What triggers Hyperinflation?

What triggers hyperinflation?

Argentina Venez CubaWe teeter at the pinnacle of the largest credit bubble in history. It was fraying already in early 2019. Beginning of that year economists forecasts a rate hike no later than 2020. The fed funds futures market implied an 80% chance that the fed would cut rates. This was long before China exported its virus from Wuhan.

In September 2019, the REPO market implodes (see updates for 2019 on Goldonomic). The Repo market is the primary funding mechanism for Treasury bonds and mortgages. Repo funding costs surged overnight to a 7% premium over the fed funds rate. Within two weeks and In order to contain the drama, the Fed had to print $181 billion to fund the repo dealers to prevent the credit contagion from spreading. A week later, Powell announced that the Fed's balance sheet would begin expanding indefinitely.

"If there would not have been this Chinese virus, the Central Banks would have to invent one."

Six months later the virus gave the fed the excuse it needed to spike its balance sheet from $3.7 trillion (Sep 2019) to $7.8 trillion today. If there would not have been this Made in China virus the Central banks would have to invent one.

The Fed's money-printing was necessary to bail out the repo dealers and to cover the federal deficits. The federal deficit which was projected around $2.3 trillion this year has already been surpassed by the Biden regime who plans to generate a $3.8 trillion deficit this year. [Figure 1]

picture translation: economic systems that ACHIEVED the impossible: Argentina without MEAT, Venezuela without OIL, Cuba without SUGAR.

1 fed receipts versus expenditures 2021

The level of borrowing necessitates a further acceleration of the pace of money printing: who else will of could buy Treasury bonds in the quantities required to fund this spending.

Figure 2 - Fed liabilities on a log scale: the rising slope indicates that an increasing trend is required for the central banks (FED, ECB) to remain liquid.

2  federal reserve liabilities 2021 05 17

Note the parabolic increase on a logarithmic scale. Such growth is an absurdity in the real world and cannot persist for long. Each time the demand of the Government outruns the ability to raise taxes, the expedient of money printing ended both the currency and the state.

Russia, Hungary, China, Zimbabwe, Venezuela went all through the same scenario...Note the BEND or a CRISIS (COVID?) that prompts extreme acceleration toward the final destruction of the currency. Figure 3

3 increase in money supply 2021 05 17 

The charts show only the increase in the money supply. They do not show the value of that money, which tends to be resilient at the beginning and then collapses at a faster rate than the rate of money printing would imply. Figure 4

4 Weimar 2021 05 17

There is a reason why the total value of a currency at first moves independently of its quantity in circulation. As long as bank assets are backed by solid assets, the value of a currency remains stable no matter the quantity of money supply. However, when a central bank issues new currency against speculative assets as Government Bonds, the situation becomes different. In this case, the currency will remain strong as long as the government remains solvent and the bonds find buyers. If the assets of a central bank suddenly become worthless, then so does the currency regardless of its quantity.

Note: This is WHY Central banks today buy SHARES, try to keep interest rates low, and buy all Treasuries. In fact, by doing this they make the coming catharsis even worse.

Hyperinflation will generally occur when it forces its central bank to buy treasuries to fund deficits when the value of those bonds are collapsing. At that time, there is no way for the central bank to intervene in the market to support its currency. As a matter of fact, the more they try so, the faster the currency loses its purchasing power.

Thomas Sargent concluded that it was persistent losses on the central banks' balance sheets that caused hyperinflations, not the quantities of money in circulation. Figure 5

5 supply of dollars vs. purchasing power 2021 

"This is WHY Central banks today buy SHARES, try to keep interest rates low, and buy all Treasuries. In fact, by doing this they make the coming catharsis even worse."

There is a reason why the total value of a currency at first moves independently of its quantity in circulation. As long as bank assets are backed by solid assets, the value of a currency remains stable no matter the quantity of money supply. However, when a central bank issues new currency against speculative assets as Government Bonds, the situation becomes different. In this case, the currency will remain strong as long as the government remains solvent and the bonds find buyers. If the assets of a central bank suddenly become worthless, then so does the currency regardless of its quantity.

In 1980 the Fed started to hike the general level of interest rates and succeeded to save the Dollar. A new cycle began. This time, however, there is an overcapacity in the interest-rate sensitive parts of the economy and therefore each monetary intervention must increase in scale and scope to prevent economic and political collapse.

The time comes when the money printing begins to lower, not increase, the total value of the dollar (euro) and the RED line of the chart start coming DOWN despite all stimulus spending. At that point, the purchasing power of the state will begin to collapse even as the central bank is ordered to purchase more treasuries. Either we shall see hyperinflation, either the nations will have to balance their budgets.

Balancing budgets would result in a huge social conflict, unrest. Higher taxes are already surpassing 50%. Therefore hiking taxes will certainly result in lower tax revenues (Laffer curve). The only other choice will be less spending either by budget cuts or a crashing currency.

It is clear that Government is the enemy of all well-disposed, industrious, and decent men and the outcome would be welcomed. However, industrious and decent men should first make sure they have protected their wealth by holding gold.

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