The 4 Steps to Hyperinflationary Booms

By Dr. Jeffrey Lewis, GoldSeek

With the current US deficit soaring above $12 trillion, the conditions are ripe for inflation.  However, is hyperinflation just around the corner?

Step 1: A Collapse

Before hyperinflation can begin, there is often a collapse, or series of collapses, that send currency prices higher.  Fleeing from assets, whether metals, stocks, or even real estate, investors sell their holdings for currency or cash.  When you sell an instrument, you are not necessarily selling an asset as much as you are buying another.

For instance, should you sell real estate, you are buying dollars, which you receive in trade for your property.  This increases the demand for paper currency, and ultimately, its value.  Cash equivalents, money markets and treasury bonds, for example, also rise in value, as they are seen as safe-haven investments that also provide a small, although tangible, return.

Step 2: Keynesian Solutions

After a collapse, Keynesian economics calls for an increase in government spending, as well as an expansion of the money supply to calm the markets. Although the validity of Keynesian economics is questioned by other schools of thought, it is the prevailing think-tank philosophy employed by most governments and central banks.

Government spending is usually increased by the creation of new entitlement programs (think Social Security) or stimulus spending (think New Deal and the American Reinvestment Act of 2009).  These new programs generally increase debt loads and simultaneously increase the amount of money in circulation.

While these programs are in service, the central bank must also act to keep interest rates low.  As expected, during such periods of economic calamity, investors want safety and are generally unwilling to invest.  The central bank usually acts to decrease interest rates, increase the money supply, and provide ample credit to governments to fund the ventures.  Keeping interest rates low also minimizes the long term cost of stimulus by making borrowing less expensive.

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