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What is the Likelihood of Hyperinflation in 2010, 2011 or 2012? Part 2: How Inflation Gives the Illusion of Creating Wealth

By: Steve Johnson

1/14/2010 - 115 Comments

Inflation gives the illusion of creating wealth because the new money injected into the economy creates a short-term spending spree that makes people feel rich again.

The increase in spending creates a rising GDP, increases the tax revenues and increases consumer confidence. 

In short, inflation makes everyone feel like the economy is doing better. That is what we are feeling today, because of the trillions that the Fed has injected into the economy in 2009.

Enjoy the feeling while it lasts, because it never seems to last long as the previous round of inflation.  The inflation created by the Fed in 2003-2005 only lasted three years, and therefore I don't expect the round of inflation created in 2009 to last more than one year. 

The Fed's recovery plan is based on fooling everyone holding dollar.

The day of reckoning is getting closer by the minute.  The money that American’s are spending today is not their own and will need to be paid back.  Yet, we think we are gaining wealth by spending more money.  The perception of wealth has been fabricated.

Spending Will Lead to an Inflationary Depression

If we continue to create and spend trillions of dollars without regard for the value of the dollar on the global market, the world will one day sell the dollar and move to a different currency – as they have been discussing for several years. 

What that means it that the world is getting ready to take back their wealth that they have borrowed to us over the last 30 years.  You see China is really in control, just as the borrower rules over the lender. 

China’s wealth is not trapped in our Treasury Bills like the Fed tells us.  They and the rest of the world could take back the wealth that they have been borrowing us at any time. 

When China decides that borrowing money to American consumers that cannot afford to pay it back is no longer worth the effort, they will sell the dollar and the sinking value of the dollar will cause their currency to increase in value. 

The process will cause the U.S. to lose a great deal of wealth while China will gain back its wealth.

Within a very short period of time the wealth of America could be transferring back to foreign nations through a currency crisis of the dollar.  Stripping us of our ability to borrow any more money and drastically reducing the value of the money we have.

The dollar could lose anywhere from 30-90% of its present value within one year. At that time, the government will be faced with a much bigger problem than the housing market collapse that started in 2007. 

Government Spending Must Be Stopped

At that point, it will be impossible for the economy to afford to pay for our very large government employees, military and social welfare programs.  The only solution will be to cut the government by 50-70% or create another round of inflation with the creation of hundreds of trillions of new dollars to keep the government in operation. 

The government will be trapped between a deep depression or an inflationary depression, cut 50% of the government or create another round of inflation.

If they decide to cut 50% of the government, it will result is a depression, as government job cuts will add 20% to the already high unemployment and the cuts to social programs will burden the working class with absorbing these costs.

If they decide to create another round of inflation, it will result is even higher prices with more price controls, wage freezes, tax increases and any number of these disastrous policies to try and control the market.

The sinking dollar would cause prices to increase 10-20% per month virtually guaranteeing that if the government decided to create another round of inflation we would have hyperinflation within two years.  Hyperinflation is defined by an increase in inflation by 50% per month.

The government will have no choice but to drastically cut spending and face the deep depression that they have been avoiding for so many years, allowing the market to purge the inflation that has been created by their own monetary policy.

If foreign nation begin aggressively selling the dollar in 2010, we could see hyperinflation as early as 2012.

In the next part of this article series I'm going to talk about how to break the cycle of inflation before getting to hyperinflation.

Part 1: Why is Inflation So Hard to Stop and So Easy to Start?
Part 2: How Inflation Gives the Illusion of Creating Wealth
Part 3: How to Break the Cycle before Getting to Hyperinflation

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