Will The US See Inflation or Hyperinflation?

by Wes Bridel on November 23, 2009

in Stewardship

Inflation or Hyperinflation?

Inflation or Hyperinflation?

We’ve laid out several bombs that could go off in the US economy in the coming years.  If one, some, or all of these things happen, what effect would that have on our economy, our wealth, and our lives?

These factors could further influence the rest of the world to decide they no longer want to hold their reserves in dollars.  The Dollar has been losing value at an incredible rate (15% this year).  If foreigners decide they don’t want dollars anymore, chaos will erupt.  I don’t pretend to know exactly what this will look like, but I have no doubt it will be chaotic.

The US government is trying to achieve a slow steady destruction of the Dollar so that it can repay its debts with these new lower value dollars.  However, if one of these bombs hits and foreigners decide that they don’t want to hold dollars any more, massive inflation occur.

The question will be – how much?  Are we talking late 70’s early 80’s style inflation – or something much more severe?

The US must continually sell new debt to pay for all its programs.  What if people stop lining up to buy it?  They have two options.  They can increase the rate at which they promise to pay its lenders back.  Or they can print more dollars and buy its own debt as it has already done this year.  Any other country in the world which tried to do what the US has already done this year would see its currency tank immediately.  Investors would run for the exits.  Because the US is the world reserve currency and because investors have thought of the US as the safest place to be their entire lives, this hasn’t happened yet.  But these things always do come to an end, and there are many signs that this could now be happening.

There will really be no other choice than to raise interest rates to attract new debt buyers.  If the government keeps printing money to buy its own debt, things will get ugly real fast.  Either way, we’re looking at the value of our wealth being drastically reduced through this inflation.

If the foreigners who own the $7 Trillion dollars decide they must get rid of them because the value keeps sliding, they could all come back home in a hurry.  What would it do to prices here if a new $7 Trillion was injected into the market buying any real asset available?  Prices would go through the roof.

It’s very easy to imagine us going through something like what Argentina or Russia have gone through in the last couple decades.  Massive inflation that ends with all current currency being basically worthless.  Have you ever been to a country that had previously seen massive devaluation?  I went to Turkey once and would have to get $400,000,000 Turkish Lira out of the ATM every time I went.  I felt rich!  To the same degree that I felt rich, the Turks felt poor.  This could be us in the not too distant future.

Hyperinflation

This is when inflation occurs at such an extreme rate that the value of that currency basically disappears.  There have been 28 instances of hyper-inflation over the last century according to Economist Peter Bernholz who has studied them.  20 of these have occurred since 1980.  His study found one determining factor for Hyperinflation.  Hyperinflation kicked in each time a government deficit exceeded 40% of its budget.  In 2009, we will hit this number.  You can read more about this here.

If you would like more ideas on how to prepare for this coming storm, please sign up for our free newsletter here.

If you’d like to read more about the spiritual realities behind what’s happening, read the series we just finished on Daniel.

This post is Part 10 in the series Financial Outlook of the United States. To continue with this series, click on Pt 11. To gain more insight, you can read about the coming storm here, in Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8 and Pt 9.

Photo credit: Keny Luger

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