General Question

critter1982's avatar

Hyperinflation, deflation, or neither?

Asked by critter1982 (4100 points ) November 20th, 2008

Hyperinflation” is runaway inflation. This is what Germany (Weinmar Republic)experienced in the 1920s’s, where people had to literally pay barrels full of German marks to buy a loaf of bread. People were burning their money because it was worth more as kindling than as a currency.

Deflation is what the U.S. experienced in the Great Depression, where most people had no money to spend, hire employees, or do much of anything.

If we’re going into hyperinflation, then investments like gold – which tend to hold their value in inflation – are best. In this case, the government should stop printing money like its Monopoly money.

If instead, we’re going into deflation, then cash or treasury bills hold their value the best. Because prices go down in a depression, each dollar is worth much more, and is a good thing to hold onto for investing purposes. In this case, the government should spend more to get things going.

Or do you feel that we tend to think of things as all or nothing. Do you think the US is going to shift somewhere in the middle?

What are you doing at this point to make sure that you and/or your family will be alright in the future. Are you stockpiling food? Are you buying gold? Are you starting to grow a garden or learning to hunt? Are you taking your money out of the banks, out of the stock market, hiding it under your bed? Are you doing nothing?

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16 Answers

miasmom's avatar

I don’t know that we fit into either two extremes. I do think groceries and dining out is definitely more expensive, but it doesn’t cost a wheelbarrel full of money for milk…yet. And yet housing prices are in an extreme slump, so that would be more like a depression.

So I don’t have an answer there… :). But we are spending less (eating in a lot more and not buying fancy new things) and trying to save a bit more also…not freaking out completely with the stock market, but being aware.

Time will tell.

Zaku's avatar

Clearly it’s not currently as extreme as either of your historical examples. Also, does not “deflation” refer to the opposite of inflation – the lowering of market prices? It seems to me you were describing the conditions during the Great Depression that might have partly caused deflation, not what deflation is, no?

Seems to me what we have is bank profiteering, usury and failure, monopolization, fear and misunderstanding, spreading conversations about a financial crisis, overvaluation of housing, high cost of living, and a widening gap between the rich and the poor, high and low wages, and more and more people having a harder and harder time affording basic necessities.

critter1982's avatar

d@Zaku: Yes but these things you listed can individually drive economies into the ground. The combined culmination of each issue you listed IMO will either drive this economy into deflation, or potentially hyperinflation if the world decides to eliminate the US dollar as the currency of international trade. At this point because the dollar is no longer backed by gold nor backed by international trade, the dollar would continue to weaken as our government will inevitably increase and excessively drive our national debt to obseen limits. China and Saudi Arabia will no longer want to let us borrow money and could dump their US bonds at any time if they foresee the US not ever able to pay them back.

Because we are in a situation we haven’t truly seen before I was just wondering whether or not the flutherites have begun to take precautions or whether you are concerned? Are you not concerned with either deflation/inflation?

wundayatta's avatar

For years, we lived the way we thought we could afford. We were constantly saving. Pumping as much as we could into the 401Ks. For most of that time, we earned more than we spent. That changed in the last two years. We were dipping into savings to pay for the kids education.

I liked to watch the money grow. At the same time, it was just numbers on my computer. All theoretical, and it only meant anything if we sold. That’s still the case. The numbers are about half what they were, but they’re still all theoretical. As long as we keep our jobs, and earn more than we spend.

With deflation, the economy stops, because no one wants to spend a dollar that might be worth ten percent more tomorrow.

Hyperinflation, I believe, can only happen if the government prints money profligately. I don’t think that will happen. I think the US govt will print enough money to keep deflation at bay, and maybe allow moderate inflation.

The real problem is the crisis in confidence. Everyone is afraid, so everyone is hunkering down. Buying little. Preparing for the holocaust.

But at some point, people will have to start spending, because they need things. When that happens, business will once again feel a growth in demand, and will hire more folks, and pretty soon, we’ll be back on a growth road.

When that will happen, I don’t know. Most reporters I haar say the economists think it will happen in a year or two from now.

All I can think of is that the stock market has shed close to half it’s value in a few months. I wish I had cash to invest now, because when things go back up, they are going to rocket up!

laureth's avatar

@daloon: “But at some point, people will have to start spending, because they need things…”

What people need and what they think they need are often two different things. What fueled the growth of the economy wasn’t people buying loaves of bread, it was big screen TVs and $50,000 weddings. People are still buying bread, but they don’t need SUVs anymore and that’s what is helping keep us in this mess.

cak's avatar

—> Not an economist here, but I agree with laureth. I hear the mentioning of getting the spending going; however, the spending that will “stimulate” the economy, isn’t happening. It’s the holiday season, the spending isn’t happening. The sales are out there, now; however, it’s looking like a very flat season, to put it lightly. No one I know is spending like they were and they can spend; however, living in a city where Wachovia was anchored and still waiting for the effects of the buyout, people are nervous. Bank of America is here, too…stock is falling there…fast. It’s not in “danger” but people are nervous.

These are families that buy their kids laptops, tvs, cars…things like that, for presents. It’s not happening and with the projection of a 1–2 year recovery (and that was being said before the automakers were really weighing on us) is forcing families to really ask, “do we need another flat screen tv”? The answer, generally is no.

The small products, soft lines and the like are not going to bolster the economy.

wundayatta's avatar

@laureth: people do need transportation, and they do need places to live, and they do need many other things that aren’t huge flat screen tvs or SUVs. At some point, the utility of what they currently own will not be enough. That’s when demand will pick up.

I do agree with CAK, though. People who can afford it, are not buying things for Christmas. Everyone is in a hunker down and see what’s happening mode. Certainly my family is doing that. My computer is six years old! I’ve been planning to get a new one for at least a year. Now I’m going to make it last as long as I can stand it (it is soooooo slow).

My wife works at Wachovia. The Wells Fargo people were there Wednesday, checking out the unit where she works. They got in at like 7 am, not knowing when the Wells folks would arrive. They came after 9. Then there was a nervous round of introductions followed by the questioning. The Wells people got to do all the questioning, and the Wachovia people had to sit there and answer, but didn’t get to ask anything back. Like being children in trouble with the teacher.

It’s really scary how money can change things like that. “We bought the company where you work, so we own you!”

Of course, that’s the way it goes in business. It makes you wonder, though, if the government can do that. They are going to loan money or buy outright shares in many companies. How can they manage their assets? Will government have the people to do that? Or will government (i.e., us) get taken to the cleaners once again?

It brings home to me that many people are loyal to this country, but they hate the government. I don’t know how they do that trick of emotional jujitsu, but it’s not uncommon.

Honestly, I think things are in such a mess, that I don’t see how we can find a way out of it any time soon. I have a suspicion that this recession is going to last a good deal longer than two years. It may last long enough to kill Obama’s chances of getting re-elected. Or maybe not. Roosevelt was re-elected three times.

Japan had a twenty year slowdown. Are we in for something like that, too?

sacaver's avatar

It was always my understanding that the danger with deflation is:

1. Businesses stop spending because prices continue to drop on goods. The businesses get into a game where they speculate that prices will continue to drop tomorrow, so why spend money today? If this attitude continues, then the economy grinds to a halt as everything is locked up in an economic stand-off.

2. Deflation is harder to control than inflation as the Fed has limited abilities to control deflation. With inflation, the Fed can raise rates and cool things down. But with deflation, you can only go to zero and then you’re done. You can’t charge negative rates on borrowing.

If the first point above is also holding true for the average consumer, even those who have the means to purchase, then things continue to get worse. Think about it… if you have the money to purchase a new TV, and you see it at $1,000 today, but you think there’s a good chance that prices will drop next week to $800, what do you do? You sit and wait. But if you hear that prices will likely fall again in a couple more weeks, well, you continue to wait.

In the meantime, the retailer waiting for you to come in and spend money is starting to sweat. They’ve got bills and payrolls waiting on one side and inventory sitting collecting dust on the other. They’ve just gone and slashed prices on the $1,000 TVs in order to lure shoppers in. They are losing out on their margin for profit, but hey, less profit is better than no profit. But if shoppers still don’t bite, they can try to lower prices again, but eventually you get to the point that prices are as low as they can be. If consumers are still holed up waiting for a better deal, things spial down. At the bottom, the retailer goes under and people lose jobs.

The only way out is to spend, but at this scale, it’s seemingly all on the government to get the engine going. But I think they’ve lost the keys…

wundayatta's avatar

Still, even in deflation, couldn’t the Fed tighten up credit, by raising all the rates, and wouldn’t that have at least some influence on deflation? Sure, people’s money that they have on hand would be getting more valuable, but if they wanted to borrow, they’d be paying higher rates, and once cash on hand ran out, you’d stop deflation.

Does that seem plausible?

Zaku's avatar

@critter: I’m interested, and it will no doubt affect my finances and life, whatever happens, but I think I’m actually for economic turmoil at this point, because I think the previous situation, and the old system and assumptions were awful and inappropriate and blindly closed-minded and getting worse. I think the world’s economies and theories can and should be dismantled and reinvented in a way that serves the needs of all people far better than the old/existing/distressed system has. I also think that the old system inevitably will lead to crisis and collapse, and the sooner it collapses in a serious way, the sooner that can be seen clearly and new systems can be be invented.

Mizuki's avatar

We are in a deflationary spiral, like Japan between 1994–2007. Assets become worth less, (like homes, cars, commodities). Banks are unwilling to lend and consumers are unable and or unwilling to borrow. We are clearly in a deflationary period.

This period will be followed by hyper-inflation in 6–18 months as the bail out money and all the printing of money washes over our system, and the dollar will most likley be devalued or replaced by another currency.

I am and have sold everything I own in USA and transfered all my saving to Yen. The house I sold in 2005 for 500k now sells for 300k, the Yen is up 20% from 2005.

I am the happiest renter in the world. WHAT EVER YOU DO DO NOT TAKE MORE DEBT!

laureth's avatar

Actually, I believe the best parallel to this economic situation would be the Panic of 1873. Quoted from here:

The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral…

But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America’s heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region’s assumptions about continual economic growth were too optimistic…

As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September…

(Sorry for the small print, but I didn’t want to take up too much room.)

Anyway, European nations reacted by blaming the Jews. I wonder who the scapegoat will be this time?

Mizuki's avatar

The scapegoat will be Obama. He cannot swallow the enormous shit sandwich made for him by George W.

@laureth——back in the 1800’s there were jobs, unlike now. Resources were cheap, unlike now. We don’t make stuff we just create financial instruments of no value.

laureth's avatar

There weren’t jobs and cheap resources for very long, once the Panic started. There was 25% unemployment, worse than we have now. And resources were cheap for a while because they were flowing in from the U.S. – just like they now flow here from China, which is part of the problem.

By “scapegoat,” I mean in the same way as the Jews were scapegoated in Europe. As much as people will blame Obama, that’s just mudslinging compared to pogroms. Personally, I’m suspecting that immigrants, legal and illegal, will bear the brunt of this one. It’s not their fault, but neither was it the fault of the Jews. People just like to have somebody lower that they can crap on when things go awry.

Zaku's avatar

Seems to me it would be a good thing if housing prices in the US deflated back to where they were semi-affordable. Forty years ago, a house sold for $30,000 that last year was valued at about 30 times that. Just a two-bedroom house, nearly a million dollars? Seems like a great deal of devaluation would itself be a good thing.

I get that deflation’s mainly just a symptom, though.

Mizuki's avatar

Zaku——you may just see the $30,000 home in your lifetime. Be careful what you wish for.

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