Tuesday 8th July 2008 4:38 p.m. Hyperinflation idea & key links!
Here is my idea of the magnitude of inflation we might expect. Afterwards, I give some links to key articles on hyperinflation that I have read in the last few years.
After listening to John Williams speaking about hyperinflation on the 5th July edition of radio.GoldSeek.com (2nd hour), I had an question, then an idea.
How could we calculate the magnitude of the possible upcoming hyperinflation?
The idea came the following night: look at how much money might need to be created to underpin the financial markets.
Suppose the mountain of financial derivatives was to collapse and the Federal Reserve had to print enought money to monetise it.
Money supply - Wikipedia, the free encyclopedia gives the M3 (broadest) money supply in the USA as 10.3 Trillion when it was last quoted in February 2006. At that time, the total notional value of outstanding derivatives was about 600 Trillion $ worldwide. More conservatively, perhaps we might try using total derivatives exposure of US banks first.
http://www.federalreserve.gov/releases/h6/hist/h6hista.txt for Fed M3 data
http://www.nowandfutures.com/key_stats.html for a reconstruction of M3 money supply to the present day, where it now stands at $13.5 Trillion.
OCC: Publications - Qrtrly. Derivative Fact Sheet tells me that the Total Notional Value of All Derivatives of US banks is about $180 Trillion.
To monetise these if they collapsed would take an increase in the money supply of 180/13.5 = 13.33x or 1,333%.
Initially, I used $10 Trillion for M3 and $500 Trillion to represent all derivatives outstanding worldwide at about that time in 2006 when M3 was last quoted. It gave an idea of how many dollars are out in the world versus the derivatives contracts. To monetise that lot would require an increase in the money supply M3 from $10T to $500T, an increase of 50x or 5,000%.
Interestingly, that would represent a 98% devaluation in the US dollar, which is about the same as the entire devaluation that has occurred over the last 75-100 years , since the inception of the Federal Reserve in 1913 and/or the US leaving the Gold Standard in 1933. Gold was $20.67 an ounce then and has recently been as high as $1030 per ounce, an increase of 50x or a devaluation of the $ against gold of 98%. Similarly for the British Pound. The gold Sovereign was a £1 coin originally but is now worth £108 in gold bullion value, a devaluation of the pound against gold of 99%.
So, after already seeing a 98% devaluation in the $ in less than 100 years, maybe we could see a 98% devaluation in the next 10 years, to write off the derivatives mess over the next decade. This also assumes that the derivatives don't increase even more (they are currently increasing far faster than the standard measures of money supply: M1, M2, M3, MZM, etc). I think Jim Sinclair mentioned that the total derivatives notional value worldwide has actually passed 1,000 Trillion (a US Quadrillion), which, versus 13.5 Trillion M3 would take a 74x increas in M3 to cover it, as of 2008.
Since the path of inflation would probably be unstoppable at that point, it might be possible to see yet another 98% devaluation in the $ in a single year to keep the trend going, and we would then be into a Weimar style hyperinflation with the $ going effectively to zero (perhaps along with many or all other currencies). Jim Sinclair doesn't expect the US to have the full Weimar experience of hyperinflation, whereas John Williams of Shadowstats does see this as the final outcome.
In any case, I see this quick calculation as being the one and only way to get an idea of the true potential of inflation needed to revive the financial system in the case of a systemic collapse being imminent. The only alternative would be to let the system collapse into a massive deflation. If they have already used as collateral for generation of credit, the magnitude of deflation that might occur if the 1,000T$ in notional derivatives were to be revalued to zero is quite alarming! Essentially, perhaps this 1,000 Trillion could be viewed as a form of money supply and if it was destroyed, the money supply would go from $1,000T to $13T (with only M3 remaining) perhaps overnight, nearly a 99% reduction. Hyperdeflation!
Some best links on the Hyperinflation topic:
A superb article by Julian Philips that I read a few years ago: The Quintessential Inflation - The Great Weimar Inflation (when the gold price by my calculation reached 76.5 trillion marks per ounce in 1923). Then I would recommend reading John Williams' Hyperinflation Special report linked below, straight afterwards.
There was also Howard Ruff's Kitco article, called hyperinflationary depression and here is the link to the excellent John Williams Shadowstats Hyperinflation Special report download page . This highly detailed Special Report is also linked from the front page of the excellent Shadow Government Statistics Home Page.
Here is a link to John Williams' indispensible Shadow Government Statistics » Alternate Data Series graphs.
Also, the excellent Jim Sinclair's MineSet is a key resource for talk on the derivatives debacle.
My own posts on inflation/deflation:
Hyperinflationary depression? 2008-04-26
Inflation/Deflation debate is BUNK! 2008-05-29
Chart hints at Financial Disintegration: 2007-12-23
Mega-move from Dow:Gold megaphone! 2008-06-04
Megaphone top in Dow:Gold ratio? 2008-06-03
Earthquake + inflation is more than 3%. 2008-02-07... (totally frivolous)