Comments (17)

• Todd

  This is one of the big draws and probably one of the reasons for the resurgence of Austrian economic thought. The fact that Von Mises, Rothbard and Hayek were so precient about what is happening now. It will be interesting to see how all of the events happening now will play out. I'm voting that we will see "immediate runaway inflation and a massive flight from the dollar".

  Published: October 4, 2008 8:31 AM

• Krazy Kaju

  I'm not sure if we're at that point yet. I view this as our "1907 recession," perhaps the big crash is still a few years down the road.

  Published: October 4, 2008 10:04 AM

• Jay D

  I don't understand how covering a bank run would be inflationary. The money in the bank was already created. The inflation was already done. It is just digital money instead of paper money. Printing paper to cover bank runs would just turn a big chunk of MZM into M0, no? No net change to MZM?

  Published: October 4, 2008 10:04 AM

• Fred Mann

  Good point Jay D. This will not necessarily be inflationary at all, unless they overcompensate on the bailout (as they seem to have done). Even then, it will only add a "little" extra money into the system.
  BUT, the bailout WILL cause additional harm by undermining the ongoing corrective market processes. The market is trying to adjust housing prices and interest rates (etc.) to a level that corresponds with reality. The government is standing in the way of this necessary corrective process and is ensuring that the problem gets worse. It's like they're building an ever-larger dam out of tinker toys to contain an ever rising river (analogy needs work).

  Published: October 4, 2008 11:23 AM

• Krazy Kaju

  It would be inflationary in the sense that all the newly printed money would then reenter the fractional reserve banking system and multiply again, which would lead us to the same problem down the road.

  Published: October 4, 2008 11:27 AM

• Yancey Ward

  Such an event, and it may be coming, would seem to me to be the final nail in coffin of the banking system. What would people do with their recovered deposits? I suspect mattresses would start filling with actual paper money, and/or people would convert their bank balances into hard assets that could be concealed from prying eyes. A government, facing such a loss of confidence in actual banking, would quickly find itself unable to levy the taxes it needs to operate. What would be it's response? Either a complete loss of liberty as it's agents seek out these hidden assets, or hyperinflation. In a country full of guns, I predict hyperinflation until the government itself collapses.

  Published: October 4, 2008 11:46 AM

• Fred Mann

  Krazy,
  In the scenario Rothbard outlined above, the banks fail due to "bad loans", which would likely be accompanied by a drop in the money supply as the loans are prematurely "settled" through foreclosure sales.
  BUT, other things could trigger a bank run ... mere rumours of trouble, for example. In this case a bailout WOULD be inflationary. In this scenario, the money created in the form of credit/loans would still be outstanding, AND we'd have an additional influx of money as the banks reserves are restored to 100% (from their current 10% or whatever it is).

  Published: October 4, 2008 12:13 PM

• Fred Mann

  Yancey,
  There is another possibility. When Zimbabwe's currency began to crumble, Zimbabweans began to use the euro for some of their transactions. This could happen here. If the dollar fails, the euro (or another "strong" currency) may begin circulating in the US. And it might "work so well" that a blue-ribbon panel will be set up to consider the establishment of a multi-national central bank. As Hoppe points out, governments are strongly incentivized to expand their jurisdiction, so this may not be as unlikely as it seems right now.

  Published: October 4, 2008 12:23 PM

• Todd

  Jay D, perhaps you can clarify something for me. Wouldn't expansion of credit cause an inflationary effect on prices? I feel that credit serves as more of a medium of exchange than actual paper money. After banks clear the bad debts off of the books, they will start to loan more money to businesses and consumers, thereby, adding to the existing credit, correct? So we will have the existing bad debt ($700 B or so) and we will have new debts if things go the way the government and the Fed wish.
  Thanks for helping me out.
  

  Published: October 4, 2008 12:35 PM

• Jay D

  Todd,

  The inflationary credit expansion already happened. People borrowed more money than they should have. That extra borrowed money bid up prices.

  If those bad loans were allowed to default, the result would be a contraction of the money supply (from where we are today). Borrowed money would be taken out of the system. That would be deflation. You can think of the Fed bailout of bad loans as the Federal Government paying off the debt to the banks. The Fed bought the bad debt with the idea that the bank can make a new loan to replace the one that was going to disappear through default. There is no net change to the money supply. If all goes well.

  Now the Federal Government would own loans that may or may not be bad. People will be paying off at least some of those loans to the Federal Government. It then depends on what the Federal Government does with that money coming in. If they burn it, there would be no net change to the money supply. If they spend it on government projects (which is what they want to do, "the government will actually make money on this buyout"), that money would be put back in the system bidding up prices.

  I don't know what direction would be least disastrous, I'm just trying to observe.

  Published: October 4, 2008 1:34 PM

• Joe Reed

  
  Just how much US currency would it take to actually choke the Panama Canal ?

  Paulson will NEVER touch my guns and gold.

  Published: October 4, 2008 3:06 PM

• Ralph Fucetola JD

  M2, I believe, was about 2T around 1980, up to 7T in March 2006 and by March 2008 (according to comments made by Ron Paul to Fed Head Bernanke in March, at a Congressional hearing) it was, I recall, 14T.

  In the past week or so, they must have set in motion another Big T to cover the 61 B "stimulus" package Congress passed a couple days before the 850 B bankster's bail out, and the 25 B to big auto "loan" and the 600 B in new "liquidity" from the central banks...

  I think Murray was a true seer and knew, sooner or later, the Fed fiat money experiment would end in hyperinflation.

  Anyway, I suspect betting on Rothbardian hyperinflation is a safer bet than betting on the sagacity of Bush, Pelosi, Paulson and Bernanke!

  Published: October 4, 2008 7:38 PM

• James Ralston

  @Krazy Kaju:

  You're neglecting something: if a total system-wide bank run were to happen, it would thrust the fraud that is fractional reserve banking naked into the spotlight, with the entire United States (if not the world) watching.

  Certainly, there would be some people who would be gullible enough to take the fiat money that the FDIC pays them and put it right back into a bank, but I think the vast majority of people would take their fiat money out of the banking system entirely.

  (If they were foolish, they'd stuff it in their mattress (only to see the government inflate its value away); if they were smart, they'd convert it into gold, or some other tangible asset whose value the government can't directly destroy.)

  But either way, without the money in the banks, the banks wouldn't be able to inflate it via fractional reserve lending. Of course, at that point, lending would pretty much dry up, and we'd face some tough times as we transition (out of necessity, not choice) from an economy built on spending to one built on saving. But at least we'd be spared the horrors of hyperinflation.

  Furthermore, if you're a member of the tinfoil hat brigade, this entire financial crisis is actually a carefully orchestrated plan to destroy the dollar so that the people who really run the country can usher in a new currency: the Amero.

  Published: October 4, 2008 7:50 PM

• Michael Giesbrecht

  As for the Euro replacing the dollar, I think the European central bankers suffer from the same human defects as the rest of us. As the Euro increases in value relative to the USD, they will be begin inflating the Euro in order to reap the immediate benefits of that higher exchange rate.

  Eventually, they'll ruin the Euro too.

  Cheers,
  Michael

  Published: October 4, 2008 8:40 PM

• Jeffrey Tucker

  I've not heard this conspiracy theory before, nor anything about the Amero, so googling it turned up a predictable script. The problem is the same with all such theories: the elites really aren't that smart, not that much in control of events, and certainly not that long-term thinking. I wouldn't rule out any grand plan, but I would rule out the possibility that government is smart enough or in control enough to pull off such a thing. Also, I don't see how a single North American currency would benefit the Fed and the power elites more than a dollar-dominated globe.

  Published: October 4, 2008 9:00 PM

• Jim

  I'm not so sure there would be hyper-inflation. Bernanke himself said 'the world is awash with liquidity'. This statement, shortly before the bail out, suggests the money is rapidly losing value and markets are trying to correct by deflating prices to a natural level that will be self-evident to buyers and sellers. The problem now is the US has become the bank for the entire world, while being indebted to China, so a crash in the dollar would likely not be repaired by a marriage with the euro.

  Though I have no evidence, one can make an argument that this is economic warfare, driving the US further into debt, and more beholden to US Bond Holders - of which China holds almost 2 Trillion. By our government borrowing for the bail out (all in) an additional One Trillion, in addition to the apprx. $350B deficit, we can see that we are now in debt 1.35 + 2 Trillion, mostly to the Chinese.

  We lost 1.5 Trillion in equity last week, and put the government in charge of the financial system. "ending wall street as we know it"

  Brilliant!
  
  So our national debt is now suddenly 10 trillion and our future obligations exceeding $50 Trillion.

  The collateralzied deferred swaps, those 'insurance policies' on the bonds that are in default, exceed 56Trillion. True, much of that is held internationally, but again, the world banks on the dollar.

  All of this is based on 'the full faith and credit of the United States'. how much is that worth?

  We can't inflate our way out of this mess.

  Just last week little Costa Rica said it would not be buying US Treasuries - it is borrowing from the Chinese, at negligible interest.

  Costa Rica uses the US dollar as its currency.

  The Chinese are taking away our last market: money.

  I am not even surprised to see quasi-military or indirect and/or non-military challenges from hostile nations to our periphery and sphere of influence. Georgia, Venezuela.

  Oil is falling again, taking the dollar with it.

  Has anyone drawn any conclusions that all this occurs coincident with our presidential election?

  If you were inimical to American interests, would you try to defeat us militarily or by sleight of hand?

  Redirection. Works every time.

  Published: October 4, 2008 11:37 PM

• MM

  The government is printing money so fast that even cash isn’t a safe bet any more, says Daniel Zurbrügg. And even though gold has slumped during this crisis, the long-term outlook for gold investing remains attractive. Once institutional investors stop dumping gold holdings and the US dollar rally stalls, Daniel says gold will zoom back up to $1,000 an ounce and beyond.

  Published: November 28, 2008 2:30 PM