Inflation and hyperinflation

My first blog!

I confess that I am not an economist, but I have become more interested in the subject over the years.I credit Jim Sinclair who gives free advice on his Mineset web-site for much insight.

http://jsmineset.com/


Alan Greenspan acted puzzled and befuddled by the fact that all the easing by the Fed did not produce any significant inflation, and still hasn't. Here is my theory about the subject. Inflation is caused by supply and demand for goods and services and generally is affected by money supply. However in the golden age of the global economy we have been able to keep prices in check due the fact that labor costs have been reduced through outsourcing. However in a domestic economy, eventually price pressure would be felt even if labor costs had been contained. But in the global economy, foreigners who are paid dollars for goods and services bought by Americans are generally satisfied to invest many of those dollars in US Treasury securities rather than seek goods or services to purchase from the US. Due to the enormous twin deficits, the trade deficit and the Federal budget deficit (and national debt), the funds sent overseas do not come back in sufficient amounts to put pressure on goods and services in the US economy. So it is fairly easy to see why in the global economy that a country running staggering federal budget deficits as well as having enormous trade deficits with our trading partners would not experience inflation. Mr. Greenspan looked at the situation as a convenience because the trade deficit financed the federal deficit.

However, this is a convenience that has a day of reckoning. The notion of hyperinflation is scoffed at by most economists because inflation has been low for more than 20 years. But as Jim Sinclair points out, hyperinflation is not a demand event. There has never been a hyperinflation that came about because of an overheated demand market, except perhaps in the price of tulips centuries ago in Holland. Generally hyperinflation as it occurs in places such as Zimbabwe and post WWI Germany, is caused by loss of confidence and/or printing of huge amounts of money by a central bank. The United States has maintained sterling AAA credit due to its sound fiscal management policies, but with two rounds of Quantitative Easing (printing trillions of dollars), we risk a loss of confidence that could trigger hyperinflation. This is the driving force behind the rising price of gold and silver as hedges against the dollar. Once foreign holders of dollars decide that they are better off not holding dollars then the supply of dollars will increase and velocity of money will start pushing prices higher.

To learn about "Quantitative Easing" watch this humorous but sad You Tube video:

http://www.youtube.com/watch?v=PTUY16CkS-k