"What causes hyperinflations? The answer is: Quasi-fiscal deficits! Why have we not seen hyperinflation yet? Because we have not had quasi-fiscal deficits!
What is a quasi-fiscal deficit?
A quasi-fiscal deficit is the deficit of a central bank. From Germany to Argentina to Zimbabwe, the hyper or high inflationary processes have always been fueled by such deficits. Monetized fiscal deficits produce inflation. Quasi-fiscal deficits (by definition, they are monetized) produce hyperinflation.
The only losses that can meaningfully affect central banks stem from flows (i.e. deficits), like net interest losses. These losses result from paying a higher interest on their (i.e. central banks’) liabilities than what they receive from their assets. These losses leave central banks no alternative but to monetize them, in a deadly feedback loop. They are like black holes: Once trapped into them, there is no way out, because (fiscal) spending cuts are no longer relevant, unless they produce a surplus material enough to offset the quasi-fiscal deficits. And that, by definition, is impossible."
--http://www.zerohedge.com/news/2012-12-19/guest-post-what-causes-hyperinflations-and-why-we-have-not-seen-one-yet
Comment: This makes a lot of sense. And since the Fed Reserve makes a profit each year (most of which goes to the Treasury), by this definition hyperinflation is impossible.
So if this is true, what would cause quasi-fiscal deficits? Either bad assets (like defaulted mortgages) that don't pay interest, or borrowing in a foreign currency that has higher interest rates than can be earned domestically. With the Fed's ballooning balance sheet, having bad assets is a distinct possibility.
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