Gary North writing at LewRockwell.com thinks that hyperinflation will not be the outcome of the current monetary crisis:
This is the fear of most hard-money analysts. They see the Federal Reserve as the ultimate engine of hyperinflation. It could become this, if its senior decision-makers use Robert Mugabe as the model. I do not think The FED’s Board will do this. Mugabe is the laughing stock of the world. No one in the West wants to go down in history as the equivalent of Mugabe. The many books that predict hyperinflation ignore this. They assume that what happened after World War II in Hungary or after World War I in Germany and Austria is in some way typical of what Central banks do. It is in Latin America. It is in African tribal cultures. But it isn’t in Western industrial societies. To be labeled a South American central banker would be a mark of failure in the West. No central banker wants to wind up in the footnotes as his country’s equivalent of Dr. Gono, the head of Zimbabwe’s central bank in its time of hyperinflation.
While I agree with North that western central bankers are aware of the possibility of making themselves laughingstocks and wish to avoid it, I am not sure that they will, for several reasons. First there is the desire of central bankers to avoid deflation, which may be even stronger than their fear of inflation. Current central banking doctrine holds that excessive inflation and deflation are both risks while deflation is the more pernicious and difficult to fight because while interest rates can always be raised to fight inflation, it is near-impossible to cut interest rates any further once they reach zero.
Bernanke has said that the Great Depression was caused by the failure of the Fed to inflate sufficiently. My second reason is that they are using the questionable money supply metrics M1, M2 (and maybe a secret M3) which as Michael Pollaro has shown on his site devoted to commentary about the AMS (Austrian Money Supply) are often moving in the opposite direction to the trend of the actual money supply - meaning that in periods of inflation the Ms may show a deflation. Central bankers using this information are more likely to fight deflation when there is an inflation going on, adding fuel to the fire.
My third reason is that I am not clear on who exactly is in charge of making big decisions like inflation or deflation, there are many interest groups that want things that can only be given to them inflation; Congress spends money and the Fed monetizes some fraction of the debt. It is not obvious that there is much of a constituency that cares about avoiding either inflation or deflation. Some would be hurt by either but the entire issue is an example of the logic of concentrated benefits and dispersed costs. I am skeptical that we will see the Fed standing up as the last line of defense against congress, saying, “I’m sorry we can’t monetize any more debt because the risk of inflation would be too great”.
And finally, if the system is as unstable as I think it is, a bit too much policy bias in one direction or the other could trigger the inflationary or deflationary collapse and might be difficult to contain without a much larger move in the other direction. I’m not sure if anyone, including central bankers, knows exactly where the edge of the knife lies. While they are busy fighting inflation, trillions of excess reserves are piling up in the banking system, creating latent inflation if the money multiplier kicks in. Despite Bernanke’s confidence on 60 Minutes, can they withdraw the excess reserves from the system without resuming the deflationary collapse that they sought to forestall in 2008? And once this deflationary collapse resumed, can they stop it again, other than by monetizing several additional trillions of bad debts?
