Key Points About Hyperinflation

The encyclopedia (farlex) explains hyperinflation.

(emphasis mine) [my comment]

Hyperinflation

Rapid and uncontrolled inflation, or increases in prices, usually associated with political and/or social instability, as in Germany in the 1920s.

Inflation during World War I

The hyperinflation that blighted Germany between 1920 and 1923 had its roots in World War I. Prices rose by 240% between 1914 and 1919. This figure was equivalent to price rises in France and the UK, but masked more serious problems in Germany. The Germans had borrowed vast sums to fund the war. When supplies of funds proved inadequate, the German central bank, the Reichsbank, simply lent itself money and printed new banknotes. The currency was not backed by gold after 1914, so there was no limit on the amount of money that could be printed. The amount of marks in circulation rose by 300% between 1914 and 1919. This resulted in limited inflation at the end of the war, but the seeds of later problems were sown.

Post-war expenditure

The new Social Democratic government of the Weimar Republic had great plans to improve the conditions of the poor in Germany. Improved education, welfare, and more jobs were promised. These were expensive programmes to deliver, more expensive than the government could really afford in 1919. To finance them the government borrowed more money and printed more currency. Prices rose by 400% between 1919 and 1920, yet the German government did little to try to stop the rise. Prices did actually stabilize after 1920, partly due to improved exchange rates. Import prices fell by 50%. However, the government did not act to stop future price rises. In fact they simply carried on printing more money to pay for the price rises. Between 1920 and 1921 the supply of money increased by 50%. At this stage a loaf of bread cost 2 marks.

The burden of reparations

The shadow of Germany's defeat in World War I and the reparations demanded by the Allies hung over Germany throughout this period. Under the terms of the Treaty of Versailles (1919) following the end of World War I, Germany was forced to sign a 'War Guilt clause' and pay reparations (compensation) for the damage Germany had done to the economies and infrastructure (buildings, communication networks, and utilities) of the Allies. In 1921 the Allies presented the Germans with their demands for payment, a sum of Ł6.6 billion (132 billion gold marks). Germany was already in financial trouble, and the only way its government could see to pay the reparations was through the printing of more money. Without this bill, the German government may have been able to adopt a more sensible policy and avoid some of the worst effects of the hyperinflation that followed. As the defeated nation, however, the Germans had no way to avoid paying the Allied demands.

Attempts to control inflation in 1922

The impact of reparations on the German economy was catastrophic at a time when social and political upheaval was widespread under Germany's new democratic constitution. Prices were already rising fast by the start of 1923. The number of items in the shops stayed the same, but there was suddenly more money around to spend on them, so prices started to rise. When the government printed more money to meet the new prices, the price rises began to become astronomical. In the 12 months before January 1923 prices rose to more than 75 times their January 1922 levels. A loaf of bread now cost 450 marks. The German government seemed powerless to stop the inflation. In fact they were making it worse. They tried to support the value of the mark against foreign currencies by buying German marks from abroad. By raising the demand for marks they hoped they would become more valuable and reduce inflation. This was a total failure, and merely led to the Germans spending much of their precious gold and foreign currency reserves to buy worthless German marks. The German government also carried on printing more and more money to meet the demand, which just led to higher price rises. The German government also refused to raise the interest rate for borrowing, which encouraged business people to take out ever larger loans, secure in the knowledge that they would be able to pay them back with worthless currency. This further increased the demand for money and meant more had to be printed. However, at this stage price rises were nowhere near the levels to be seen in 1923.

Franco-Belgian invasion

With rising debts and an increasingly worthless currency, the Germans stopped paying the reparation payments demanded by the Allies. The response of the French and Belgians was to occupy the German industrial region of the Ruhr in January 1923. They intended to get their reparations from the German factories and mines in the form of goods and raw materials. The impact on the German economy was devastating. With the loss of so much industrial production and income the German economy faltered. This alone would have led to higher inflation, but the response of the German government made the situation worse. They organized strikes in the Ruhr, and paid the striking workers' wages out of government funds. Of course the government had no money, so simply printed more cash to pay the workers. The government employed 300 paper mills 24 hours a day to turn out the currency. As prices rose the denomination of marks on notes was changed. Notes bearing one figure were recalled to have a new figure printed on them. The government believed it had to supply the demands for more cash or the economy would grind to a halt. By October 1923 the government was printing 120,000 trillion marks a day, yet the demand was eight times the production. The response of the government was to further increase production to 500,000 trillion marks. As money became worthless so people stopped using it and began to barter for goods. The economy of Germany seemed to be collapsing, and the government was simply making the problem worse rather than solving it.

Effects on the German people

In 1920 a loaf of bread in Germany cost 2 marks. By June 1923 when the hyperinflation was in full flow, a loaf of bread in Germany cost 430,000,000,000 marks. Prices rose by the hour. People sitting in bars or coffee shops found that their second drink could cost twice as much as their first. Images of the era include children using piles of banknotes as building blocks or toys, and Germans wallpapering their houses with banknotes [Anyone dying for a room wallpapered with 100 dollar bills? Give it a year, and you might just be in luck]. Workers were paid up to three times a day. The wages would be collected in a wheelbarrow and taken down to the shops to be spent as quickly as possible, before prices rose any further.

Shopkeepers found it almost impossible to make money. Unless they could spend their takings on new supplies immediately, they would be unable to restock their shops with goods. Many shopkeepers simply closed their doors, or opened as little as possible. Goods became hard to come by. Farmers refused to bring their produce to the towns as the money they received was worthless by the time they came to spend it. There were riots in Berlin and other German cities, and some workers organized parties to go to the countryside and steal the farmers' produce out of the ground. Trade unions bargained with employers for regular wage increases, but these failed to keep pace with rising prices. At first workers believed they were doing well, but this feeling soon disappeared as they struggled to support their families. Those who were reliant on pensions from the government fared very badly. The government failed to raise benefits fast enough to keep up with price rises and pensioners struggled to survive. People with investments in bank accounts saw their value vanish overnight. Any income generated was worthless. Tax receipts for the government stopped, as people realized that they could reduce their taxes to virtually nothing to pay if they waited a few months to pay. With money increasingly worthless, the government lacked the incentive to collect taxes. By October 1923 just 1% of government expenditure was covered by taxes. To make up the shortfall the government simply printed new notes to cover the remaining 99% of expenditure.

Many Germans gained from the hyperinflation. People with property were able to ride out the storm, while those with debts or mortgages saw their value disappear and their debt payments effectively end. Businesses were able to borrow money, spend it on new machinery, and then pay back virtually nothing to the banks. Bankruptcies became almost unknown. In 1913 around 10,000 German firms went out of business due to their debts. In 1923 the figure was less than 200. The speed with which Germans had to spend their money meant that demand in the shops was actually higher than before the period of hyperinflation. In response to this companies employed more workers, and unemployment effectively ended by 1923. Banking jobs, for example, rose from 100,000 in 1913 to 375,000 in 1923. Companies opened new factories to supply the high demands of Germans desperate to part with their cash. The German government also benefited in at least one way. During World War I the government had borrowed vast sums to finance the war effort. As the hyperinflation rose, the government saw its debts being wiped out.

The solution

With Germany on its knees, the government finally acted. A new centre-right government had been established in August 1923 led by Gustav Stresemann, a renowned politician of the liberal right-wing German People's Party. The German government realized eventually that it would be unable to defeat the French and Belgian invasion, and would have to accept the agreed reparations. Resistance to the French and Belgian forces was abandoned. Reparation payments were restarted, and economic stability was re-established. In November 1923 the government called a halt to new currency issues of marks. A new currency, the Rentenmark, backed by land and property was created. The new government led by Stresemann realized the mistakes made in the past and tried to solve them. Each Rentenmark was exchangeable for 1 trillion old marks with a limit of 2.4 billion Rentenmarks to be issued. The government also cut its expenditure, partly by sacking around 700,000 employees. However, reparations remained a problem.

In April 1924 the US government brokered a deal with Streseman known as the Dawes Plan, a scheme initiated by US republican politician Charles Dawes to help Germany pay off its enormous war debts. This reduced Germany's annual payments to more manageable levels, and arranged for the Germans to receive loans of 800 million gold marks from banks and businesses in the USA and Europe. In August 1924 the Rentenmark was replaced with a new Reichsmark of equal value.
The new currency had backing from gold so inspired confidence. Taxes were raised and by 1925 the German government actually had a surplus. The Pact of Locarno (1925) settled the frontiers between Germany, France, and Belgium.

Long-term impact on Germany

The hyperinflation of the early 1920s had a negative impact on the democratic stability of the Weimar Republic. Although there was economic recovery from 1924 to 1929 with the assistance of US loans, confidence in the democratic politicians who led Germany was shattered [This will be seen again here in the US]. When the USA demanded its loans back after the Wall Street Crash of 1929, the German economy collapsed again. Much of the middle class, many of whom lost everything in the early 1920s, supported the Nazis after 1929 as they had lost all confidence in the democratic politicians handling of the German economy. The workers of Germany also abandoned the democrats, moving their support to German communism. This collapse of support for democracy was not simply the result of the hyperinflation crisis of the early 1920s, but it had a major impact on the German people. With the second economic collapse after 1929 Germans no longer believed that the politicians who had led them to two economic disasters in the space of ten years were capable of running Germany. The opportunity for extreme political forces to gain power was great, with both communist and fascist parties threatening rebellion. Within four years of the Wall Street crash the destruction of the democratic dream of 1919 was complete and Adolf Hitler's Nazi state was in place.

My reaction: This well written article summarizes some key points about hyperinflation.

1) Hyperinflation begins, always, with budget deficits. Governments promise more than they can afford, racking up debt. When this accumulation of debt reaches the breaking point, a loss of confidence and currency collapse begins.

2) Instead of keeping budget steady in the face of rising prices, most governments adjust spending upwards to compensate for inflation. This increasing government spending, paid for with printed currency, is what makes price rises become astronomical during hyperinflation.

3) In a currency collapse, the government's initial reaction is usually to support their currencies. For example, the US is supporting the dollar using currency swaps. These efforts always prove useless, worsening the eventual collapse by squandering resources and racking up foreign debt.

4) During currency collapse, governments also refuse to raise interest rates (because this would make financial system insolvent). These low interest rates are used to speculate against the currency, making hyperinflation worse.

5) Shopkeepers/retailers find it almost impossible to make money during hyperinflation. Rising costs make it impossible to restock shops with goods. With the US's economy so dependent on retail sector, this is a nightmare waiting to happen.

6) Many people end up gaining from the hyperinflation.

A) Those with debts or mortgages see their value disappear and their debt payments effectively end.
B) Businesses were able to borrow money, spend it on new machinery, and then pay back virtually nothing to the banks.
C) The government's debts are wiped out.

7) Once the government finally finds the resolve needed to stop the hyperinflation, the steps to stabilize prices are:

A) Stop printing money and introduce a new currency
B) Cut expenditure (by laying off hundreds of thousands of government employees)
C) Renegotiate (or default on) national debt
D) Raise taxes

8) Hyperinflation shatters confidence in the politicians and political institutions. Even more, hyperinflation undermines faith in democracy itself, which can lead to extremist forms of government (ie: facism, etc...)


Conclusion: Hyperinflation happens because of irresponsibility at the national level. Politicians spend more than the nation can afford, and, when prices start rising, they don't have the political will to take the steps necessary to stop it.

It will be interesting to see what the long term effects of the dollar's collapse will have on the US political system. Right now it is too early to tell what those effects will be.


Here are some past entries on hyperinflation:


What life looks like during hyperinflation

What Is Hyperinflation?

Models of Hyperinflation

How Deflation Creates Hyperinflation

The Dynamics of Inflation and Hyperinflation

*****The Nightmare German Inflation*****

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21 Responses to Key Points About Hyperinflation

  1. Bowtie says:

    I'm not sure interesting is the best description of what could happen... It is just our turn to learn the lesson about fiat currency.

  2. J.P.S. says:

    Im From Argentina.
    I Know What youre talking about..
    Hyperinflation in USA, and hat happend to the rest of the world?

  3. SPECTRE of Deflation says:

    Inflation, let alone hyperinflation is a net expansion of credit and/or money. The world is afloat in fiat currencies, and to think America will fall while the EU and Asia will be just fine is crazy. Germany did not have the Mark as the Reserve Currency for the world. Credit is contracting faster than the fools can create it, and that is with them using every tool available at their disposal.

    The Telegraph mentioned $23 Trillion for EU Banks. Will they print faster than this? No way in Hell. The M11 Money Multiplier is off the cliff for awhile now, and it won't change any time soon. You had your inflation already.

  4. Degaz says:

    Found this on the web and thought you might find it interesting:

    The really chilling parallel is that the United States, Britain and Japan have now taken to funding their budget deficits through seigniorage. In the United States, the Fed is buying $300 billion worth of U.S. Treasury bonds (T-bonds) over a six-month period, a rate of $600 billion per annum, 15% of federal spending of $4 trillion. In Britain, the Bank of England (BOE) is buying 75 billion pounds of gilts over three months. That’s 300 billion pounds per annum, 65% of British government spending of 454 billion pounds. Thus, while the United States is approaching Weimar German policy (50% of spending) quite rapidly, Britain has already overtaken it!

    That is scary stuff! I have ceased listening to the deflationists. If we start to see interest rates go to double digits, then we'll see. Right now, all those US dollars sitting in vaults around the world could easily make their way back home and compete for the limited amount of available goods. All without a single domestic loan being made...

  5. Thank you very much for your efforts. Your blog is one of my stops at least twice a day.

    My question is when? When will hyperinflation strike. I have seen some dire predictions regarding the effects on the society in the United States what is your take. For instance Gerald Celente believes that our society will collapse and I believe that Peter Schiff see's much the same thing happening. What is your take and since I respect your commenters opinion so much what is their take?

    If that is similar to what you see happening perhaps an article where you lay out the scenario. Or perhaps you have already written such an article and a link.

    There is a terrific article written by someone from Argentina regarding the effects of Hyperinflation on Argentina...do you see something like that here or worse...better?

  6. SPECTRE of Deflation says:

    Inflation in money and/or credit less than previous inflation is deflation. There is no way around this universal truth. The velocity of money has peaked, and is heading down even further from here, and there is not a damn thing they can do about it. They keep mentioning inflation to throw off the poor sheeple. A dollars woth of debt is down to a dime of added GDP. Do you understand what that means?

  7. Anonymous says:

    I have not much money to buy gold. Is that correct I start to save and collect silver dimes for buying a house at that time? I remember one economist said house price will collaspe as well because people will be very poor and selling houses survival.The price will decline as no demand at all at that time...???

  8. pebird says:

    I have a slightly different perspective.

    Hyperinflation begins with soverign debt - not necessarily budget deficits.

    Germany had both deficit debt and war debt - plus you don't know what the war

    debt amount is until you get the bill.

    And the war debt was to be gold-backed. Germany went off the gold standard in

    1914, although they continued to mint gold coins until at least 1915. These

    coins were in circulation and were hoarded during the war by many Germans.

    When the reparations bill came due - gold had to collected.

    German bankers resorted to an age old trick - increase velocity to bring the

    hoarded coins into circulation and siphon them off at depository.

    In addition it was a time of political unrest just when the public wanted to get

    back to a "normal" life. When the Ruhr was going through confiscation, the

    residents got out of money and into real goods - real estate, diamonds, etc. (by

    this time gold had been effectively removed from circulation). These actions

    bled into the rest of the German economy, with a low demand for excess cash in

    the Ruhr region and a high demand (due to post war inflation) for money in the

    rest of Germany.

    Industrial policy was also a factor - there was a need to rebuild - which

    required raw materials (not so much in Germany), so exports were needed and a

    cheaper mark was pushed by industrial interests.

    Workers were fairly well organized - increases in costs of living were offset by

    salary adjustments.

    The political disruption made policy coordination very difficult. Basically,

    the German state lost control and the currency (foundation of any state) was

    completely lost. The Rentenmark (Renten means "pension") was basically a

    currency backed by a mortgage on the real estate of Germany.

    It was a perfect storm for Germany.

    Each historical epoch has unique situations - while we can learn from Germany,

    our experience will be different. The US is taking preemptive actions - the

    currency swaps are not because our currency is collapsing now, but it

    "sterilizes" the effects of a potential future collapse (to some extent).

    The challenge you have with the hyperinflation thesis is that no one with any

    power wants our debts wiped out. In the US that game was played in the 80s -

    now avoiding inflation is the name of the game. BUT not all inflation is

    created equal - the inflation you and I experience is not important - the

    inflation to be avoided is wage inflation. That is why the CPI has been so

    manipulated over the years - because consumer-experienced inflation is not as critical to financial health as wage inflation.

    Through globalization and the *special* relationship with China, we have

    imported wage deflation (experienced through lower cost consumer goods). But

    more importantly through the USD-CNY peg, we have been experimenting with a

    semi-global currency for quite a while.

    The USD being *printed* now will never go into circulation - it won't become money - it will be kept in the financial system. There is a political fight with the choice between personal bankruptcy and financial system restructuring - I just don't see individuals winning that fight.

    In fact the money that was provided to Wall Street also sterilzes the US from true Keynesian policies - there is no way the government will authorize the funding to raise aggregate demand since what was given to Wall Street had so little oversight.

    What will be of interest is how the *special relationship* evolves. As US asset

    prices fall, Chinese asset prices will rise (relatively - not nominally). As

    demand collapses - to the extent that China can reconfigure for internal demand

    and shift exports to other parts of the world - they can survive the downturn.

    Well what about the US need to finance their deficits? We have Geithner saying we don't need any more bailout funds - probably because we can't sell the bonds anyway and besides Congress won't approve it. Savings rate is going up and imports are cratering - the need to sell Treasuries is reducing.

    I expect there will be more attention to budget deficits (Obama starting with tiny steps - $100MM) and tax increases. We'll see how much pain the US consumer is willing to take.

    Long L curve - if you think a flat line is a curve.

  9. Anonymous says:

    There is a lot of money that is being printed to bailout banks, and banks are hanging on to that money to strengthen their balance sheets instead of lending the money out. Once the money makes it into our economy, that is when we will see the inflation. Gold is an excellent hedge against inflation, but the question is, if you want to sell your gold what currency do you take for delivery once it has served its purpose and made you a sizeable profit?

  10. Numonic says:

    You people need to start reading my replys instead of being so confused why all these bailouts aren't causing prices to rise. And the deflationists needs to take in to consideration risk premium/borrowing/production costs.

    First of all hyperinflation has begun. It began when the credit contraction began because that is what hyperinflation is. Hyperinflation is a great credit contraction.

    The only reason prices aren't high right now is because instead of these companies coming to the customers for the money they need, they are going to the govt. through these bailouts. And the govt. is more than willing to help because higher prices of things(not debt) is bad for the currency. But very soon the credit markets will take a hit soo hard that the govt. will not be able to keep up with the credit contraction and these companies will have to tap all resources and the rich, those who can afford non-neccessities are still a market to tap in to.

    So deflationists you are right about the enormous credit contraction keeping the bailout money from entering the economy BUT prices will rise not because the credit markets will thaw and ease. Prices will rise because the credit markets will get TIGHTER, so tight the govt.s printing presses will not be able to keep the credit markets open and extra help will have to come from you and me(the customers) through rising prices which is something the govt. does NOT want and has be stalling from happening with the printing press and these bailouts. Yes, the printing press and the bailouts are keeping prices from rising high.

    Get gold and silver now! The price of everything right now, not just gold and silver is being artificially depressed with these bailouts, but the credit contraction will win and cause companies to tap the customers for the increased borrowing costs govt. bailouts will not be able to stop.

    We are in hyperinflation. A credit contraction is in fact hyperinflation. The effects are rising prices through rising borrowing costs and the only reason we see larger bills is because the govt.'s attempt to stop the credit contraction(hyperinflation) by supplying the needed currency. Those rising prices would still appear even if the govt. stopped printing the currency. The bailouts are stalling those rising prices. This is your chance, your opening. Get whatever you can while it's cheap. The govt. can only slow the credit contraction for so long. Soon(before this year ends I believe) the credit contraction will get too much for the govt.'s printing presses to handle and those rising prices will be exposed. Get gold and silver now while it's cheap.

    I'm against the immorality of the bailouts and I understand how the bailouts will lead to "mal-investment" as lenders lend with ease and no regard as they are given assurance that they will be bailed out but allot of people think that bankruptcy would have a different effect. Bankruptcy would not have a different effect. Bankruptcy would lead to higher borrowing costs and thus higher prices. All this money through these bailouts if not coming from the govt. would be coming from you and me(the customers) as companies raise prices to pay the increasing borrowing costs. We should be thanking the govt. for these bailouts as they are a window in a burning house that we are trapped in. That window can only stay unblocked by the fire for so long as the credit contraction moves faster than the govt. can print $100 bills. So thank the govt. for suppressing the price of silver and gold and thank the govt. for these bailouts that are suppressing the price of everything else and take advantage of these suppressed prices before the fire blocks the window, that's before the next shoe drops in this credit contraction(which looks to be the commercial real estate market). It's not the credit contraction that is making things cheaper, it's the govt. bailouts in combination with the credit contraction causing prices to drop or not rise high. Removing either 1 of these 2 things(bailouts & credit contraction) would cause prices of things(not debt) to sky rocket. The thing is there is a limit to the bailouts as the govt. can only print $100 so fast while the credit contraction can take $100 allot faster. The govt.(with these bailouts) is doing everything in their power to be the only one these companies take their money from. They don't want these companies to start charging customers higher prices because that would be bad for the currency, so these companies are taking those higher prices to the govt. and the govt. through these bailouts are paying those higher prices so we don't have to(for now). But there is going to come a point where the credit contraction intensifies and the govt. will not be able to bear the load by itself and the companies will have to raise prices to make the difference the govt. could not handle, either that or the govt. will print larger bills to combat this increase in the credit contraction. But this won't really help as the bailouts at the current stage are drawing distrust in our debt. If we increase the bailouts by creating larger bills, the credit contraction will be intensified by holders of our debt dumping our debt as larger bills are a sign the govt. has lost control of the credit contraction and that there is high risk of the debt defaulting. And thus the govt. will be forced to print even larger bills to combat the increased credit contraction. At this point prices of things(not debt) will be going through the roof. And eventually it won't matter if we print or let the credit contraction run because the area between too much debt and too much base money will be miniscule and whether we stop printing or continue printing prices will continue rising. I expect us to go through all of this before this year ends. So take advantage now and get whatever you can and need before you can't afford it. I expect the prices of everything regardless of how unnecessary/easy to produce to rise although the price of things more necessary and hard to produce to rise more.

    P.S. Things that are difficult to produce(gold/silver) do not go with banking as banking requires bailouts to survive. If you can not bailout your debt, trust in the debt and the banking system is lost and the banking system fails and you have hoarding which is the opposite of banking. Banking requires letting someone else hold your money, hoarding requires no one else but you knowing where your money is. Gold/Silver and things that are difficult to produce are for hoarders and paper currency and things that are easy to make are for bankers. Bankers eventually become hoarders as the debt grows so large that even the seemingly easy thing to produce(i.e. paper currency) becomes difficult to produce and through rising borrowing costs due to this credit contraction, companies are forced to raise prices to make the money to pay the loan to stay in business and the currency of the bankers is devalued and the things that are difficult to produce become more valuable.

  11. Robert says:

    Hi Eric:

    Great Article !

    One question for you.

    What's the potential spill-over effect on non-dollar currencies like Euro - who's economies are heavily reliant on exports to the US ?

    Should the US government declare bankruptcy - one assumes what ever is left of the Euro zone's export market in North America - would disappear - impacting the Euro too.

    Any ideas ?

    Robert

  12. Bowtie says:

    Numonic:

    I think you finally found the key explanation: "The only reason prices aren't high right now is because instead of these companies coming to the customers for the money they need, they are going to the govt."

    - Thanks!

    Although one question - quoting the helicopter himself:

    "The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing."

    the government can now "print" instantly, the physical currency doesn't matter as much as it used to - does that change the equation?

  13. Numonic says:

    I refuse to believe "the physical currency doesn't matter as much as it used to". Physical currency matters more now than it ever has. Lack of the physical currency is why we are having a credit contraction. We are experiencing the greatest lack of physical currency in history. We can no longer create money out of thin air(which is Fractional Reserve Banking/0 reserve banking and also what you say Bernanke is suggesting he is doing). The Fed is printing physical Fed Notes more than ever before and giving them to the banks but it's still not enough to stop the credit contraction as what is needed is Weimer and Zimbabwe size bills. The Fed will realize this when the commercial real estate market seizes up this year.

    Do you realize what it means for the Fed to buy Treasury Notes? It means that the Treasury needs a bailout. Quantitative Easing is no different than TARP. QE is a bailout of the Treasury. There is a lack of Fed Notes in the banking system and the Treasury needed some Fed Notes or it would have faced defaults on the Notes. It still faces defaults as there continues to be a lack of physical Fed Notes as the debt for Fed Notes is enormous(hundreds of trillions of dollars of debt) and has stretched the dollar too thin and could no longer grow and thus contracted and is causing a domino effect of contractions, triggering all debt to contract(come due) also causing people to loose trust in debt and exacerbate the contraction by selling the debt which is a demand for more Fed Notes. The monetary base is growing at record breaking rates but not fast enough to stop the credit contraction, only slow it's speed. Had we never started/or discontinued these bailouts there would be enormous defaults and the price of things(not debt) would be through the roof. But we have been doing bailouts since before we went off the gold standard. It became too difficult to bailout banks with gold so the bankers moved to only paper. But the Fed is printing like mad. I don't know if you misunderstood what Bernanke said or if Bernanke himself is lying, printing is the only logical thing the Fed could be doing. The banks need physical Fed Notes and the Fed is giving it to them. The fed is trying to keep debt from defaulting as default is death to the banking system. The debt became so large that it became difficult for banks to supply depositors, let alone continue lending thus the banks went to the Fed for the needed physical Fed Notes and are continuing to do so except the debt contraction set off a chain reaction and now the contraction is going faster than the Fed can print $100 bills to stop it. In comes Weimer size bills.

  14. Anonymous says:

    Numonic:
    Great post with original thinking, and I think your right about prices rising. Peter Schiff has said that when this happens govts. will fix prices which will cause supply issues. What are you're thoughts.
    Do you have your own blog?
    Scott

  15. Numonic says:

    Man i can go all day about price fixing and about how we are in fact not witnessing the beginning of price fixing but the end of price fixing as we have been price fixing for decades but at a larger scale. The price fixing we have been doing goes by the name of "credit". Credit has allowed us to get otherwise unaffordable things for cheap. Thus Credit is price fixing.

    Price fixing causes shortages as is evident in the gold and silver market and is also evident by our huge trade deficit and poor manufacturing sector.

    Think about it. Why produce to sell something to get the money you need when all you have to do is go to the bank and borrow the money you need. Thus more people go to borrowing but then the govt. has a choice to restrict credit or extend credit. The thing about restricting credit though is that in order to keep this system of banking going we have to maintain the image of solvency. If we restricted credit people would start getting in their mind that our banking system was not solvent and thus exacerbate the credit restriction by putting less of their money in to bonds and banks which would show a sort of image of insolvency(the same way people look/ed at China as poor because of the lack of credit expansion). Thus making our bonds and banks less trustworthy. It's when we are lending that our bonds look trustworthy as lending sends the message that we have money to spend and that we are solvent and the image that you can trust that the bonds will not default. Which is why bond prices have been rallying for years. The easier credit is, the safer bonds look as easy credit gives the image that we have so much cash that we can give it away for nothing and we have been doing that for years until the debt got too large and stretched the dollar too thin and our insolvency was exposed. So I believe the reason they made credit easy was to make the bond market look good. The easier credit was the better the image was given of the bond market as easy credit means solvency and hard credit means insolvency. And no one would accept bonds that looked to have a high chance of defaulting. And our banking system survives on people accepting bonds. As the opposite of accepting bonds(banking) is hoarding. So anyway that's why i believe they made credit easy. It was to make the bond market/banking system look good and solvent so that more and more people would accept bonds and keep the banking system going. Today they are struggling to keep that image and they are doing it with these bailouts but they will fail without Zimbabwe size dollar bills as the debt deleveraging is too large.

    Oh and No i don't have a blog. I'm really more interested in getting the information than spreading it but if you're suggesting I should get one, i guess I should say thanks. I didn't mean to high jack Eric's blog but Eric's blogs are a big influence on what I'm talking about as are others sites such as runtogold.com, silverstockreport.com , allamericangold.com, silver-investor.com and recently inflation.us even Mike Shedlock and a slue of other news articles over the years. But i do admit none of them are saying exactly what I'm saying which is that the bailouts are the reason why prices are not soaring right now and how default and bankruptcy will cause prices to soar just as much as too much easy credit would.

    Thank the govt. for price fixing and take advantage of it as it is coming to an end. Take advantage of it by getting things you need now while they are cheap, especially gold and silver which will last through the price rise.

    Do you know that if you own 1000 ounces of physical silver today, you are technically richer than allot of millionaires? Why? Because if you took all the above ground silver and tried to give each millionaire in the world 1000 oz each, you wouldn't be able to because of supply constraints. So you'd be holding more physical silver than allot of millionaires could possibly hold. So technically, if you hold 1000 ounces of physical silver, you are already a richer than allot of millionaires. That's how small the silver supply is. You don't see it now because of price fixing but you will when the price fixing ends. And it will come to an end with the collapse of the credit market because credit is price fixing.

  16. Bowtie says:

    Numonic:

    I agree with the previous post - I have not seen your argument anywhere else, only on this blog. I regularly check this blog, Mish's, and Lew Rockwell's. I think that you have the right idea about what is going on.

  17. Numonic says:

    Cool, and I know i say "thank the govt. for price fixing" but i don't mean to say that as if price fixing is a good thing, I'm just trying to help you protect yourself by advising you to take advantage of the price fixing(which is soon coming to an end) by buying gold/silver. Price fixing is horrible as it creates shortages and starvation but i believe even price fixing is part of the free market as the consequence for price fixing leads to shortages which then leads to the end of price fixing and higher prices and thus more production eventually prosperity. The free market is always working, otherwise it wouldn't be the "free" market. To say we have no free market's because we are not allowing failure is to underestimate the free market, as the free market has a consequence for not allowing failure and thus is in fact working when we think because of the absence of allowing failure it isn't. So just because we don't allow failure doesn't mean the free market isn't working. The consequence of not allowing failure is an action of the free market which means the free markets are working even through times of price fixing. So even communism is within free markets as there is a free market consequence for communism. I believe that with the free market there is a balance that price fixing can only go so far. I don't believe in the idea's of Malthus(that there will be a permanent shortage of food and energy for the people of the world). Believe it or not with what is going on in the world economies, I'm more optomistic about people of the world prospering in the future because we are witnessing the end of a system that caused shortages and are moving to a system that will increase production. It may sound cruel but we should be celebrating the collapse of this world economic system as this system of credit has been causing shortages all around the world and is the main reason behind every hyper-inflated currency in history. The world is headed for prosperous times just as soon as the credit(price fixing) market collapses. Think about it, we'll have something that will be appreciating over time, then think about what people will do to get that thing(and I lean more towards working and producing) as Jason Hommel points out that "People who riot and steal during times of crisis will be punished just like they always are. If the stores move out of an area that is prone to rioting, then that area suffers the most.". Besides we're coming from a system of rioting and looting which goes by the name of "credit" and I believe people will realize rioting and looting is not beneficial as it leads to shortages and starvation. So the way in which gold will be received will be through trade of things that are worth it and those who hold gold and silver will spend the metals wisely as they are rare. What the metals are spent on will benefit society as what it will be spent on will be necessities and from here economies will prosper.

    Like i said Jason Hommel of silverstockreport.com is one of my main influences and here's an article of how rising silver and gold prices will make the world(not just those who bought the gold and silver at artificially low prices) more prosperous.

    I'm Positive we'll Prosper with Silver
    Silver Stock Report
    by Jason Hommel, November 4, 2006

    http://silverstockreport.com/email/prosper_silver.html

  18. Numonic says:

    Also people that ask what will drive demand for silver/metals need to educate themselves on the industrial uses of silver/metals. Contrary to what they say on the media industry is needed more when there is a shortage of things/poverty(which is now) than when there is an abundance of things. So the equation goes like this: If food is in shortage, the only way to beat the price rise is by producing more, not by consuming more faster than the price is rising because 1. there is a limit to how much we humans can consume because we become full and 2. there is a limit to how much we can consume because of supply constraints. So trying to buy 100 gallons of milk in one day in order to avoid having to pay the rising price of milk in the future will not work because we are not like bears where we consume allot in a short period of time to last us through a season and then go in to hybernation. We live day to day but milk expires rather quickly so we can't buy allot in one day to try to save money on future expenses of milk. We have to figure out what is causing the price rise in milk, and we know it's a shortage of milk that is causing the price of milk to rise. So the solution to the problem of prices rising in milk is to produce more milk. This requires industry and industry requires metals. Thus milk (or in general things that expire allot sooner than we do) require metals. Which is why metals, especially silver will do well when there is a shortage of things. So without industry you can't have food and without metals you can't have industry, so without metals you can't have food. So silver and other metals are definitely dependent on their industrial uses, fortunately there is no better time for industry than during times of shortages/economic crisis. This is why in economic crisis the metals do well. So don't listen to anyone that says during times of starvation and poverty people have no use for the metals. It's in times of starvation and poverty that metals are needed most.

  19. Bowtie says:

    silver is 3 x more conductive than copper - means 3x more efficient - booma bama is all about saving energy! I think silver is a monetary currency like gold - not just like any other commodity...

  20. Numonic says:

    It's so like the slave system they have us in to make us believe that the end of their slave system is the end of humanity. People are running and panicking that the end of this slave system(credit) they are in is the same as their demise or the end of the world. And they(the bankers) promote that idea in attempts it will get everyone doing their best to keep the system going. The "Massa WE sick" idea. You know at my job there are these ponzi scheme ideas going around. Everyone is trying to keep that system of credit(price fixing) going. They won't let go of that system. The end of credit(lending/price fixing) is not the end of humanity it is the beginning. With credit we haven't been causing a shortage of things, we've been causing a shortage of producers. We are not running out of oil in general, we are running out of people who produce oil as all the producers have been becoming consumers. I know in some reports that read we still have hundreds of years of oil in the earth. We have been starving ourselves, surviving on the cheap oil, the oil we did not have to work much for to get which leaves the world practically untouched and very ripe for picking. This is why I see a prosperous future for the world and that the end of credit(lending/price fixing) is the beginning of this prosperous world. As the end of credit will be the beginning of getting all this wealth out of the earth. As credit has been the cause for decreased production, the end of credit will be the cause for increased production. So let's celebrate the end of this credit/price fixing system for it will be better for the world.

  21. Anonymous says:

    Thank you all for your comments.

    Numonic, maybe you should consider having a blog, your thoughts are worth having their own place on the web. Thanks if you do so !

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