Friday, August 31, 2012

Mish on Hyperinflation

Update:  I expanded the post below into a more general Hyperinflation FAQ.   I also update that post from time to time.  I recommend readers go to that instead of this.  


Mish wrote another post on hyperinflation, something he has called nonsense many times.  I think he is wrong about hyperinflation in many ways.    

I think Mish's biggest mistake is that he defines hyperinflation differently than everyone else. The International Accounting Standard of IAS 29 says there is hyperinflation when "the cumulative inflation rate over three years approaches, or exceeds, 100%.".  This works out to 26% per year.   I have seen many other definitions for hyperinflation but they almost all have something like "inflation over X per year" or "inflation over Y per month".     People pick some inflation rate as the cutoff between regular inflation and hyperinflation.  It is just the values for X or Y that differ.  Mish; however, looks at the typical end result of hyperinflation (currency becomes completely worthless) and then defines that as "hyperinflation". This is wrong. Hyperinflation is the journey, not the end result. It is the time of high inflation, not after inflation stops.  Hyperinflation is a process,  a positive feedback loop, that once entered is very hard to get out of. This process can go on for years. 

There are some cases where they have successfully halted hyperinflation. After having inflation over 26% per year they got back down to more sane levels and the currency was not a total loss. In these cases Mish's definition would say there was no hyperinflation (no total loss of faith in currency) while most would say there was hyperinflation but it was halted.   It can sometimes take years for hyperinflation to finish (either halting or death of the currency) and with Mish's definition we could not say till it was all over if it was really hyperinflation. 

Mish thinks there is no chance of hyperinflation for the US dollar.  Hyperinflation happens when debt is over 80% of GNP and deficit is over 40% of government spending. The US is at or near these numbers, so the danger of hyperinflation is real. What happens is that the more the central bank prints money and buys bonds the less other people want to hold bonds. But the less other people hold bonds, the more the central bank has to buy them so the government has enough money to spend. You get a positive feedback loop or death spiral. Please see my writing on hyperinflation.  

Mish thinks that the US having around $400 billion in gold would prevent a complete loss of faith in the currency.  Having assets could delay a complete loss of faith in a currency, but does not help so much at preventing inflation over 26% per year.  It does not matter how much gold the US is holding if they are spending 50% more than they get in taxes. They will have to keep printing money, so there is not a finite amount of paper money.  With a constantly increasing quantity of paper money it is not possible to hold any fixed exchange rate of dollars to gold. It is the debt and deficit and the fact that when the government will always get the central bank to print money and buy government bonds when things get desperate that causes hyperinflation.  When France took the extensive church land holdings and used that to back a currency they still got hyperinflation.   By Mish's logic this should have prevented a complete loss of faith in the currency, but it did not.    The ongoing deficit meant there was not a finite amount of paper money.   I highly recommend this article on France's experience. A more recent example is hyperinflation in Iran even though they have huge amounts of oil, which should have protected them if gold could protect the US.

Mish thinks people would not decide to have hyperinflation.  I don't believe there has ever been a "decision to have hyperinflation". Hyperinflation is when things get out of control. It is not something central banks or government voted on. No group in government or a central bank has had a show of hands like "all in favor of hyperinflation raise your hands". Not the way hyperinflation happens.  Hyperinflation is a market response to government debt over 80% of GNP and deficit over 40% of spending when the central bank starts printing money and buying up government debt. Everyone thinks they just need to print a bit more money to make it through the next week or month and there is nothing else they can do since the government needs money to keep in operation. Nobody votes for hyperinflation. Nobody wants it. It just happens.

Mish thinks you need some major trouble like losing a war and paying reparations to get hyperinflation.  The US won the Revolutionary War, did not pay any reparations, and still had hyperinflation. Remember, "not worth a Continental"?  There was hyperinflation in the South during the Civil War. So I think it is fair to say that America has had hyperinflation twice already.  As someone pointed out in the comments, there were more cases of hyperinflation in America's colonial period.   I also think that if the US had not made it illegal to own gold in 1933 that the Fed would have gone bankrupt, because they did not really have enough gold to back all of the notes they had issued, and that paper money would have become worthless then too.  The US was not in a war in the 30s.  Hyperinflation is more common than most people realize.  The time periods from the Revolutionary War hyperinflation, to the Civil War hyperinflation, to the 1930s currency crisis, to now, are all similar.   To me this looks like some major currency crisis cycle is about due.

Mish has posted that he thinks a currency crisis is coming.   Even if this is a limited drop in value, like a factor of 2, and not leading to the total destruction of the currency, it could still result in prices going up by more than 26% per year, which many people would count as hyperinflation.  I don't think it will be so limited.   Things are just too far gone.


There have been over 100 cases where the combination of a government spending way more than they got in taxes and a central bank printing money and buying their debt to help them out (often after changes in law or leadership) caused hyperinflation. What is the core difference in the US government or US central bank that anyone could think sets them apart from these 100 cases?

People may think it is easy to avoid or stop hyperinflation.  It seems obvious that if you just have the central bank stop buying government debt the hyperinflation would stop. The problem is that the government needs money to operate and is spending nearly twice what it gets in taxes and has debt around the size of the GNP. The only way the government can keep in operation when other people stop buying their bonds, or even rolling over their bonds, is if the central bank steps in. So the government always makes sure the central bank steps in.   This may take changing laws or replacing people at the central bank, or just ignoring laws, but the government will get the money or it is bankrupt.

Mish can see no reason for the Fed to suddenly print trillions of dollars.  But there is a reason it might happen.   Mish has quoted someone as saying "More than half of the debt, however, is short term, maturing in less than a year."  With a current national debt of about $16 trillion, this would mean about $8 trillion is due in the next 12 months.  If people stop rolling over bonds then the government will need the Fed to print over $9 trillion in 12 months ($8 for old bonds coming due and $1 for the current deficit).   This bond panic and massive buying by the central bank is how hyperinflation seems to typically start.

Mish will say that the Fed on its own could not cause hyperinflation but Congress could.   This displays a lack of understanding of how hyperinflation works.  It is always the combination of the government spending far more than it gets in taxes and the central bank printing money and buying government debt.   It is the two together that result in hyperinflation, not one alone.

Mish will say "hyperinflation is a political event not a monetary event".  I think Milton Friendman was right when he said "inflation is always and everywhere a monetary phenomenon".  First off, hyperinflation is a process that can go on for years, not an event.   The exact cutoff point between regular inflation and hyperinflation is arbitrary, so it makes no sense to say that below 26% it is a monetary phenomenon and above 26% it is a political phenomenon.   

Mish said, "Since printing $2 trillion did not spur credit expansion, pray tell why would $50 trillion?".   Mish needs to read the storey about the straw that broke the camel's back again.  There are situations where a small amount of something is ok but lots is not.  There are lots of medicines that are helpful in small doses but deadly in large doses.  If 2 people go walking on some ice they might be fine but 50 people walking in the same area might break through.  Hyperinflation has a human element.  There is sort of a panic to get out of the bonds and then a panic to get out of the currency.  It is hard to say exactly when the panic will start, but I don't think anyone ever prints more than the GNP in one year without getting hyperinflation and certainly not 3 times the GNP.

Mish will say that the Fed can not give money away or spend it and that banks only want to lend to  credit-worthy businesses but those and consumers are still deleveraging.  So Mish can not see how the Fed can put money into the economy.   He is not seeing that the government has no real limit on the amount they can borrow and spend.  They have a debt limit but they increase it anytime they get close, so it is not a real limit.   This government deficit spending, financed by the central bank making new money, is the real source of inflation but Mish never talks about it.

Mish thinks it is silly to compare the US to Weimar Germany or Zimbabwe hyperinflations because the situations are so different.   Each case of hyperinflation is unique, so if you are looking for differences you will always find them.   You need to understand the similarities.  Hyperinflation happens because debt gets over 80% of GNP and deficit gets over 40% of spending.   It does not matter how you get into that situation.  Hyperinflation works the same if you lose a foreign war,  a civil war, a dictator goes crazy, a government with excessive foreign debt, nationalizing too many businesses, rampant corruption, productive collapse, excessive regulation, a regime change, too many taxpayers fleeing high taxes, a massive depression, or whatever.  It just matters that the government is spending nearly twice what they get in taxes and has already borrowed more than is reasonable.   When they are in this situation they can not borrow more, except from the central bank under their control.  So they get the central bank to make money and "loan" it to them.  When the reality is the only way they can pay back that "loan" from the central bank is by first getting another "loan" from the central bank you are probably headed for hyperinflation.

Mish thinks that when China and others arrange things so they can do trade without US dollars that it does not matter.   He thinks if the Arabs stopped pricing oil in dollars it would not matter.  He notes that currencies are fungible, in seconds you can exchange any currency for any other currency, so "it does not matter one iota what oil is priced in".   The US military burns lots of oil.  Right now the US can just print some money and get as much oil from the Arabs as they want.  If they could not do this but had instead to tax their people to get the money to buy oil it would be much harder.   Anyone who has an option to buy some amount of oil at some price in dollars 6 months from now will usually save up the money in dollars.   While they could save up the money in some other currency, there is a risk that the currency fluctuations over the next 6 months will be such that what they saved is not enough to buy the oil at that price.   So they can eliminate this currency risk by saving in dollars.   Having international commodities priced in dollars increases the demand for dollars.   Mish does not seem to get this.  If the Arabs and Chinese no longer took US dollars there is a good chance the US dollar would be headed for hyperinflation right away.

Mish notes that all the recent predictions of US dollar hyperinflation have been wrong so far.   It is certainly true that anyone predicting hyperinflation of the US dollar before Sept 1, 2012 was wrong.   This does not mean that all predictions of US hyperinflation are wrong or nonsense.   It seems that all fiat money will come to an end at some point, it is just hard to say when.

Mish notes that other countries have all sorts of problems too, so the US dollar may not drop against those other currencies.   Hyperinflation is not really about exchange rates.  If the Pound, Yen,  Euro, and Dollar were all getting 26% inflation the exchange rates could stay the same but we would still have hyperinflation.

Mish does not think the US central bank would willingly destroy their currency.  He thinks this alone debunks hyperinflation.     Why did  that same logic not protect all  the other central banks from making hyperinflation?  The government writes the laws, appoints the people to the central bank, and controls the guns.  When the government is desperate for money from the central bank they get it.   But also remember that the central bank is created by the government.  If the government collapses  because  it does not have enough money to pay for things, the central bank will probably go down as well.  The survival of the central bank does depend on the survival of the government.   I think this is the core of why central bankers risk their currency to support their governments.

Mish thinks that having lots of private debt makes hyperinflation impossible.   Mish defines inflation and deflation in terms of the money supply; however, Mish has his own definition of the money supply.  Mish counts "credit marked to market" as part of the money supply.   So if the bond values are crashing Mish would say there is deflation.   However, as interest rates shoot up when hyperinflation starts, bond values crash.  So you can have 26% per year price inflation, which many count as hyperinflation, at the very same time that Mish's defintion of deflation was met.   In fact, I expect that at the start of most hyperinflations, when bond values are crashing, that Mish's definition of deflation is met.  If everyone else is looking at prices going up fast and saying "this is the start of hyperinflation" and Mish is looking at bond prices crashing and saying "this is deflation", he will look silly.

The debt deflation idea is that as people are paying back debts the total measured money supply can go down.  Since central banks loan money into existence it would seem that after the money was paid back to the central bank there would be no net inflation.  The big thing that these people overlook is that governments never seem to pay down their debts.    In Weimar Germany and Zimbabwe the central bank was just loaning money into existence.    However, those governments could not pay it back but kept borrowing more and more.    The US central government debt has gone from like $9 trillion to $16 trillion in the last 4 years. During the hyperinflation people talk about the central bank is buying government bonds to stimulate the economy, stabilize interest rates, or show faith in the government.  After the hyperinflation is all over, people forget about the central bank buying bonds and just talk about how the government was just printing and spending money.  The historical narrative simplifies out the central bank so it becomes much clearer and looks so foolish.  However, this simplification makes is so that the next victim of hyperinflation does not see they are doing the same thing.   They think of the historical hyperinflations as just stupidly printing and spending money while their current government is just borrowing it.    So the same mistake is repeated again and again.

61 comments:

  1. The yield on the 10yr is about 1.6%. That is symptomatic of deflation, not hyperinflation, or even moderate inflation.

    The USD is a reserve currency for many central banks. If USD hyperinflation were imminent, wouldn't these banks be exiting en masse?

    But thanks for writing. One needs to know the mainstream thought on such matters. Why, I just sold a raw land property and the buyer professed that he was buying it because he believed it would shield him from inflation. Rather than point out that property prices are a function of willing buyers who can borrow nearly the entire purchase price, I sagely nodded in endorsement of his genius. When everybody believes inflation is imminent, guess what? It ain't gonna happen.

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    1. Sorry, Anon. You're mistaken. The yield on the 10 yr is only 1.6% because of massive money creation, the very definition of monetary inflation. Even considering falling private sector credit, we have significant inflation. Asset prices can fall while "need to have" things like energy and food rise.

      Foreign central banks cannot exit "en masse" because by doing so they would crush the dollar while still trying to sell their bonds, making them far less valuable as they unload them. (many more sellers than buyers) They are trying to slowly exit instead by using more dollars to buy hard assets rather than bonds. This attrition in US bond holdings is their strategy to minimize the haircut they'll take. They also need to continue keeping people employed and destroying the dollar would destroy their export economies, as we are their major customer. The resulting social unrest would have them strung up like Mussolini.

      In the long run, your land buyer may be correct. In a decade or two there might be a willing buyer, hyperinflation or not, assuming we restructure the economy and society. But it beats holding fiat money. Especially if they mortgage it at fixed rates and pay it off in hyperinflated dollars. It becomes nearly free then.

      The majority does NOT feel high inflation is imminent, as you yourself demonstrate. Buying 30 yr bonds as a "safe haven" at 2.5% or whatever is pretty much proof of that.

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    2. Ridiculous. Have either you or Mr. Cate studied anything regarding hyper-inflation? Do you even know what inflation is? If supply and demand are in equilibrium, and prices rise, that is indicative of inflationary policies. If supply is limited or restricted, as is the case in food, medicine, and energy, then prices may rise regardless of monetary policy. Even more so when the government prints restricted classes of currency that may only be used to purchase items in limited areas: i.e. SNAP and the like.

      Sure, those foreign central banks are some remarkably thoughtful entities by your account. And Mussolini? You are cracked like a dropped pie plate.

      Mortgages at fixed rates? Therein lies another reason why near-term hyperinflation in the US is out of the question. Do you really believe that the mortgage lenders of this countries are going to stand aside and be destroyed while the retail mortgage buyer realizes a windfall profit? Just shut down the entire banking system so Joe Blow can experience a brief moment of euphoria at having screwed the banks? Right.

      The majority is the SOURCE of the inflation non-sequitur. Don't BS yourself into believing that you are a contrarian.

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    3. Hyperinflation is sort of a hobby of mine, as you can tell from the existence of this blog, How Fiat Dies. I do think I have a very good understanding of it. I think Mish is one of the best economists in the world and I have high respect for him. I would not challenge him on something I had not really studied.

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    4. Anon... regarding the little guy putting it to the bankers with real estate and mortgage action... look back at the 70 and 80s... millions of mortgage owners repaid their mortgages with inflated dollars... such a savings it forms the basis of many portfolios today! Remember the Savings and Loan fiasco... that was the little guy putting it to the bankers... even tho most didn't have a clue why.

      think the bankers could stop that avalanche...??

      or maybe you are a little too young to remember?

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    5. Sorry, Anon, fiat money is a confidence game. In the early stages of an inflation, confidence is high, because people can still remember a linkage to gold. Slowly, fiat money depends on supply and demand. If the money supply does not change radically then confidence remains.

      The problem with fiat money is that it distorts the economy by deluding entrepreneurs into ventures for which there is little demand. This is wasteful. The housing bubble is a good case. Sure, CRA and subprime loan market was a symptom of that, but the housing bubble would have burst as soon as the FED tightened money creation, as it does occasionally to squeeze some of the enthusiasm out of the market.

      We need to differentiate between a general price rise due to an increased supply of money and a hyperinflation. A hyperinflation is a sign of panic when the public realizes that their currency has no store of value. This prompts them to get out of the currency as quickly as possible because holding the currency for even a short time diminishes its purchasing power. The government experiences that loss of purchasing power too, so it demands ever more money creation.

      It is possible to prevent an incipient hyperinflation, but usually the political price is too high. Israel did it in the ‘90s. I see no one, even in a Republican administration, if they win, willing to do that.

      People have an almost infinite ability to lie to themselves. “This time, it will be different,” they say. The definition of insanity is supposed to be repeating the same old mistake and expecting a different result.

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    6. This is like saying that a damn that is filled to top holding a shitload of water and we are totally safe because we can manage it by releasing a little bit of water(in comparison to the river sitting behind it.

      At the same time, we have rain that is continually falling.

      So, it is fine until the water causes the the damn to give way and we can't stop the deluge of water flooding the land beneath it.

      I could have simply said what others have said a million times. We have low interest rates, a stable currency and low inflation until one morning we wake up and we don't.

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  2. The low interest rate is symptomatic of the Fed printing money and buying bonds to drive up their prices and down the interest rates. Even Krugman has noticed that when interest rates are below inflation rates gold goes up.

    I think once the central banks start dumping dollars the hyperinflation will start right away.

    I really doubt that I am mainstream. :-) Everyone in Zimbabwe or Argentina thought inflation was imminent and guess what, they were right!

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    1. Is anyone here familiar with the FOFOA blog ?

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    2. I have read the FOFOA blog some. I think they are right on a bunch of stuff (like gold will go up) but that they are wrong to try to have gold only as a store of value but not used as a medium of exchange. The best store of value happens to also make a good medium of exchange.

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  3. The part of hyperinflation that I can't understand is how can it be sustained without a feedback loop to wages? Zimbabwe was a closed society shut off from credit markets. Argentina had a very high union rate with inflation clauses built into their pay.

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    1. Much of the US government's expenses are indexed to the CPI. So you have a feedback loop all setup and ready to go.

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    2. But how does that get in my paycheck if I'm the average private citizen with minimal savings? Wouldn't there be a demand collapse as prices spiked?

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    3. The average private citizen will be in bad shape. Sorry. Demand will collapse for anything optional. Demand for food will not collapse. The economy will be a mess.

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    4. Obviously these forces tug at each other. Deflation/inflation. I assume wage increases that don't match inflation will be the norm. However, they must rise to at least substinence levels, or workers will die!

      So, things that are unnecessary for life will go down in real value, while necessities will go up. This will scour the BS out of our system. Stupid stores and products will be gone. Our consumption will eventually match our true wealth.

      Also, as we've seen in recent decades, the government can always be counted on to make up the difference through transfer payments (food stamps, housing assistance, "earned income" tax credits, etc). People will simply vote themselves indirect pay increases through government spending. When 80% of the population is on the dole, and deficits are 10x tax receipts, it'll quickly become a death spiral.


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    5. And those people that work in the optional spending area would lose their job, which is deflationary, right?

      Without direct payments to all citizens, I don't see how hyperinflation can occur. People can only spend what they saved, earned, borrowed or stole. We have no savings, wages are static or declining and credit would be nonexistent.

      Your posts are excellent in describing how the fire gets started, but I'm still missing the part on how it stays lit. Seems every path leads back to deflation.

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    6. In hyperinflaton all kinds of people lose their jobs. It does nothing to stop the hyperinflation. The hyperinflation is about government spending and printing money to fund that spending. Really the more optional parts of the economy that shut down the more unemployed people the government will have to print money for.

      The way the fire stays lit is that the government was spending nearly twice what it got in taxes before the economy was destroyed. After that the spending is even further above the taxes. So they are really printing and spending money very fast. Nobody loans them money any more, so it all comes down to printing. It only stops after the government collapses or they balance the budget, which is very hard starting with twice as much spending as taxes and then destroying your tax base with hyperinflation.

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  4. The exact definition of hyperinflation is pretty arbitrary. My idea of it is a number higher than 26%, but to each his own concept of it.

    Interesting points, I tend to agree with them.

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    1. The cutoff point is pretty arbitrary. But the idea that there is some cutoff between regular inflation and hyperinflation is nearly universal. I don't know anyone else that defines hyperinflation the way Mish does.

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  5. Thanks for the article and the back and forth in the comments sections. I love reading about this stuff and hearing the different perspectives. We live in interesting times and I'm doing my best to stay on my toes and be prepared for whatever happens.

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  6. Have you read Martin Armstrong's take on hyperinflation? He believes that the big bankers will not permit hyperinflation of the reserve currency because they do not want to get paid in funny money? Some inflation is OK with them due to the ability to lend on the basis of fractional reserve lending helps them make real money from money they loaned into existence. Which is why austerity talk is everywhere and can probably go on for awhile before the people being victimized by austerity really get out of control.

    Another question: we know that every reserve currency in the last 600 years of history has eventually fallen by the wayside due to social, economic and military declines accompanied by the extensive government financial mismanagement. Armstrong has written many very informative articles about this: his take is that things never change because human nature never changes. But Armstrong does not recall a single instance of a reserve currency status going away in a bout of hyperinflation and I'm not convinced the USD is different just because it is a fiat currency.

    One more thing: the government has long since rejiggered the CPI to grossly underreport the rate of inflation. Shadow Government Statistics has more on this. Daniel Amerman has also written several good articles detailing this as well.

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    1. To prevent hyperinflation you need to reduce the government budget deficit. Do you think the big bankers can do that?

      It is only since the US went off the gold standard in 1971 that a fiat currency has been tried as a reserve currency. You can't get real hyperinflation when using gold or silver. The roman money was debased by mixing base metal in with the silver. This was sort of like a slow motion hyperinflation.

      Even a CPI that underreports inflation is enough for the indexed government expenses to shoot up fast. If there was a law that all government salaries and expenses could not be indexed to inflation in any way, then you would have less risk of hyperinflation. As they printed more money but expenses did not index up they might actually be able to balance the budget. But there is no such law. Things are setup for hyperinflation.

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  7. Inflation CAN Take Different Form than the Conventional Definition of "To Much Money chasing To Few Goods"

    Flooding an Economy with Liquidity(Dollars) CAN Be Very Inflationary when Coupled with the Ever Expanding effects of the National Debt. As Long as the World "IS" Willing to Lend America the Needed Money to Keep the Doors Open and the Lights on in America, IT Works. But When Creditors believe America is as BIG a RISK as the Sovereigns in Europe are, This Party Will END and the Purchasing Power of the "DOLLAR" will TANK........"INFLATION"

    For Every 100 Bases Point Move in Interest Rates from here on out, American Taxpayers WILL be Forced to PAY an Additional $420 BILLION to Service the Federal Debt. Interest Rates ARE at the Bottom and when Uncle Ben Signals that the "QE" VooDoo Super Cycle IS Over, The Greates Carry Trade in Human History WILL End Over Night and the U.S. Bond Market WILL BE Crushed!!!!!!!!!!!

    America, in 2013 your going to find out just how EXPENSIVE Nearly $18 TRILLION Dollars in Federal DEBT Really IS!!!!!!!!!!!!!

    "The REAL News Matters"

    http://www.therealnewsmatters.com/

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    1. I think that an extra 1% interest on $16 trillion comes out to $160 billion per year. An extra 5% or so and people should realize the situation is hopeless, they will QE to infinity.

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    2. Yes,

      This time will come and i will put my bet on the fed not doing any QE to bail out the government. The payments are made by the treasury, not the fed. So the US will be on the hook for the payments, not the fed.

      We'll see if the fed choses to destroy itself for the benefit of the government. I dont understand how people can con themselves into believing this when the fed has only worked to remove debt from banks and sattle it on top of the public.

      Is anyone thinking out there?

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    3. The other hyperinflation cases had central banks that kept bailing out the government. If they did not buy the government debt, and nobody else did, the government would collapse without money to spend. Why do you think the Fed will not bail out the government? Why did all the other central banks? What is the key difference?

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  8. Stumbled across this blog..and must say I really enjoyed getting some well articulated points and rebuttals. I certainly respect MISH and although I do not know if he is right, I certainly value his insights.
    I am no economist so... a grain of salt here with my comments/questions:

    It seems that there is a ton of fiat locked up in the contracts of the "investors" who made the correct bets against all these financial instruments which the FED has mopped up and stored (?sterilized is the term?) on its balance sheet.

    The question I have is how, and if ever, do these get unfrozen, because if these investors decide to cash out at once, won't their zillions of dollars in profits become worthless as fiat suddenly floods the economy- no matter how much land, industry, precious metals etc becomes available for sale?

    It seems it would be a mutually assured financial self destruction.

    Sort of like Antarctica..It is a very arid desert, with only a minuscule amount of precipitation each year, yet it holds most of the earth's fresh water, locked up as ice. If it melts, we are in for world-wide floods.


    Also, should not the death of fiat be measured by the emergence of a competing form of money or commodity? It sure seems to me that other countries are beating around the bush when they agree to price oil in gold, or their local currencies and bypass the US $. This is a de facto admission that the new ultimate currency is barrels of oil or BTU's etc.

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    1. The Fed is paying interest on a bank's "excess reserves". This is basically extra money at the Fed. In the same way that when the Treasury sells a bond it gets some money out of private hands, the Fed is taking some money off the market by paying interest. But while a bond might take money off for 30 years, this Fed trick to remove money can be undone by the bank any day they want. So this money could suddenly be released.

      If everybody bales out of the US bonds and US dollars then the value of these will crash. But since you can not keep everyone else from getting out by staying in yourself, your best move is to be the first one out. In this situation, where first out is best move, the panic can come at any time.

      The final death of a fiat money is when the government gives up on it. But if people start pricing oil in gold this death will come sooner.

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  9. Bernanke is selling as many dollars as he can and charging an ever higher inflation fee, impoverishing everyone. Politicians are Bernanke's biggest customers.

    People cannot afford both the currency and their wants (deflation) and can now only afford the currency and their needs (inflation). One day people will not be able to afford the currency or their needs (hyperinflation).

    Most of the world already cannot afford the currency. I believe this is why there is poverty in the world.

    Bernanke is in over his head. I believe he knows others know more than him. He will suddenly disappear himself from the stage, leaving other people to clean up his mess.

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  10. Wow,

    Mish must either be the worst writer or people just dont get it.

    First off, the fed controls the supply of credit. Second of all, the fed will not just issue new credit or debt for the heck of it. It only does it to benefit banks and the fiat system. Note that this is not the same as printing bills. Even if the fed could, it wouldnt do such stupidity because it destroys the banks capital. There should be zero more discussion on this, the fed will never destroy itself willingly.

    The congress can, by implementing laws, issue unbacked paper and indeed destroy the dollar and creating hyperinflation.

    Zimbabwe is a non fiat non credit based economy that kicked out their productive class and was left with poor unproductive people. On top of it, Mugabi created tons of bills without backing.

    For the US to create inflation, non debt bills, trillions of it, would have to be created. That would cause hyperinflation. The fed creating debt will do squat.

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  11. It was the Zimbabwe central bank that printed money and bought government debt. It was fiat money too. The US has tons of bills without backing. The Zimbabwe central bank was creating debt too. What is the real difference?

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  12. Z gov paid with paper bills, not debt. Go try lending in Z and let me know how that turns out.

    Fed issues debt, which is repaid. When repaid, supply is taken out of the system.

    In theory, the fed can issue as much credit as it wants, in practice, it wont because it destroys the fed and the banks.

    The Z government was not bound by banks.

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    1. The Zimbabwe central bank bought government debt with new money. The US central bank is buying government debt with new money. The Zimbabwe government could only pay back previous bonds by borrowing more money. The US government can only pay back previous bonds by borrowing more money. There was no limit to the amount of money the Zimbabwe government could spend. There is no limit to the amount of money the US government can spend. There is no real difference. The end will be very similar.

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    2. I dont think im getting my point accross. Let me try one last time.

      In zimbabwe, the governtment tells the central bank how much to print. In the US, the fed decides how much to print.

      In zimbabwe, the government is the creator of new currency. In the US, currency is only created when new debt is created, and again, the fed controls this.

      The difference is in zimbabwe, the government prints to spends on whatever it wants irrespective of banks. Heck, there are no banks.

      In the US, the banks OWN the fed and decide what it does, not the government. The banks are destroyed by the emission of currency without backing (it makes the crappy loans they made woth less, as they would get paid with ever cheaper dollars). In other words, the banks would never, never, never, ever allow that to happen...unless the congress forces it upon them.

      I would agree with you if the congress still had control of the fed, but it aint the case. If it was, the dollar would be gone already.

      Now, banks enjoy a controlled demolition, where they can devalue the currency; thereby slowly stealing people's wealth (aka what happened the last 40 years).

      Would you destroy a system like this if you were a bank?

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    3. If you look at the history of hyperinflation the government always gets its way with the central bank. Even when the laws seem to give the central bank the power, it does not end up that way. The reason is the government makes the laws, has the guns, and appoints the people to the central bank. So when the government really needs money, like they would not be able to pay their employees, they always are able to get the central bank to buy government bonds. If you use history as your guide, the US central bank will buy as much government debt as needed. It already seems to be doing so.

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    4. I guess the question is: how much power does the government have and is that power bigger than the banks'? Here's my take on it:
      Considering the history of the US, who murdered JFK and the rest of the Kennedy's, who shot Reagan, who controls the Military Industrial Complex, who controls the banks and Big Oil, we know that very few people control the US and the executive and legislative branches. I believe the same people who control banking and Big Oil also control the Military Industrial Complex and the executive is just a puppet to make the American people believe there're still three branches of government.
      If the same people run banking and the military there's no doubt the executive is going on their knees when the Rockefellers and their private army at the CIA say so. After all, every single president after JFK has been such a nice guy, remember?
      What I expect to happen is the bankers will try to milk the existing system as much as possible and when loss of trust in the dollar reaches critical mass they'll just take out the huge gold reserves that FDR stole and back all Federal Reserve notes with that gold, repricing for whatever they can. This will restore confidence in the dollar and dodge the collapse, Americans won't be able to get the conversion to gold, the same way FDR did it, because the goal is to restore the confidence abroad, the American people are already stuck with it and have nowhere to go anyway.
      Of course, the biggest burden the government has is the social security and welfare programs, these will be gotten rid of with an Executive Order by the President and all the deadbeats and elderly will be left to fend for themselves or just die. If the people resist, then there is the military standing by to put down any resistance. It's no surprise the Posse Comitatus Act has been thrown out, the Department of Homeland Security is buying 400 million rounds of ammo, NSA is building huge spy centers in Utah, increased surveillance, etc. Eventually if things get out of control, the President will announce Martial Law, the Congress will be promptly relieved of their responsibilities, tens of thousands of leaders of oppositioin groups will be disappeared (law for that in place too, just in case the President needs it if Martial Law wasn't announced yet).
      What do you guys think?

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    5. The best way to predict the future of a power struggle between a central bank and a government is to look at the history of past power struggles between central banks and governments. The ability to print money and loan it at crazy cheap interest rates to their friends does give the central bank crazy amounts of power. But history seems to show that the governments will change laws, appoint new people to the central bank, and rally the people against the central bank, so that in the end the government has more power and wins. But then everyone loses as the money becomes worthless.

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    6. Meeeh, Vincent, I think your history is a little old, times have changed, the old feudal order is gone, the new feudalism is here, same as the old one, just that masters are different.
      Today, the American government cannot rally the people against the banks because the banks control the press. The whole government is infiltrated by stooges of the banksters and one person or a group of people at high levels cannot change it. The president IS a representative of Goldman Sachs and the rest of them, they put him there! Any executive (the President himself too) will be shot dead if they tried to bite the hand that put them where they are now.
      I am looking at a different history than you are: recent American history proves what I am saying time and time again (JFK, RFK, Reagan, Ron Paul's presidential campaign, the list is long). They will kill you if you fired their men at the CIA. The CIA is the private army of Wall Street, don't fuck with them, they are Wall Street's hit squad not just for dictators in Latin America and overseas but also for representatives of the executive in our homeland too who refuse to follow the line. For God's sake, the government had hard evidence the super rich industrialists were trying to oust FDR back in the 30's and install fascist regime in America and nobody got convicted, nobody even got arraigned!!! Yeah, they cut a deal with FDR, ya know and everything was forgotten.
      There is no internal conflict between what the government wants and what the bankers want, because they're part of one body, because everything the government wants is peppered with backdoor deals for the bankers. For example, food stamps go through Chase Bank, HSA (health savings account) are managed by big banks (Chase anyone?). You look at any money that goes out of the government coffers, you'll find out it either ends directly in the pockets of huge corporations/banks or bounces off of them on the way to the American people.
      After all, if the Federal Reserve has been in existence for 100 years now, wouldn't you think that "power struggle" would be over with by now? Well, it won't because there never was one. After all, the government (read: the bankster-infiltrated Congress and President) created the Bank.

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  13. Deflation, not inflation is the real thing to fear. The Fed is trying to inflate the economy and it isn't working.

    There has never been hyperinflation without home prices going up - and house prices aren't going up!

    Yes, what the Fed is doing is inflationary - but inflation isn't happening and won't be happening any time soon!

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    1. I am not saying that we already have hyperinflation. When inflation first goes up you will see interest rates go up and this will actually make housing prices drop. But in the long run, hyperinflation will make home prices go up. But they are a lagging indicator.

      I can not find any incident of double digit deflation in a pure fiat currency. There are many many cases of triple digit inflation in fiat currencies. I think inflation is the real thing to fear if you are using fiat money.

      It is hard to say how soon people will lose confidence because it depends on people.

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  14. The proof - as if any were needed - that "Mish" is totally removed from reality is that he apparently REALLY, TRULY believes the U.S. STILL HAS $400 billion worth of gold. "Mish" probably also still leaves out milk and cookies for Santa Claus, the Easter Bunny, and the Tooth Fairy. Good on 'ya, "Mish".

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  15. Good article and good replies to the questions and the disagreements. Good to see at least one person understands hyperinflation. Not one in a thousand people do. Enough money outside the US already exists to hyperinate should confidence be lost. Confidence is unlikely to be lost though without the continuation of deficit spending and new money creation to cover said deficit. The bond market is the key. If auctions start to fail to the point the Fed has to buy all issuance, it will not tame many private sales to start tbe avalanch. When major bond fund managers are starting to talk ow.ing gold, well, lets just say it is not a good sign for the bond market.

    The Germans did not expect hyperinflatio either. It willcome like a thief in the night. It does not have to be so, but balancing the budget is the only alternative and I don't see that happening.

    JB

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  16. Most folks discount the possibility of hyperinflation because they don't understand accounting, especially as to how it applies the federal budget deficit. For the last four years, the headline budget deficit has been around $1.3 trillion. but that is just the cash deficit.

    If you understand GAAP accounting (generally acepted accounting principals), which is the type of accounting required of corporations, you would know that the USA is running a GAAP deficit of about $5.5 trillion PER YEAR!!!

    Congress had the great idea of exempting themselves from the embarrassment of having to report that they are running an annual deficit of 40% of GDP. So you can see, the USA roadrunner has already run off the cliff, and as soon as he looks down it will be hello canyon. Got gold?

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  17. There have been more hyperinflations in the US then just the Civil War and the Revolutionary War. Many of the pre-Revolutionary War colonies printed their own currencies and debased them to zero. It got so bad that Parliament forbade the colonies from issuing paper currencies, around 1760. After the fiasco with the Continental, the power to issue paper money was stripped from the Federal government in the new US Constitution even before it went to the states on a vote of 9 to 2. This vote (in combination with the 10th Amendment) stopped the issuance of US paper money for about 70 years. Thebn Grant packed the US Supreme Court with pro-paper money justices who convinientkly forgot all about the 10th Amendment and who ruled that paper money was Ok.

    Among the comments recorded by James Madison on that vote

    Mr. BUTLER. remarked that paper was a legal tender in no Country in Europe. He was urgent for disarming the Government of such a power.

    Mr. READ, thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelations.

    Mr. LANGDON had rather reject the whole plan than retain the three words “(and emit bills”)

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    1. The colonies having cases of hyperinflation is a very good point.

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  18. We can agree that we will get default, because there is no way in real terms that the U.S. can pay its obligations. Whether that default is explicit, or indirectly through hyperinflation, is important to those who do not invest in gold and silver, but for those who do invest, it is irrelevant, because had they known in advance how the default was to occur, they likely would still have chosen gold and silver as their investment vehicles. As Peter Schiff has said: "We will get deflation WHEN PRICED IN GOLD."

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  19. It's rather simple, folks. We'll have both deflation and inflation. Deflation of everything you own and inflation of everything you need.

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  20. I stopped reading MISH when he obdurately continued to opine that the of the obligatory pricing of Saudi oil in U.S.dollars had nothing to do with its strength because one could exchange those dollars for whatever asset one chose. What he religiously refused to entertain was that just the fact that the exchange is required at all and it does not matter how quickly one would sell the U.S.$, not to mention the requirement of holding the dollars to purchase oil in the first place, gives the U.S. petrodollar its present top dog status. IMHO he a tool for the establishment. He wasn't picked TIME econ blogger of the year for nothing.

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  21. For those interested in the hyperinflation or not discussion, I recommend reading some of Martin Armstrong's and Jim Sinclair's articles. As a very rough summary, Martin Armstrong would say that you can't have hyperinflation in the dominate world economy; hyperinflation can only exist in secondary economies. If the conditions for hyperinflation arise in the dominate world economy, then there is a societal collapse. On the other hand, Jim Sinclair would say that we are very well on the way to hyperinflation.

    I leave it to someone better educated on the topic to read the material and summarize it better...

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    1. If the US gets a 30% drop in the value of the dollar, then China will have the dominant economy. If the US gets hyperinflation it will get a much bigger drop than that. I think there is a good chance that the US Federal government collapses. I hope that the states will remain. Sort of like when the USSR went away and you got lots of new countries. I think the US is headed for really hard times. I expect riots and such but not fully "societal collapse". Lots of places have had hyperinflation and crime often goes up a bit but it is not Mad Max or anything close to that.

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  22. Exactly!

    Iraq was invaded and Saddam Hussein removed because of his sales of oil in Euros and gold.

    Dick Cheney and friends were scared of the Saudis doing the same and the US Buck losing it's reserve currency standing to such a degree, a total currency collapse would be around the corner ... but it's still possible, as long as the US military spending is sky high and few insightful minds speak loud enough about it so as to press the US government to cut such unproductive spending, and put 99% of it into serious domestic revitalization projects ...

    Why is nobody even taking about?

    The brainwashed nation doesn't understand the difference between wasteful, unproductive national spending by letting the government be a free tool to maximize private corporate profits by moving virtually all productive capacity abroad at an enormous expense to domestic employment and at a huge cost to the social and cultural development of a nation in great need for better public education, healthcare and individual political understanding ...

    Getting a new iPhone and not knowing how to mobilize a nation to a focused social, political action will not resolve these problems by themselves!

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  23. I read Mish's article and I'm glad I'm not the only one that saw the flaws in his argument.

    Inflation, deflation and hyperinflation are monetary events. These follow the supply/demand model. The metric is just arbitrary at best.

    First thing to realize is that money is just a commodity. Its creation is a monopoly enterprise. An enterprise backed by force of law and in the worst case guns.

    When supply grossly exceeds demand, nobody wants to be holding the old maid. The velocity of money increases in a market anchored by productivity capacity.

    That ugly supply/demand thingy rears its head again as the consumers are chasing a small, select set of products; food, housing, energy, etc.

    The problem is, was and will always be supply/demand. Ergo, money is supplied to a dwindling demand base. That demand base is determined by productivity of goods/services. No productivity, no demand. Increase supply without demand and the exchange value decreases. In our case, more dollars available for fewer goods.

    We tend to forget that those closest to the supplier get first usage. Gov't, then banking, largest corporations, then everyone else. Defecation follows the law of gravity. The negative effects of over supply are cumulative the further you are removed from the source of supply. Effectively a shipping and handling fee at every level.

    Any venture that fails to deliver a return on investment is malinvestment. What products or services does the government produce that provide a positive return on investment?

    The Fed and bankers love inflation. Inflation produces profits in numbers. Do you really think the average investor understands P/E ratios? How about higher profits, but lower standard of living as a consequence?

    Where did anyone get the fool idea that a business could grow faster than the population indefinitely? Never forget Calvin Coolidge's remark, "The business of America is business." The business of the gov't is tax revenue enhancement. Once productivity drops, the only way to increase tax revenues is by inflating the money supply.

    Without off-shoring our productivity, the negative effects of inflating the money supply would have been noticed a couple decades ago by even a dimwit. Off-shoring effectively exported inflation.

    This will last until consumer confidence fails. Just my opinion, but I think we crossed the Rubicon a while back.
    I'm not an economist and I don't play one on TV. I do know that the vast majority of us voted for this mess and we are gonna get it.

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  24. Again, won't hyperinflation occur in non-reserve currencies first? The USA will be last, so what's the fear?

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  25. Once again, hyperinflation is a monetary phenomenon.

    Here are the problems with a reserve currency in today's market. Bank exposure to foreign investments. Currency swaps. Derivatives, etc.

    Imagine a global financial web where each currency is just a strand tied to some other countries strand. If one fails, the web starts falling apart.

    The reserve currency is the anchor strands. Each anchor strand needs to be re-enforced because by itself it won't stand up to the erratic financial winds.

    All of these strands depend on confidence in the reserve currency as the anchor points.

    If a major financial establishment runs into problems, confidence can deteriorate. As confidence fails, velocity of money increases. This increases anxiety about the value of the currency and we have a death spiral.

    None of this requires hyperinflation in a non-reserve currency to drag down the reserve currency.

    Remember Lehman Bros? Remember the efforts over Morgan Stanley? Uh, black swan events? Wars?

    Fear is the mind killer. Recognize the potential and prepare by increasing your adaptability to move quickly towards other profit seeking possibilities that WILL arise. I say adaptability rather than ability because adaptability requires mind-set. Folks may have ability, but fear stops them. Early bird gets the worm.

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  26. There's a GOOD reason I stopped reading Mish's nonsense years ago.

    - HeliBen

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  27. Here is an extensive article on the hyperinflation debate at acting man: http://www.acting-man.com/?p=4987

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    1. That article is better than many. However, it makes a very common mistake. Like many others he looks at 2 cases of hyperinflation and say the US does not look like these, so he is not yet worried about hyperinflation. The best approach is what Bernholz did in looking for the common characteristics before many cases of hyperinflation. He found that debt over 80% of GNP and deficit spending over 40% of total spending was the best way to predict hyperinflation.

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  28. An entire page with lots of comments and not once is the word MATH used. I am not amused.

    The math is certain. First deflation, then inflation...then hyperinflation. We have 100 cases where it ends very, very badly when the central bank begins debasing the currency with monetization. They give it a cute name QE...sounds so innocuous. We are at QE3 even rhymes. But it is debasement. And it is trillions...

    Further, in those 100 cases there are common themes and math and ratios. Look at our debt to GDP, look at deficit spending. The math is certain. We have currency reserve status on our side but that is coming to an end.

    The Chinese understand the house of cards and are quickly moving to kick over the dominoes that lead the mega house of cards we have created. They would like to take us down without having to fire a shot. Thus their re-smilting gold bars from ounces to kilo's for their soon to be gold backed currency. meantime search "43 trillion lawsuit" and see what you get, and see what happens if one of the many derivatives time bombs explodes and money comes flooding back home...so many factors to consider besides the fact that the bankers can not take all factors into account.

    We will have hyperinflation. Fiat currency always ends the same way. No fiat currency in the history of man has survived. NOT ONE EVER. The fed's frn is no different and this time it's NOT different. It will collapse. The math is certain, only the timing is uncertain, whether it be sooner or later.

    They are doing the exact things everybody else did before their hyper-inflations occurred and every one of them did not see their demise until it was far too late. We are well past the point of no return and the fed has shown that the only thing they know to do is print.

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  29. You wrote: "Mish said, "Since printing $2 trillion did not spur credit expansion, pray tell why would $50 trillion?". Mish needs to read the storey about the straw that broke the camel's back again. There are situations where a small amount of something is ok but lots is not."

    In a recent interview on GoldMoney http://www.youtube.com/watch?feature=player_embedded&v=d_TYaINi_NY#! . . . Mish says that with $50 trillion in credit that now exists, Bernanke's printing a trillion here or there will not create hyperinflation. He says he doesn't expect problems with the US economy for "two or three years", and that eventually the price will have to be paid.

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