Gary North Says “NO!” To Hyperinflation

In case you missed his previous missive on the subject, entitled “Which Flation Will Get Us?“, Gary North came out today firmly against the idea of a hyperinflationary experience in the US or any other industrialized country with a privately owned central bank. Instead, North is predicting “mass inflation”, which he defines as 15-30% money supply growth per annum.

North bases his conclusion on four premises:

1. The central banks control inflation, the central banks are owned by the banks, hyperinflation destroys banks who are borrowed short and lent long
2. There is too much public awareness of the role the Fed plays in promoting inflation nowadays (primarily thanks to Ron Paul), so they will get blamed if something goes wrong
3. People have become accustomed to the boom-bust cycle and the pattern of recessions following inflations, so the public will be more tolerant and forgiving of a recession and the “return to normalcy” than the destruction and reset of a hyperinflation
4. Members of the Federal Reserve System participate in a lucrative employee pension system which primarily holds US stocks (53% of plan assets) and bonds (34% of plan assets), which will be made worthless by a hyperinflation, giving the employees of the Federal Reserve System a vested interest in preserving the system and averting hyperinflation

North calls hyperinflation a “policy choice”. He believes the only thing that could change this outcome would be if the Congress nationalized the Fed. Then, all bets are off.

It’s an interesting prediction. It makes a lot of sense. I am not sure how mass inflation will avoid some of the problematic items mentioned above though (particularly #2 and #4).

If North is right, this should be good for gold and not so good for people invested in stocks as consumer price increases will likely outpace increases in stock prices. Stock prices may even get hurt short-term because of increased commodity prices for many businesses.

UPDATE

Robert Wenzel of EconomicPolicyJournal.com fires back:

So don’t put me in the more unemployment camp or the mild inflation camp,or in the non-hyperinflation camp. Long term there are too many unknowns to be in any camp, especially when you have a machine known as the Fed that can shoot out billions trillions of dollars whenever it chooses. I just watch what the Fed is doing and adjust accordingly on a roughly six month basis. The constant adjustments are no way to live, but are necessary because of the fact that we do have a central bank, the Federal Reserve, that manipulates up and down the money supply. Right now, because of the new money accelerated growth that is occurring,  I anticipate that the climb in price inflation is going to escalate dramatically, where this spike in price inflation will stop, I have no idea. I just take it six months at a time.