I thought Ron Paul was predicting hyperinflation...could someone explain please?

[TheOraclePaul]

I have heard Ron Paul make continual calls for a hyperinflationary depression - I'm just wondering if anyone knows whether or not he's changed his opinion. The reason I'm asking is that it's beginning to look more and more like a deflationary depression. As I'm sure everyone is well aware, central banks can create incredible incentives for people to borrow and banks to lend, but if they choose not to, then credit dries up, and there is a reduction in inflation. Does anyone know Ron Paul's reasoning for a hyperinflationary depression, other than the US Dollar becoming completely worthless all of a sudden (of which I'm not entirely sure will happen, given that everyone is rushing to it as a safe haven as credit dries up, just like in the 1930s)? I would like to know, not only for my own curiosity, but because I'm wondering whether or not I should hold cash and buy precious metals when they are cheaper (in the great depression, cash was king, and everything else became incredibly cheap). Will this deflationary phase pass? Will the American consumer experience both deflation, in terms of access to credit, and inflation, in terms of how expensive everything gets? Please explain, and if possible, with references to various theories (austrian school economics etc.). Thanks everyone!

 

[noxagol]

http://www.lewrockwell.com/paul/paul483.html

 

[TheOraclePaul]

Thanks for the reply!

I understand that is Dr.Paul's position, but I don't understand how hyperinflation can come about. Short of literally printing money (the dollar bills in your pocket), I don't quite understand how credit expansion can lead to it. As we are currently witnessing, if banks are unwilling to lend, credit contracts. It doesn't matter if the Fed sets rates at 0%, and injects liquidity in various enterprises, if they don't use it to make loans, and borrowers don't borrow (just look at what happened in Japan - 0% rates and they were in a deflationary cycle for like a decade). Could someone explain the link that I am missing? I trust Dr.Paul 100% and believe him, but a part of me still thinks that he is human, and could make a mistaken diagnosis (ie. inflation instead of deflation). One thing is for certain though, he is right about a coming recession/depression.

 

[Original_Intent]

It does seem strange that credit is tightening while people worry about hyper-inflation. Someone in another thread mentioned that deflation really wouldn't do much good, for the banksters, because unlike the depression, money now has no inherent value.

So if hyperinflation is what we expect, why the credit tightening? It doesn't make sense.

I expect we are seeing a bit of "Art pf War" thinking by TPTB. Basically Sun Tzu said to try to appear strong when you are really weak, and try to appear weak when you are really strong.

I suspect they will tighten just long enough for people appetite for credit to sharpen. Maybe we will see another six months or a year of tight credit. Then when people start screaming, I expect they will give us just what most of us will be demanding, the floodgates will open and easy credit again. The Fed will probably cut another half a percent tomorrow, so we will se when banks actually start making loans to regular folks again.

That's all just a theory of course, and I am not claiming to be an economist, but IF we are heading for hyperinflation, then that is the only thing I can figure that makes any sense.

Also, dont forget that the bailout package lowered the reserve requirement for banks - at least the first version would have, not sure if it made it into the bill that passed. Anyway, the only reason to lower the reserve requirement is if they intend to inflate the currency. Otherwise they would rais the requirement to cause deflation, right?

 

[LibertyEagle]

What do you think "credit expansion" and "inject(ing) liquidity" are? They're increasing the money supply.

 

[Cleaner44]

I understand that is Dr.Paul's position, but I don't understand how hyperinflation can come about. Short of literally printing money (the dollar bills in your pocket), I don't quite understand how credit expansion can lead to it. As we are currently witnessing, if banks are unwilling to lend, credit contracts. It doesn't matter if the Fed sets rates at 0%, and injects liquidity in various enterprises, if they don't use it to make loans, and borrowers don't borrow (just look at what happened in Japan - 0% rates and they were in a deflationary cycle for like a decade). Could someone explain the link that I am missing? I trust Dr.Paul 100% and believe him, but a part of me still thinks that he is human, and could make a mistaken diagnosis (ie. inflation instead of deflation). One thing is for certain though, he is right about a coming recession/depression.

The fact is that the Fed has inflated the money supply to a ridiculous degree. Why would you think this would lead to deflation?

 

[TheOraclePaul]

Central banks can't force people to borrow or banks to lend

The ability of central banks to stimulate the economy, as Alan Greenspan used to say, is a silly notion. Even he admitted that the power of the Fed resided on only one thing: human psychology. It doesn't matter what sort of incentives are in place if banks don't lend and people don't borrow. That is why central banks are weak, because it doesn't have a direct source of power.

With regards to your statement of credit injections, and I'm just being the devil's advocate here:
Let's say for example I put 1,000,000$ in your bank account, but you never took it out, and did nothing with it (didn't use it as collateral for a loan, etc.) and it just sat there. I understand that in the definitive sense that would be 'inflating' the money supply, but it would not lead to an increase in prices or distortions in the marketplace.

The reason I say this is because I get the feeling a lot of banks are going to take their handouts, and then sit on them. I mean, if you started thinking the economy was going down the tubes, and someone handed you a wad of cash, would you go out and spend it or take unnecessary risks, or hold onto it until when you really need it?

 

[TheOraclePaul]

The fact is that the Fed has inflated the money supply to a ridiculous degree. Why would you think this would lead to deflation?

Only a TINY percentage of the money supply is actual physical cash. So short of literally printing new money, I don't see how they can bring hyperinflation about. I'm not saying it won't happen, I'm just looking for an explanation. They can expand credit all they want, but in the end, it requires a willing borrower and lender - I would of figured almost everyone on these forums would understand the basis of central banks power is very weak (it relies on human psychology, which is out of it's control).

 

[Original_Intent]

Only a TINY percentage of the money supply is actual physical cash. So short of literally printing new money, I don't see how they can bring hyperinflation about. I'm not saying it won't happen, I'm just looking for an explanation. They can expand credit all they want, but in the end, it requires a willing borrower and lender - I would of figured almost everyone on these forums would understand the basis of central banks power is very weak (it relies on human psychology, which is out of it's control).

Read my above post. Tell me if it makes any sense.

 

[bluemarkets]

I guess the real question is how do you gage deflation/inflation...

Are you paying more for gas, food, and living expenses? If yes then that points to inflation, if prices are going down, then deflation.

I think I read somewhere that most likely commodity prices will go down first, as the global deamnd shrinks up and people realize we are in a global recession. But, as you see our government doing now to combat this, just throwing more money at the problem will definitely inflate the dollar overtime. Check this out ...
http://www.youtube.com/watch?v=h9-tBGxVU6o&feature=related

Also, read what just happened in Iceland this week, massive currency inflation!
Read from the beginning all the way through ...

https://www.kitcomm.com/showthread.php?t=24585
This is what I fear what will happen to the dollar

just my opinion

 

[tropicangela]

Only a TINY percentage of the money supply is actual physical cash. So short of literally printing new money, I don't see how they can bring hyperinflation about. I'm not saying it won't happen, I'm just looking for an explanation. They can expand credit all they want, but in the end, it requires a willing borrower and lender - I would of figured almost everyone on these forums would understand the basis of central banks power is very weak (it relies on human psychology, which is out of it's control).

It is paperless money that they are pumping around and injecting. It's credit because we as taxpayers will pay it back to the Federal Reserve. Our government is the borrower and the Fed is the lender.

 

[tropicangela]

An inflation tax does not necessarily involve debt emission. By simply emitting currency (cash), a government will induce liquidity and may trigger inflationary pressures. Taxes on consumer spending and income will then collect the extra cash from the citizens. Inflation, however, tends to cause social problems (e. g., when income increases more slowly than prices).

http://en.wikipedia.org/wiki/Inflation_tax

 

[BarryDonegan]

I have heard Ron Paul make continual calls for a hyperinflationary depression - I'm just wondering if anyone knows whether or not he's changed his opinion. The reason I'm asking is that it's beginning to look more and more like a deflationary depression. As I'm sure everyone is well aware, central banks can create incredible incentives for people to borrow and banks to lend, but if they choose not to, then credit dries up, and there is a reduction in inflation. Does anyone know Ron Paul's reasoning for a hyperinflationary depression, other than the US Dollar becoming completely worthless all of a sudden (of which I'm not entirely sure will happen, given that everyone is rushing to it as a safe haven as credit dries up, just like in the 1930s)? I would like to know, not only for my own curiosity, but because I'm wondering whether or not I should hold cash and buy precious metals when they are cheaper (in the great depression, cash was king, and everything else became incredibly cheap). Will this deflationary phase pass? Will the American consumer experience both deflation, in terms of access to credit, and inflation, in terms of how expensive everything gets? Please explain, and if possible, with references to various theories (austrian school economics etc.). Thanks everyone!

if there winds up being a voluntary deflationary depression then it will prove him even more correct... that would mean that the feds efforts to increase the money supply were overwhelmed by the market itself

 

[Chase]

One of the reasons we're probably going to have hyperinflation is because when the US dollar loses its reserve status and trillions in US reserves held overseas start to get sold off, the value of the dollar is going to fantastically plummet.

 

[Xenophage]

bluemarkets made a good point:

Austrians tend to think of inflation as "inflating the money supply" but that's not really the definition of inflation. Inflation is inflation of prices. Austrians attribute the *cause* of inflation to be an increase in the supply of money. There is essentially no difference in the short term between an increase in the supply of money and an increase in the amount of available credit: prices will go up either way to match the ease and availability of funds.

In the case of a severe credit crunch as the market attempts to adjust to defaulted loans and a severe shortfall of funding, you're going to get deflation as money stops circulating and people start saving more. That's the process that *needs* to happen right now, because we've been experiencing massive inflation for such a long time already. Unfortunately, what the government is attempting to do is to prevent that credit crunch by injecting *more* credit and *more* money into the system. The banks won't hoard this new wealth the way you think they will, because they make money by lending and they have no reason to believe the government will cease backing them with tax dollars.

So, as the government tries to prop up a failing inflationary system with more inflation, we run a high risk of eventually seeing hyperinflation the way Ron Paul describes. The only way to avoid the *deflation* is to ramp UP the *inflation*.

You have to bear in mind through all of this that its a completely artificial phenomena. The problem is that economic activity is stimulated by debt and credit, but there's actually no value or wealth being created when a bank hands you a loan. Instead, you and the bank are both gambling on your supposed *future* productivity. The banks, however, don't even have the money they lend to you - they borrow it in turn from each other and the federal reserve!

So, there's no REAL economic value being produced by expanding credit. Real economic growth comes from producing things like steel, microprocessors, automobiles, cheeseburgers, and tickle-me-elmos. But it *seems* like there's more wealth in the society because money is abundant, at least in the short term. In the end, you can't escape the fact that the United States is producing less and less real wealth every year as our jobs ship overseas and our assets get bought up by foreigners. Our economy has been in the shitter for a long time, and now the chickens are coming home to roost.

Or something. I'm not any more of an economist than any of you here

 

[Xenophage]

On second thought I'm not sure cheeseburgers count.

Thoughts?

 

[Chase]

I think cheeseburgers count because they're still something of value that has been produced from raw materials using labor.

But be careful about your definition of inflation. Some, like wikipedia, seem to suggest that inflation indeed is monetary inflation, until the Keynesians stole the term from us to talk about prices going up

In economics, inflation or price inflation refers to a general rise in the level of prices of goods and services over a period of time.[1] The term "inflation" originally referred to increases in the money supply (monetary inflation); however, debates regarding cause and effect have led to its primary use today in describing price inflation.[2]

 

[Johnnybags]

The demand destruction takes place first

assets get repriced lower. Then, when foreign investors begin selling treasuries and repatriating funds or buying assets instead of paper the real fun begins. Obviously the Congress is going to spend money whether you want to do it thru a stimulus check or government spending spree. Rates begin to rise (ala) Iceland to attract foreign capital to run the government. The value of the dollar begins a new decent and then the inflation kicks in not because of demand but because the government is printing dollars to pay for shortfalls and the world recognizes it. Watch the bond market hit new lows in price and high in yields sometime next year and you'll know it has begun in earnest. At that point we become an Iceland of our own.

 

[rich34]

I could be wrong, but it was my understanding that the hyperinflation that Ron Paul is speaking of will come about when all the trillions of dollars that are being held in foreign banks right now come home to roost all at one time. Think about it. No one wants to be holding a worthless dollar so when one of the country's start cashing in their dollars the others will follow. And now all of a sudden your introducing literally trillions of "new" dollars into the domestic economy. There's your hyperinflation.

Again I'm no expert, but that's how I understand it to happen.

 

[FindLiberty]

The government's regulations, limits, controls, bailouts and media propaganda all remind me of a crappy children's museum. Although the enthusiastic kids are frantically spinning away and trying random sequences, none of the colorful knobs and dials is actually doing anything useful at all.

At least the kids are smart enough to quickly realize that no results are forthcoming and they soon move on to give something else a try.

Maybe government should review the U.S. Constitution for a change.