I frequently hear, in one form or another, statements such as this: "the Fed is printing money like never before...the dollar will collapse, gold will skyrocket and hyper-inflation is inevitable."  Economics and Finance just aren't that simple.  While the current conditions could culminate into these results...they also may not.  It is important to consider what is happening, why it is happening and how it fits into a more global perspective.  Let's look first at the U.S. money supply.  While it's true that the Fed is printing money rapidly, there is a reason for it.

Looking at the M2 money supply, a broad measure of cash & deposits, we see a nearly 6% increase at the end of 2008 that coincided with the credit crisis.  The M2 supply has grown about 2.5% since.  If we think of our economy as the amount of money available (money supply) multiplied by the transaction frequency (money velocity) then we can see that as one falls the other can be raised to compensate and maintain economic activity.  Currently, the velocity of money has dropped dramatically in part due to the reduction in bank lending, which plays a large role in money velocity.  Increasing the money supply is a well-accepted means of compensating for reduced money velocity.

Inflation is an increase in overall price levels, or put another way, a reduction in the purchasing power of a currency.  Thus, the increase in M2 mentioned above does add inflationary pressure because more dollars chasing the same amount of goods results in higher prices.  True.  But the Fed also has tools to allow it to reduce the money supply.  If the Fed can effectively shrink the money supply as velocity returns, we may still see inflation, but it need not be hyper-inflation.  It is a balancing act.

Let us now take a world view on U.S. dollar strength. Currency values are compared to each other, thus for the dollar to decline, other currencies have to appreciate. That is where the problem lies. Looking at the debt to gross domestic product (GDP) ratio, a measure of a country's public debt compared to its GDP and a good indicator of a country's fiscal strength, we see the entire developed world has been living on debt spending. Japan, the world's second largest economy, has a debt to GDP ratio of 172%...the second highest in the world, behind only Zimbabwe. Germany's ratio is 66%...number 20 in world debt rankings. France is ranked number 16 with a 68% debt ratio. Italy is number 5 with a debt ratio of 106%. The UK's ratio is 52%...number 35 in the world. The U.S. ratio is 37.5% with a world rank of number 61. The idea that the currencies of other major economic nations are fundamentally stronger than the U.S dollar doesn't hold up when viewed against their own public debt levels. Yes, we are bad...but everyone else is as bad or worse. The logical currencies to appreciate against the dollar are those associated with growing, emerging economies such as the Chinese Yuan. However, the Yuan should, and likely will, appreciate against nearly all other currencies...not just the dollar. The U.S. dollar should weaken against developing country currencies like the Yuan, but not against those of major economies using excessive debt-financing such as Japan or the European Union.

I do not feel hyper-inflation is inevitable given a deeper analysis of the conditions viewed as driving hyper-inflation. Deflationary pressures, at least for now, are stronger. Rising home foreclosures, credit card defaults and unemployment along with lower home values and lack of bank lending are all deflationary.