Hyperinflation Watch

June 15, 2010 – The latest financial results of the US government show that it continues to spend and borrow recklessly.  As a consequence, there has been no improvement in the hyperinflationary outlook for the US dollar.

Hyperinflation results when a country’s central bank turns government debt into more currency than is demanded in economic activity.  It is unfortunately impossible to measure precisely the demand for currency.  Nevertheless, the rate at which the government is borrowing can be used as a general guideline to determine if too much currency is being created.

If government borrowing causes the debt to accumulate at rates of increase greater than the historical trend, clearly too much new debt is being added, which forces the central bank to ‘print’, i.e., turn that debt into currency.  I have discussed this phenomenon before.  “The [Federal Reserve] has one mission.  It is to make sure that the federal government obtains all the dollars it wants to spend.  If the federal government cannot attract these dollars from the world’s savings pool, then there is only one other way to obtain them.  The Fed must print them.”

The following chart illustrates the worsening problem.

Federal revenue remains stagnant, indicating that the economic recovery is weak at best.  At the same time, federal spending is not contracting.  Therefore, the gap between income and outlays remains near record levels.  New debt continues to be piled upon existing debt.

The once-almighty US dollar – that only a few decades ago was considered to be ‘as good as gold’ – continues down the road toward hyperinflation.  All that is needed to ignite the hyperinflationary bonfire is a small spark.