New Year Prediction: Hyper-Inflation

The depth of the … let’s start calling it what it is … Bush Depression(1) has caught most people off guard. But the most surprising thing about it is the unprecedented things that have been happening.

• The bankruptcy of major financial institutions. Huge companies like Lehman Brothers and Merrill Lynch going out of business is simply mind-boggling.
• The crash of real estate prices. Going into this crash, I remember thinking that there might be a prolonged period where real estate sales were very low, but I personally thought real estate prices went up or stayed the same. I never, ever expected that prices would fall like they have.
• The wild swings in economic events. In a previous blog, I actually predicted – almost to the day – when oil prices would crash. But I never expected them to keep going down as they have. In six months, the amount oil prices fell from their peak is more than double the price at the bottom. In the stock market, both the top three record daily point gains and the top three losses (Dow average) took place in 2008. Eight of ten top daily gains were in 2008. But all those gains and more were totally lost in the huge drop at the end of the year. The Fed has dropped the funds rate to an unprecedented value of essentially zero. They’re giving away money!

In response to all this, Obama, supported by a choir of economists, Democrats, and even some Republicans, has pledged to simply dynamite the dam and spend, spend, spend like there is no tomorrow to jolt us out of the Bush Depression.

I have news. There is a tomorrow. Maybe not a good one, but it’s there waiting for us anyway.

When the “bailout” was first proposed, I was against it because I believe that this kind of spending will inevitably create an inflation of monumental proportions. So far, the severity of the Bush Depression has created exactly the opposite effect. Economies don’t experience actual price deflation very often, but that’s what is happening right now because people have abruptly stopped buying. That creates a surge in inventory and business has to unload it at whatever price they can get.

But what happens when this inventory is gone?

Then prices start to respond more to the supply of money than to the availability of goods. And the supply of money will have been pushed to the moon by all this uncontrolled spending.

But there’s another economic force that worries me even more. Right now, government is able to get their hands on this money only because foreigners are still willing to buy our debt. As a result, we’re drifting deeper and deeper into debt with “friends” like China, Saudi Arabia and various and sundry super-rich around the world. If the day ever comes when these “friends” decide they’re not willing to lend us any more … well, we’ve already seen that happen with former homeowners across America. But with nations, it’s a little different. You don’t get frozen out completely. You just have to pay more. And paying more means interest rates get pushed up regardless of what the Fed chooses to do. If we don’t have the money, the last resort of the government is to simply print it, which results in even greater reluctance to buy our debt, which results in even higher interest rates and so on and so forth.

The economic term for this is “hyper-inflation” and it really does happen. Another wonderful result of eight years of Bush.

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(1) A “depression” is “a severe economic downturn that lasts several years. Characteristics of an economic depression include declining business activities, falling prices, rising unemployment, increasing inventories, public fear and panic.

I’d say that fairly describes what’s been happening recently.

There is no standard or official definition, however. Before the 1930s all economic downturns were called depressions. The term “recession” was coined after the Great Depression to avoid using the same word to describe economic downturns.

According to the National Bureau of Economic Research, the current official “recession” has been going on since December 2007. So we’re into our second year and the thought that it’s going to suddenly stop is just wishful thinking.