Hyperinflation Watch

The US government’s deficit grew again in December 2009.  The difference between its outlays and receipts as presented on the following chart has now reached a new record.

In order to smooth out month-to-month fluctuations and illustrate the underlying trend, the above chart calculates the US government’s deficit using a 12-month moving average of both receipts and outlays.  The resulting gap between income and spending rose 10-out-of-12 months in 2009.  The gap, which was $62.1 billion in January 2009, nearly doubled to $122.6 billion for the month of December, the largest monthly deficit so far.  The trend – as illustrated by the two 12-month moving averages – suggests that this gap will continue to grow.

Note that while spending appears to be leveling out, receipts remain in freefall.  With unemployment continuing to rise, it seems likely that this downtrend in receipts will not reverse anytime soon.

So the US government remains on course to continue accumulating a huge mountain of debt.  One has to wonder when the breaking point will be reached.  After all, how much of the world’s savings can the US government really expect to attract?

If the US government cannot attract enough savings to meet its borrowing needs, it has to ‘print’ the dollars it wants to spend, which is of course what quantitative easing is all about.  But this printing comes with a cost, just like every episode of government currency creation throughout history.  It is the cost of inflation, and eventually, hyperinflation.