Why don't we see US$ hyperinflation?

[MikeMark]

So the interesting thing about our money system is that it is Debt (or Credit) based. Money is created at the bank, when you borrow it. People usually think that they are borrowing someone else's savings, but that hasn't been true for over 100 years.

GDP is increased by government spending in the standard calculation, however that's a horribly bad way to look at government spending. Governments create nothing, so saying that they increase GDP by spending is wrong. In fact, Governments take what could be used by the people and re-direct it into places that the people might not choose. This is actually destructive to overall GDP. Getting a handle on how much is the hard thing to do.

Now thinking about inflation, inflation occurs when either more money is created than goods or more goods destroyed (or used up) than money is destroyed. Deflation is the opposite. And yes, money gets destroyed. That's what the FED wants to prevent, believing that deflation is bad.

So consider two graphs below:

In a credit based system, total money is basically cash + credit. The funny thing is that one person's credit is someone else's debt. Now the next number is subject to speculation, but I believe I'm giving the right range. Credit in the US is something like 4 - 7 times larger than cash.

So when household debt declines as it has been, that is deflationary to the total money supply. The FED saw this beginning to happen in the end of 2008 and wanted to inflate. Always the best and easiest way to inflate is to give money to the big banks which in turn buy government debt or pay off bad debts. Deflation in a credit based system with high credit levels will cause exactly what we saw happen: high price items, like homes, lose their value rapidly due to price contraction effects of deflation in the money supply.

The really interesting thing about it is that people are required to look at the value of their "owning" in terms of price instead of in terms of the value of the item itself to them, when they have borrowed money on it. If the sale price goes down, the people and the bank both want to either re-negotiate or get out of the obligation. So the credit based system becomes a feedback loop that brings the prices down rapidly, in an attempt to remove the unneeded products from the market place, or at least reprice them at their needed level.

The government sees this as destructive to the market (and especially to the banking system) and attempts to prevent the declines. That's why there has been so much additional government spending from 2008 to now.

So the short answer is actually two-fold: government spending as a percent of total GDP is low and household debt has been declining, which is deflationary.

Enjoy,

-MikeMark   

[troy112]

us debt isn't that massive and australians don't know shit about money

Its Austrian Mate. And the only thing keeping US alive is , the faith of other countries in US dollars and its military capabilities. Som it will remain same for quite some years, unless people start realising. and come face to face to the truth.

[KawalGrover]

So how come US and it's counterfeited dollar are still afloat? Why isn't it happening?

Here is a link that a user on these forums shared.

https://www.youtube.com/watch?v=dQdmsL147j0

I think this guy does a stellar job in explaining why those dollars that they have pumped haven't been in the market. Over 81% of it sits with the Fed collecting interest for the banks that were bailed out in the first place. Crazy.

[pening]

Ask Japan, they've been trying to inject some inflation for over a decade.  The reason is that many following pop-economics dont accept/understand that inflation is a measure of price increases, not increase of the monetary base.  This may lead to inflation due to excess money supply, but its not a certainty.  cf Japan...

The Fed is not printing money, from what I understand.

And that's the other point ignored.  Quantitative Easing isn't printing money - the clue is in the use of different words.  People think it's just a fancy way of saying the same thing, and it is very similar in principle.  But in detail, its different.  The money is going in to bonds to effect bond prices change, and into bank balance sheets.  This is key, it answers "where is the money going".  Another detail over looked is the bonds are not cancelled, the Fed/BoE have a large stash of bonds which they can sell back to the market to remove excess supply in future. If in some future years they don't do this, that when you may begin to see significant inflation problems.  There's another factor of exporting the inflation abroad, mostly to emerging markets where they have lots of growth to soak it up and its largely hidden (but that's complicated I don't really get that whole aspect).

That said, running such a massive deficit as we in the UK and US are is bonkers, though as far as i can tell half the problem in the US is tax breaks from previous administrations that haven't been reversed.  You'd be amazed how quickly the deficits reduce with even a few % increase in tax revenues.  But the anti-taxation Austrian school don't want to say anything about that.

[thaaanos]

So the short answer is actually two-fold: government spending as a percent of total GDP is low and household debt has been declining, which is deflationary.

Household debt declined by writeoffs not by repayments, hence money supply was destroyed correct?

[twiifm]

Ask Japan, they've been trying to inject some inflation for over a decade.  The reason is that many following pop-economics dont accept/understand that inflation is a measure of price increases, not increase of the monetary base.  This may lead to inflation due to excess money supply, but its not a certainty.  cf Japan...

The Fed is not printing money, from what I understand.

And that's the other point ignored.  Quantitative Easing isn't printing money - the clue is in the use of different words.  People think it's just a fancy way of saying the same thing, and it is very similar in principle.  But in detail, its different.  The money is going in to bonds to effect bond prices change, and into bank balance sheets.  This is key, it answers "where is the money going".  Another detail over looked is the bonds are cancelled, the Fed/BoE have a large stash of bonds which they can sell back to the market to remove excess supply in future. If in some future years they don't do this, that when you may begin to see significant inflation problems.  There's another factor of exporting the inflation abroad, mostly to emerging markets where they have lots of growth to soak it up and its largely hidden (but that's complicated I don't really get that whole aspect).

That said, running such a massive deficit as we in the UK and US are is bonkers, though as far as i can tell half the problem in the US is tax breaks from previous administrations that haven't been reversed.  You'd be amazed how quickly the deficits reduce with even a few % increase in tax revenues.  But the anti-taxation Austrian school don't want to say anything about that.

Good explanation.  I would add that the ultimate goal of Quantitative Easing is to create liquidity in the near term.  The problem is that when private balance sheets are underwater, you can flood the market w cheap money but the private sector still have no choice but pay down their balance sheets and deleverage debts.  QE by itself is not enough to jump start the economy.  Richard Koo describes this as a "balance sheet recession"

[morphtrust]

add to all the good replies here, the fact that the world currencies other than the dollar are also inflating their quantities of currency in unison for the most part so it makes everything look hunky dory, so prices dont go up much. (ie the price of the dollar vs the price of the yuan, or the euro, is some what stable due to them making more euros and yuan at about the same rate as the dollar, keeping everyone thinking the value of the money they hold has not changed, and that is all fiat is, perception of value, just like bitcoin. the only two things different about bitcoin over fiat that really matters at this point, is that you can not easily counterfeit it, and the banks don't get first crack at it making the rest of the world come begging for a dole out of it. with bitcoin (and other crypto) the people make it a reality, so really we should work much harder to build an all crypto community system by learning skills that we can use to produce goods in exchange for crypto, and nothing else. only use fiat for things that we can not get with crypto like shipping (anyone up for building a network of transportation to do this? lol)

[johnyj]

It's extremely simple: I print one trillion dollars for myself, but I spend only 1 billion dollars. No inflation will happen, and at the same time my wealth increase 999 billion dollars

[Bit_Happy]

"Various bubbles"
Real estate, stocks, silver, Bitcoins   
We have inflation, just not obvious hyperinflation at this time.

It is happening, its just that right now the inflation is in the stock market as thats where most of the QE3 money went.

[aminorex]

Velocity of money is plummeting.  The result is balancing the oversupply.  They are doing a really good job at something which is a very very bad idea, and likely to explode in their faces at any moment.  The situation becomes more precarious with each passing day.

[Bit_Happy]

Velocity of money is plummeting.  The result is balancing the oversupply.  They are doing a really good job at something which is a very very bad idea, and likely to explode in their faces at any moment.  The situation becomes more precarious with each passing day.

The situation becomes more precarious with each passing day.
That was true 10 years ago, 15, and even 25 years ago.
Someday the economy will crash, but they have been able to delay for a long time.

[hashman]

The interesting thing about the fiat system is that nobody knows the money supply. 

Sure there are some nice charts here, and people like to repeat 85b per month..  but there is really no way to know.  Even the secret bosses of Yellen and Bernanke who think they know the truth about M1 really don't know.  Cool eh?   

[MikeMark]

So the short answer is actually two-fold: government spending as a percent of total GDP is low and household debt has been declining, which is deflationary.

Household debt declined by writeoffs not by repayments, hence money supply was destroyed correct?

Interestingly, it doesn't matter whether by write offs or repayments. Either case is deflationary. This is due to the fact that money is created when credit/debt is created. When the debt is paid off, or the credit repaid, the money is then destroyed. The same occurs in write off.

The sad part about write offs is who ends up with the real property. It usually ends up in the hands of the bank. That's the same people who loaned out nothing and called it money, in exchange for a claim on real property.

On the flip side of that is what happens when the market discovers that something has been produced that is completely unneeded. Sometimes these real things get destroyed. As an example, during late 2009, many new homes in California were literally bulldozed under. That's inflationary. However such a small amount of that happened compared to other occurrences that has little to no effect.

[romang]

The interesting thing about the fiat system is that nobody knows the money supply. 

Sure there are some nice charts here, and people like to repeat 85b per month..  but there is really no way to know.  Even the secret bosses of Yellen and Bernanke who think they know the truth about M1 really don't know.  Cool eh?   

its all crazy how much they print

[aminorex]

The interesting thing about the fiat system is that nobody knows the money supply. 

Sure there are some nice charts here, and people like to repeat 85b per month..  but there is really no way to know.  Even the secret bosses of Yellen and Bernanke who think they know the truth about M1 really don't know.  Cool eh?   

its all crazy how much they print

I suspect hashman was referring to credit creation in the shadow banking system, but even the runs of the printing presses are an open question.  Whence the supernotes?  The 2.3 trillion misplaced in defense budgets, as per Rumsfeld's testimony to Congress on the 10th of September, 2001?  Whence the Air Force cargo jet  load of pallets of $100 bills which went missing in Iraq?  And that's just stuff I know about.
 

[hashman]

The interesting thing about the fiat system is that nobody knows the money supply. 

Sure there are some nice charts here, and people like to repeat 85b per month..  but there is really no way to know.  Even the secret bosses of Yellen and Bernanke who think they know the truth about M1 really don't know.  Cool eh?   

its all crazy how much they print

I suspect hashman was referring to credit creation in the shadow banking system, but even the runs of the printing presses are an open question.  Whence the supernotes?  The 2.3 trillion misplaced in defense budgets, as per Rumsfeld's testimony to Congress on the 10th of September, 2001?  Whence the Air Force cargo jet  load of pallets of $100 bills which went missing in Iraq?  And that's just stuff I know about.
 

Exactly.  But actually, do we really know about this stuff?  Not really.  It's only hearsay (well, for me anyway as I am not involved with any of these incidents).  With public currencies we can *really* know how much is out there.  At least an upper limit.  With the old stuff, we have to rely on hearsay and drawing conclusions using reason.

     

[Swordsoffreedom]

It's happening as other countries try to reduce their dependance on the US dollar and switch to other currency baskets
Also why the Chinese do not want more American debt but want commodities instead

[Lannister]

USD is too big too fail
many countries around the world using USD as their currency pegging and using USD for export-import trade
if USD fail, many countries will get its effect too
Economic Crisis everywhere 
A good policy when goverment (in another country) reducing dependence on the dollar

[CurbsideProphet]

Almost anybody surfing these forums is familiar with Austrian economic school views and the drill that goes along following lines:

- massive US debt
- even bigger unfunded liabilites
- massive FED printing of money
- mismanagement, debasing of currency has led (across space and time) to one thing and one thing only which is hyperinflation

Sitload of books predict the financial doomsday - some of them now almost a decade old.

So how come US and it's counterfeited dollar are still afloat? Why isn't it happening?

Inflation is caused by an increase in BOTH the money supply AND the velocity of money.  Your points only address supply.

[toknormal]

I don't think any of the answers given so far are the reason there's not rampant inflation.

The reason is that the fed offers a competitive interest rate on excess reserves to serve as a magnet to "suck" all the new money back onto its own balance sheets as soon as the bond purchases are made, so that it doesn't get out into the economy.

Look - all the money (mainly in the form of US T-Bonds), is sitting backed up on the feds balance sheet... http://qz.com/157198/the-federal-reserves-balance-sheet-will-hit-a-mind-boggling-4-trillion-any-day-now/

Read this wiki article which states how the law was changed in 2008 to allow the fed to do this. The express purpose was so that they could start doing QE without it causing rampant inflation. http://en.wikipedia.org/wiki/Excess_reserves#In_the_United_States_.282008-.29


(Actually, this poster is saying the same thing)

When we say the govt is printing money, we are not really talking about the paper notes in circulation, rather electronic money (digits in a computer screen) that exists in bank accounts.

Yes, of course. They are not doing that either though.

an excerpt from some quick google search result:

When the Fed creates $85 billion, it uses this money to buy bonds - typically split 50/50 between US Treasuries and Mortgage Backed Securities (MBS). Here is what's important: When the Fed creates and gives $85 billion in reserves to its member banks, it removes $85 billion worth of assets (bonds) from the balance sheets of those same member banks. The result is that no new net financial assets enter the economy.