This weekend's entry is a focus on "hyperinflation" .vs. "deflation" as the possible paths forward for The United States.
Let us take a purely analytical look at this matter. I'm going to ignore people's words, because we have seen over the last few years exactly how much value you can attribute to the jawboning coming out of such asshats as Bernanke and Paulson.
To put it bluntly, zero. Go watch the video again if you need a reminder of the prescience and accuracy of their public statements.
No, I want to examine the two options and what they mean for people who are actually pulling the levers of policy.
Let us first define the roles here. Bernanke, Chair of The Fed, is a Banker. So is Chase, Morgan Stanley, Citibank, Wachovia, WaMu, Wells, etc. All banks. All of the people who The Fed serves are in fact bankers, and The Fed is made up of bankers. Each and every one of them.
They make their money borrowing and lending money. That's all they do.
But money is just a medium of exchange, really. It has value only because other people will give you things, whether they be hard goods or services, in exchange for some of it.
Absent a willingness to make that exchange currency has value only as a way to heat your home - as fuel.
So let's assume that the bankers lend you $300,000 to buy a house. You buy a house, but can't make the payments. This is a microcosm of what's going on right now.
The bankers have a choice - they can force foreclosure, in which case they own a house, or they can force hyperinflation, in which case you can pay them. Those are, in fact, the two options, although of course those are endpoints and "something in the middle" can happen too.
Which of the two would you, as a banker, prefer?
When you made the loan that $300,000 was, roughly, the equivalent of a small yacht, or a (very) fancy car.
In a deflationary environment the banker gets as much of your money as he can, and then he also gets the house! You lose big, but does he lose? Well, not really. He started with an asset (money) that was roughly the utility value of the home, and he ended up with the home itself, which has the same utility value. Further, the money he gets before you default goes up in value, as premium comes out of hard assets.
That is, he might have not only the house, but enough money to buy a yacht as well (at a distressed sale.)
The banker makes money in terms of real value in a deflationary environment. You, on the other hand, being debt, get rammed.
Ok, now let's look at hyperinflation. Let's say that the government prints up $300,000 and sends it to everyone in the country. Hurray! You can pay off your mortgage, and you do so.
But what happens to the banker?
He gets reamed in both holes. Yes, he has his $300,000 back, but what does that $300,000 buy? Oh, not very much eh? Go look at Zimbabwe, Argentina, or any other place where hyperinflation takes hold. The banker gets stiffed in a big way (as does anyone else who's business it is to move and hold money) because what once bought a house now only buys half a house, or less.
Those who argue that Bernanke will "hyperinflate" have a tiny little problem with their thesis. That thesis depends on Bernanke and the rest of the banks (who are, in fact, his masters as well as his servants) acting in a fashion that is explicitly against their own self-interest.
Oh, and by the way, they know this.
See, banks normally want a small amount of inflation. Just enough to make it not worth it for you to hoard cash, as it slowly devalues. This forces you to spend and invest, lest you see your purchasing power disappear.
But what a bank never wants to see is an inflation rate that is above their lending "spread", or the difference between their cost of funds and what they charge. If that ever happens then they lose big; remember, all banks are leveraged and as such small "percentage" base losses get multiplied by their leverage ratio!
So exactly what is all this "poppycock talk" about helicopters and such?
Quite simple, really. You start talking about deflation and people freak out. You want to be Fed Chairman? You don't dare say that you'd respond to a credit crisis by allowing deflation to take place. Never mind that it would help you and your buddies - it positively reams everyone who is in debt, and that's 80% of the population, plus the government itself!
So no, you put on a happy face.
But would you really, if push comes to shove, choose to hyperinflate?
Oh hell no.
Look at what people do folks, not what they say.
Especially when dealing with public officials.
Every one of those folks is in their office because they're good liars.
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