com/21