Hyperinflation is not just more inflation. Additional conditions are needed to go from inflation to hyperinflation. From New Deal 2.0′ s Rob Parenteau
<!– Friday, 03/19/2010 – 10:57 am by Rob Parenteau | 2 Comments –>Rob Parenteau explains why the the hyperinflationist deficit hawks need to take a deep breath.
After a two day blogging slugfest on fiscal deficits, I find that the question of hyperinflation now demands an answer. And here it is: fiscal deficit spending may be a necessary condition of hyperinflation, but it is hardly a sufficient condition…..
Money is created by creating credit. Credit comes from nothing – banks make loans first. The loans create the deposits and reserves, not vice -versa. From Washington’s blog and cross posted by Yves Smith at Naked Capitalism:
Most people think that banks lend solely from their base of deposits. Some also know that with fractional reserve banking, they can loan out many times more than they actually have in reserves.
But very few people – with the exception of those in the banking industry and financial experts – know where credit really comes from.
Germany’s central bank – the Deutsche Bundesbank (German for German Federal Bank) – has admitted in writing that banks create credit out of thin air.
As the Bundesbank states in a publication entitled “Money and Monetary Policy” (pages 88-93; translation provided by Google translate, but German speaker and economic writer Festan von Geldern confirmed the basic translation):….
….more at: http://www.bundesbank.de/download/bildung/geld_sec2/geld2_gesamt.pdf (in German)….
Do you get it now?
Private banks don’t make loans because they have extra deposits lying around. The process is the exact opposite:
(1) Each private bank “creates” loans out of thin air by entering into binding loan commitments with borrowers (of course, corresponding liabilities are created on their books at the same time. But see below); then
(2) If the bank doesn’t have the required level of reserves, it simply borrows them after the fact from the central bank (or from another bank);
(3) The central bank, in turn, creates the money which it lends to the private banks out of thin air.
It’s not just Bernanke … the central banks and their owners – the private commercial banks – have been running the printing presses for hundreds of years.
Of course, as I pointed out Tuesday, Bernanke is pushing to eliminate all reserve requirements in the U.S. If Bernanke has his way, American banks won’t even have to borrow from the Fed or other banks after the fact to have reserves. Instead, they can just enter into as many loans as they want and create endless money out of thin air (within Basel I and Basel II’s capital requirements – but since governments are backstopping their giant banks by overtly and covertly throwing bailout money, guarantees and various insider opportunities at them, capital requirements are somewhat meaningless).
The system is no longer based on assets (and remember that the giant banks have repeatedly become insolvent) It is based on creating new debts, and then backfilling from there.
It is – in fact – a monopoly system. Specifically, only private banks and their wholly-owned central banks can run printing presses. Governments and people do not have access to the printing presses (with some limited exceptions, like North Dakota), and thus have to pay the monopolists to run them (in the form of interest on the loans).
At the very least, the system must be changed so that it is not – by definition – perched atop a mountain of debt, and the monetary base must be maintained by an authority that is accountable to the people.