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Milton J. Madison - An American Refugee Now Living in China, Where Liberty is Ascending

Federalism, Free Markets and the Liberty To Let One's Mind Wander. I Am Very Worried About the Fate of Liberty in the USA, Where Government is Taking people's Lives ____________________________________________________________________________________________ "Extremism in defense of liberty is no vice. Tolerance in the face of tyranny is no virtue." -Barry Goldwater-

Friday, December 21, 2012

Guest Post: What Causes Hyperinflations And Why We Have Not Seen One Yet | ZeroHedge

The problem that the USA and most of the developed world faces is the probability of a crushing deflation. Deflation is caused by too much debt and the inability to service that debt. Banks will fail, business will not be able to gain credit or could not afford it given that business will fall. That was what the financial crisis of 2008 was all about. And the central planning response to that was to increase debt at the central government level while corporations and individuals leveraged. But in true central planning/collectivist style the hard work was never addressed. Eventually, the US government will default on it debt since it will be impossible to service both the debt and to meet the obligations and promises made to the people.

The central bank of the USA, the Federal Reserve, is seeking to counter the natural response to deflation. This is another government central planning/collectivist response to a problem. However, what the economy then faces is the prospect of a highly destructive inflation. It could come out of anywhere and the path to prosperity between inflation and deflation is particularly difficult. it will require the defunding of the national spending machine, the US Federal Government and I doubt that that will ever happen.

Since the central bank has been practically purchasing all debt that the economy creates, it either can sell it, let it mature or hold it indefinitely by more purchases. But what this does is to centralize all of the risk onto the central bank balance sheet. The problem is that when interest rates rise, the funding of this position is either through borrowing money at the higher rates, leading to losses or just more money out of thin air to pay for the difference. Eventually, this becomes a slippery slope and either the nation will experience hyperinflation as the central bank continues to create funny money (I think in Weimar Germany there wasn't enough government debt to buy to create new funds so they purchased commercial paper of corporations) or throws in the towel and allows the central government to default.

Instead, we will either have destructive deflation or hyperinflation both of which will impoverish the people. Good luck!!!

Guest Post: What Causes Hyperinflations And Why We Have Not Seen One Yet | ZeroHedge


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