Monetary Psychology: Hyper-Inflation Vs. Deflation

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psychology

Because fiat currencies (like the US dollar) have no intrinsic value, their perceived value is subjective and subject to public agreement.  That agreement and psychological changes are measures of public confidence in the fiat currency’s value.  That agreement is subject to change at any moment based on changes in the public psychology.

•  In periods of inflation, confidence that the dollar will still be worth a full one dollar tomorrow wanes.  During periods hyper-inflation, everyone knows/agrees that the value of the currency is falling like a stone.  The faster the value of the currency falls, the less confidence we have in it–and the faster we spend it.  In extreme cases of hyper-inflation, we sell something in the morning and struggle to quickly buy something with the currency we just acquired.  If we hold the currency too long, it’s value will diminish so rapidly as to be almost worthless within days or even hours.

Government likes a little inflation (say, 2%) because: 1) government (the world biggest “borrower”) can repay its debts with cheaper dollars; and 2) inflation compels people to spend more rapidly and thereby “stimulate” the economy and generate higher tax revenues.

•  In periods of deflation, public confidence in the value of the currency rises because we know that $1 will buy more tomorrow than it will today.  Knowing/agreeing that the value of the currency is rising, people tend to save rather than spend.

Government hates any amount of deflation because:  1) government (the world’s biggest “borrower”) must repay its debt with more “expensive” dollars; and 2) deflation compels people to spend less rapidly and thereby slows the economy (a slow economy generates less tax revenues).

•  Today, many economists agree that we may be heading for an economic depression where the economy slows to a near stop.  However, some economists predict that we’re headed for a hyper-inflationary depression (one where the fiat dollar loses value quickly and substantially), much like the former Zimbabwean dollar.  In theory, a hyper-inflationary depression is a contradiction in terms.  A “depression” signifies a slowing of the economy, but inflation (and especially, hyper-inflation) should cause the economy to accelerate as everyone seeks to dispose of their currency as fast as they acquire it.

Inflation is an expression of a loss of public confidence in the currency’s ability to retain its purchasing power. Hyper-inflation is an accelerated loss of public confidence that’s so fast that, eventually, the people agree that the hyper-inflating currency is losing so much value so fast that it must abandoned and allowed to die.

•  Other economists predict that we’re headed for a “traditional” deflationary depression where economic activity slows, in part because the currency’s value increases significantly and persistently over an extended period.  As the people “agree” that their currency will purchase more tomorrow than today, public confidence in the currency’s persistent purchasing power rises, the currency increases in value, people are less likely to spend (more likely to save) their currency and the economy slows.

•  If you believe we’re headed for an economic depression, and you want to know whether that depression will be characterized as “hyper-inflationary” or “deflationary,” answer one question:

Is public confidence in the dollar’s ability to retain its value more likely to rise (leading to deflation) or fall (leading to inflation)? 

Insofar as the American people (and/or people of the world) “agree” that the US dollar’s value is likely to continue to fall (it’s already lost 95% of its purchasing power since A.D. 1971), we’re headed towards a hyper-inflationary depression that will end with the demise of the dollar.

Insofar as the American people (and/or people of the world) “agree” that the US dollar’s value is likely to reverse course and begin to regain value, we’re headed for a traditional deflationary depression.

So which is it?

Will public confidence in the fiat dollar continue to fall or will it begin to rise?

It’s not as true as it once was, but it’s still true that foreign wealth flows to the US dollar as a “safe haven” during times of political or economic instability.  That influx of foreign wealth is an expression of rising (though foreign) public confidence in the value of the fiat dollar and thereby contributes to deflation.  Deflation is possible.

But as I view the US and global economies, three things seem certain:

1) The government wants inflation so it can repay its debts with cheaper dollars;

2) The dollar has, in fact (and probably by government intent), lost 95% of its purchasing power over the past 40 years;

3) The government continues to want inflation and therefore the inflationary trend of the past 40 years will at least continue and probably accelerate;

4) Even if government wanted to deflate the currency and increase the dollar’s value, there’s virtually nothing government can do (except raise interest rates which would probably push the economy into a depression) to increase public confidence in the fiat dollar.

I understand that the dollar’s value will fluctuate over the next months or years. Sometimes, it will go down.  Sometimes, up.  Confidence will rise and confidence will fall.  But mostly, the fiat dollar’s value will have to fall over the next months or years.  That means that, although we may see occasional signs of deflation, mostly, we’re going to see inflation caused by a persistent decline in public confidence in the value of the fiat dollar.

The big question is whether we can expect mere “inflation” of, say, less than 20% per year–or if we can expect hyper-inflation of, say, 50% (or more) per year.

Inflation is mostly caused by the thieves in government wanting to rob their creditors and control their people’s economic activities.   Hyper-inflation is evidence of a complete and accelerating loss public confidence in the value the fiat currency.  Hyper-inflation is evidence that the people have lost almost all confidence in their fiat currency and that, within the next few months or years, that currency will die.