Are We Poised for Hyperinflation?

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Recently by Michael Pollaro: Monetary Watch February 2011: Obama's Budget, the GOP and Its Implications for USInflation

What follows is an update to our recent essay — America, poised for a hyperinflationary event? – including an update to our supporting metrics through December 2010. We're calling it a Roadmap to an inflation supernova in America, this essay elaborating on the dynamics and possible triggers behind the supernova. Not the only way America could get there, but if present trends continue, a roadmap that we think should be high on the list. Let's get right to it…

The U.S. government borrows and spends, running up its debt obligations, ad infinitum. At trend growth of 1.5 times U.S. net private savings and rising, such borrow and spend policies are increasingly beyond the means of America to finance the obligations…

Foreign investors have though over the last clutch of years stepped into the financing mix in a big way, bailing America out…

Underpinning this foreign demand for U.S. government securities are what we call “print and buy” countries — the mercantilist-minded, exporting-driven trading partners of America in Asia and the emerging markets plus the dollar-based, oil-producing countries of the Middle East, Africa and Latin America. They are the countries of the world whose central banks buy U.S. dollars collected by their export businesses, by printing their own money with which to do it, and with those dollars turn around and buy U.S. government securities, not because they necessarily consider them good investments, but primarily because the U.S. government securities market is currently the only U.S. dollar repository big enough to take the bid. In so doing, they keep their currencies weak and their export driven economies strong…

The U.S. government relishes the help of any and all foreign creditors because the bid those banks provide — for the U.S. dollar and in turn for U.S. government debt — is a job that would be left largely to the Federal Reserve and their U.S. private banking partners. Said differently, without the help of these foreign creditors, given a savings starved America, the Federal Reserve and its private banking partners would be having to monetize a lot more of that government debt, we think at levels more analogous to the inflationary 1970s; i.e., to pump the money supply even more then they already have to keep interest rates and the cost of U.S. government debt in check. Indeed, with a Federal Reserve Chairman in Ben Bernanke loathe to see interest rates rise, in the case of the Federal Reserve, something we could almost guarantee…

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Michael Pollaro [send him mail] is a retired Investment Banking professional, most recently Chief Operating Officer for the Bank’s Cash Equity Trading Division. He is a passionate free market economist in the Austrian School tradition, a great admirer of the US founding fathers Thomas Jefferson and James Madison and a private investor. He is a columnist on the Forbes blog.

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