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By Ron HeraMarch9, 2010©2010 Hera Research, LLCBen Bernanke, Chairman of the US Federal Reserve, faces aSisyphean task becauseUS banksareexperiencingdebt deflation and, because lending isnowatmuch lowerlevels, monetarydeflation is encumbering the domestic US economy as existing debts continue to be serviced.Government deficit spending can only offsetlowerconsumer spending to a degree, and themushrooming debt of the US governmentraises the question of whether the US can repay or rollover its debt obligations, given that tax receipts arelikely tofall.Despite deflationary pressure,the value of the US dollar is in a downtrendpointing tohigher prices for imported goods andenergy. Devaluing the US dollar will reduce the value of debts in real terms,thus it can makedebt levels sustainable,but higher prices will exacerbate debt defaults, worsening the condition of US banks.Mr.Bernanke’s dilemma is how tosalvagethe balance sheets of US bankswithoutsparking high inflationor unleashing hyperinflation.Where the US dollar is concerned, opinions on hyperinflation range from the view thathyperinflation of the world reserve currency is impossible in principle (because, for example, thevalues of other currencies are linked to that of the US dollar), to the view that hyperinflation of the US dollar has already happened and that all that remains are the consequences.The two mostwidely accepted theories of hyperinflationarethe monetary model, where a positive feedback cycle is caused by a disproportionate increase in the velocity of money as a consequence of increasing the money supply too quickly, and the confidence model, where the monetaryauthority issuing a given currency is perceivedto beinsolvent or no longer legitimate.Theviewthat hyperinflationis the inevitable result ofa central bank issuing too much money or ofa government taking on too much debt, while correct, both states the obvious andpresupposesthat some previouslyknownor predictable limit is reached.The ability to service debtis onesuch measure, but the value of a debt in real terms depends on the value of the currency.In practice, hyperinflation is recognized only after the inexorable death spiralof a currencyhas begun. Detecting it in advance is another matter entirely.Mathematical models of hyperinflation,such aspredicting years between redenomination basedon inflation rates or applying the quantity theory of money, describe what ishappeningbutnotwhy.Usingthe monetary modelalone makesit difficult toexplainapparentcounterexampleswherehigh levels of sovereign debtcompared to a nation’s gross domestic product (GDP) or monetizationdid not result in hyperinflation.The confidence model seems to suggest that hyperinflation can be explained by crowd psychology where hyperinflation is analogous to a market mania or is an example of masshysteria. The idea that hyperinflation is only a crisis of confidence, i.e., that it is apsychological phenomenon, not only lacks predictive value butimplies thathyperinflation can be prevented bymanipulating public opinion regardless of mathematical realities.