De-bunking the Case for Hyper-Inflation

"Money often costs too much." ~ Ralph Waldo Emerson

With massive government spending and rising food and energy prices, imagining a not-too-distant future of extreme inflation is quite an easy undertaking, which may be part of the reason I do not participate in the popular forecasts for hyper-inflation.As long as the Federal Reserve has the ability to print money, the long-term macro-economic trend will be inflationary.  But will inflation really become the large problem that many forecasters predict?  Personally, I don't think so... at least not any time soon...Here are my logical assumptions that suggest inflation will not be a large problem any time in the near future:

• Supply/Demand:  My simple-minded definition of Inflation is "too many dollars chasing after too little amounts of goods and services."  It's the classic supply/demand balance.  While there are reports of shrinking inventories, there also remains the likelihood of growing unemployment.  In addition, and even as job losses stabilize, consumers must open their wallets for corporate pricing power to return.
• De-leveraging of consumer credit and bank balance sheets may be a multi-year process:  Consumer discretionary money will go towards debt reduction before it goes to spending on products and services that are not absolutely necessary.  Likewise, banks and big business have some cleaning up to do on their balance sheets before their free cash flow is at healthy levels.
• The shifting money perception paradigm:  Consumers are changing the way they see money and, hence, their financial habits.  They are doing more with less and some time will have to pass for complacency to return and for the credit cards to be pulled out again.  There is more of an attitude now that says "Do I need it?" rather than the preceding mind set of "Do I want it?" In the immediate wake of the largest credit crisis since the Great Depression, the appetite for buying new products and services will be lesser than (or equal to) the appetite for debt reduction.  In addition, more and more credit card users will put away the plastic as credit card companies raise rates and fees, even on their best customers.
• Rising Commodities and Food prices will hold down discretionary spending:  Higher prices for oil and food are inflationary but can also put a dent in an already thin consumer wallet, leaving less money remaining for spending elsewhere; therefore keeping a lid on hyper-inflation for the foreseeable future.
• The greatest money tap of all, home equity, is almost non-existent:  More than 20 percent of homeowners are "under water" (owe more than their home is worth).  The remaining 80 percent has little capacity and/or desire to tap into home equity any time soon.  Keep in mind that, as home values fall and debt levels hold steady, home equity gets crushed.  For example, a 40 percent fall in home value represents a 70 percent decline in home equity. 
  
• If consumers spend, it will be on "deals:"  Once again, consumers are changing their habits -- they are "smarter" shoppers than before.  Coupon usage is on the rise and discounts have to be deep for consumers to spend, especially for those non-essential items.  Low prices will be the norm for a long time.
• A rising savings rate:  When consumers reduce debt to a satisfactory level, they are likely to shift discretionary money to savings.  Reducing debt and saving money are generally good but can be bad for the economy when everyone is doing it at once.

"You could not step twice into the same river; for other waters are ever flowing on to you." ~ Plato

As with nature, and ourselves, the financial markets are constantly evolving.  Inflation, as long as the Federal Reserve has the power to print money, is the prevailing long-term macro-economic trend.  In the short-term (less than three-years), however, a logical perspective would expect Deflationary conditions (high supply/low demand, falling prices) possibly evolving into some degree of Stagflation (slow growth, surging inflation). 

"Bad reasoning as well as good reasoning is possible; and this fact is the foundation of the practical side of logic." ~ Charles Sanders Peirce

Beyond three years is difficult and foolish to forecast.  Logic would expect, however, that tremendous government borrowing and spending will almost inevitably lead to high relative inflation... just not any time soon... and not as dramatic as the most extreme forecasters are saying.

"Things do not change; we change." ~ Henry David Thoreau

To conclude my thoughts here, I can not help but add that, as an individual, there is no controlling the economic environment; therefore, the prudent-minded person will focus on those things that are well within their control -- spending, investing, pursuing education, allocating assets, allocating resources, and allocating attention to name a few.

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Related Post: "Can We Help Being Deceived?"

Comments

[Silver Bullion]

"....Here are my logical assumptions that suggest inflation will not be a large problem any time in the near future..."

Granted you make some excellent points, but here we are 18 months later and inflation is starting to run rampant. Food prices are esculating, and the problems in Egypt et al are directly linked to food inflation IMHO.

[Kent @ The Financial Philosopher]

Silver Bullion:

Thanks for the comment. I did make the point in this post that food and commodity prices were rising.

My primary observation, however, was that the component of inflation (the price of goods) that is most affected by consumer spending will prevent extreme inflation in the short-term.

I agree that overall inflation, especially considering food and commodity prices, is rising significantly (and has been since this post); however inflation as a whole is not extreme as was a common concern at the time I posted this.

I presume hyper-inflation will be realized once the recession is over and unemployment is closer to "normal."

Finally, I also said that Stagflation (slow economy, combined with higher rates of inflation) is likely in the short-term.

Thanks again for your comment...