Tuesday, 21 August 2012

Gary North: Hyperinflation Is Not Inevitable (Default Is)

Following on from the article written earlier today here is a very good article about the deficit, federal government debt and the subject of hyperinflation in the U.S. written by Gary North titled Hyperinflation is Not Inevitable (Default Is).

Before discussing hyperinflation in other countries in the past and how it destroys creditors, he writes the following on why he believes it's unlikely the U.S. government can escape the burden of debt through hyperinflation,
The important fact in all of this, with the exception of Brazil, is this: this possibility of escaping the burden of debt is available only on a relatively short-term basis, and it is available only where the borrower has the right to repay the loan at any time in the national currency. Whenever these two provisions do not exist, hyperinflation only marginally benefits borrowers at the expense of creditors.
Consider the biggest debtor of all: the US government. It has borrowed money out of the Medicare trust fund and the Social Security trust fund from the beginning. The government has issued nonmarketable IOUs to both of the trust funds. These IOUs are good for decades. They are not short-term IOUs.
The government is in a position to repay only short-term bonds bought by the public. It is not allowed to repay holders of long-term bonds before the date that the bond terminates and the monies are to be repaid.
This places the US government at a significant disadvantage with respect to creditors. While it is possible for issuers of corporate bonds to repay the creditors at any time, this is not possible for the US government. Furthermore, the largest of its debts are related to two programs: Social Security and especially Medicare. These debts cannot be repaid with fiat money, because to do so would involve paying off long-term debts early. This is not possible for the federal government, unless the federal government changes the law. If it does this, it would be an admission of total defeat. It will be open default.
In the concluding part of the article he writes,
This is why I am not persuaded by those people who say that hyperinflation in the United States is inevitable. I don't think it is. I think default is inevitable, but I don't think it needs to be default by hyperinflation. That is because the government cannot get out of its obligations by fiat money. It cannot default by using hyperinflation, because hyperinflation will only last a few years, but the obligations last for the next 75 years. 
This is an excellent article and an eye opener on the subject of the massive government debt in the U.S. so its highly recommended you read the full article.

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