If you cite inflation statistics these days you inevitably run into the same counterpoints from those who have long been predicting hyperinflation in the USA. And despite the fact that there are still no signs of hyperinflation (or even high inflation) in the US economy the hyperinflationists remain convinced that they will one day be right. One of the classic responses that you hear from this crowd (aside from the misleading “gold is higher” argument) is not that they’ve been wrong, but that the data the government uses is “misleading” or “manipulated”. This always leads back to one place – Shadow Stats, which is a website known for recreating certain government statistics such as CPI and M3 in a manner that they claim is more accurate than the “manipulated” government data. The BLS and Shadow Stats had a bit of a back and forth a few years ago over this and several other economists have cited irregularities in the Shadow Stats data. Many others have defended Shadow Stats and their service is more popular than ever.

Now, I don’t necessarily believe that the approach that Shadow Stats uses is flawed. In fact, I think it’s incredibly valuable to have companies and independent analysts reviewing government data. After all, our democracy is dependent upon holding our government accountable. In this regard, the Shadow Stats site contributes a very valuable service.

So while I am not here to claim that the Shadow Stats data is not useful, I do think it’s important to highlight some interesting facts surrounding their application of this data and analysis in recent years. The most glaring is the accuracy of their most famous prediction. Shadow Stats has been predicting hyperinflation for at least 6 years now and every year the forecast gets bumped to the next year. For instance, in 2005 Shadow Stats said government spending was spiraling out of control and would inevitably lead to hyperinflation:

No Way Out — System Doomed to Hyperinflation
The regular, annual $3.5 trillion shortfall in government operations cannot be covered by Uncle Sam; the situation has deteriorated beyond any hope of a solution within the existing system. Raise taxes? Even a 100% personal income tax would leave a deficit. Cut spending? Spending cuts that would bring government fiscal conditions into some semblance of order would be so draconian as to be beyond any political possibility in today’s environment. What remains inevitable — only a matter of time — is a national bankruptcy.

Such circumstances in the past — though no nation on earth has ever come close to experiencing the level of fiscal and financial fraud now being perpetrated on the American people — typically have been “cured” by revving up the printing presses and creating excessive quantities of money. The end result is a monetary collapse in a hyperinflation, with the currency becoming worthless. For a detailed discussion of a possible U.S. hyperinflation as well as a history on the GAAP accounting reports, see “Federal Deficit Reality: An Update” (July 7, 2005). “

The head Economist of Shadow Stats, John Williams, became increasingly vocal about hyperinflation as the years passed. In 2007 he rightly predicted a recession. But the recession he foresaw was a hyperinflationary recession. In 2008 Shadow Stats issued a special hyperinflation report. It said:

“Official CPI could be running in double-digits by year-end 2008….The efforts by the federal government and the Federal Reserve to prevent a systemic collapse as a result of the banking solvency crisis has started to spike broad money growth, as measured by the SGS-Ongoing M3 measure, which currently shows a record annual growth rate of 17.3%. While the Fed has not been formally creating new money — yet — by adding to reserves, it has had the effect of creating new money by re-liquefying otherwise illiquid banks, by lending liquid assets versus illiquid assets. As a result, a number of banks have been able to resume more normal functioning, lending money and creating new money supply. As the systemic bailout proceeds, formal money creation will follow and already may be starting to show up in official accounting.”

Now, from the Monetary Realism perspective there is a whole lot wrong with this picture. The comments on reserves imply that the Fed adds new money via programs such as QE2. Regular readers know this is simply not true and it is why their predictions surrounding the QE’s with impending hyperinflation have been wrong thus far. What we tend to see from hyperinflationists when discussing QE is that the Fed is monetizing the debt and adding substantially to the money supply by adding reserves. In 2010 John Williams said:

“The weakening in broad money growth is despite the initial Treasury-debt monetization in the second
round of “quantitative easing.”

He then showed a very scary chart of the monetary base – the one which depicts a vertical line which would give one the impression that the broader money supply is exploding. The only problem here is that QE is not debt monetization and it is not money printing. We know this because we now have rock solid evidence that adding reserves to the banking system is in no way inflationary – in fact, the money multiplier has now even been rejected by the Fed itself. Because banks are never reserve constrained there is never a need to be alarmed by the Fed’s swapping of reserves for bonds (at least not for the reasons hyperinflationists would have you believe).

Shadow Stats also recreates M3. According to their own data, M3 collapsed in 2009. It has since recovered but remains at relatively meager levels when compared to the period where the hyperinflation predictions started in 2005 when M3 was surging at near double digit levels.

So, when we look back at those 2005 hyperinflation predictions one can’t help but be reminded of all the traders in Japan who have been shorting Japanese Government Bonds since 1990. Or the various economists who have been predicting the inevitable rise of the bond vigilantes in the USA. Some have been making this prediction for decades now. But like the hyperinflationists, they have misinterpreted the actual operational realities of our monetary system and in doing so have made predictions that are unlikely to come true.

On a slightly different note, I always find it interesting how those pushing the hyperinflation theme love to collect U.S. Dollars. For instance, if you visit Shadow Stats you can buy a subscription to their services for a fee – in U.S. Dollars. Now, a hyperinflationist would argue that they are using those dollars to buy hard commodities so that’s a valid point, but the problem is that there are no signs of hyperinflation in the Shadow Stats subscription service. In fact, in real terms, the subscriptions are deflating! If one goes back and reviews the cost of the service it has remained remarkably stable in price:

(Figure 1 from July 16th, 2006)

(Figure 2 from May 12th, 2008)

(Figure 3, from August 28, 2011)

According to the US government inflation should have caused those subscriptions to surge to $197 in 2011. But your Shadow Stats subscription has actually gone down in price since 2006 because inflation has risen a total of 13%+ according to the CPI. Of course I am cherry picking here and I am not showing the data in terms of gold or what could be viewed as a general decline in our standard of living. In fact, I think one could make a good case for the idea that our standard of living has declined since 2006 (not the case since 1913 when the Fed was founded or since 1971 when we went off the gold standard, but that’s a different matter). But you can see the irony regardless.

The bottom line is, no matter how one views all of this data, it’s practically impossible to conclude that the hyperinflation predictions have been remotely true. Perhaps the hyperinflationists will be right in the coming years. But as regular readers know, I doubt that will be the case as hyperinflation has tended to be the result of exogenous factors and not merely the monetary event that many like to make it out to be. The good news here is that hyperinflation forecasts are as affordable as ever so get in while the getting is good (or while the getting is bad?).


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • LVG

    I think you give Shadow Stats too much credit when you say their service is valuable.

  • Deus.Ex.Machina

    This hyperinflation meme is both fascinating and baffling. I have a friend who has been repeating it for almost 20 years. Sometimes I have this vague notion that the gold bugs are praying for a currency collapse and in the aftermath they become the almighty overlords of the earth with their hoards of gold. Prehaps I read too much sci-fi.

    Thank you for providing this site, Mr. Roche. It has been at the top of my bookmarks for over two years.

  • Kristjan

    Cullen you nailed It this time! Keep up the good work I really enjoyed It :)

  • http://Pragcap.com Cullen Roche

    Right Robert. I actually like the Shadow Stats site and I use it quite a bit. But there’s many ways to interpret their data….I just so happen to disagree with Mr. Williams.

  • Kevin

    Nice work Cullen. =)

  • NJ

    As a newcomer to MMT, what I find amazing is the discussion that exists surrounding the money multiplier effect. I mean, the fact that there is real disagreement over something that seems so easy to verify is just mind boggling. All you need to do is walk into a bank and ask if they are reserve constrained…They either are, or are not. Im not sure I understand how you could disagree about that…

  • Adam

    I would be very hesitant to suggest that anyone just, “walk into a bank and ask if they are reserve constrained” because a bank does accept deposits and it does make loans so it is very easy to then assume that deposits are needed to make loans (note: I’m guessing you said this in a more tongue and cheek manner but I didn’t want someone else to take it as literal). You would have to speak to the correct people who work with and operate the balance sheet of the bank to get the correct answers.

    To be clear, banks do not accept deposits in order to make loans! That is a mischaracterization of how a bank operates. Banks accept deposits in order to make investments. How do they get you to deposit money with them? They offer to pay you interest on large deposits AND they operate a payment system which you can utilize. You deposit money into a checking account; the bank gives you checks (or other PAYMENT instruments) and promises to settle these payments from your account as they come due. Now when you deposit money into your checking account the bank doesn’t put it into the vault and wait for the payment requests to come in, it uses those deposits to make investments and keeps only enough liquidity to clear those payments as they are needed. Deposits are just cheap ways of funding payment requests. If a bank needs additional liquidity there are other ways of obtaining it (sell bonds, borrow from Federal Funds market, etc…)

    Loans… Loans only require deposits (or other forms of liquidity) to fund payment requests generated by the loans. When you receive a loan from a bank you do not receive money! It is better to think about what you need and what the bank is really promising. When you need a “loan” what you really need is to make a payment (or series of payments) that exceed your current ability to finance. So when you go to the bank you are really asking the bank to make one BIG payment (or a series of payments) for you in exchange a series of smaller payments plus interest. The bank is really only promising you to make a payment. This is why you typically get a loan check when you leave the bank – it’s a payment instrument – the bank is promising to make good on this payment.

    So operationally when you get a loan you get a check – a payment promise. The check is going to get deposited in an account. If the check gets deposited at the same bank the bank just credits the account – the deposit comes out of thin air. The bank doesn’t take money out of the vault to make the payment it just creates the deposit. Funds or liquidity is only needed when a payment request is made.

    Alternatively that loan check could have been deposited at another institution that is now going to make a payment request to the originating institution. When that payment request comes in the originating bank only needs funds to settle that payment request. If the bank does not have sufficient liquidity at the time it will have to source the funds elsewhere. Most likely it will borrow from the overnight Federal Funds Market.

    The reason it can borrow from the Federal Funds M is because when the deposit hit the books at the other bank the deposit became “money”. That bank took a deposit and wants to make income off that deposit. It is ready for investment and if another bank needs liquidity it’s willing to pay interest to borrow from another bank with excess deposits. (note: a bank can invest money from a deposit the moment the teller hits enter on the key board. Yes the bank is taking a risk that the payment is rejected, but the bank is in the business of taking risks to make money).

    All said and done, banks use deposits as an inexpensive way to fund their payment system and while loans do generate payment needs they also generate their own deposits so they are self funding. (note: it is possible a loan does not generate a deposit. Example: a car dealer goes to his bank and CASHES a loan check he received from a customer. No deposit (at this time) is made. If there are no excess deposits in the banking system such as in this example then the FED will always make sure there is sufficient liquidity in the system. The FED’s primary role is to insure the payment system does not fail (hence the FED discount window). Reserve requirements are suppose to help protect the payment system and have nothing to do with the creation of loans.

  • Tom Hickey

    Speaking as the devil’s advocate, there are other hyperinflationary scenarios out there, especially visible at Zero Hedge. The narrative is that a deflationary depression will lead to wholesale “money printing” by governments running fiat currencies and this will devalue the currencies to the point that they will no longer be accepted and people will shift out of financial assets into tangible assets and goods driving the price level up in the extreme, resulting in social breakdown. (This is the gold and guns crowd, after all.)

    There are ingredients in this narrative that could conceivably take place, but those putting forward this theory represent it as inevitable due to the nature of fiat currency regimes. There are huge differences distinguishing possible, plausible, probable, and inevitable. At this stage, I would rate this as possible. Inevitable? Nah. But it’s a better constructed narrative than that of Williams.

  • SS

    Cullen, looks like you should have listened to that buy signal you got, huh?

  • ocean

    Using CPI figures, today we need $1.28 to buy $1 worth of goods/services from 2001 (10 years ago). Has our standard of living increased by 28% to equally offset the decreased purchasing power?

    If yes, then CPI is accurate.
    If the standard of living has increased by more 28%, then CPI is overestimated
    If the standard of living has increased by less than 28%, then CPI is underestimated

    For those who are unemployed, lower wage class and fixed income seniors, their standard of living has decreased. Economist tend to aggregate and not deal with reality.

    Here is some history.
    5 years by CPI implies a 12% improvement in the standard of living
    10 years by CPI implies a 28% improvement in the standard of living
    20 years by CPI implies a 66% improvement in the standard of living
    30 years by CPI implies a 249% improvement in the standard of living
    40 years by CPI implies a 558% improvement in the standard of living
    50 years by CPI implies a 756% improvement in the standard of living
    98 years by CPI implies a 2282% improvement in the standard of living

    By CPI we have a 22x improvement to standard of living today relative to 1913
    And a 2.5x improvement relative to 1981.

  • ocean


    How ridiculous is it that central banks are now accumulating or retaining a shiny piece of metal with limited industrial use in exchange for their fiat? This is the antithesis of what you accuse John Williams of.

    Why are central banks speculating by retaining and/or purchasing gold relative in exchange for their fiat currency?
    Why are central banks placing their balance sheet under greater risk by purchasing or retaining gold (that is in a bubble), instead of holding riskfree treasuries of their fiat?

    Are central banks and individuals irrational here or are acting on a real concern with the stability of fiat by hoarding this gold?

  • http://howfiatdies.blogspot.com Vincent Cate

    From previous post you said that we don’t have to worry about foreigners dumping treasuries because they would have to fire millions of people if they did that. The latest data shows that they have dumped $17 billion but they did not start firing people. Do you still think that foreigners can not dump treasuries? Why? If the Fed is buying Treasuries why is there any trouble for anyone to sell them? If only the Fed was buying and they used new money then there could be some $7 trillion in new money in the next year. Historically hyperinflation happens when there is debt over 100% of GNP and deficits are 40+% of spending and people stop buying the government bonds. Why would the US be different? Just because it is the reserve currency? What if it stops being the reserve currency, then you could believe in hyperinflation?


  • zombiebanksmustdie

    Hello. I just read your paper “Hyperinflation – It’s More than Just a Monetary Phenomenon”. Its interesting but a bit short – i would have liked a more detailed explanation of what exactly happened but okay.

    I got a question concerning foreign denominated debt. What does it tell us about the eurozone? The euro is a foreign currency for all countries using it, right? Would that mean that there is a risk of hyperinflation in the eurozone? I personally see deflation as the main danger, but i’m not so sure any more. In Europe we don’t have that huge private debt that is crippling the US. But we have countries whith rather poor tax systems and a lot of tax evasion and these countries (esp. Greece) are getting pushed down even more by the austerity terrorists. Where could this get us?

  • effem

    Is not gold a “true” CPI? I understand it can be noisy but I also have a sense it leads moves in the CPI by a decade. What is gold if a reflection of the cost of some combination of labor + mining rights + machinery + taxation, etc?

  • Not an Economist


    Interesting questions. I’d be interested to hear your answers to those same questions for Japan. The Yen is not the reserve currency, so would the US not reflect the current state in Japan if the dollar was no longer the reserve currency? Is Japan facing a serious hyperinflation threat?



  • http://www.pragcap.com Cullen Roche


    You’ve been digging around into too many conspiracy theory websites. Have a read here. http://seekingalpha.com/article/288016-would-it-really-matter-if-china-stopped-buying-u-s-bonds

  • http://www.pragcap.com Cullen Roche

    Looks like it. Chalk this up as another reason why it’s always silly to let your emotions get in the way of your strategies. Oh well. The last time I ignored the algo was in 2008 when the market was cratering. I guess that makes me 50/50 on ignoring it. And I don’t like coin flips. Back to trading like a robot I guess….

  • pebird

    I think the hyperinflation theme can take hold on some people because they experience a real decline in wages during a deflation. Relative to their wages, prices are increasing and so become receptive to the idea that this relationship would accelerate, hence hyperinflation.

    I do think the change in government calculations to decrease pricing via hedonic adjustments is bogus – and a fairly blatant attempt to manipulate CPI to reduce adjustments to government payments as well as put pressure on wages in general.

  • http://www.pragcap.com Cullen Roche

    It depends. The Euro, as it is currently constructed is unlikely to collapse because of the core nations imposing austerity on the periphery.

  • http://howfiatdies.blogspot.com Vincent Cate

    I think the Japanese Yen and the British Pound are also headed for hyperinflation. The Japanese government has been able to borrow huge amounts from their people by making savings accounts funnel into government bonds. I also think that no matter which of the dollar, pound, yen goes first the other two will follow soon after.

  • http://www.pragcap.com Cullen Roche

    There is almost nothing in Japan’s current situation that is consistent with past hyperinflations. Readers should realize that Vincent has long been predicting hyperinflation and he has made crucial errors in his understanding of monetary operations, hyperinflation and the workings of the monetary system. I have actually pointed these out in real time over the last few years, but Vincent is unswayed and incredibly persistent in his austrian mythologies. His comments should come with a bright red warning sign that read – “dangerous to your financial health!”

  • Willy2

    What John Williams and other (hyper-)inflationistas (e.g. Peter Schiff, Jim Puplava, Eric Janszen) fail to understand is that understating the CPI, since the early 1980s, is precisely the reason for the de-/disin-flation since those early 1980s.

    From about 1965 to about 1979 there was in a lot of countries a thing called automatic price-compensation. If inflation (=CPI) was say 6% then wages automatically went up by that same amount. This is – most certainly – VERY inflationary.
    But that changed in the early 1980s by understating CPI. Then wage increases remained lower than the REAL inflation and that means that the purchasing power of wages, Social security, entitlements etc. decreased. And that’s highly de-/disin-flationary. Hence the 30 year bull market in government bond that’s about to coming to an end this/next month.

    Yes, TPC is right. QE 1 & 2 increased bankreserves but it wasn’t (literally) printing money because that would have destroyed the creditmarkets. Nonetheless the US – most certainly – runs the risk of Hyper-inflation when (not if) the credit markets collapse (in the future). Then the FED simply has no other option but to literally print money (banknotes). And then and only then the US would risk Hyper-inflation. It simply depends on how desparate the FED becomes then. And I certainly wouldn’t be surprised to see the FED blow up in the second half of 2011 or in 2012.

  • asking questions

    Nice explanation, so my whole knowledge of fractional reserve banking was wrong. I always believed that the banks fund loans with the deposits it has. And if a run on the bank happens then the bank could no longer provide loans thus making that bank insolvent.

  • Humblepie2008

    I recently had to replace furniture for my home. In 1999, I paid $1500 for a Simmons Pillow Top King bed. This Spring I bought a memory foam online at Walmart.com for about $400. The bed is as comfortable as the $1500 one. I bought a 20 inch Sharp LCD TV for $499 in 2006 from Amazon.com. This is now replaced with a 40 inch Philips LCD HDTV (1080p 240Hz) that cost me $499 online from Walmart.com. The picture quality is dynamic!
    I don’t pay more for faster/more powerful computers. I pay less for acceptable quality furniture. I don’t feel the inflation except in gasoline and food prices.

  • krb


    Good article but I wish you would have more clearly made the point in your article that I think “Robert Rice” is speaking to above. You have to read very closely to detect what I think your point is, that tracking stats and making forecasts are two distinctly different talents and Williams may be good at one and poor at the other. A quick or careless reader of your comments could come away thinking you wish to raise doubts about Williams claims that govt data is flawed, or to a cynic, manipulated. If that IS your point, then I believe you’re wrong……Williams has done a good job, in my view, showing that govt data is in fact flawed or manipulated. I would agree with you if your point is he’d be better leaving the forecasting to others, but would not agree with you if you think that should also raise doubts about his stat keeping talent.

    You clearly understand MMT and our monetary system, I’ve learned a great deal from you and appreciate it. But you’ve also expressed opinions or forecasts about political strategies that could be, or are probably, flawed. You wouldn’t appreciate someone lumping the two talents together to raise doubts about your expertise on the MMT side. krb

  • http://www.pragcap.com Cullen Roche

    The irony in the hyperinflation argument is even deeper than most understand. In fact, our std of living surged to such astronomical levels, that when the Nasdaq bubble hit in the 90’s we tried to sustain our std of living by going into debt after the bubble implosion. The reality in America is that most of us are grossly unaware of how good we have it in this world. And while it’s great to demand more and the best, it’s entirely unreasonable to make these ridiculous claims that our std of living has declined over the last 40 or 100 years.

  • http://www.chpc.biz Brian Ripley

    Hi Cullen,

    According to the interview with Ron Paul on Fox this last weekend:

    …the US is bankrupt and should stop going “cap in hand” to the Chinese to borrow money.

    The conspiracy of ignorance is alive and well.

  • jjames

    and how bout healthcare, auto, and housing costs since 1999?

    more deflation?

    cullen’s next article will be titled. “why hasn’t the world come to an end, with all these hyperinflation forcasts?”

  • ocean

    Ron Paul policy is directed by the constitution – he is antiwar, anti-fed, pro-gun, small government, anti fiat….

    If the constitution said that currency should be fiat (and not backed by gold) and government spending is encouraged he would be more supportive.

  • ocean

    Hedonics is a way for them to estimate standard of living and here is the conrundrum. When we get to peak oil/resource that produces a general moderate price increase, will they allow CPI to reflect the now lower standard of living or somehow back it out?

  • http://howfiatdies.blogspot.com Vincent Cate

    The gold and silver just show that your claim that Austrian economics is dangerous to your financial health is wrong.

  • Pierce Inverarity

    I see nothing in the Constitution about Federal tender needing to be backed by gold. If I’m missing it, can you please direct me to the section? Thanks

  • http://www.pragcap.com Cullen Roche

    No one ever called this deflation….Please try to stop misleading people with hyperbolic comments. It’s getting tiresome.

  • ocean

    Section. 10. Clause 1. (Interpretation is different matter but is the basis of his opinion)

    No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

  • Pierce Inverarity

    That refers to the individual states, not the Federal govn’t.

  • http://www.pragcap.com Cullen Roche

    According to that sort of thinking we should go out and short American corporations and US govt bonds as well. If you actually put your money where your mouth over the last few decades you’re getting your mouth kicked in. But no, you guys prefer to just cherry pick the gold trade and claim that it somehow validates your overall thesis. It’s nonsense.

  • http://howfiatdies.blogspot.com Vincent Cate

    I have not been expecting for hyperinflation for decades, only the last 2 years. The normal signals of 40% deficit spending and debt at 80+% of GNP are only recently reached.

    If people expect paper money to fail they often invest in gold and silver, as these are “hard money” and “the only money nobody can print”. Such investing has been doing very well.

  • ocean

    That is a debate to have with libertarians, I’m simply relaying their position ot the best of my knowledge.

  • pebird

    My problem with hedonics is that there are few, if any, examples of negative hedonic effects that are reflected in the CPI.

    For example, you get to drive a more comfortable and safe car, so hedonic pricing of the car is lower. You spend more time in traffic (which is why they have to make a more comfortable and safe car), but there is no recognition of that cost calculated into the standard of living.

  • Austin

    Here’s an interesting chart that compares SPX, gold, silver, the dollar and bonds.

    From Shanky’s Tech Blog:


  • pebird

    In my view the CPI should reflect the COST of living, not the VALUE of living. Once the real and nominal get conflated, all kinds of confusion result. The standard of living should be reflected in a different set of statistics that take into account what we VALUE, such as life expectancy, free time, etc.

  • http://www.pragcap.com Cullen Roche

    So then why do you cherry pick gold prices from the past? Should we assume that you just bought gold? Or are you also short tsys and other forms of US paper? Besides, one doesn’t have to be an austrian or hyperinflationist to be bullish about gold. According to your statements, I’ve probably owned gold longer than you have….

  • http://www.pragcap.com Cullen Roche

    I don’t disagree, but that’s not an economic debate. It is more a matter of opinion. People value different things and it’s hard to put a value on happiness.

  • Adam

    “And if a run on the bank happens then the bank could no longer provide loans thus making that bank insolvent.”

    This is still probably true, but not because it doesn’t have sufficient deposits but because the bank is under attack and is not a good candidate for an inter-bank loan. It still needs to fund payments tied to loans and if it become shut off from outside liquidity and is experiencing and outflow of deposits it may not be able to risk making new loans as it wont be able to fund the payments tied to those loans. Remember, a loan creates a deposit, but for the bank to use the deposit to fund the loan it has to have access to that deposit and a run on an institution might cut it off from the interbank lending market where that deposit may have been made.

  • KB


    I am almost getting a feeling that you try to pick up the most irrelevant, weak, and most easily ridiculed hyperinflationists arguments to prove your point….

    Sorry, if I misunderstood, but I assume you are claiming that there is negligible chance of hyperinflation in USD during the next 10-20 years. I think the opposite is true. Yet, it does not prevent me from believing that short-term we will experience deflation, and thus I have been long US treasuries for some time, and do not plan to sell them yet.
    To me (and I think you would agree) hyperinflationary episode is first and foremost a loss of confidence in currency. I believe it would happen after a number of deflationary/stagflationary cycles. When exactly will it happen? Being humble practitioner, I confess I have no clue. I only think it would happen during the next 5-10 years, and USD will not be the first major fiat currently in circulation to be hit, most likely it will be either EUR, JPY or GBP. The loss of confidence will rather come from corporate players, not from the public, and thus it will be swift and unstoppable.

  • http://www.pragcap.com Cullen Roche

    Shadow Stats is the most highly cited hyperinflation theorists out there. How is their argument “weak” or “irrelevant”? Where is a better argument?

  • ZombieBanquier

    Some prices will rise faster than the rate of inflation. Some prices will rise more slowly. That is because inflation indices are weighted averages.

    Some prices matter a lot to some people. I need a lot of foot powder and green beans, and it really upsets me when these things shoot up in price, like during droughts in the foot powder-green bean agricultural belt in the midwest. This does not mean, however, that policy should be pursued to reduce the rate of inflation.

    We had a housing bubble. Health care costs are rising much faster than inflation for various reasons we shouldn’t go into here, but suffice it to say…in this man’s opinion, it’s probably one of the economic sectors that’s least amenable to laissez-faire, both inherently (information problems, etc.) and due to our policies and attitudes.

    Also, here are new vehicle prices compared to the overall CPI, starting at Jan. 1 1999:


    Now that DOES seem oddly deflationary – way more than I would have expected. But that’s the data.

    On an unrelated note, is everyone else getting Boar’s Head lunch meat ads in the don’t-scroll-your-mouse-over-it banner at the bottom of the screen? That’s an odd demographic juxtaposition – “Interested in markets? MAYBE HAVE A SANDWICH, !@#$er.”

    – The poster formerly known as Y

  • http://howfiatdies.blogspot.com Vincent Cate

    Here is a better argument. In previous cases where a government that could print its own money had deficits over 40% of spending and debt over 80% of GNP people stopped buying their bonds and they had to print lots of money as the bonds came due and hyperinflation started. Why do you think the US would be any different?

  • KB

    Reading your and other “balance sheet” recessionists blogs, I got the impression that your lot trashed these arguments long ago…
    Regarding the arguments i cited, apparently they are not originally my own, and, unfortunately I can not recollect where I saw them. If I found a reference, I will get back to you.

  • http://howfiatdies.blogspot.com Vincent Cate

    So do you agree that when the government is making $100 billion in new money each month that there is a risk to the value of the dollar?

  • DDT

    Good discussion, and I agree that hyper-inflation is not a foregone conclusion. However, I have some serious disagreements with some of your assertions. First, the assertion that QE is not money printing is only correct in the sense that dollar bills are not literally being printed. The Fed is creating electronic bank-credit money, not physical currency. The key is that when the Fed buys treasuries from banks, it credits their excess reserve account at the Fed. That credit comes from nowhere, it is new money, it is not a loan. The banks are free to do with these reserves as they please. (They do have to keep a minimum deposit)
    The Fed understands that this practice could be violently inflationary, so the are now paying interest on excess reserves, so the banks have an incentive to just leave them there, where they do not circulate and cannot cause inflation. The banks are OK with this because they can’t find enough credit worthy borrowers for those funds, and credit worthy people aren’t borrowing money anyway. The banks are free to takes the funds and invest them in, say, the stock market if they choose. This accounts for the strange increase of the markets on low volume.

    In general we are in a large scale debt deflation that would destroy the banks unless the Fed was funneling money to them. The lack of credit combined with onerous debt servicing costs is causing deflation. This deflation is evident in the housing market and unemployment, and will be more evident in the imminent recession. The Fed is struggling to prevent this from spreading to the stock market, and bond market in the hopes the economy will recover and erase all their sins.
    As Jim Rickards puts it we have offsetting inflation and deflation which makes things seems somewhat stable when they really aren’t. The question of hyper-inflation depends on whether the Fed will create unlimited amounts of money to prevent severe deflation. So far they’ve indicated that there is no limit, but it seems likely that there would be political limits to how much money they can print. We shall see.

    Interestingly, in a hyper-inflation credit cards would cease to be accepted because they carry a premium, and they don’t pay merchants for 30 days. Neither of these would be acceptable in a hyper-inflation and the economy would revert to real cash overnight. In this case the treasury and Fed would have to literally print untold amounts of paper money to keep the economy going. Large transactions would require larger bill denominations. So we would begin to see $1000 bills, and perhaps larger. This would rapidly begin to resemble the Weimar hyper-inflation.

    There is a difference though. In Weimar Germany, the wealthy people converted DM to Swiss Francs almost immediately, they had somewhere else to go. With the dollar being the reserve currency, and no alternatives on the horizon, a US hyper-inflation would spread to the entire world, so there would be no safe haven currency. We can see how the swiss and japanese are forced to debase their currencies in response to a rise. This would happen on a global scale. This is exactly why gold is remonetizing itself after 40 years of being kept dormant. It is the only currency that won’t have to debase itself.

    Finally, hyper-inflation is a very poorly named phenomenon which accounts for some of the confusion. Its name refers to an explosive rise in prices. Economists insist we define inflation in terms of the money supply, not prices. However, in hyper-inflation the nominal money supply is increasing but the real money supply is decreasing, so hyper-inflation is fundamentally deflationary. Just think about what a basket case the economy is during a hyper-inflation: it is shrinking in real terms. So inflation as a credit driven increase in money supply has NOTHING in common with hyper-inflation which has no credit supply, and shrinking real prices. Inflation does not lead to hyper-inflation, hyper-inflation is a currency collapse.

    I think John Williams is confused about what hyper-inflation is. I think he believes it is a severe form of inflation, when it is more of an out of control deflation. He’s not alone in that. Regardless, his work is excellent.

  • http://www.pragcap.com Cullen Roche


    I’ve done this dance with you once before. You don’t answer any of the crucial questions because you don’t understand the dynamics of the monetary system we are discussing. Why don’t you come back in a year and we’ll reassess.

  • KB

    Precisely! Williams looks like too easy target, when we discuss folly/validity of hyperinflation arguments. I am sure there are better thesis somewhere out there… FOFOA is first coming to my mind, but there should be more.

  • http://www.pragcap.com Cullen Roche

    Keen’s at the other end of the spectrum (he’s far more accurate than the austrians, but still misses some crucial points which I believe lead him to focus excessively on the debt deleveraging story). Leaving out the vertical level in the monetary system is like having a discussion about human biology without discussing the functions of the brain.

  • http://www.pragcap.com Cullen Roche

    DDT, you might want to review the links in the article on QE. Your understanding of the program is not accurate.

  • http://howfiatdies.blogspot.com Vincent Cate

    MMT people don’t care about history? Historically when people flee bonds in a currency that currency is going to collapse. If this $17 billion is the start of a dumping trend it does seem something to care about.

  • Gerald P

    The low price Chinese goods masked the lower purchasing power of American workers whose salaries were stagnating. The illusion of maintaining our standard of living has weakened as the Chinese prices are rising, and so is our unemployment. The real tendency of future manufacturing technology needing fewer workers will exacerbate our social problems. Does anyone have an answer?

  • http://www.pragcap.com Cullen Roche

    My entire hyperinflation paper is a historical reference….I don’t know where you come up with this nonsense. What’s the point Vincent? We’re not even close to being on the same page. Please come back in a few years when the hyperinflation still hasn’t happened.

  • Kyle


    Although there has been a strong bull market in US and Japanese government debt in recent years, I am hoping you could comment on the Japan situation. As you are probably aware, Kyle Bass and Dylan Grice have set out their case regarding the possibility of hyperinflation in Japan. They believe that although there is strong demand for JGBs now, this demand will weaken in the coming years because of (1) demographic reasons and (2) debt to GDP at over 200% and growing.

    Bass and Grice point out that the Japanese government cannot afford large interest rate rises (let’s say, to over 3% on the 10-year JGB) because of the interest payments required to service this debt.

    Do you believe that hyperinflation could happen in Japan by the year 2020? If not, who will buy Japanese debt at or near current yields, given the demographics of the country?

  • ZombiBanquier

    In previous cases where a government that could print its own money had deficits over 40% of spending and debt over 80% of GNP people stopped buying their bonds and they had to print lots of money as the bonds came due and hyperinflation started. Why do you think the US would be any different?

    Didn’t we reach those levels during World War II and not have hyperinflation?

  • Colin, S.Toe

    Re #6: I am eagerly awaiting the MMT primer on “The Global Monetary System for Dummies” (or is that an oxymoron – ‘Global Monetary Regime…’??)

  • http://howfiatdies.blogspot.com Vincent Cate

    Most of the deficit in WWII was due to the war. When the war was over it was easy to make cuts in military to where there was a budget surplus. There is no way to make such huge cuts today.


  • John Zelnicker

    Adam — That was a good, easily understood explanation of the payment system and the use of deposits to fund the clearing needs and investments. It’s about the best answer I’ve seen to the question: If deposits don’t create loans, what do they do? Thanks.

  • John Zelnicker

    KB — It looks like Cullen read you first paragraph and responded to that alone. As four your contention that Cullen would agree with you that hyperinflation is first and foremost a loss of confidence in the currency, I can’t speak for Cullen. But, having read his paper on hyperinflation I don’t believe he would agree with you. I certainly think you are mistaken. My understanding of the hyperinflations of recent decades is that they were all first and foremost a result of exogenous shocks to the economy in question.

  • SS

    Ha. Well, I only point it out because I bought last week after you mentioned that it had given you a buy. :-)

  • ocean

    I think you could argue that Japan is closer to the tipping than US, given they are at 250% debt to GDP vs 80% in US. But what will make yields rise?

    Also as long as the gdp growth rate is > interest rate on public debt, than mathematically the debt is sustainable. That is why recession is such bad news for debt.

    And your missing a point re. JGB and treasury bonds. That is, the treasury spends (deposits social security checks, government employee and contractors in their respective bank out). Now banks are full of deposits (reserves). The Fed notices the excess reserves that the treasury deficit spent and offers bonds to soak up enough excess reserves to maintain the FFR. The banks will almost always choose a 2% bond over 0.25% on reserves. And any other buyer of the bond means the bond issue is oversubscribed. They really can’t fail because they target excess reserves that the treasury already spent. So back to your question, what happens as Japanese age and no longer purchases them – the bank.

    Hyperinflation – maybe but not because japanese no longer purchase the bonds.

  • ZombiBanquier

    But the deficit has been driven by the tremendous drop in tax revenue, increased mandatory spending due to a weak economy/labor market and, thus far, deviation from trend growth. Except for special tax breaks that will eventually expire and a one-time fiscal stimulus package, we’re not much different than we were in 2007 when the deficit was ~$150 billion. So if we recover, the deficit “problem” goes away.

    If we don’t recover and real interest rates stay below real growth rates, the intertemporal government budget constraint ceases to…constrain. Primary deficits for any duration don’t violate the “no ponzi” stipulation. So if we don’t recover, even in a neoclassical paradigm, the deficit “problem” goes away. Of course, we’re left with a far more enormous problem in that case.

    So, if you think we’re going to recover, World War II remains an apt comparison: the deficit stops rising so fast once the crisis is over – in the 40s, the war; now, debt-deflation unemployment. If you think we won’t recover, then it’s smooth sailing for an entirely different reason.

  • DDT

    OK, here’s the problem: the Fed effectively uses a primary dealer to buy treasuries. At the end of the transaction, the government has the money and the fed holds the note. However, that money didn’t exist yesterday, and its now in circulation. The government slowly siphons off money in the form of taxes and pays the fed interest and eventually the principle. So if the Fed sterilizes that money; that is keeps it out of circulation, that effectively removes it from the money supply event hough its still there.
    However, the Government is constantly increasing its debt, so more and more of this money keeps coming into circulation where it can easily cause inflation. Maybe some day the G-man’s debt will shrink, so that net-net the Fed is taking money out of the system, but I wouldn’t bet on it.
    When we’re talking about RMBS, which the Fed pays more for than they will ever get back, the difference is pure money printing

  • ZombiBanquier

    If people expect paper money to fail they often invest in gold and silver, as these are “hard money” and “the only money nobody can print”. Such investing has been doing very well.

    There’s a certain irony to this. If people expect their currency to fail, perhaps it is a good idea to get into precious metal. But they cannot deem their investment to have done well because they have no idea what the purchasing power of their precious metal will be under the new monetary regime – all their gains are unrealizable. You can’t count your chickens in the old unit of account.

  • http://www.pragcap.com Cullen Roche

    No offense DDT, but I really think you need to read my primer and the articles on QE.

  • rhp

    I’m still agnostic on this one. Maybe a short bounce, but how long are you going to ride it?? This is what I’m concerned about, and it is coming up in six trading days……….. http://www.telegraph.co.uk/finance/financialcrisis/8728628/Euro-bail-out-in-doubt-as-hysteria-sweeps-Germany.html

  • Kevin

    Do note that the national central bank is perfectly capable of preventing even a systemic bank run: the central bank has the legal authority to purchase assets from banks that are experiencing a bank run, in return for reserves. These reserves can be used to meet the demands of people requesting to withdraw their deposits.

    For example: suppose that a bank has 100$ in assets of which only 10$ are reserves (cash), and suppose there is a run on that bank where people want to withdraw a total amount of 50$. The bank only has 10$ in cash, so unassisted it will fail. But the central bank can opt to purchase 45$ worth of assets from the bank in return for 45$ of cash. As a result the bank will be able to meet its obligations to its depositors. The bank survives the bank run albeit in a new smaller size, with a final 50$ in assets of which 5$ are reserves.

  • pebird

    I respectfully disagree. I think there are statistics available that reflect values, we can disagree on what values we value, but the stats (life expectancy, infant mortality, etc.) are fundamentally economic.

    Just like in the CPI, just because I don’t personally purchase everything in the market basket, it doesn’t mean that the CPI is a subjective measure.

  • Anando

    Would you say that QE2 had absolutely no role to play in inflating commodity prices since it started ?

  • http://howfiatdies.blogspot.com Vincent Cate

    Every time it is clear there will be more money creation the price of gold, silver, and commodities goes up. This week the notes from previous fed meeting come out and it looks like they want more money creation and commodities go up. When QE2 was hinted at a year ago prices went up. The market clearly thinks money creation causes commodity prices to go up.

  • theta

    This theory has a giant hole, which is that the problem we face today is the huge amount of debt – debt denominated in these very fiat currencies. This guarantees demand for these fiat currencies. So, if and when this “massive money printing” occurs, people will still need that newly printed money to pay back debt, so they will NOT abandon the fiat currencies, they simply cannot. This is already happening by the way in the last couple of years. Increase in M2 is met by decrease in total debt (private debt specifically).
    As a side note, I would advise against reading Zero Hedge, which the blog equivalent of the Sun in the UK.

  • theta

    What are you talking about? CPI has absolutely nothing to do with standard of living.

  • Tom Hickey

    As a side note, I would advise against reading Zero Hedge, which the blog equivalent of the Sun in the UK.

    I read ZH instead of the comic strips (excepting Dilbert, of course). :)

  • Tom Hickey

    Some people consider that if goods prices rise (CPI) and wages don’t keep up, then the real wage declines and with it the the purchasing power of workers, hence standard of living also on this measure.

  • perpetual neophyte

    After digging bit more, it does appear that the Belarussians were not on a free float exchange rate system. In addition, according to the Bloomberg article Cullen linked, they issued “dollar bonds” and bonds denominated in Russian rubles.

  • ocean

    I finally got around to looking into this. Maybe people are playing with words and stretching meanings because of their innate hate of inflation but this is their position.

    There logic is like this
    1. The federal government is prohibited from printing fiat money since there is not specific authorization for it in the Constitution. The States are also prohibited from printing fiat currency because Article 1 Section 10.1 limits States to only using gold or silver as money. The Constitution just limits government, not people from issuing fiat, then only the people are permitted in the USA to issue bills of credit (fiat).
    2. Since fiat currency (i.e. “Bills of Credit”) is not defined as Money, this line implies that the Congress shall not emit Bills of Credit, as well as the States, since
    Congresses power to “coin Money” refers to “lawful money” and not “bills of credit (fiat)” That is, since fiat currency is not defined, as money than Federal government cannot issue fiat*
    3. Some stuff about Fed being unconstitutional, gold confiscation of FDR was unconstitutional, states using fiat USD is unconstitutional blah blah blah

    *The United States Code, Title 12, Section 152, states: “Lawful money shall be construed to mean gold or silver coin of the United States.” Also the United States dollar (sign: $; code: USD) is the unit of currency of the United States and is defined by the Coinage Act of 1792 to be between 371 and 416 grains (27.0 g) of silver (depending on purity).

  • ocean

    Belarus devalued their currency 50% (as per request by IMF).
    This produced instant import inflation.
    Belarus then raised minimum wage (against the austerity reform plan of IMF)
    This was a signal that the government would deficit spend
    This signal led to conversion of ruble for euro, franc, gold and other assets