The path we are on leads to hyperinflation and is only a few years away. We are perhaps only one or two more injections of new money away from seeing inflation that is out of control.
The round of inflation created by Bush-Greenspan created the housing bubble that pushed housing prices up by 100-200% until they started collapsing in 2006. That injection of trillions of dollars of new money pushed up the GDP for nearly eight years, creating the illusion of wealth and fooling a lot of people into spend money that they didn't really have. The bankruptcies are still being counted.
This time the Obama-Bernanke round of inflation is likely push up the GDP for a much shorter period of time and they are already claiming their policies saved the economy from a depression. Bernanke recently said that the worst U.S. recession since the Great Depression was probably over. He is crasy to say that, because he has only succeeded in creating a much larger recession down the road.
Each time that new money has been injected into the economy it has created even bigger problems down the road and this time is not going to be any different. The foreign borrowers are starting to realize that we are not going to be able to pay them back in real dollars. The dollar is sinking as noted by the prices of gold that has already been over $1200/ounce.
If foreign investors continue to support the dollar and the U.S. spending in 2010, than perhaps the politicians will keep the party going a little longer, but eventually it’s going to end very badly and the U.S. government and its people are going to have to deal with out of control spending and very high inflation.
“The real cure is the recession, but nobody wants to swallow that pill”, Peter Schiff
Once the decision is made to fight inflation, it will take a few years just to stop inflation from continuing to increase and then several more years to reverse its direction.
All governments around the world are going to have to fight inflation, because the dollar is the world currency – and the primary cause.
Looking at other nations who have suffered through times of inflation, they were able to stabilize their currency by using the dollar within their country. But now that the dollar is inflating, there is no other currency to use to stabilize the dollar.
There are no good choices because even the other leading currencies, like the Euro, Yen (Japan) and Yuan (China) are being inflated by their governments - although slower than the dollar.
Gold is only currency that cannot be inflated by a central bank and therefore likely to continue to rise. Central banks, like China and India, realize this and have begun converting their wealth into gold.
Solution – Cut Spending, Increase Interest Rates
The way to prevent history repeating itself is to change monetary policy - increase interest rates. The only path to rebuild a sound economy is the path to return to sound money, which is, to STOP expanding the money supply and STOP increasing the national debt. And all of this could have been prevented.
Savings are the key, because without foreign savings we will have no means to fund new businesses to new create jobs and new wealth. We need to stop spending what little wealth we have left and start saving more money then we spent so that we can create jobs, by producing and selling thing to the rest of the world that has the wealth to spend.
At the beginning of 2010, I think it is very likely that the government will continue to create inflation and even if they talk about fighting inflation their policies will not support their rhetoric.
Therefore the probability of remaining on the path to hyperinflation is very high, perhaps 90%.
The governmental leadership in the next year are going to have to step up and start facing the recession no matter how difficult it is going to be and more inflation is not the answer.
If we continue the inflationary policies that exist today into 2011, then we have perhaps a 75% chance of hyperinflation within three years. If we were to change course today and raise interest rates to 6-8% and stop the bailouts and stimulus packages, then our chances of hyperinflation drop to 20%.
Time will tell how President Obama and Congress deal with the deepening recession that we are facing, as foreign creditors continue to threaten to sell the dollar and the economy begins to sink back into recession after the last round of inflation wears thin.
Congress is currently planning to continue to stimulate the economy with bailouts and handouts until they are forced to stop. That may not happen until after the 2010 elections, pushing us dangerously closer to hyperinflation.
Congress and the President need to stop spending and start cutting, and the sooner they do the sooner the economy will be forced to face the sins of our over-spending inflationary policies that got us into this mess.
Make no mistake; there is no other way out of this economic mess. Creating yet another round of inflation is not going to fix the economy. The government cannot fix the economy, only the people can.
We need new leaders that are bold enough to lead us through the pending deep recession so that we can one day rebuild a sound economy based on savings and production, capable of producing real wealth again.
The call for new leaders is also very dangerous, because we are just as likely to get a well spoken tyrannical leader as we are to get an honest leader who believes in something other than the good of human nature.
Here are a several other articles that I have written about inflation.
Are You Really Gaining Wealth or Has the Wealth of America Been Fabricated?
The Fiat Money System Is Failing
Why Spending Now Feels So Right, When It’s So Wrong
Five Reasons Why the U.S. Government Benefits from Creating Inflation
The Future Global Currency Will Be Backed By Gold and Silver
Dollar Has No Where to go but Down
How Bad Could Inflation Get?
Also, here are the other articles in this article series.
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