2010-09-17blogspot.com

Gonzalo makes a provocative point (and one I've suspected for a long time): in the late 70s/early 80s, we were really having the beginnings of hyperinflation; it took extreme measures of monetary policy (Volcker's high interest rates) to "slay the inflation beast". This was done by convincingly creating the perception that the government was tough on inflation, and only secondarily responsible about the money supply.

What's missing today? The ability and political will to do anything difficult (and responsible) whatsoever. Thus, once the "(hyper)inflation genie" gets out of the bottle, it likely will not be put back.

There are some things I don't agree with in here, but overall I think Gonzalo makes the right points (one example of a disagreement is with his statement "money supply has nothing to do with hyperinflation." Of course it does. The money has to be created in the first place to bid up prices. The key observation is that when the money flows out of financial assets and starts chasing hard assets, there is suddenly much more of it in those markets).

... here is the tragedy: Increased inflation will not be perceived—at least not at first—as anything to get into a twist over. Each subsequent month will see an inflationary rise at a slightly faster pace, adding a percent or two a month to the annualized rate—but at least at first, not only will this not be perceived as anything worrisome, it will be considered a good thing: Because of the current deflationary recession we are in, any pick up in the inflation index will be interpreted as a pick up in the overall economy...

here is the key difference: Ben Bernanke and the Federal Reserve cannot raise rates to reign in incipient hyperinflation, like Volcker did in `79.

Apart from the obvious fact that Bernanke is not half the man Paul Volcker is (both literally and figuratively), and therefore lacks the balls and the backbone to do what needs to be done, Bernanke simply does not have the room to maneuver, insofar as the Fed funds rate is concerned...

Bernanke is set up to take a hit from hyperinflation: If and when there is a run on Treasuries, and a subsequent run up of commodities, at least initially, the Federal Reserve under Ben Bernanke will not only do nothing, they will encourage this situation. The Fed and its current leadership will interpret this rise in the CPI number as an indication that “We are on the road to recovery!”



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