Four Reasons Why Hyperinflation Hasn’t Hit the U.S. Economy…Yet
By Keith Fitz-Gerald
Chief Investment Strategist
Money Morning
Everything we know about classic economic theory suggests the U.S. economy should be experiencing Zimbabwe-like hyperinflation right now, thanks to the nearly $2.2 trillion the U.S. Federal Reserve has pumped into the system.
But we’re not…yet.
Classic economic theory says that money supply can be used to stimulate the economy and our central bankers seem to agree. That’s why they’ve pumped more than $1 trillion dollars into the economy, engineered countless bailout bonanzas for zombie institutions, put Detroit on life support, and delivered a bunch of financial Band-Aids to the trauma ward – all in a desperate bid to make Americans feel better about the global financial crisis.
To their way of thinking, the trillions of dollars have been a success. That’s why any meeting of the Group of Eight (G8) nations looks more like a mutual affection society with central bankers anxious to claim credit and backslap each other in congratulations for having avoided the “Great Depression II.”
But by taking the Federal balance sheet to more than $2 trillion from $928 billion 2008, they’ve created a situation that should have resulted in an epic inflationary spike to accompany the 137% increase in liabilities.
Yet that hasn’t quite happened.
Core inflation – which denotes consumer prices without food and energy costs – has actually decreased from 2.5% in 2008 to 1.5% presently. And that has many investors who have heard the siren call of the doom, gloom and boom crowd wondering if they’re worried about nothing.
So what gives?
Well, there are four reasons we haven’t yet seen hyperinflation:
- Banks are hoarding cash. Despite having received trillions of dollars in taxpayer funded bailouts and lived through a litany of shotgun weddings designed to reinvigorate the shattered lending markets, most banks are actually hoarding cash. So instead of lending money to consumers and businesses like they’re supposed to, banks have used taxpayer dollars to boost their reserves by nearly 20-fold according to the Federal Reserve. The money the bailout was supposed to make available to the system is actually not passing “Go,” but rather getting stopped by the very institutions that are supposed to be lending it out. Three-year average annualized loan growth rates were 9.6% before the crisis; now they are shrinking by 1.8%, according to Money Magazine.
- The United States exports inflation to China, which remains only too happy to continue to absorb it. What this means is that low priced products from China help keep prices down here. And this is critical to something that many in the “China-is-manipulating-their-currency” crowd fail to grasp. If China were to un-peg the yuan and let it rise by the 60% or more it’s supposedly undervalued by, we’d see jump in prices here in everything from jeans to tennis shoes, toys, medical equipment, medicines, and anything else we import in bulk from China. Chances are, the shift would not be dollar-for-dollar or even dollar-for-yuan, but there’s no doubt it would be significant. Many economists I’ve talked to privately think 25%-35% is probable. So the next time you hear a “Buy American” extremist, you might want to share this little inconvenient truth.
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Now before I get a bunch of hate mail about this, let me just say I want to “Buy American” too. I’m all for supporting our native industry and our own domestic job markets. But in today’s world, “made anywhere” is really hard to do and even harder to support. The interconnected nature of businesses and global manufacturing chains, not to mention the payment system, makes that nearly impossible. Granted, perhaps that’s part of the problem, but that’s a subject for another time. The lessons we learned in the 1930s are clear, and they must be acknowledged – protectionism only makes matters worse, no matter how we feel about it personally.
- Consumers are still cutting back. Therefore, the spending that normally helps pull demand through the system is simply not there. I don’t how things are in your neighborhood, but where I live, people are still cutting back. Indeed, data from the U.S. Department of Commerce and the Federal Reserve Board shows that consumer spending growth averaged 1.4% a year prior to the crisis and is now shrinking at a rate of 0.7%. What this means is that people have figured out that it’s more important to save money than it is to spend it. And, given that consumer spending makes up 70% or more of the U.S. economy, this is a monumental change in behavior that all but banishes the last vestiges of the “greed is good” philosophy espoused by Michael Douglas as Wall Street pirate Gordon Gekko in 1987.
- Businesses continue to cut back rather than hire new workers. Therefore, wages and wage inflation figures are lower than they would be if the economy was truly healthy and the stimulus was working. This is especially tough to stomach because it means people are still being marginalized, laid off and “part-timed” instead of being hired. And that means that most of the earnings growth we’ve seen this season has come from expense reductions rather than top line sales growth – and those are two very different things. But while this is tough, it’s also helped keep inflation lower than it would otherwise be. Prior to the financial meltdown, job growth averaged about 1% a year over the last three years whereas now it’s falling by 4.2%.
The upshot?
Any one of these factors could change at any time. And that means investors who are relying on the Fed’s version that everything is okay and that the government is managing inflation may be in for a rude awakening.
The only thing the Fed is doing is managing to manipulate is the data, and even then, not very well.
[Editor's Note: No one knows the Asian markets - or the true nature of the global capital markets - like Money Morning Chief Investment Strategist Keith Fitz-Gerald. For the last several years, Fitz-Gerald has made those insights available to investors via his daily columns in Money Morning and its monthly affiliate, The Money Map Report. Now he's making those insights available through his new book, "Fiscal Hangover: How to Profit From The New Global Economy," which can be purchased here.]
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Comment by J.D.Beck on 4 November 2009:
Americans are by and large ignorant as to : Who is the “Fed’s”… moreover the incredible power given to the Fed’s, by a two party system who in all honesty has never had goodwill towards its people on their agenda, is as obvious as a nose on a face.
Sadly the upper 20 % who make a living of the mass (this includes almost everybody who earns a living in the financial sector) will not call a spade a spade…
Thank God, finally a few Americans are beginning to expose how they have been bamboozled by Democrats and Republicans alike…the odds are it is too late.
Just as Germany paid a price in WWII for living with blinders… Americans will now pay the price for being so incredible naive.
Comment by jh443 on 4 November 2009:
Reason #3 (Consumers are still cutting back) is the major reason why inflation hasn’t yet happened. When people don’t have money, they’re not going to buy your product. What good does it do to raise the price of it if the bottom line is that you’ll generate less profit?
Why don’t people have money? Well, that’s answered by Reason #4 – fewer people are working. Many have already exhausted all available unemployment benefits (and the Senate is stalling on passing the latest one).
Go ahead corporate America – raise your prices. I dare you. I double dog dare you. There’s nothing you’ve got that we can’t do without if need be.
Comment by David on 4 November 2009:
Fourth reason!; the ‘money supply’ is not exactly honest. There is M1, M2, and M3. Printed money is only a small part of the total money supply. The remainder is unconstitutionally created by banksters and other counterfeiters, and that $651 TRILLION is vanishing now, no matter how hard they run the money printing presses. So they print a measly 2 trillion. So frigin what. Draw, hang, and quarter the crooks.
Comment by LES DENIS on 4 November 2009:
YOU FORGET….AS FAR AS THE LESSONS WE LEARNED FROM THE 1930s….
WE WERE A CREDITOR NATION THEN AND WHEN WE RAISED TARIFFS OTHER COUNTRIES STOPPED BUYING FROM US….
NOW WE ARE A DEBTOR NATION AND WE NEED HIGHER PRICES ON FOREIGN GOODS SO AMERICANS WILL CHOOSE A
PRODUCT MADE HERE…WHICH WILL PRODUCE MILLIONS OF NEW JOBS HERE….YOU AND ALL THE OTHER ECONOMISTS
HAVE IT BACKWARD….HIGHER TARIFFS ON FOREIGN GOODS
WILL MEAN INFLATION BUT IT WILL MEAN PROSPERITY HERE…
NOT DEFLATION AND DEPRESSION….LD
Comment by Robert Cogan on 4 November 2009:
It’s much worse than “Consumers are still cutting back,” as if that was voluntary. 30 years of real wage stagnation due to “free trade” wage and job destruction has left American consumers deeply in debt while the government and Fed Res. keep handing cash support to the banksters. GNP=MV. Without velocity of circulation we get no growth. It’s so bad we now have to extend taxpayer subsidized consumption from farm subsidies to tax credits for home purchases, cash for clunkers; next it will be appliances.
O Bummer should have gotten an new Fed Chair, fired Geithner and started trying to get Congress off the corrupting dole of bankster lobbyists. We are going to have an “L” shaped stagnation until working families are allowed to get treasonable incomes again! Start with H.R. 3557, a bill to give everyone on Social Security another 3% COLA (about $415/yr.) Trickle down is coming too little too late.
Comment by Chad Aarhaus on 4 November 2009:
Good article, excellent comments too.
I believe there is no way for the economy to begin to get healthy until one way or the other these bankers are forced to mark to market Their books, causing a lot of influential people to loose money.
Comment by David Perry on 4 November 2009:
A fifth reason we have not yet seen inflation is that, historically, there is always a significant delay. It would take about 18-24 months for monetary inflation to begin showing up in the consumer economy, even if none of the other factors were involved.
Comment by Gary Wardell on 4 November 2009:
The United States exports inflation to China, which remains only too happy to continue to absorb it. What this means is that low priced products from China help keep prices down here. And this is critical to something that many in the “China-is-manipulating-their-currency” crowd fail to grasp. If China were to un-peg the yuan and let it rise by the 60% or more it’s supposedly undervalued by, we’d see jump in prices here in everything from jeans to tennis shoes, toys, medical equipment, medicines, and anything else we import in bulk from China. Chances are, the shift would not be dollar-for-dollar or even dollar-for-yuan, but there’s no doubt it would be significant. Many economists I’ve talked to privately think 25%-35% is probable.
Amen
Comment by jh443 on 4 November 2009:
This is the first I’ve heard that Gary – but I hope it’s true. I’d love nothing more than to see the prices of Chinese goods jump dramatically.
Sure, the prices at WalMart would sky-rocket overnight, but this would only be followed by sales volumes at WalMart plummeting.
“Mom & Pop” stores would once again stand a chance of succeeding.
Comment by J Gruszynski on 4 November 2009:
The reason the “models” (as an engineer, I use the term very loosely when it comes to economics – macroeconomic models are crap uniformly) say one thing but don’t, is that they do not model reality very well in the first place.
Most (all?) monetary models make a simple assumption of Supply-Demand equilibrium. This gets hard coded into the model, usually somewhere in the math there as an implicit D=S identity. Same is true for endogenous and exogenous growth models.
The problem is that this one little assumption is far from trivial. Having deflation? Guess what? D!=S at all. That’s the very definition!
And when it comes to something like economics governed by a differential equations (marginal == differential), that little difference can and usually does completely negate the simulated prediction made by the model.
Unfortunately economists don’t generally have enough math to understand even the most rudimentary facts about the models they employ or the systems they are trying to model. The number one lesson from engineering is that nothing interesting or revealing comes from equilibrium models – all the interesting and threatening behaviors come from non-equilibrium operation of the system so the model better cover non-equilibrium at least to a 1st order.
Most economic systems are *not in equilibrium* for the most part even during “stable” times. The world’s economic system today is definitely is an extremely non-equilibrium operating mode. The idea that any equilibrium model is going to give you anything useful or accurate in such an environment is profoundly stupid. And using one is like giving a gun to a duck.
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=105×5298904
Comment by Aprovocateur on 4 November 2009:
Another reason is the U.S. dollar carry trade. Dollars are leaving America to inflate other asset classes: emerging markets, oil etc. (please search the web for recent comments by Nouriel Rubinni)
Regards
Comment by James Yamaki on 4 November 2009:
The US economy is moving in the right direction: slow growth. According to the experts, we are out of the recession since June 2009. Second quarter growth is estimated at about 4%.
The higher powers couldn’t have made better decisions than what they did and doing in managing our economy. We would be facing a depression if the Feds had not stepped in and saved the big banks, AIG and the auto companies. Let’s face it, the US is in a huge financial and economic mess and it must muddle its way out. It is not over. We are still in it and have some ways to go.
The executive branch and Congress are doing it slowly. They still have have not addressed and corrected the real problems occurring in the financial sector. Instead, the two government levels have chosen to fix our health system first ahead of our financial system.
It is interesting what is happening now and what are going to happen in 2010 in regard to federal legislation regarding the financial sector. Your writers are doing a good job of educating and keeping us informed.
There is hysteria among investment advisors about hyperinflation, etc., but the reality is the US economy is more in a period of deflation, and deflation is just as bad as inflation or worse. The US government is addressing deflation, as it supposed to, and trying to get the country out of it. All the stimulus aid and other governmental actions to help banks and bail out mega companies are all about correcting deflation, which is the real problem facing our country.
Comment by Jacob Steelman on 4 November 2009:
Back in the 1980s, when we were having another government-created financial mess, I was looking to purchase a new car. I was in the showroom of an American car dealer. The salesman gave me his sales pitch. I said that I could buy a Japanese import for a $1000+ less. Could he match the price? To which he said no but this was an American made car and I should support America. To which I responded, I am an American and you should support Americans. At the end of the day all that counts is buying the best goods and services at the best price without regard to the country in which is manufactured.
Comment by Rob on 4 November 2009:
Indian Govt just bought 200 tonnes of gold. China is now the fifth biggest holder of gold reserves in the world. China is doing direct currency swap deals with other countries bypassing the US dollar reserve. Oil is being traded in Euros and other currencies. The US dollar is being undermined daily. The GFC was the bursting of a bubble that has now been re-inflated by trillions of dollars of new paper currency. The same people who didn’t see the GFC coming are now telling us everything is all right again. The Fed has just kept its proverbial finger in the dam while all the bankers flee. Everyone knows the game is up and not a matter of if but when.
Comment by Andrew du Boulay on 4 November 2009:
French philosopher Charles Montesquieu writing in ‘The spirit of the laws’, over 250 years ago said: ‘If the republic is small, it is destroyed by a foreign force, if it is large, it is destroyed by an internal vice’ . US Vice President John Calhoun indicated from where that internal vice may be derived hinting strongly that it was held together by the cohesive power of the vast surplus in banks. ‘Economic hit man’ John Perkins confesses the system is fuelled by something more dangerous than a conspiracy, it is driven by an ideology. Gordon Gekko would say that ideology captured the essence of the evolutionary spirit and marked the upward surge of mankind. Yet the economic evidence suggests that ‘greed in all its forms’ is not necessarily good for the greatest number.
The United States carries the largest debt of any nation ~ approximately $11.3 trillion on the current account deficit and $44 trillion in long term liabilities. The economic health of the US is threatened by $55 trillion in long-term government debts and liabilities. This hidden debt equals to $473,456 per household. US debt has continued to increase an average of $3.81 billion per day since September 2007. Interest paid on the national debt is the third largest expense in the US federal budget. Only Defence and the Departments of Health and Human Services are higher.
The former Federal Reserve Chairman, Alan Greenspan, told the House Budget Committee in September 2004: ‘As a nation, we may have already made promises to coming generations of retirees that we will be unable to fulfil’(Cauchon and Waggoner, 2004).
The debt-deflation theories of Irving Fisher (1933) and Hyman Minsky (1977) demonstrate that the US strategy of inducing inflation will also reduce her national debt. In simple terms if more money is created and put into circulation, it erodes the current value of money, thus allowing the US to re-pay its dollar liabilities to countries like China, Japan, U.K., Taiwan etc, at a discount proportional to the rate of inflation.
Strategically, this is something that the US administration is fully aware of ~ so is a bit of inflation justifiable? It would obviously counter act the effects of the US – China trade imbalance, but we have to remember, countries like China and Taiwan pegged the value of their currencies to the mighty dollar so that there would be price stability in trade contracts. It was not a case of China manipulating the value of the yuan (but they did resist pressure to revalue it). Those countries just kept to the agreement, it was the US system (government, the privately owned Fed, other banksters, hedge funds and toxic assets) that destroyed the credibility of the US dollar.
American forefathers’ moral fabric made the union a great nation, their competitive edge made the US strong, resources made the US powerful, but nevertheless, greed may destroy the empire.
It is ironic that the nation, that gave the modern world an international financial system, undermined the very system it created. The US government allowed banksters to take over, control and run the monetary system, thinking that the free market would exercise self-discipline.
Greenspan, a fervent proponent of deregulation before Capitol Hill in October 2008, conceded serious flaws in his own philosophy. He admitted: ‘I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms’. He added: ‘I have been going for 40 years or more with very considerable evidence that [the system] was working exceptionally well’*.
What Greenspan failed to consider was the fact that for 35 years of his 40 year tenure, the Glass Steagall Act** had been in force which provided a mechanism to regulate American financial institutions. When the Glass Steagall Act was repealed in 1999 it created an opening for banks to actively participate on Wall Street and vice-versa. Somewhere between 1933 and 1999, both legislators and policy-makers forgot the precise reasons why that Act had been introduced to start with.
It is total mismanagement on the part of government that, in the richest country on the planet, an un-proportionally high percentage of the population now lives in poverty. It is arrogant that a corrupt regime, wants to impose their twisted monetary policies on the rest of the planet. It is idiotic that the global financial crisis eventuated because the US government relinquished its responsibility to greedy banksters almost a hundred years ago. It is foolish to allow the profit orientated financial institutions to continue f**king the system.
The government’s bailout to the banks was meant to be passed on to the businesses and consumers as a line of credit to correct the credit squeeze, but the banks kept those funds and used them for speculative purposes. The banks are generating far greater returns on Wall Street than they could ever do lending at 5 % to business and consumers. So the banks profit at the expense of the tax payer and the economy gets no better. How is that bailout money supposed to have a multiplier effect if it is not spread throughout the economy?
As Montesquieu said, it is a certainty that the corrupt republic is destroyed from within. Perhaps it is a blessing that all empires crumble.
*House Committee on Oversight and Government Reform, Testimony of Alan Greenspan, The Financial Crisis and the Role of Federal Regulators, 110th Cong., 23rd October 2008. Available at : oversight.house.gov/documents/20081023100438.pdf
** The Bank Act of 1933 US Code, Title 12, Chapter 3, Subchapter 1, Section 227, alternatively named after the two congressmen who introduced the bill.
Comment by Jerry Mamahit on 4 November 2009:
So the hyperinflation is no longer to be or postponed and for how long?
Comment by Tassos on 5 November 2009:
This is an excellent article.
It is the HUGE chinese shock absorber that saves the day and also the third world. Products, services, all made in china, latin america, india, asia. There will never be inflation as long as US continues to live at the expense of the poor. China is dead poor, don’t be fooled by flashy Shangai and Beijing where less than 10% of a middle class population lives. Go to the mainland and look at the sweatshop factories of 1 dollar a day wage. Go to mainland India and Vietnam, go to mainland Colombia. The empire is here to stay guys no matter how many trillions are printed. Economic theory refers to fair competition and is not related to US, unless you think it’s fair for us supporting our lifestyles at the expense of a dollar a day child labor
Comment by Don Fishgrab on 5 November 2009:
We,ve all heard the saying, “money doesn’t grow on trees.” Some of the economists and politicians appear to think it does. Suggestions to accelerate retirement rates by moving more to Social security ignore the fact that there is already a problem with a lack of funding. An economist stated that the US is big enough to fund whatever they want, and we should go ahead and do that. If he is right, Why do they need to raise taxes? They should be able to eliminate them instead.
Taxes remove money from the economy, weakening it. Government spending does not add new money, it only replaces some of what was removed. Government projects and spending cannot fund a recovery.
Tax reductions have nearly always been in the form of a tax rebate. They are a temporary injection of money into the economy. Most tax rebates have been insignificant to those recieving it, rarely even as much as a weeks pay, and has cost more than the people recieved to distribute. A long term reduction in taxes would have more impact, because it would not need to be returned. I do not see politicians or economists advocating such changes.
Comment by Drew on 5 November 2009:
Spoken like a true Keynesian, James.
Comment by Tannim on 5 November 2009:
Nope all around.
First, the core inflation numbers are inaccurate. Real Inflation is mostly hidden right now and is at about 17%, not the visible core stuff,
Second, while it is true that banks are hoarding cash, they never should have gotten the bailouts in the first place–if anybody, the taxpayers should have. All the hoarding cash does is create a slow rise to the hyperinflation instead of a fast jump, but it will happen nonetheless. We’re currently in the saddle of a double-dip recession, but nobody in DC dares admit it for political reasons. The bailouts were a horrible idea, and they should not have been rewarded for bad business practices.
Third, China can continue to absorb inflation as long as they have a trade deficit in their favor, which is why their cheap crap continues to be imported and be cheap. Tariffs will not improve that either. When the trade deficit goes away, they stop importing our inflation, and we are totally screwed. China has us over a barrel, dictating trade policy to us based on our debt, and the consumer and worker suffers with the widget economy going out of business. But if we try to restore the widget economy and narrow the gap, our debt comes home to roost. This is why deficit and debt spending has been so much of a problem!
Fourth, consumers are cutting back but not cutting debt as the cutbacks are going back into necessities, because those prices are going up–that slow rise to hyperinflation mentioned above. Had the consumers gotten the bailout directly, instead of the banks, their debts would be reduced, which hurts the inflated paper economy, but it would have created more consumer confidence and investment in the widget and service economies. But doing that would bring back the issues of deficit spending explained above.
Fifth, employment cutbacks are happening from rising costs in health care and unemployment insurance premiums while wages stagnate, not to mention the slow rise in costs of supplies and materials to actually produce anything.
It all comes back to the deficit spending and out-of-control debt coming back to roost, and all attempts to minimize the pain will be ineffective. That’s why the stimulus didn’t work–you can’t stop a tide rolling in by spraying it with a garden hose the other direction.
Comment by erich kellner on 5 November 2009:
While agreeing with all the facts cited in the article I am much less panicked about the prospects of hyper-inflation. For one, China isn’t going to revalue the yuan by 60% over-night but allowing for a gradual adjustment over time. Domestic production , i.e. jobs, would take up the slack here. There’ll be a new equilibrium in world commerce. The dollar should rise relative to other currencies, such as the Euro and Yen etc.
The Fed will mop up the excess liquidity. The only worrysome item in my view is unchecked spend and tax policies pursued by the present administration that may kill the economic recovery.
Comment by Phil on 5 November 2009:
@ Tannim
An A+ for your analysis. Great.
Comment by Vivianclare on 5 November 2009:
I would like to see some real employment numbers, such as:
Out of all tax returns submitted by Americans, deduct all 1099s, deduct all government workers (police, politicians, teachers, postal workers, etc.), then deduct all those working in health care. Now, how many people are left? These are the folks actually “producing” productivity. I’m curious to see what the percentage is. That’s the number of actual jobs you have. As the cost of insurance and insurance mandates & regulations skyrockets, w-2 jobs decrease drastically, and there is strong disincentive to have older employees. Once one’s age is over 50, you wouldn’t believe what health insurance costs.
I totally do not trust our unemployment statistics. My husband is a 1099, and we pay all medical insurance with after-tax dollars because of that fact. However, for purposes of losing his unemployment benefits, he was considered “employed”. They may have considered him employed, but he has years with about zero income. However, I’m sure he was included in the statistics as an employed person. Big deal. Many jobs these days are commission only, and very low paying. To brag that an economy is going well because unemployment has decreased is not painting an accurate picture.
Comment by NoBama2012 on 6 November 2009:
We have been a debtor nation since the Revolutionary War !!
So. you have to choose Hamiltonian policies or Jeffersonian policies
<Hamilton historian (B.O.) now occupies the Whitehouse?
The 20% wealthy/elite is more like 5% of the population.
Inflation is the cure for our present economic demise….except,
double digit inflation will be the U.S. economy demise as it is unmanageable by all. Employment, income, hires always trails any economic business upturn. BETTER THAN SOCIALISM IS CAPITALISM. If that $2 trillion "stimulus" plan was substituted with the NoBAMA stimulus plan-we would not have been here/now. NoBAMA Stimulus Plan = $50k to each person who leaves the workforce, or social security plan to start a business.
This business would have SBA 90% finance = $500k and MUST
employ 3 non-owner people. Hence, 2 million = 6 million employed !! ALL PAYING TAXES !!!! Economy stimulated, unemployment reduced, social security re-balanced. Bankers happy making loans again. CAPITALISM IS THE ANSWER!!
Thats the way this old guy sees it !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Comment by Tom on 9 November 2009:
you hit the nail on the head, I can’t understand way some many people are to what is really been going on, and the facts. Even with facts and proof. They don’t believe or are blind. All i can see and say is 80% of people are brainwash controled, and hide in disney land.