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(Hyper)-Inflation, deflation, HOCG and LOCG

HOCG = High order Capital Goods (real estate, machinery).

 LOCG = Low Order Consumer Goods (energy, food)

Hyperinflation is caused not by facts but by an intangible: the sudden realization of what had been there all along but hadn't been recognized. Today inflation is rising slower because the velocity of the growing money supply is momentarily coming down. This is a normal phenomenon in an inflation and hyperinflation cycle.  April 15, some talking heads pretend the US has fallen into Deflation and the UK is to follow. This happens because they have no understanding of what Inflation, Deflation and Hyperinflation is.

Important is to UNDERSTAND a hyperinflationary depression sees simultaneously and FALLING prices (HOCG) and rising prices (LOCG). [HOCG = High order capital goods (ex. Real Estate) - LOCG = Low Order Consumer Goods (ex. energy and food)

The most difficult concept for the professional public to understand is that hyperinflation can exist along with a totally disastrous economic environment. Hyperinflation falls flat because it fails to take into account the infinite velocity of money that a Weimar creates during a depression economy as a product of throwing monetary discipline at the wall.


Prices = Money Supply x  Velocity of the money

Basically, there are 3 inflation fazes:

  1. In the first faze, as the cost of goods and services increases, people start to spent less. They save because they 'think' prices will come down again. The velocity (the speed money is spent) decreases. Such a situation is possible because of the ignorance of people trusting the authorities. (today, people hardly can save more   there is too much debt!)

  2. In the second faze, people recognize Inflation. After some denial, they start to become aware that the cost of goods and services won't come down again. Velocity goes up again.

  3. As soon as people understand the cost of good and services will continue to go up, they loose faith in Fiat Money and they prefer to hold goods instead op paper money (Gresham's law). The Velocity increases dramatically. We have runaway hyperinflation.


Examples of inflation phases

Argentina - click to enlarge

CPI inflation

Money supply

  • The expansion of the Money Supply in the Western world has been explosive [this is the least one can say]. Yesterday the G20 agreed to expand it by another 5 TRILLION DOLLAR. Contrary to the 1930's (Great Depression)  in the USA where the opposite happened. Only Germany did the same what they are doing today and the policy resulted in the Weimar Hyperinflation.

  • The lesson?  whatever the authorities do, one the economy and the financial system has been violated (and it has) it snaps. It does so because the system because more and ore unstable. It start to rock more an more until something snaps and it crashes.

  • NO FINANCIAL SYSTEM has survived FRACTIONAL RESERVE BANKING (usury) and the creation of FIAT PAPER MONEY out of thin air EVER. Such a thing is simple impossible.

  • Hyperinflation ALSO results in parabolic rising stock markets (Zimbabwe) as people apply Gresham's law: the bad money chases the good and exchange Fiat paper for Equities which are participations in REAL ASSETS.

December 2008 the velocity of Money is still negative. Hyperinflation will start once this trend reverses....like it did in Argentina


Posted on July 11, 2008 - Francis D. Schutte

It more and more occurs to me that people have not the slightest idea of what Inflation and Deflation are and what the consequences are for the investor. Also, few understand the difference between Inflation and what is defined as Hyper-inflation.

The definitions of Inflation and Deflation will be skipped as these have been explained in detail earlier under Academics.

In economics, hyperinflation is inflation that is "out of control," a condition in which prices increase rapidly as a fiat paper currency loses its value. Formal definitions vary from a cumulative inflation rate over three years approaching 100% (Today, many goods exceed the 100%) to "inflation exceeding 50% a month." In informal usage the term is often applied to much lower rates. As a rule of thumb, normal inflation is reported per year, but hyperinflation is often reported for much shorter intervals, often per month.

Another definition of Hyperinflation is any inflation rate over 20% and/or any condition where prices rise faster than the Money Supply. This is another important reason why authorities in the USA have stopped publishing the M3 figures, why it is so hard to find correct figures for the EU and why all Inflation Indexes are cooked.

The definition used by most economists is "an inflationary cycle without any tendency toward equilibrium." A vicious circle is created in which more and more inflation is created with each iteration of the cycle. Although there is a great deal of debate about the root causes of hyperinflation, it becomes visible when there is an unchecked increase in the money supply or drastic debasement of coinage, and is often associated with wars (or their aftermath - Iraq, Afghanistan), economic depressions, and political or social upheavals. Because taxation and financing have become impossible, in the final stage, authorities monetize their debt.

The reason why it can be so hard to ‘understand’ we have (hyper)inflation is that in a (hyper)-inflationary cycle and certainly in the initial stage NOT ALL PRICES RISE. Some prices, by name of these of the HOCG will even tend to fall.

As explained by Von Mises, as a result of Fractional Reserve Banking, Fiat Money and inflation, at a certain point, the prices of HOCG (High order capital goods) tend to fall and those of LOCG (low order consumer goods) tend to rise. In other words, we have a (hyper)inflation cycle but we still see some prices fall. We have (hyper)inflation and deflation at the same time. Rather confusing.

The shift from HOCG to LOCG exists because of a misallocation of funds. In other words, funds that should have been used to improve the agriculture and to increase the energy supply, were misallocated to for example the Real Estate market, and were used in the dot.com and stock market bubbles. However, because of oversupply, at a certain point, the demand for HOCG dries up and as suppliers/manufactures  scramble to sell the overstock, interest rates go up and prices of HOCG come down.

Meantime, no or little attention has been paid to the LOCG. No new investments nor research were made (because of the misallocation of funds there was no incentive), existing installations/plants became inefficient and outdated. Politicians did not understand the problem either and used the mass psychology to earn votes by not allowing the construction of Nuclear Power and Clean Coal plants, by making it difficult and even impossible to drill for more oil and to built new petrochemical refineries. No attention was given to the failing supply of LOCG. At a certain point, we see a growing disequilibrium between supply and demand (Peak oil and food commodities) and we end up having an inelastic supply (peak oil) and a rising or stable demand for the LOCG . Prices  start rising at an abnormal rate. There is inflation and sometimes hyperinflation.

Important is to understand that this is the direct result of Fractional Reserve Banking and Fiat money creation by the Banks and Political authorities. In other words, they are at the very origin of the evil they are blaming the speculators for today.

A recession and depression starts and last until all of the misallocated funds have been recycled correctly into the LOCG. The longer the cleaning cycle is delayed by subsequent credit injections  by Banks and Politicians (more fiat money, more misallocations and more inflation), the stronger and pain fuller the cleaning action and potential crash of the HOCG and the recession and depression.

If authorities really mean to stop inflation, they should stop Fractional Reserve Banking and the creation of Fiat Money.

Price increase of LOCG y/y 1 year 3 years *
Steel 40% to 70% 150%
Chemicals 25% 75%
Shipping costs 375%  
Crude oil 43% 129%
Ethanol  21% 63%
Heating oil 44% 132%
Natural gas 77% 231%
Unleaded gas 40% 120%
Corn 60% 180%
Soy beans 26% 78%
Aluminum 35% 105%
Copper 26% 78%
* extrapolated over 3 years    
Price decrease of HOCG    
Real Estate -20% to -60%

The Calendar of Modern Hyperinflations:

For the moron financial TV hosts claiming that major inflation is well down the road because inflation requires a business recovery to occur:

Angola 1991-1999
Bosnia – Herzegovina 1992 – 1993
Chile 1971 – 1981
Greece 1943 – 1953 At the high point prices doubled every 28 hours. Greek inflation reached a rate of %8.5 billion per month.
Israel 1971 – 1985 (price controls instituted)
Japan 1934 – 1951 
Romania 1998 – 2006
Turkey 1990 – 2001 
USA 1773 – not worth a Continental
Yugoslavia 1989 – 1994
Zaire 1989 – present (now the Congo)
Zimbabwe – 2000 to present. November of 2008 – inflation rate of 516 quintillion percent

From http://en.wikipedia.org/wiki/Weimar Republic



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