Deflation Leads To Hyperinflation

The Daily Paul reports about hyperinflation during a deflationary slump:

(emphasis mine)

Confused About Hyperinflation? It Always Happens During A Deflationary Slump!

There seems to be some confusion about Hyperinflation. Do you know that in 95% of all historic cases of hyperinflation it begins during either a deflationary depression or deep deflationary recession? The other 5% is brought about by political stupidity as in Zimbabwe.

Hyperinflation operates in a very different way than regular inflation.


Regular inflation does not lead to hyperinflation,
deflation leads to hyperinflation, primarily because the people are beat down by the deflation depression or recession and they being to lose confidence in the government and the money and because the central banks will always over respond to the deflationary we are now seeing with perhaps the most dangerous move the FED can make and that is quantitative easing, or direct fiat liquidity injections.

It seems counterintuitive, and perhaps that is the problem some people are having in trying to understand just how hyperinflation occurs.

Now, I fully realize that some are under the impression that hyperinflation can only occur when the money supply is rapidly moving through the economy, that is definitely true of plain inflation, but not of hyperinflation since it is a horse of a very different color.

The fact is that the normal velocity of money has very little to do with hyperinflation as it does with regular inflation where the velocity of money is converts the expanded money supply into inflation.

As I said, hyperinflation is primarily a psychological event and happens when masses of people lose confidence in both their government and the monetary system. Yes, it does have to do with the money supply also, but it is primarily the effect of people simply losing faith in the system. Such a loss of faith can happen and usually does happen during deflationary periods, not in periods of economic booms or even economic recoveries. So, hyperinflation is both a monetary event and a socio-political event. Every single example in history, all the way back to Rome, will show that hyperinflation always begins during a deflationary period and is a combination of a rapid increase in the money supply with a rather rapid loss of confidence in the system. Check it out for yourself.
So, hyperinflation, as I have said a hundred times on the DP never happens during an upturn in the economy.

Some seem to think that the money supply has to be filtering through the economy for it to happen, but history proves that is not the case with hyperinflation, only inflation. It is a mistake to believe that the normal deflationary/inflationary forces are at work when hyperinflation takes hold of an economy,
they are not the primary force behind hyperinflation.

At the moment, there are absolutely huge amounts of fiat funds being infused into the economic system, which, if we were in a recovery would automatically translate into high inflation, but the danger is that hyperinflation could very easily take charge as the public continues to lose a great deal of confidence in the government and the monetary system.
Another interesting fact about hyperinflation is that it always seems to involve some type of quantitative easing by the governing powers, now, for the first time the FED is using the policy of quantitative easing in this country.

The reason that hyperinflation and quantitative easing are so linked together is because with quantitative
easing there is a direct infusion of money into the economic system by the central banks instead of using the fractional reserve system and the monetizing of debt. Many are screaming about debt monetization, well guess what…they are skipping that process now in favor of quantitative easing and there in is the danger for hyperinflation. Quantitative easing also skips the market process normally associated with the creation and velocity of money.

There are several other companies, or sectors of the economy that are lining up at the quantitative easing trough, GE, along with the Big Three are all sticking out their hands for this direct lending bailouts, many are trying to figure out just how to ask for the money now, they are working the system. Even the banks have now consolidated themselves into institutions with the tagline:"TOO BIG TO FAIL".
The type of credit that is involved with quantitative easing always, without exception, carries a major consequence with it, especially when the FED is basically “printing” this money without going through the usual monetization process. The dollar will suffer, at the moment it is only slightly rallying because of the actions taken by the FED with TARP and other handout programs but that will stop as we continue on this destructive path. The fact is that there will be nothing to help the dollar from drastic depreciation, the carry trade won' t help, nor will any attempts to draw in more credit from overseas.

My reaction: I was wondering how long it would be before our government started printing money to finance our deficit spending. I was also wondering how this money printing would be sold to the public. Now I know the answers to both questions: the time is now, and the name is quantitative easing. Hyperinflation is absolutely 100% guarranteed.

While on the subjet of quantitative easing, I would like to point out that
the US is not Japan! Quantitative easing here is suicide for two reason:

1) We are the world's reserve currency! Japan could use quantitative easing without worrying about foreign central banks dumping the yen, because the majority of the world's central banks are long the dolar, not the yen. If the US starts using quantitative easing, it will lose its status as the world reserve currency and central banks will bail on the dollar, causing hyperinflation.

2) US fundamentals are toxic! Japan was a nation of savers with a trade surplus when it used quantitative easing. In contrast, today the US is buried under a mountain of debt while running enormous trade deficits. Quantitative easing will break currency pegs, forcing nation like China to stop financing our debts. The reason quantitative easing breaks currency pegs is that nations like China would need to print so much money to offset the dollar's devaluation that it would destroy their own currencies.

I repeat: now is the time to be in gold or silver.

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0 Responses to Deflation Leads To Hyperinflation

  1. Dave says:

    It appears that the PTB have thrown in the towel and opted to bail themselves out, knowing it will result in the complete and utter destruction of the dollar's value.

    It my belief that they have the Amero waiting in the wings to step in and replace the dollar once its death appears imminent. The question is, will anybody trust the Amero after what the government has done to the dollar?

    By the way, thanks for the Sam and Ming plug!


  2. dashxdr says:

    Bring on the hyperinflation! Postings like this one are music to my ears. Get your gold + silver now before it's too late.

    The US empire is too corrupt anyway to repair things from within. Let it reorganize through bankruptcy/collapse.

    A nice healthy bout of hyperinflation will educate the people on how they can't trust the government or fiat currency. And coincidentally the socialist paradise we're trapped in will collapse miserably.

    So many out of work government employees...just the the thought of that fills me with hope. The overwhelming bad the Federal Government employees do far, far, far outweighs any good they do. So let it all collapse. And the sooner the better!

  3. Dread says:

    Eric, you told me before that you weren't Austrian, but it appears that you are turning Austrian every single day from your very first post. Just what is it specifically that you think you disagree with Mises, Hayek, Rothbard, Hazlitt, and Dr. Ron Paul?

  4. Degaz says:

    I agree, hyperinflation is inevitable within the next 5 years. What will happen to the dollar stores? Will they become hundred dollar stores only to be five hundred dollar stores a week later? I think I heard it best on a radio show the other day; bet on inflation. If you go to the store, buy a case of tuna instead of one can. Someday, when that same tuna costs 100X more, you will have bought low and sold (eaten) high! That is great advice and the time is now.

  5. Martijn says:


    After reading some more of your posts I am beginning to see how the psychological effect of loosing faith in the government can boost the velocity of money and ramp up inlfation. I will read some more and perhaps come back on it.
    What I so far seem to have missed is how the 1930s -which in quite some aspects were similar to the current misery- have failed to end in hyperinflation. Was that the gold standard?

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