Posted Nov 20, 2013 by Martin Armstrong
QUESTION: Marty; I assume I understand the bottom line comes down to hyperinflation is just hype because it assumes the government will honor its promises. If they are moving to even negative interest rates and we see a rising tide of bankruptcies of cities and states to escape the unfunded pensions, then it is clear you are correct that there cannot be hyperinflation. I am correct?
ANSWER: Absolutely. Hyperinflation is a good sales pitch but it PRESUMES government will honor all its promises. There is no indication in history that any established government has EVER done such a thing. They will confiscate everything they can, raise taxes that kill the economy, and the less revenue they generate the higher interest rates will rise forcing further defaults on debts. But you are correct. The trend in the state and local levels WHO CANNOT PRINT MONEY, is to default on their unfunded pension liabilities. At the Fed level, they will further cut entitlements, raising the age on Social Security, and all of this is DEFLATIONARY not INFLATIONARY. The system collapses when people wake up and see there is now way out.
Keynes said you move to deficit spending when DEMAND shrinks in the private sector and then reduce that debt in good times. They spend all the time reducing only when necessary. They have expected the Fed to sterilize what they do on the fiscal mismanagement side, but the Fed, using Monetarism, has also gone to virtually zero rates. Larry Summers is correct that the Fed is screwed if the economy turns down now. His solution is now to go negative and eliminate all paper money moving to electronic virtual money like Bitcoin.
They cannot sell bonds if they hyperinflate, which is why they are constantly playing with economic numbers and raising taxes while cutting entitlements. Veterans are entitled to healthcare. Yes, they give them a number. Who knows if they get seen in any timely fashion. This is the real face of public healthcare when government runs it.
So yes. You are correct. Hyperinflation PRESUMES they will honor their debt. If they do not, it just vaporizes and that is DEFLATIONARY. Do you really trust people like this to honor their debts?