Wednesday, August 15, 2012

Gary North on Hyperinflation - Why It Won't Happpen to USD

From his latest column:

This is why I am not persuaded by those people who say that hyperinflation in the United States is inevitable. I don't think it is. I think default is inevitable, but I don't think it needs to be default by hyperinflation. That is because the government cannot get out of its obligations by fiat money. It cannot default by using hyperinflation, because hyperinflation will only last a few years, but the obligations last for the next 75 years. In other words, the default will be much more open. The government is going to have to renege on promises made to the vast majority of people who are now dependent on the federal government for their retirement income, and it will also default on the workers who are still in the workforce, who are paying each payday into Social Security and Medicare.

Anyone who makes the case for inevitable hyperinflation needs to present evidence on how hyperinflation will enable the United States government to escape the political obligations of the promises that it has made to retirees.
Exactly. Inflation does nothing for these types of entitlement liabilities (probably makes them worse) and also does nothing for the short term borrowings of the federal government. Plus, the Federal Reserve is massively long bonds, so inflation would blow them up - to whatever extent that is even possible, anyway.

4 comments:

portland_allan said...

SS benefits are indexed to inflation. So are payments to medical providers for Medicare & Medicaide, albeit in a slightly more round-about fashion.

So yeah, hyperinflation isn't a panacea by any means. Instead, they'll default by price-fixing in all its glorious forms. You can go to the Dr. for $20, if you had a doctor. And receive negative real rates on all your savings. And see the math for your SS COLA cooked like an Enron financial statement.

portland_allan said...
This comment has been removed by the author.
CP said...

And whether they are indexed or not, the expectation is that they provide a certain amount of purchasing power, in the case of SS, and services, in the case of Medicare.

I would say rationing would be the more likely form of default - like health care in Britain.

Especially the end of life stuff. Of course, doctors will tell you that they wouldn't want those types of measures used on them.

portland_allan said...

Right, price-fixing == rationing. Sometimes I'm not the clearest.

Speaking of end of life, I just this week I read of a brother in-law of a blogger I frequently read who lived alone, fell and hit his head. They found him some days later in a coma and unresponsive. They didn't realize at the time he had fallen, and all the Dr's jumped to the conclusion he had a stroke or something and began talking of putting him down. The family insisted on more tests and they "discovered" his brain had all it's high-level functioning. So they did some more testing, realized the swelling was not internal, that it was from an external blow. So some more medication and time to bring the swelling down and long story short he's now fully responsive and recovering in the hospital. Now, if he were 10 yrs older, and Medi* was another 2% of GDP how much faster would they have written this guy off? How much harder would it have been for the family to demand more testing?