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Showing posts from 2010

Where Is The Hyperinflationary Tipping Point?

With all the money printing going on at the Fed, why is the Fed having trouble creating inflation in the economy?

One of the reasons is that asset values are rapidly declining. This leads to a collapse in available sources of consumer credit. For instance, now that home values have fallen, home equity lines are not available. Existing lines are gradually being paid down or defaulted on.

Fed liquidity programs such as TARP, which swaps cash for mortgage backed securities, is going into equities and not into new loans. It also seems to be about the only liquidity entering the system. The rest of the liquidity sits on the bank balance sheets, unable to find a home in an asset bubble. Bank lending needs an asset bubble to get into the economy because Banks are too conservative to lend like venture capitalists. They only really want to lend against assets, which are all falling in price due to the aftermath of the once great asset bubble. Since banks only want to lend against asset…

The curious case of the Yuan and the Yen

Two curious pieces of news today:

Geithner Says U.S. Examining Ways to Push China on Yuan Rise

Treasury Secretary Timothy F. Geithner said the U.S. isn’t satisfied with the pace of yuan gains and is considering ways to urge China to let the currency rise faster.


Fed refused to comment on Japan weakening the Yen.

NEW YORK (Dow Jones)--The Federal Reserve Bank of New York declined to comment on Japan's intervention in currency markets that has pushed the dollar sharply higher against the yen.

So why are we perfectly happy, or at least neutral, with Japan, the #3 economy, weakening the Yen and are furious at China, the #2 economy, decreasing the value of the Yuan.

This is a good question for any would be political economist to ponder. The treasury is certainly in charge of the political aspects of the dollar's relationship to other currencies. The Fed's political objectives are somewhat murky but assumed to be largely the same as the treasury's.

Let's call this the Asia…

Why there will be no hyperinflation

I have been reading the inflation/deflation debate for some time now on various parts of the web. The inflationists insist that we will collapse like Wiemar. The deflationists insist that we will collapse like Japan. The memory of the 1970s inflation is strong in many an old gold curmudgeon, so the inflationists seem to be more prevalent. I will in this essay attempt to argue that hyperinflation will not happen if global commodity markets remain priced in dollars. The reason for this is that if inflation increases, the rest of the world will bid commodities up drastically, especially oil, and severely throttle U.S economic growth, leading to a more restrictive monetary policy.

Hyperinflation always happens due to a foreign exchange crisis. The population, sensing a high level of inflation, rushes to change their earnings in for real goods or foreign currency. In the case of Wiemar, or Argentina, the rest of the world is largely unaffected. They see their currencies drastically …