Hyperinflation: In The Near Future?

Over at LewRockwell.com, there's an interesting interview of Jorg Guido Hülsmann about the possibility of hyperinflation being engendered by the Federal Reserve's quantitative easings. Prof. Hülsmann made the point that the justification for QEII differed from earlier justifications: before, QE was said to be necessary to prevent deflation. Now, though, the Fed's rationale is to get the U.S. economy moving again. [One subsidiary reason: driving the greenback down would help exports.] He also noted that the Fed doing so helps the U.S. Treasury finance its deficits at historically low interest rates.

In other words, the overall supineness of the bond vigilantes and the bubbleish demand for U.S. Treasuries gives the U.S. government the opportunity to finance more spending at abnormally low rates. For whatever reason, nowadays is one of those time when the Fed can push down interest rates without a rebound due to inflation expectations ramping up.

Prof. Hülsmann believes that double-digit inflation will make its appearance in a few years, but is skeptical about a Weimar-style hyperinflation breaking out. He noted that, in Weimar days, more than 50% of the Weimar government's budget was financed by inflating. The U.S. government is nowhere near that level now. There would have to be sustained quantitiative easing for some time before that point has been reached.


Call me superstition-prone, but I believe hyperinflation won't be a real threat until it's generally accepted that hyperinflation is impossible. There's a real opening right now for some up-and-coming mainstream economist to make a splash by saying that limits on loan growth imply that the Fed cannot induce hyperinflation, because the banks won't follow through by lending excess reserves out to the point where the money supply explodes. Even if they were willing to, loan demand from creditworthy customers would block the excess reserves from moving into the economy to that extent. The "data" backing it up would, of course, be the excess-reserves situation since late 2008.

This kind of thinking is dangerous because it implies that the Fed can expand reserves limitlessly without engendering hyperinflation. Since the "new normal" has captured so many people's attention, I could see some tenure seeker arguing what I sketched out above. The paper would be called "Structural Impediments To Hyperinflation" or some such.