[BigTex]

I think we are speculating on truly un-answerable questions here.

If you asked 100 experts you would get 100 different answers. If one of them happened to be correct, that expert would be pronounced a genius, but the reality is that out of 100 experts one is likely to be right, no matter what you are discussing.

It's like Yogi Berra said: "The future aint what it used to be."

[Heineken]

I'll believe there is deflation when (if) food prices fall dramatically.

Right now we're just seeing the inevitable unwinding of the housing bubble (which could be a very long-term unwinding) and the oil bubble (which has to be a very temporary one). To me that doesn't equal deflation, yet.

Maybe precious metals were in a bubble too. But gold is still far higher than it was 18 months ago. So are gasoline prices and so are so many others.

The mists must clear before we truly know where we're headed.

Deflation might be kinda nice for a retired fellow like me on a fixed and low but relatively secure income. Everything getting cheaper all the time!

[venky]

The ratio of debt to GDP for the US is still considerably less than several other major economies of the world. The absolute numbers seem so huge precisely because the US economy is so huge.

I also remember reading somewhere that the debt to GDP ratio for the US is currently about 5 times less than that of Weimar Germany preceding the hyperinflation there. I cant remember the exact figure though.

We might start to see an unhealthy rate of inflation soon, but I doubt a hyperinflation.

[gnm]

$this->bbcode_second_pass_quote('venky', 'W')e might start to see an unhealthy rate of inflation soon, but I doubt a hyperinflation.

[sjn]

$this->bbcode_second_pass_quote('seahorse2', 'M')attduke,

I just can't ask a good question. I'm not here to argue deflation, in fact, my opinion is that nationalizing Freddie and Fannie is the precursor to hyperinflation.

Over the last year, we have all heard and argued the ongoing debate between deflation (asset prices) and inflation (food and energy). All that aside, what I'm asking is a very pointed question, does the nationalization of Freddie and Fannie a precursor to the argument for hyperinflation in the U.S.?

For example, an editorial at Minyanville points out that one of the risks of the recent F&F takeover by the gov't is the risk of hyperinflation.

$this->bbcode_second_pass_quote('', 'N')ext up, and at risk of trying to predict the future, the fourth and perhaps final brain-cramp of our rulers is likely to take the form of some kind of monetization of the bad loans (CMBS’, commercial loans, credit card/auto loans, etc.) which are next in line to go up in a mushroom cloud. In English, this means that the government, finally unable to borrow more money on our backs, will literally start printing dollars to buy bad debts ushering in a hyper-inflationary spiral worthy of its evil twin – the deflationary spiral of the Great Depression.

[seahorse]

$this->bbcode_second_pass_quote('', 'S')eahorse, you know the answer to your question already. Why else would they have bailed out F&F? You aren't going to get an answer to that from the deflationists because they won't have one. The debate all along, has been whether the US would intervene to prevent (or react to) a deflationary spiral. The answer appears to have been given.

[heroineworshipper]

Hyperinflation has been constant sine 1973. Every savings & loan bailout is an answer to a lack of money to keep up with rising prices.

[ColossalContrarian]

$this->bbcode_second_pass_quote('heroineworshipper', 'H')yperinflation has been constant sine 1973. Every savings & loan bailout is an answer to a lack of money to keep up with rising prices.

[korosten]

seahorse2,
I agree that the bailout of F&F is a necessary step towards hyperinflation. I think they are so worried about a repeat of the great depression that they will probably bail out more banks to avoid serious deflation.

So given the fact the the bailout happened, and assuming that more such bailouts will happen and that probably other steps will be taken to combat deflation (such as lowering interest rates), I wonder what the possible outcomes are?

Is hyperinflation avoidable given the above, or can we still end up with a serious deflation (and what happens after that?), or is it possible to get back to a "nice" 1-3% inflation as usual?

I wonder if we can answer this question also statistically:
from all the countries that had similar amounts of debt as the US and had an economic downturn, what percentage of those ended up in hyperinflation, deflation or neither?

[seahorse]

Korosten,

You framed the issue I've been struggling with. In the end, I too believe that nationalization would be a necessary step before we could see hyperinflation. As you point out, they are trying to avoid deflation. But whether they can avoid deflation and in turn avoid hyperinflation via the bailouts remains to be seen.

[thuja]

It looks like we are in for a period of strong deflation brought on by the credit bubble and the collapse of the housing market. Massive ankruptcies, layoffs, unemployment and further foreclosure should accelerate the deflation.

Governments throughout the world have injected massive amounts of money into the financial markets with little effect so far. Banks seem to be hoarding their cash infusions.

At some point there is likely to be a tipping point where banks start lending again and the amount of available fiat money explodes. At this point we are likely to see a rapid shift to an inflationary and perhaps hyperinflationary period.

I think of the recession to 50 $/barrel oil as similar to the tide rolling out just before a tsunami. The beach seems like a great place to be...until the mother of all waves rolls in...

[copious.abundance]

Was there a hyperinflation after the deflation during the Great Depression?

No.

Was there a hyperinflation after the deflation in post-bubble 90's Japan?

No. In fact Japan has almost been in deflation ever since.

There was also a deflation in Hong Kong following the 1997 Asian financial crisis, which lasted until 2004. AFAIK, there was not any particularly noteworthy hyperinflation which followed, aside from the standard inflation the world saw over the past few years until recently.

There were 3 other noteworthy periods of deflation:

One in the US following the Civil War (after the US went back on the gold standard, having temporarily abandoned it during the war). This deflation lasted some 25 years. AFAIK there was no particular hyperinflation in the US in the early 1900's after the deflationary period ended.

The second was in the US which followed the recession of 1836. AFAIK there was no hyperinflation afterwards.

Finally there was one in the UK after WWI, which existed for similar reasons as the post-Civil War deflation (the UK temporarily went off the gold standard during the war, then returned to it afterwards, creating deflation).

One might say that the deflations prior to ~1971 "don't count" because the nations which experienced them were on (or went back to) the gold standard. But even ignoring those, we still have the deflations in Japan and Hong Kong, neither of which were followed by periods of hyperinflation.

So the answer to your question is, Not necessarily. Of course there could be a first time, but historically there has been no reason for it.

--> Wiki article on deflation <--

[3aidlillahi]

$this->bbcode_second_pass_quote('', '
')One might say that the deflations prior to ~1971 "don't count" because the nations which experienced them were on (or went back to) the gold standard. But even ignoring those, we still have the deflations in Japan and Hong Kong, neither of which were followed by periods of hyperinflation.

So the answer to your question is, Not necessarily. Of course there could be a first time, but historically there has been no reason for it.

[copious.abundance]

After the Japanese bubble burst in 1990, setting in motion deflationary forces, the Japanese government did pump a lot of money into their system. I don't know if it was equal to 10% of their GDP, but it was a lot.

And if that weren't enough, the Bank of Japan set interest rates at 0% for many years, and that still didn't prevent deflation from occurring.

[kokoda]

It could.

Deflation occurs because of fall in demand, or an oversupply in the market.

Inflation occurs in exactly the opposite scenario.

The problem we face at the moment is a credit crunch. This in turn causes a liquidity problem as businesses can no longer gain access to credit needed to allow them to continue operation.

We could see the impact of this several months down the track when we notice that the supermarket shelves are starting to look a little bare and prices start to soar.

[seldom_seen]

From the 10,000 foot view, hyperinflation is inevitable:

1. Growth based economy stops growing.

2. Leaders of growth based economy try to "stimulate" economy by pumping money in to economy. Money is an abstract representation of power or "energy." (Defined as the ability to do work, or get stuff done, or get yourself a sweet Cadilac Escalade with custom rims). Money is not energy, money is not a substitute for energy (don't tell that to an economist).

3. Money disappears in to "black hole," as asset prices devalue. Much talk and concern develops about "Deflation." Devaluation of asset prices has limits. The value of your house or your 401k can only go to 0. There is no limits to how much money can be printed. (There are probably theoretical limits based on the amount of 0's that can fit in a spreadsheet with modern computers.)

4. Prices for bubble assets (houses, investment accounts as well as SIVs, CDOs, CDS and all that BS) reach some sort of low water mark.

5. Growth based economy still not growing! Govbank still printing! (money still not a substitute for energy).

6. Goto 5

An economy predicated on endless growth requires endless amounts of energy to feed that growth. That annoying fact isn't going to constrain policymakers though. They will continue to try to substitute money for energy for as long as things appear more or less "normal." I give them another year (best case, most cornucopian scenario, two years).

Then we, like all those other sad societies will need wheel barrels of cash to purchase a loaf of bread.

[yesplease]

$this->bbcode_second_pass_quote('seldom_seen', 'A')n economy predicated on endless growth requires endless amounts of energy to feed that growth.

[yesplease]

$this->bbcode_second_pass_quote('3aidlillahi', 'I')'d like to find out how much cash was injected into each of these systems that didn't have hyperinflation after deflation. I doubt it's anywhere near what the US is putting in (in terms of percentage to pre-deflation money supply). The US seems to be on the verge of injecting 10% or more of our GDP into the system every year on top of what we'd already been doing.

[Micki]

Can't find the source now but I read Japan waited nearly 10 years with using quantitative easing injections.
This is a more sure way to get money into circulation as it goes into enterprises that needs it for spending not for hoarding.

Regarding deflation first, I would say some material weakness is material for hyperinflation to take place. Hyperinflation is basically the result of panic attempts to restore failing economy. Hyperinflaiton would not come out of a steady normal inflationary environment.

[uNkNowN ElEmEnt]

All of the deflationary periods the second poster listed all have one main thing in common. The dollar at that time was pegged to gold. Have we ever seen a depression or major recession where there was a fiat currency in place?

Japan has the second highest debt per GDP. what effect does that have for their deflationary bubble. and how does the fact that they are the second highest holder of US treasury bills play into both their current situation (deflation as opposed to hyperinflation) and the US situation (which looks about to implode).