Wikinvest Wire

Marc Faber sees hyperinflation

Wednesday, May 27, 2009

It's pretty clear that we'll see much, much higher inflation in the U.S. after the Federal Reserve embarks on another "baby-step" campaign to normalize interest rates and withdrawal all the recently printed money in a manner that will not squash a nascent economic recovery, but Zimbabwe-style inflation seems to be a bit of a stretch.

Not so in the mind of Dr. Marc Faber, according to this Bloomberg report.

The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.

Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.
You can watch the whole interview here, though it's in high demand at the moment.

To get a really good inflation going in the U.S. (per the government's statistics), rental costs have to go much higher since their combined weight in the the Consumer Price Index (i.e., actual rental costs for renters and the nefarious "owners' equivalent rent" for homeowners) is almost one-third of the overall index.

That will be difficult to do as long as there are millions of empty houses across the land.

But, prices for food, energy, and domestic services may rise dramatically and we will surely hear assurances from the central bank along the lines of "we can tolerate a little inflation to ensure a return to economic growth".

But, Faber has no doubts.
“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

Federal Reserve Bank of Philadelphia President Charles Plosser said on May 21 inflation may rise to 2.5 percent in 2011. That exceeds the central bank officials’ long-run preferred range of 1.7 percent to 2 percent and contrasts with the concerns of some officials and economists that the economic slump may provoke a broad decline in prices.

“There are some concerns of a risk from inflation from all the liquidity injected into the banking system but it’s not an immediate threat right now given all the excess capacity in the U.S. economy,” said David Cohen, head of Asian economic forecasting at Action Economics in Singapore. “I have a little more confidence that the Fed has an exit strategy for draining all the liquidity at the appropriate time.”
It's hard to imagine that the Fed will do any better coming out of this than they did going in, blindsided as they were to the global credit deflation that has taken such a toll.

There is little reason to think that they won't be similarly blindsided by much higher rates of inflation in the years ahead, though they will be sure to dismiss its long-term impact initially.

Of course, by that time, it will probably be too late to do anything about it.


Bruno T said...

I see tax receipts are down 34% at the IRS in today's news. Meanwhile the "projected" deficit is what, $1.8 trillion just this year. Meanwhile we're maybe just months away from the interest the govn't has to pay on all their debts going way up. (at some point it easily consumes all tax receipts). We owe $60 trillion more in unfunded entitlements that we don't have the money for even if we didn't run deficits. Meanwhile our govn't seems to be doing whatever it can to quash any industrial revival here and we are not competitive in a global economy. Energy costs will continue rising for decades.

So to cover all this, I assume all we have is "printed" money/monetization/etc. So why not hyperinflation ultimately? It seems to be almost a mathmatical certainty. What would reverse the trend?

I think what's causing all the bizarre activity in the markets recently (stocks going up even though their futures look bleak, a massive deleveraging last year that took down even commodities in a mistaken thought that dollars were valuable and safe, etc) is that for a large segment of those too close to the picture to pick out the details, they think this is all just another downturn. The status quo went on their entire professional lives so they assume that's how it goes. I'm not sure it is going to be normal. I think it may be the end of the dollar, period. Whether that's in 3 years or 20, I can't calculate. But at some point it really is silly pieces of paper and little else.

News said...

Marc Faber is going crazy at his old age. US byperinflation also means world hyperinflation because the rest of the world is pretty well levered up. Hyperinflation for the entire global economy cannot end well and will probably result in war.

I do not believe we will get to hyper inflation.

dangermike said...

the only way to prevent it at this point is if the fed winds down and eventually reverses the printing presses as the financial sector heals. If we don't destroy the dollars printed to cover the credit crunch as credit returns, that will almost certainly set us into massive inflation.

John S said...

We'll get 500% inflation but the government will report it as 4.5%. Problem solved. The killer will be energy prices. Throw in the unintended consequences of "cap and trade" and $20 gallon gasoline is in your immediate future.

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