A Look at Hyperinflation

Lately I see many people pointing to this that and everything else but especially rising home prices, gasoline prices, and commodity prices as if those constituted "hyperinflation". It is a word being bandied about without anyone having a firm grasp as to what it really means. Hyperinflation involves a complete and sustained collapse of faith in currency.

If you want to understand hyperinflation please look at Zimbabwe.

The BBC is reporting that Public hospitals fees have gone up from Z$300 to between Z$800,000 and Z$1m (US$10) with immediate effect, the state-owned Herald newspaper reported. The costs of consultations, maternity services, surgery and intensive care are also increasing.

The 333,200% increases come a month after the government lifted a freeze on private health care charges.

333,200% increases is (no ifs ands or buts) hyperinflation.

Back in the US, gasoline prices soaring 100% in response to peak oil has nothing to do with hyperinflation. In fact, soaring oil because of "peak oil" has nothing to do with inflation at all.

Oil soaring because of loose monetary policy does have something to do with inflation. Unfortunately it is very hard to see the difference.

Yet it is critical to understand the difference.
Please review:

• Inflation: What the heck is it?
• Inflation Monster Captured
• In Praise of Saville
  

In case you do not believe me or Saville perhaps you might believe Marc Faber. Please consider the article Marc Faber shatters prevailing market myths.

Q: How important is it to understand the role of the Federal Reserve to understand the world economy?

A: I think it is very important to understand the fact that we have a central banking system where the central banks can indicate, theoretically drop dollar bills from Helicopters. You wont be able to do that because all American helicopters are in Iraq. But they can print money, that is a fact and they can flood the system with liquidity.

Then you have to find a measurement of inflation. We measure inflation by rise in money supply. It would be wrong to think that the inflation is just consumer price increases. Inflation is a loss of purchasing power of your currency, dollar or Rupee. It can manifest itself by rise in consumer price but it can also manifest itself by a loss of purchasing power of money against real estate, or against stocks and real estate.

Q: What is the public enemy No 1 in your book, would it be inflation, or deflation?

A: In my book public enemy No 1 are the central banks. I think the world will be much better off under a gold standard. Other than that, I think the asset inflation is much more dangerous than consumer price inflation because asset inflation is driven by a huge credit bubble. Then asset prices become very expensive and when asset prices go down it leads to recession. So the Central Banks will support asset prices and see to it that they keep on going up. So they will inflate more and more and eventually you will come to an economic collapse.

Point blank, if the US was anywhere close to hyperinflation, Centex and other builders would not be knocking off $100,000 on the prices of their houses. I would not be able to buy chicken legs at .49 a pound on sale. Round roast would not be $1.69 lb on sale. I bought several roasts and had the store make ground round for me, paying zero% extra for the service. I recently bought whole turkeys at .69 lb and turkey breasts at .99 lb. Over Easter I bought a butt ham for .98 lb. Center cut pork chops not on sale are $5.49 lb. Phooey. Who needs that? At least once a month they are on sale for $2.29 lb or less. Seriously we are talking 1970's prices. I know because I worked as assistant manager in a grocery store back then. Heck I have no idea how they can even raise chickens at .49 lb. If you know then please tell me!

Yes, you can complain about medical prices, property values etc. But... If you have lived in your house for the last 5 years your expenses have gone down (assuming you were smart and refinanced anywhere close to the bottom). You can also complain about car prices but that will fall on deaf ears. We bought a brand new and very well equipped Hyundai Elantra (in 2005) for $10,500. Anyone paying $30,000 or whatever for an SUV and is now complaining about insurance costs and gasoline prices was simply asking for trouble in the first place.

Speaking of gasoline prices.......
The US has some of the lowest gasoline prices in the world.

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Is that hyperinflation? Where?
To the extent that those prices are rising because of peak oil and not loose monetary policy, gas price hikes are not even a symptom of inflation at all.

Please do not mistake this post to mean I believe the CPI. I do not. It seriously understates energy prices, medical prices, education costs, property taxes, and a whole slew of other things. But the bottom line is that any talk of hyperinflation in the US is seriously misguided.

As for me, I am waiting for a turn down in credit expansion which is what the focus should be on. The threat is not where everyone is looking, and I guarantee you everyone is looking at inflation running out of control. Flashback 2002: does anyone remember the deflation threat? That the FED is now concerned about inflation after 15 consecutive rate hikes smacks of the same wrong way thinking of the Fed in 2000.

The Fed is almost always fighting the wrong battle so I agree with Faber that it should be abolished. A return to the gold standard and elimination of fractional reserve lending is just what we need. It would be a very painful adjustment to make, but a serious adjustment is coming anyway. We may as well make it the right one.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/