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Posts Tagged ‘Economy

Fiat, Devaluation and Hyper-Inflation

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Fiat money

Most nations have fiat money today, not backed by any physical asset. Its worth is not based on how much is in circulation, rather it is based on the “guess” of how much tax and other revenues the government will receive in the next year.

Issuance to reserve banks, nature of obligation and redemption

Federal reserve notes are issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents.

The notes are obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks for all taxes, customs, and other public dues. They are redeemed as lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.


The classification of hyper-inflation is: an episode where the inflation rate exceeds 50 per cent per month. In history this has occurred in the 1920s in Austria, Germany, Hungary, Poland and Russia. Germany in 1923, for example, experienced a 3.25 million per cent inflation rate in a single month. Since the 1950s hyperinflations have been experienced in Argentina, Bolivia, Brazil, Peru, Ukraine and Zimbabwe, so confined largely to developing and transitioning economies.

The root cause of hyperinflation is: “excessive money supply growth, usually caused by governments instructing their central banks to help finance expenditures through rapid money creation.”

Could hyper-inflation happen in the U.S.? While possible, certain conditions would have to exist.

  • The rapid expansion of the monetary base by the Fed, European Central Bank (ECB) and Bank of England (BoE) would have to continue and feed into a more rapid and sustained expansion of money in the hands of the general public.
  • Governments would have to face difficulties financing their bailout packages and funding their debt.
  • Public confidence in the government’s ability to service debt without resorting to the printing press would have to disappear, as well as the government’s actual ability to withstand the pressure to do so in the first place.

With the fact that governments are pumping large sums of cash into the banking systems, the creation of government programs designed to stimulate the economy and the bailout of large corporations, a scenario of hyper-inflation cannot be ignored. Markets are currently priced with an opposite view of lasting deflation in the next several years.


Written by Ben

October 18, 2009 at 9:12 pm

Posted in Market Meltdown, Politics

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