fgmr.com | December 13, 2010 – For several months I have been warning that hyperinflation of the US dollar is looming.  The ominous signs of this impending currency train-wreck are becoming increasingly clear. 

For example, crude oil is threatening to break above $90 per barrel.  Copper has broken through $4 per pound to a record high price.  The prices of many other commodities are also in uptrends. These commodities are not in short supply.  There is no shortage of oil or copper.  Rather, these high prices are the result of too much money printing, which if not quickly stopped by returning to a sound money policy will ultimately lead to hyperinflation.

Last week another important part of the hyperinflation puzzle fell into place.  Long-term interest rates surged, continuing their sharp upward path that began two months ago.  The 10-year T-note during this two month period has risen from 2.4% to end last week over 3.2%, a remarkable and therefore telling jump.

This rise in long-term rates lays bare the flawed logic of the Federal Reserve’s newly announced $600 billion so-called “Quantitative Easing” program supposedly designed to help the economy.  This new round of money printing is not going to help the economy, which has been hollowed out by years of debt financed consumption along with too little savings and production.  This money printing is serving only one purpose.  This central bank trickery is providing the federal government with all the dollars it wants to spend. 

So despite the fact the Fed will be purchasing $600 billion of US government debt instruments, T-bond and T-note yields are climbing, a clear sign that investors are rushing to sell their US government paper.  Why?  Because they know the purchasing power of the dollar is being debased by QE, and more importantly, will continue being debased.

I have discussed this reckless monetary policy before.  “The [Federal Reserve] has one mission.  It is to make sure that the federal government obtains all the dollars it wants to spend.  If the federal government cannot attract these dollars from the world’s savings pool, then there is only one other way to obtain them.  The Fed must print them.”

The following chart illustrates that the US government continues to spend and borrow recklessly.  Despite all the pump-priming by the Federal Reserve aimed at stimulating the economy and therefore increasing US government revenue, there has been no meaningful reduction in the deficit.

Federal expenditures remain far above federal revenue.  More worrisome is the resulting growth in US government debt – now nearly $14 trillion – much of which the Fed is turning into currency with its QE actions.  The transformation of government debt into currency by the central bank is the core cause of hyperinflation.

The dollar not only remains on the road to hyperinflation, the rise in commodity prices and bond yields mean that the dollar is picking up speed as it heads toward the fiat currency graveyard.  Remember, numbers don’t lie.  But the same thing can’t be said for politicians who refuse to accept reality or central bankers willing to experiment with the US economy just to test their chalkboard theories.