Faber Getting Carried Away on Hyperinflation
Bloomberg (HT2LRC) reports that Marc Faber is predicting Zimbabwe for the US economy:
The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.
“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”
I have been warning of severe price inflation for some time, and when people ask me “hyperinflation?” I respond, “What do you mean by ‘hyper’?” Recently someone coaxed a number of 25% annual inflation out of me, since I think Bernanke will do what needs to be done to bring it down to the maximum acceptable level, which I somewhat arbitrarily put at about 25%. (Of course the true increase in CPI will probably be more like 35%, but the official press releases–if you have a gun to my head and force me to pick a number–I’m picturing around 25%.)
I’m not going to bother running through the numbers, but there’s no way you would see the kind of numbers Faber is talking about, absent a nuclear attack somewhere. The last time I did back-of-the-envelope calculations, I concluded that Bernanke had pumped in enough new reserves to fuel a tenfold increase in the quantity of money.
Now let’s suppose that that leads to a tenfold increase in prices, because Bernanke sits back and watches it happen. OK fine. On top of that, assume people around the world dump their dollars, such that the demand drops by 99%. (I’m speaking loosely.)
OK so now we’re talking a 1000-fold increase in prices. Let’s assume the government needs the Fed to print up a bunch more money to fund the deficit at those ridiculous price levels. OK fine, assume that doubles inflation again; a 2000-fold increase in prices.
We’re still only at 200,000%, less than 1/1000th of Zimbabwe’s levels.
I grant you, once we got up into the 1000%+ range, all bets are off, since we’re obviously not dealing with normal institutional arrangements anymore. Maybe the international bankers who give Bernanke “suggestions” would decide to go for one last hurrah before switching everything to Asia.
But I don’t think Faber has a complicated, subgame perfect scenario in mind. I think he has realized the corner into which Bernanke has painted himself, and concludes, “Zimbabwe!”
