In the inflation/deflation debate between John Williams and Bob Hoye on my radio show, Bob pointed out that in the German hyperinflation, Germany did not have the world’s reserve currency. Nor did it have a military that ruled the world. Hoye also points out that in periods of massive global credit deflation, the senior currency generally is the strongest currency.

Williams, on the other hand, believes the dollar is destined to get weaker to the point of absolute worthlessness. With a dollar that is worthless, the U.S. will fall into a hyperinflation, according to Williams, even though with each printing of money, debt continues to grow ever more rapidly than income.

Personally, I have a little difficulty with seeing Williams’s dollar crashing inflationary scenario, unless of course the military crumbles from lack of finance or a mutiny from within the military, which I think is an increasing prospect. Were it for economics rather than the military, I think the U.S. and its currency would already have tanked. (Note comments above by John Perkins on why the U.S. went into Iraq.)

But assuming the military remains functional and the U.S. (which is the only country at war these days) continues to rule the seas and essentially the entire Earth, I have to believe Hoye has it right in suggesting the dollar will at least remain stable and no doubt stronger than most people believe, for the foreseeable future. I think Bryan Rich, a currency hedge fund manager, is correct in predicting a “stronger dollar” over the next several years. (By the way, Rich, like Hoye, believes gold will gain against the dollar at the same time the dollar remains relatively strong.)

So back to the question posed above. What would precipitate a formal devaluation of the dollar? Well, the dollar has been de-facto devalued day in and day out, year in and year out, through its massive creation. No one is interested in devaluing the dollar these days, because (a) so many foreign creditor nations hold so many of them, and (b) they don’t want the dollar to get weaker, vis-à-vis their own currencies, because they want to keep exporting as much as possible to the U.S. and around the world.

Would the collapse of equities encourage a devaluation of the dollar? Yes, I think it would encourage more money creation, just as it did in 2008-2009, but in fact we saw the dollar get “stronger” during the market crash . . . so, to the extent the “risk play” continues to implode, that would be prompt “stronger dollar” deflation. And yes, I think the policymakers would attempt to overcome that with more money. But again, they are not dealing with asset money, they are dealing with liability money. And since it is liability money, debt is the raw material from which money is manufactured. Therefore, it’s like someone struggling to get out of quicksand. The more they struggle the more they wiggle themselves down into suffocation. The more money that is printed (because there are debts behind that money that are growing faster than income) the more deflationary, not inflationary, this printing is. 

The supposition that cash would be a bad deal assumes that policymakers will continue to inflate the purchasing power of our currency away. That is not an irrational supposition, because as I just stated, except for the 1930s, they have done a terrific job at causing the dollar to become less valuable. But there is that little problem of the 1930s, when the most extensive efforts in history, up to that date, failed to overcome deflation. I believe the same dynamics are in play now as then, notwithstanding the absence of a gold standard now. And so I do not automatically accept the notion that (a) a formal devaluation will be forthcoming or (b) that efforts to cause that to happen informally through endless printing press money will succeed.

The one way I think it could succeed is if policymakers literally showered the country with paper currency and people began spending it immediately. If that were to happen rather than having it deposited in banks where bankers are trying to use deposits to remain liquid and solvent (their loans going bad at a faster and faster rate), then I think we could see a massive and even a hyperinflationary environment.

But that is not what is happening, and I don’t think the bankers who own and control our country want that to happen as long as they can keep getting politicians to extract a pound of flesh from the public in the form of bailouts.

And lest you think the banks are about to start lending, check out the chart of bad loans at banks, on your left. Note that more than 16% of credit card loans are in default and nearly 12% of all real estate loans are in default! Total bank loans are nearly 10% in default. When banks have less than 10% of their assets funded by equity, it doesn’t take a Ph.D. in math to see that our banking industry in general is bankrupt. How in God’s name are you going to get the economy to inflate when banks won’t lend because they cannot do so!!??

The only way I can see inflation rearing its ugly head in any real meaningful way is if the dollar crumbles, vis-à-vis other currencies. But all the currencies are being inflated at more or less the same pace. They are all in the paper currency game and none of these countries wants that to end. So they continue to play ball with each other. And unless policymakers hand out trillions of dollars to the masses rather than to the Goldman Sachs of this world or unless the military crumbles either from its own insolvency or a mutiny from within, I have trouble seeing how we get to hyper inflation. I don’t say it won’t happen. But the way things stand now, I don’t see that taking place, even though we Americans can expect to see a continuous decline in our overall living standards, no matter which way we tip.

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