In all of history, there has never been an episode of hyperinflation that involved a currency that exists primarily as digits stored electronically in accounting programs.
Money is defined and decreed by government as being Federal Reserve Notes and Coins issued by the U.S. Mint, backed by the full faith and credit of the United States. The issue of what constitutes money within the United States is established by law and a matter of publicly accessible record and held as common knowledge.
Credit is defined as the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value plus interest) at a later date. It is any form of deferred payment. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower.
Credit is denominated by a unit of account (Dollars). Unlike money (by a strict definition), credit itself cannot act as a unit of account (Dollars). However, many forms of credit can readily act as a medium of exchange. As such, various forms of credit are frequently referred to as money and are included in estimates of the money supply.
The U.S. economy, from Wall Street to Main Street, runs on digital credit, not money or dollars or Federal Reserve Notes (FRNs) or cash or fiat. Credit is issued/loaned by banks with the implied guarantee that they are as good as cash and your surplus credit held by the banks is backed by the FDIC with an explicit guarantee to replace that credit, up to 250 thousand, should your bank fail.
It takes a solvent and functioning banking system to administer that credit.
As we’ve all seen with over 140 bank failures this year all across the U.S. and in Iceland, digital credit goes “poof!” when the banks that administer those digits fail, requiring the FDIC to replace the credit lost and the Dutch and British governments to reimburse the depositors of Iceland’s banks. I refer to these episodes of digital dollars going “poof!” as mini-hyper-deflations and while the FDIC and governments around the world have managed to replace those digits thus far, I fully expect that eventually, and soon, they won’t.
The Fed and government have been expanding and expending credit (Digital Credit) while the actual money supply (FRNs in circulation) hasn’t increased all that much, a paltry $200 Billion or so over the past 3 years ($390 Billion in circulation within the U.S.) out of the trillions in digital credit that has been added to the system thus far.
That’s $390 Billion FRNs in a $14 Trillion, measured in dollars, economy. $900 Billion FRNs in total to cover $53 Trillion in U.S. originated credit/debt worldwide. Then there is the $10s of Trillions and quite possibly 100s of Trillions in Wall Street created derivatives hanging like the Sword of Damocles over our economic heads. All of this credit comes with the assumption that the Fed will print to cover.
Into this dynamic of credit/debt, the Fed, with it’s QE2, wants to stimulate the economy by creating the “wealth effect.” This translates into feeding Wall Street Banks 100s of billions more in digital credit to spend on Treasuries, bonuses, Wall Street stocks, commodities and loans to multinational corporations. They go on to spend their money in third world economies while the dwindling supply of debt saturated U.S. tax payers pick up the tab.
Of course a side effect from this “wealth effect” is depreciation in the value of the dollar, which translates into price inflation for our already beleaguered economy. Currency devaluation with its higher price inflation places enormous pressure on the digital credit system, which is already weak from slow to no domestic credit growth and slow velocity. This, in turn, causes an acceleration in defaults and bankruptcies, continued depreciation of real asset values and digital dollars going “poof!”, which further destabilizes an already dubiously solvent banking system that is continuing to suffer from coffers full of non-performing and worthless assets, which, in turn, threatens the banking system’s continued existence.
If other countries decide against competitive devaluation of their currencies in response to the Fed’s devaluation of the dollar, but instead they gang up against the dollar, it will make Wall Street banks the first casualties of that rebuke of U.S. credit flowing into their economies. If the Wall Street banks fail, the result will be the Big Hyper-Deflation as U.S. credit goes “poof!” all around the globe.
We’re looking at the potential of trillions upon trillions of credit “dollars” going “poof!”, as they almost did in 2008.
Once you come to the realization that no bank account of any type anywhere within the U.S. (and probably the rest of the world as well) contain any money in them, that all of those bank accounts are credited accounts, populated with is a bank’s promise to pay recorded electronically, that the small amount of cash that any bank may have on hand is purely incidental to all of the accounts it maintains, you’ll realize that hyperinflation of the actual money supply is materially, physically and logistically impossible.
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