L. Neil Smith's
Number 233, August 10, 2003


Hyperinflation Before Inflation?
by John Hoffman

Exclusive to TLE

Just in case you haven't been following the financial news, on June 25th the Federal Reserve fought against our declining economy by lowering the overnight interest rate for banks to 1%, a level we haven't seen for 45 years.1 This will have the effect of pumping huge amounts of cash into the economy.

When I read about this, I said to myself... "What is Greenspan smoking?"

According to the published statistics, there's no danger of a major inflation, that deflation is our current concern... Well, I personally keep my own statistics, and when I go to the store, or when I pay my bills, or my taxes, I've been having to pony up more and more lately. That sho' ain't deflation.

What about you? Have your expenses gone up, down, or stayed the same in the past few years?

Still, my biggest concern isn't the inflation itself, but what it could lead to... Inflation is bad enough; if you've lived through the 1970's, you know what inflation is like. A hyperinflation is much worse, and takes place when people actively try to get rid of their money. As soon as someone obtains money, he will immediately trade it for goods and services, knowing that the prices he pays today may be lower than he would pay tomorrow. Prices soar as sellers are less willing to take currency for their labor and buyers bargain badly while dumping their cash. Money becomes a hot potato, and the person who holds on to it is burned as its value diminishes.

Historically, the fact that people depended on their savings has helped prevent this runaway behavior. It takes a very frightened person to withdraw his nest egg from the bank or dig it out of the mattress and spend it. At least, it used to be this way... Nowadays many people no longer keep nest eggs, but instead depend on the government to help them in times of need. The "smarter" ones have an emergency credit card they keep for a rainy day. Aside from that, they will live from paycheck to paycheck, spending money as it comes in.

Sounds a lot like hyperinflation, doesn't it?

We're very lucky there is no perception of inflation today, because the transition from inflation to hyperinflation has become frighteningly shallow. The average American need only accelerate his current behavior, aided by direct deposit and check cards, to turn the dollar into wastepaper. And the Federal Reserve has just stoked the incinerator.


1. [link]


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