Friday, January 22, 2010

US Crosses the Bernholz Line -- Hyperinflation Early Warning Signal

Via:  US Crosses the Bernholz Line -- Hyperinflation Early Warning

The basic point:

Economic historian Peter Bernholz has identified that inflation starts to take on hyperinflationary characteristics some time after the deficits of a country as a share of government expenditure rise above a third and stay there for several years.

According to Bernholz, the great hyperinflations of France, Germany, Poland, Brazil, and Bolivia all occurred after deficits reached that magic percentage or higher (In Bolivia, it reached 91%). The United States crossed over the Bernholz line last year.

The time lags for onset of the disease vary following the indication.

A word about the definition of inflation:  Monetarists and Keynesians alike (neoclassical economists) generally follow Friedman in saying “inflation is always and everywhere a monetary phenomenon.”  Some Austrians say inflation is money supply growing faster than real product.

For practical purposes, let’s define inflation as a general and sustained rise in prices, all prices, including consumer and producer prices.  This is very different from a localized asset inflation such as America has recently experienced in stocks and real estate and commodities.  Let’s call these “asset inflations.”  Asset inflations are not so good at reducing real debt loads, as most people’s incomes (and wealth) don’t follow asset price bubbles upward—and they are definitely left behind when the bubble bursts.

For a general inflation to get going there must be a “wage-price spiral,” so that incomes rise to meet or at least follow the general rise in price level.  Hence, I define a general price inflation as “a labor market phenomenon accommodated by monetary policy.”  The money supply does indeed grow faster than real product in such a case.

I go through all this merely to point out the unlikelihood of a general inflation in the current environment, in which labor unions are nearly extinct, employment-at-will is the law of the land, fascistic Storm Troopers routinely terrorize citizens for trivial infractions, basic Constitutional rights to due process have been destroyed (the Government can “disappear” you legally if they designate you a “terrorist”—hold you forever without any due process, torture you, do whatever they like with you), and for the most part citizens respond by cowering in their homes, afraid they will be next to run afoul of the dystopian corporate police state, to drop into poverty and a life of internal exile or worse.

Now, the monetary authorities, in their wisdom, would actually like to see a general inflation, as this is their deus ex machina for dealing with excessive federal debt loads (debts of all varieties, really).  Hence, I expect the national governments, goaded by their monetary wizards, to try to “enfranchise” the working populations of the world somehow, in a desperate last stand of Bretton Woods (II).  If successful, they will accomplish nothing less than the the supernova of Bretton Woods II, a global hyperinflation. 

And hyperinflations generally end up permitting those with money and access to leverage, the Big Money, to expropriate the working folks of whatever they had left, and if historical precedent applies, to set the stage for full-bodied Fascism to arise.

The solution:  raise taxes on the rich in America who have twisted the income distribution so much in their favor, and provide workfare and health benefits to the people.  There is enough to go around.  We don’t need to run huge deficits, we don’t need to cut taxes on the rich, we don’t need more war.

Shame upon the ruling class of America!  You sit and watch as this happens without the slightest pangs of conscience?  As if you don’t know what is happening?  Shame upon you!


See also: 

U.S. Income Inequality Is Frightening--And Much Worse Than We


  1. What about Janzen's argument that rather than a wage price spiral inflation we'll see an inflation based on the fact that no one will be willing to exchange anything for a worthless dollar that is no longer able to store value?

    What about the opposing argument from the debt deflationists? If Steve Keen is right, and I can't find any fault with his logic, then the central banks can go on printing as much as they want, it doesn't counteract the debt money destruction going on in the real economy as defauts pile up on top of each other.

    And either way, regardless of the mechanism, hyperinflation or deflationary spiral, isn't the end result the same? More power and money concentrated in the hands of the few to the detriment of everyone else? I feel prescient lately, no matter the question if you predict the outcome that is going to screw 99.9 percent of the population to the benefit of the .1 percenters you are going to be right.

  2. You point to the crux of the problem: social values. It should be unacceptable to expropriate an obscenely large amount of money from the rest of society as if one earned and deserved it all by oneself. No man or woman is an island.

    It is possible we may have debt-deflation in the intermediate term, followed by hyperinflation, but either way, unless American society can come together the outcomes may be very unbalanced distributionally.

  3. Tom -

    As indicated, I see deflation as the intermediate-term danger as more debts default (next tsunami of mortgage resets, etc.). Excess reserves do not an inflation make, we all know that.

    But wars cause inflation pretty reliably, and given the policymakers' stated predilection for both war and inflation, I believe it will happen in time. My only question is whether it will be a general inflation or more rounds of asset inflations.

    My timeline for serious inflation or hyperinflation to get started is about five years out. We could have some more localized bubbles, like the recent stock market rally, in the meanwhile.

    I don't buy Bill Mitchell's "it's all a wash" argument at all. It sounds like academic doubletalk to me (an ex-academic).


    There is a strong relationship between growth of government spending and inflation:


  4. Hello.

    The fredgraph shows that inflation makes prices go up -- even the prices of things the government buys. (Looks like current-dollar spending numbers to me.)

    Real nice post, though.