Jeff Nielson: Hyperinflation Cannot Be Prevented By Debt/Deflation

Hyperinflation Cannot Be Prevented By Debt/Deflation

Written by Jeff Nielson   (Click For Original)


A repetitive flaw continues to circulate throughout much of the media – mainstream and Alternative, alike. This flawed analysis contends that we are heading for a deflationary crash, and reflects a fundamental misunderstanding of economic dynamics.

This fundamental (and unforgivable) error comes from a failure to recognize the definition of deflation: it is when the currency in which a particular jurisdiction is denominated rises in value. It is with this basic fact in mind that we can now view a simple hypothetical example, which resolves the phony “inflation/deflation debate” once-and-for-all.

Imagine two economies which are identical in every way, except for one, important difference. They have the same GDP, the same sized population, and a similar set of identical, economic parameters (except for that one difference). Both economies recklessly decide to hyperinflate their currencies, as represented in the “hypothetical” chart above.

This is not a chart of a potential hyperinflation. Rather, it is a chart of a currency which has already been hyperinflated (past tense). For readers who can’t “see” this already, just imagine a chart even more ridiculously extreme requiring a much larger page.

Both Economy A and Economy B have hyperinflated their currencies (i.e. driven the value of those currencies down to zero). Now we come to the key difference between the two economies – and the obvious folly of the Deflationists: Economy A is totally solvent, without a single penny of debt, while Economy B has a $50 trillion national debt, and is obviously bankrupt.

According to the nonsense of the Deflationists, the currency of Economy A which has ‘only’ hyperinflated its currency will fall to zero, while the currency for Economy B which has hyperinflated and bankrupted itself will rise in value – due to the “deflationary crash” about which the Deflationists are continually jabbering.

We thus arrive at the Idiot Principle of Deflation. A nation which only hyperinflates itself will see the value of its currency fall to zero, but a nation which hyperinflates and bankrupts itself will cause that currency to rise in value. The bankruptcy supposedly does more than merely “cancel out” the hyperinflation, it completely overwhelms it.

By now, it should be patently obvious to anyone with two synapses to rub together that the Idiot Principle of Deflation is utter gibberish, and cannot possibly add up, when one simply views the economic dynamics (and definitions) in their proper context. But the mind-numbing idiocy of the Deflationists becomes even more obvious when we add some empirical evidence from the real world.

What makes the hypothetical example above totally unrealistic? Economy A, the solvent economy, would have absolutely no reason to engage in the recklessness and suicide of hyperinflation. Solvent nations never hyperinflate their currencies. Thus every one of the (numerous) regimes throughout history whose currencies exploded into hyperinflation was also already insolvent/bankrupt. It is only such insolvency which creates the extreme desperation necessary for a government to invoke such economic suicide(hyperinflation).

According to the Idiot Principle of Deflation, this is impossible. Because these nations went bankrupt, their currency should have risen in value, rather than collapsed to zero. But there is another principle of idiocy at work here.

As has been pointed out to readers, but apparently ignored by the Deflationists, until our governments embarked upon the even more-reckless fraud of “quantitative easing” (monetizing debt), our governments literally borrowed every unit of currency into existence. This means that these units of currency are/were literally the IOU’s of our governments – our bankrupt governments.

What is the value of an IOU issued by a bankrupt Deadbeat? Zero. The currency of Economy B was already worthless, even before it began it began its hyperinflationary money-printing. The currency of Economy A only became worthless as a result of the money-printing. The currency of Economy A is worthless. The currency of Economy B is doubly worthless.

However, according to the Idiot Principle of Deflation, when you render a currency doubly worthless, it rises in value.

Sadly, this infantile error in logic/arithmetic of which all the Deflationists are guilty cannot be attributed to mere ignorance. It is (has been) nothing less than abject stupidity. The reason why such a harsh verdict is absolutely warranted can be summarized in two words (and one name): John Williams.

It is now a full decade since the esteemed Mr. Williams (of first published his brilliant essay (and analysis) “The Hyperinflationary Depression” (updated on numerous occasions), where he explained why bankruptcy does not (and would not) prevent the value of a currency from falling to zero if that governments pursues a hyperinflationary monetary policy (i.e. hyperinflationary money-printing).

Put simply, a government can destroy the value of its currency and implode into bankruptcy, simultaneously. Empirically, this is precisely what we have seen with every hyperinflationary episode in history. The deflationary crash of bankruptcy occurs (more or less) simultaneously with the hyperinflationary plunge-in-value of the currency. The former never “cancels out” the latter.

This is the true “principle” at work with these dynamics, and it is one which the Deflationists have either ignored (for ten years) or simply lack the capacity to grasp. Individual facets/sectors within an economy can implode in a “deflationary crash” (within that niche). Not only does this fail to negate any overall hyperinflation at work, it must accelerate it. Obviously a nation whose currency is “doubly worthless” should/must plunge to zero even more rapidly than the currency of a nation which is ‘merely’ worthless.

To repeat, every nation in history which has engaged in the suicidal monetary policy of hyperinflation had already succumbed to the fiscal folly of insolvency. Not only is it “possible” to simultaneously have a nation hyperinflate its currency to zero and have a so-called “deflationary” debt-default crash, it is the onlymanner in which hyperinflation ever occurs.

The Deflationists don’t understand economics. They have ignored all of our economic history (where not a single nation has ever “warded off” hyperinflation by going bankrupt). And (apparently) they have never even heard of “John Williams”. They can be, and should be, totally ignored.

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