Hyperinflation Watch

Hyperinflation Looms – The Dollar Arrives at Its ‘Havenstein Moment’

April 20, 2010 – There is an interesting article in Canada’s Globe & Mail about the lack of growth in the US money supply.  Ignoring for the moment that the quantity of dollars in circulation is significantly underreported, it observes:

“The money supply in the United States is doing something that almost never happens: it’s shrinking, after taking into account inflation.  Similar episodes in the past have usually been scary times for investors. Declines in the amount of money in circulation have coincided with recessions, and some analysts looking at the current trend say it is a harbinger of trouble. Despite signs that the U.S. is in recovery, they worry that the money supply numbers indicate the economy remains vulnerable to the feared double-dip downturn, or is close to experiencing deflation.”

I agree with the first half of this proposition about a renewed economic downturn, but not the second.  In fact, rather than deflation, the dollar is moving ever closer to hyperinflation.

How is deflation possible when crude oil prices have more than doubled since their post-Lehman crash low?  Or more broadly, how can there be deflation when the price index of 19 commodities compiled by the Commodity Research Bureau rose 47% during this same period?  It cannot of course, which means there is no deflation.

The ongoing decline in the purchasing power of the dollar has been masked by wealth destruction as over-priced assets like houses fall back to realistic levels.  There is also the problem that the mainstream media broadcasts only the government calculated CPI, which is an inaccurate measure of the dollar’s eroding purchasing power.

As John Williams of www.shadowstats.com notes: “Over the decades, the BLS [Bureau of Labor Statistics] has altered the meaning of the CPI from being a measure of the cost of living needed to maintain a constant standard of living, to something that no longer reflects the constant-standard-of-living concept.”  John reports that his “SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to about 9.5%” in March from a year ago.

So the Globe & Mail article is wrong about deflation, but I am not drawing attention to it just because I agree that “the economy remains vulnerable to the feared double-dip downturn”.  Instead, this article unintentionally offers compelling evidence that the dollar is approaching hyperinflation.

The so-called “shrinking” money supply that arises when adjusting for the loss of purchasing power from inflation is a characteristic portending imminent hyperinflation.  Let’s call it a ‘Havenstein moment’, named after the ill-fated president of the Reichsbank who presided over the destructive hyperinflation that devastated Weimar Germany.

I first explained this phenomenon in September 2007 and questioned then whether the dollar would eventually hyperinflate because Ben Bernanke would follow the footsteps of Herr Havenstein.  I quoted an insightful section from Murray Rothbard’s excellent book, The Mystery of Banking, that explicitly explains the consequences of the inflation-adjusted money supply.  Here is the relevant part of that quote:

“When prices are going up faster than the money supply, the people begin to experience a severe shortage of money, for they now face a shortage of cash balances relative to the much higher price levels. Total cash balances are no longer sufficient to carry transactions at the higher price.”

As the Globe & Mail observes, these circumstances prevail today.  Prices of goods and services are rising, but as it warns, the quantity of dollars in circulation is “shrinking, after taking into account inflation.”  This “shortage of money” is being widely misinterpreted as deflation, which is exactly what happened in Weimar Germany shortly before the Reichsmark was swooped up in its hyperinflationary whirlwind.

Rothbard provides his usual brilliant insight to explain what happens once the “Havenstein moment’ is reached.  There are two alternatives.

“If the government tightens its own belt and stops printing (or otherwise creating) new money, then inflationary expectations will eventually be reversed, and prices will fall once more – thus relieving the money shortage by lowering prices. But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public’s cash balances to ‘catch up’ to prices, then the country is off to the races.  Money and prices will follow each other upward in an ever-accelerating spiral, until finally prices ‘run away’…[i.e., hyperinflate]”

Weimar Germany took the second alternative.

The dollar has now reached its ‘Havenstein moment’.  Will policymakers follow the prudent advice of Murray Rothbard and ‘tighten its belt’?  Or like Herr Havenstein, will Mr. Bernanke continue to ‘print’?

No need to ponder these two alternatives.  The Federal Reserve must ‘print’, for one reason.  Despite the noble goals assigned to it in textbooks and offered in Congressional hearings, the Federal Reserve exists for only one reason – to make sure the federal government gets all the dollars it wants to spend, which consequently has put the dollar on a hyperinflationary course.

Spending by the federal government is out of control, causing it to borrow record amounts.  The money to fund this growing mountain of debt must come from savings or ‘printing’, and the sad fact is that there is not enough accumulated savings in the known universe to satisfy the spending aspirations of Washington’s politicians.  So beyond what it can collect from taxpayers and extract from the world’s savings pool, the dollars the federal government is spending can only come from one place – the ‘printing press’, which in the prevailing monetary system means bookkeeping entries of the Federal Reserve.

This process of creating new dollars ‘out of thin air’ creates the hyperinflation, which the ‘Havenstein moment’ indicates is near.  Sadly, like Weimar Germany, few people are prepared for this impending destruction of the dollar, but the remedy is simple – as much as practical, avoid the dollar.  Own physical gold and physical silver instead.