Hyperinflation: Expansion of the monetary base confirms clear and present danger of fiscal collapse

This blog, among many, many others, have been warning about the coming economic consequences of the fiscal debacle we have created via our out of control love for borrowed money.

After speaking with a friend today (his blog can be viewed here) about our current economic circumstances, he suggested that the primary reason we may face hyperinflation is not only due to the broad supply of cash in circulation but also because the overall velocity of money is currently very slow.  In other words, there is a ton of cash in the market and it isn’t moving around.  (The velocity of money is the rate at which one dollar changes hands throughout the course of a year.)

My friend’s opinion, with which I concur, is that if the Fed moves forward with launching Quantitative Easing III (QE3) and monetizes an additional several hundreds of billions of dollars of debt (by purchasing Treasury bills – i.e., printing cash), the additional flush of liquidity into the market is much more likely to only trigger massive inflation rather than additional spending.  The reason for this is that the money that is currently available is already not being spent – adding more to a stagnant economy will only serve to directly devalue the currency.

In 2008, the total amount of U.S. currency in circulation was about $800 billion.  In 2009, it increased to $1.8 trillion.  In 2010, it increased again to about $2 trillion.  As of today, the worldwide U.S. currency supply is $2.7 trillion.  In the simplest terms possible, the value of the dollar has decreased by nearly 70%, simply due to the vast amount of currency floating around.  We don’t truly see this impact on inflation in the short term because much of that currency is tied up in banks and is otherwise not being spent.  However, the moment it is released, the value of the dollar will drop like a rock.

In the figure below, it is clear that the initial printing crisis began in the last six weeks or so of 2008, right around the time that TARP was passed and at the same time as QE1 began [1].  Clearly, the initial phase occurred under the watch of George W. Bush and he ultimately bears responsibility and blame for its passage.  However, then-Senator Obama voted in favor [2] of TARP’s passage in 2008 and also successfully lobbied the Senate to approve a plan giving the incoming Obama administration the authority to spend the ‘remaining’ $350 billion from TARP in January 2009 [3].  The Senate sided with President-elect Obama; the vote was widely praised as a resounding “success” for the to-be President [4] [5].  So, while the President likes to run around claiming to have “inherited” a bad economy and this is strictly true in the Presidential-only sense, then-Senator Obama voted in favor of the policies which created the “inherited” situation.  For the record, John McCain also voted in favor of TARP.

 
An additional round of quantitative easing that pumps, say, $500 billion into the global markets is unlikely to be soaked up to the degree that funds from QE1 and QE2 were.  The current stagnant economy is an excellent indicator of this.  So, rather than that $500 billion being absorbed, it will move around the markets freely and dilute the dollar supply with much more of an immediate effect than we’ve seen so far.

Historically, the only way out of such a crisis has been to simply print enough currency to pay the debts off, albeit with worthless paper.  The problem is, even if $14.5 trillion in cash was flooded into the market through debt payments, the government could never hope to draw that money supply back in nearly fast enough to prevent runaway hyperinflation.

Historically, no major economy has ever survived the debt crisis we have embroiled ourselves in without massive inflation – the United States is unlikely to be any different, especially with a Congress that lacks the resolve and fiscal discipline to end our spending binge.

While all of this sounds bad enough, the picture becomes even worse when viewed through a wider historical lens – since 1918, all the way through The Great Depression, World War I, World War II, Vietnam, the Cold War, the Japanese “lost decade” in the 90′s, and September 11th, the United States has never faced an inflation risk anywhere near the magnitude of the one we’re facing today:

In the 93 years on record, the U.S. monetary base has never been at the levels it is today (both charts are inflation-adjusted).  When combined with the record $1 trillion+ annual budget deficits we have been running since FY2008 (the FY2011 budget deficit just hit $1.1 trillion [6] and the year isn’t even over yet), any additional infusion of cash or large-scale event that requires the U.S. to fund major military action threatens to push us into prolonged depression and fiscal collapse.

So, ultimately who is to blame?  George W. Bush cut taxes in 2001 and 2003, which led to one of the longest sustained periods of job growth in our history.  However, the national debt rose considerably during that time to such a degree that it may be rightly called a “debt-fueled mirage [7].”  Upon President Obama’s inaguration, we spent an additional $1 trillion on a “stimulus” bill which has resoundingly failed.  With the latest debt limit increase, President Obama will have presided over a debt increase of nearly $6.7 trillion within a single term, the largest in history (by far).

However, neither of these Presidents found their way into office by themselves – we put them there.

Ultimately, we – the people who have demanded debt-fueled binges to support social welfare programs, large-scale military action in six countries, and both housing credits and subsidies for “clunker” cars – are responsible.

Never before in our history have we faced a crisis of this magnitude – there is no magical “plan” to get us out.

In love of liberty,

The Bulletproof Patriot

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