Austrians Wrong About Hyperinflation?

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    Was just reading the following article written by Mish Shedlock, a deflationist, where he argues that hyperinflation in the US is nearly impossible and mentions that many Austrians are wrong about this:

    Here is a paragraph from the article:

    “Indeed, if $50 trillion printed tomorrow sat as excess reserves (the most likely event), it would have the same effect as if it was buried in the ground, or not printed at all. Such is the nature of a credit-based economy, and a point that has caused hugely inaccurate inflation forecasts from many Austrian economists.”

    Would appreciate some responses to these claims and/or further discussion on deflation versus inflation predictions for the US over the next decade or so.


    I don’t think anyone denies this. If the money isn’t lent out, no money multiplier will be activated.

    As for hyperinflation, I am with Gary North on this. The Fed exists to benefit the big banks. Hyperinflation would wipe out the big banks, Hence, no hyperinflation.


    In fact, neither hyperinflation nor deflation are in the interest of those who run our central-bank, fractional-reserve monetary system. The system benefits its members (some more than others) by generating ongoing monetary inflation and credit expansion. Most of the time, then, we get that result. The exceptional cases, like the deflation of the Great Depression or the inflation of the 1970s, occur when our preferences change dramatically enough in response to the forces of the boom-bust cycle that the Fed is unable or unwilling to counteract their effects. It seems to me that Bernanke has demonstrated that under his leadership, the Fed is both willing and able to prevent any monetary deflation. Given his inflationary bias, I think the next decade will be more like the 1970s than the 1930s.


    Some countries are already trading with their own currencies instead of the dollar which is the reserve currency. If the dollar continues to fall and other countries give up the dollar, the large supply of dollars outside of the US will flow back into the US causing high inflation there. What are your thoughts on this scenario?


    But don’t we all agree that in the long run markets always wins? The fed doesn’t always get what it wants. For example, I’m sure the fed didn’t want the price of gold to go from $350 to $1750 in the last decade. They can fight the market forces, but can’t beat them in the long run.

    I always viewed hyperinflation as a scenario where the money masters lose control.

    Maybe what’s more important to look at is what happens to countries historically when they lose their reserve currency status, which I think is what Sons of Liberty is referring to. When people around the world stop using the dollar, all those dollar abroad will flood back here causing massive inflation. I’ll see what I can find.


    Two breakdowns of world reserve currencies have occurred in the twentieth century. The pound in the interwar period and the dollar after the collapse of Bretton-Woods. Neither resulted in a hyperinflation.

    Inflationary repercussion of the repatriation of dollars is possible in the wake of another collapse of the dollar as a world reserve currency. But, it’s not a foregone conclusion. The Fed could manage the problem. For example, it could require banks to hold increasing amounts of currency as reserve and exchange account balances that banks hold at the Fed for currency as the repatriation proceeds.

    Of course, the possibility of hyperinflation or deflation remains since the Fed may prove to be unwilling or unable to manage the problems that its monetary inflation and credit expansion create.


    I’d love to watch a discussion between Gary North, Doug Casey, Bob Murphy, Jeff Herbener, Peter Schiff and Robert Wenzel. It seems the opinions on whether there’ll be another crash, hyperinflation, dwflation or 1970s scenario differ among our guys..


    It appears the Feds battle right now may be with holding the low interest rates. With the election cycle you have an incumbent who wants to stay in office and a challenger who does not want to start his possible first term off with another market collapse.

    If interest rates start rising it will the start a series of events that will be beyond the Feds control. Payments rise on national debt and consume more of the national budget as well as challenging market confidence in the dollar. Also, all the banks that have been bailed could be in trouble and will most likely crash the mortgage market again.


    ““Indeed, if $50 trillion printed tomorrow sat as excess reserves (the most likely event), it would have the same effect as if it was buried in the ground, or not printed at all. Such is the nature of a credit-based economy, and a point that has caused hugely inaccurate inflation forecasts from many Austrian economists.””

    Wait… isn’t this not necessarily true? Wouldn’t there be something of a crowding out effect? Reserve requirements have changed, but there were required reserves before. So, if a bank formerly had $20 million in reserves, and then the requirement is raised so that it needs $30 million, all of which is supplied to them from the federal reserve, the original $20 million is now freed up to be lent out and shuffled through the economy, yes?

    In other words, if the Fed gives banks any funds that exceed the amount of new funds needed to meet a higher reserve requirement, all of those funds will end up NOT just sitting in a vault, but being spent. Am I wrong here?


    In normal times, you’re correct. Banks hold only required reserves and invest any excess reserves (or turn excess reserves into required reserves by issuing fiduciary media through credit creation).

    In the last few years, the Fed has been paying interest to banks on reserves they hold as account balances at the Fed. Given the climate of investment in the economy, banks have decided to invest in excess reserves themselves. The quote reflects this situation and not the normal one.

    But your point is still well taken. Several Austrians made a similar point after the Fed built excess reserves up from almost nothing to $1.6 trillion dollars. If banks return to normal operations by converting their current excess reserves into required reserves by issuing fiduciary media through credit creation, the money supply will increase by $25 trillion dollars. Currently M1 is $2.3 trillion and M2 is $10 trillion.

    If the Fed had increased excess reserves to $50 trillion, then the monetary inflationary potential could increase the money supply by $800 trillion, If, instead, the Fed printed the $50 trillion and buried it in the ground, they wouldn’t face the problem of unwinding that amount of excess reserves without serious price inflation. As it is, the Fed has to worry about unwinding an inflationary potential of only 10 times M1 and 2.5 times M2.


    Regarding Tom Woods’ and Gary North’s position that since hyperinflation is bad for banks, the Fed won’t let it happen…. Has this held true for other nations that have hyperinflated (was German hyperinflation caused by their central bank or had the currency been under the control of their Parliament?, etc)

    Related to that – I assume the only alternative to hyperinflation is a sudden cessation of payments and services from the government when the Fed quits lending them money? … in which case I could see government react or prevent this by nationalizing the banks and issuing the currency themselves –> hyperinflation. How am I doing?


    Historical analysis, whether of past events or events yet to occur, requires making judgments about the relevance of the different causal factors at work that bring about the effects we wish to analyze.

    The same causal factors can be at work in different historical instances but with different intensities peculiar to each instance. If so, the effects can be different.

    According to Hans Sennholz, an important causal factor in the German hyperinflation was the delusion held by policy makers that rapidly increasing the nominal money supply was not inflationary because the real money supply was stable or even shrinking. I don’t think that factor is present in any significant strength in America today. Here is Sennholz on the German hyperinflation.

    Also, hyperinflation requires runaway inflationary expectations. These, in turn, must be caused by an actual significant and accelerating price inflation, which in turn, must be set in motion by monetary inflation. We don’t seem to be on such a path today and there are plenty of possibilities of avoiding it. (As I’ve suggested in earlier posts, the Fed does have ways of containing the inflationary potential of its build-up of bank reserves. The most obvious being to simply turn the excess reserves into required reserves with a rule change requiring 100% reserve checking accounts.) Here is an interesting article by David Laider on German economists writing during the German hyperinflation explaining the role of inflationary expectations.

    Of course, there are several causal factors at work in America today tending toward hyperinflation. But making a prediction of how our history will occur requires more than just pointing this out. It requires making plausible judgments of the likelihood of the strength of those causal factors relative to others that would generate a different set of effects. There are other alternatives policy makers could take instead of direct monetizing of the Federal debt. For example, debt repudiation. It seems to me at least as likely that the Federal government would repudiate on its debt, especially given that a large portion of it is held by foreigners and the Fed itself, instead of nationalizing banks.

    In any case, Woods and North aren’t denying the existence of causal factors tending toward hyperinflation or the possibility of hyperinflation, they’re arguing that it isn’t the most likely outcome because other factors not tending toward hyperinflation will turn out to be more significant.

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