Deflation is going to go on for a long time. They had a solution in 1933 and they didn't prop the prices of everything for 15 years as they have done this time. Once China begins to deflate, commodities are going to fall to a level that is going to put many of the commodity producing countries on the ropes. Increased lending and debt expansion in the private sector is what causes trend inflation. We have been inflating for nearly 80 years now. It will be devastating, as there is much more than what the Fed puts out, which is really nothing but another liability in return for a liability owned by the banking system. The capital base of the banking system is going to erode.
I find it quite interesting the advertising in the WSJ that John posted. There is only one place to have significant money, treasury bills. The mentioned threat if inflation is enough that buying bonds is a real crapshoot. More so will be the default risks that might arise in the meantime. My feeling is that government will make it through, but will be forced to preserve its credit rating. Thus, they will default themselves on many guarantees made on a variety of paper. The FDIC, which stands for Federal Deposit Insurance Corporation could very well go broke. Notice it didn't say, United States of America deposit guarantee, but Federal Deposit Insurance Corporation. The best guess is that government will take the debts and provide a marginal amount of currency in return. In truth, the depositors own the banks.
People don't feel free to spend money when their retirement is melting like a cube of ice on a Dallas street in August. Wages will decline. Just like we had a good 20 years of high inflation from 1970 to 1990, the United States also had 20 years of high inflation between 1895 and 1920. People will dispute this, but look it up. Gold standard or not, an expanded amount of gold and credit inflation raised the price level quite a bit during that time. I found that data on some excel tables Robert Shiller put together for his book Irrational Exhuberance. What evidently occurs is a sizable amount of credit produces demand and a build up of debt over a period of years. Then, after debt reaches a certain level, the extra credit kind of hits a wall, because the portion of the population in debt takes their income and services their debts rather than spends it. More and more debt is needed to float the economy and more and more money games come about. As the cycle matures, there is massive income coming out of piles of debt and the business turns to a debt business. In the end, the debtors are over run with expenses and the system melts. The reason government can't bail it out is because you can't get out of debt by piling more of it up and the private sector is much larger than the government. At the peak, 25% of aggregate demand was driven by new debt. Once the process reverses, the massive industries that were making huge profits out of debt lose their income then their capital and those that are living off interest lose their incomes and assets. Fully 25% of US corporate profits were being derived out of banking and bank related income. The remaining companies were deriving most of their profits out of credit driven demand. Incomes fall and demand and prices with it.
What causes hyperinflation? The best explanation I have read is a move out of a particular money. In Zimbabwe, the populace started taking their money and buying dollars immediately. thus you couldn't give it away fast enough. There is no real exit out of the dollar. In fact, should hte Euro collapse, credit in Europe and much of the credit that has been generated by European banks would disappear altogether. True demand for currency comes from the need of it to pay debts. The harder debts are to pay, the less of it is available. I am a landlord, at least indirectly. The tenants have to pay their rents. If our houses weren't free and clear, we would have to have the rents to pay the notes and the taxes. Once this process starts, we are going to see a lot of foreclosures and a lot of property on the market. Very few people are going to come out of this with any money. Free financing as we have seen over the past 70 years or so will not be available, nor will many people be aching to get back into debt.