Is Germany about to learn the lesson that the lender has as much responsibility for lending as the borrower has for borrowing.
The rules of the ECB are designed to protect the value of the currency but to keep the Euro Ship afloat it has been breaking its own rules by lending vast amounts to banks for more than a very short period.
Hyper inflation seems unthinkable to us at the moment with commodity prices high but stable, with downward pressures on wages, falling asset prices and with credit markets shrinking any real inflation seems hard to see and hyperinflation seems impossible.
Ireland is an economy falling into a deflationary death-spiral: The country lacks liquidity, leading to lower prices, leading to unemployment, leading to lower consumption, leading to still lower prices, the entire economy seems to be grinding to a halt with our ray of hope an export led recovery likely to falter based on the world economic outlook.
So an argument against hyper inflation is easy to defend. Commodity prices are more or less stable with a downward pressures on incomes, asset prices are falling, and credit markets are shrinking.
But that is because we are thinking of inflation as an economy that is overheating with all goods and services increasing in price. We are familiar with this from the boom. Demand driven price increases.
I contend that we are now hitting a phase that in a few years we are going to have high inflation and a likely hood of Hyper inflation as this Euro project unravels.
Why? Because as Europeans start to loss confidence in the Euro, people will try to buy assets to get out of the currency. Hyperinflation is caused by the loss of confidence in a currency resulting in government expenditure being paid for largely by the printing of money. Inflation thus starts acting as a tax.
As confidence is lost there is also a misallocation of funds because people will try to buy anything that is not the currency to try to have something that holds its value. The first signs of this have taken place with London house prices increasing during a financial crisis, gold doubling in a few years and massive increases in deposits to Swiss banks.
Greece, Ireland, Portugal, Spain, Italy & Belgium are all in trouble and in the coming year the only lender might become the Troika with the ECB having a bigger and bigger role. In conclusion however unlikely high inflation seems now, even hyper inflation is possible in the near term because I believe soon there will be no one willing to lend to at the least the countries above and shortly afterwards to the other Euro zone countries such as Germany and France as their banks will need massive recapitalisation. As this happens fate will be lost in the Euro and deficits will be made up by printing money instead of borrowing from the markets.
We will start by having stagflation (Inflation without growth) but I believe Europe is so poor at solving problems that inflation could run out of control.
This although painful for people with savings and pensions and in the short term could be devastating to economies might overall be a better outcome for Ireland because inflation will have the benefit of deflating our national debt in real terms and prevent debt repayments for multiply generations.
Absolute Hyperinflation which is defined as 50% a month is probably not going to happen but extremely high inflation in the coming years is a likely outcome of this crisis.