That graph looks scary, but we haven't seen much price inflation since the spike. Is this really such a big deal?
Perhaps not. This spike is clearly unprecedented and so has been cause of much concern, speculation, and debate among economists. But since the money has not made its way into the larger economy (as banks have just held it as reserves), it really has not had much effect on prices. Robert Wenzel makes a good case here that this spike in M1 is not a big deal and to instead just pay attention to M2 (a broader description of money supply). He goes so far as to suggest that the Fed may actually safely withdraw these reserves, which would make the M1 chart "return" to normal.
However, whether or not the M1 spike is contained, it represents a massive bailout of the banking system, which otherwise would have likely collapsed in 2008. Furthermore, this bailout must have its own negative, unintended consequences. Perhaps it will not play out exactly as Murray Rothbard suggested with a hyperinflationary death spiral immediately following the bailout, but these negative consequences are nevertheless likely to be large.
Isn't this talk of hyperinflation silly to begin with? Aren't recessions deflationary by nature?
A "healthy" recession should be deflationary by nature, as the malinvestments of the previous (artificial) boom are exposed, defaults and bankruptcies spread, and credit disappears. However, if these defaults are not allowed to occur, money and credit are not destroyed. Chris Martenson argues here that this is the situation we have now; we "should" be seeing deflation but are not because losses are not being recognized.
In fact, whether inflation or deflation occurs depends on how the Fed and government choose to respond to the crisis. Do they let failures occur and market forces work to liquidate and reallocate capital? Or do they "pretend and extend", bailing out the system and attempt to reinflate the collapsed bubble?
I suspect the answer, in the short-term at least, is "both". That is, the politically connected and "too big to fail" firms (think Goldman Sachs) get bailouts and special benefits. The rest of us get to pay for it and fail if need be. Overall, we might still see some period where prices generally decline, but I believe this period will not last for more than a year or two.
Why are you so sure we will get hyperinflation?
So far I have only discussed the situation in context of the current crisis that is a "bust" from the previous "boom" led by the housing bubble. The bailouts and efforts to stimulate the economy will have great inflationary potential. But this is only part of the problem. The other part, which in my opinion cinches the deal that hyperinflation (or at least mass inflation) will occur is the enormous debt owed by the federal government.
Read Gary North here to get a picture of how the government has promised much more money than it can deliver. That is, there will be two options: default on obligations, or inflate.
For a more in-depth analysis of why there is likely to be hyperinflation, read John Williams report here.
Surely the government understands this and won't let the system collapse?
There is always danger in trying to identify black swan events that could trigger the collapse of the current system. Critics of the government and Fed tend to under-estimate their creativity in responding to crises and extending the system. We often fail to appreciate how they can change their own rules as they see fit (for example, an insolvent FDIC can seize failed banks and gift them to politically favored banks instead of bailing them out). On the other hand, the government cannot "pretend and extend" forever. If there are true systemic imbalances and plans made based on fantasy instead of reality (Social Security), at some point the check comes due. Bad debts will eventually be recognized, and debts that cannot be paid either need to be defaulted upon or inflated away.
How bad will it get?
I stand by my predictions of my first post, and I do believe that conditions will deteriorate in the upcoming years and culminate in the ultimate destruction of the dollar and massive decrease in the standard of living for most Americans.
Of course, keep in mind that I'm just a guy writing on the Internet.
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