EDITOR NOTES: There’s been a lot of noise on the inflation front over the last decade since the 2008 financial crisis. On one side, you hear warnings of a potential inflationary spiral. On the Fed side, you sense some confusion as to why the economy’s still under its 2% target. Every now and then, someone brings up the prospect of “hyperinflation.” Interestingly, many mainstream investors don’t fully understand what hyperinflation is and how bad it can get. This primer explains it all--how it creeps up on the economy, its destructive impact on individual’ wealth and lifestyle, and how it might resemble what we’re seeing in today’s economy.
To wind up with true hyperinflation, some very bad things have to happen. The government has to completely lose control and the populace has to completely lose faith in the system – or both at the same time. Will the U.S. go down that path? Let’s review the situation.
Hyperinflation: A Definition
- Historically speaking, hyperinflation is essentially always a political event. Someone loses a war, the government collapses, there is a pandemic such as the coronaviris (COVID-19) that virtually shuts down the economy causing many companies to fail and mass unemployment to occur or some huge dramatic political event happens that triggers the hyperinflation. After this huge event, the politicians in charge generally begin printing money and dishing it out many times more than existed the year before and, as inflation begins to pick up, the leaders then also generally speed up the printing.
- Professor Steve Hanke defines hyperinflation as when inflation exceeds 50% per month and lasts for at least 30 consecutive days.
- In hyperinflation the money supply is going up, the velocity of money is going up, and the real GNP is going down, all at the same time. It is a triple whammy that drives prices up really fast. The munKNEE source
The Steps To Hyperinflation
- Government spending gets out of control to where the deficit is 40% or more of spending and the debt is over 80% of GNP.
- The central bank starts buying up government debt with newly made money.
- There is capital flight out of that currency.
- Bond sales fail.
- Investors move into shorter term bonds as the years pass and it becomes clear that the deficit is not going back down.
- The Government is forced to print more and more money as a result of more and more bonds coming due sooner to cover their budget.
- The velocity of money picks up. Some people notice prices going up and spend their money before prices go up more, even for things they don’t need yet. This spending of money as fast as it is earned is the hallmark of hyperinflation.. In other words, it’s when savings of any sort become the stupid thing to do.
- Many people start using foreign currencies, or gold, as a store of value when they realize that the local currency is not a good store of value even though government may forbid it.
- A black market starts in currency exchange.
- The black market spreads to commerce as people start to use barter or a foreign currency or gold for trade.
- The government freezes bank accounts because so many people are taking money out of their bank accounts and exchanging it for a foreign currency, or gold, causing many banks to become in danger of going under.
- Wages and prices become indexed to something more stable, like a foreign currency or gold.
- Wages become paid weekly or daily, instead of monthly, and the velocity of money picks up more.
- Interest rates become very high.
- Loans become for much shorter periods, a couple of months instead of 30 years.
- The black market eventually grows larger than the legal market. People no longer worry about the government requirement to use local paper currency as enforcement is impossible. Businesses that follow the law and sell for regulated prices in the local currency can not buy enough new inventory and soon go out of business making the percentage of the economy that is black market go up further and further.
- People start to no longer accept the local paper money.
- Regular taxes decline because hyperinflation has devastated the economy and much of the economy is now in the “black market”. The government is losing economic power and, at this step, there is a very real risk of the government failing. The munKNEE source
- Once people get spooked, their willingness to hold money will decline (the velocity of money will expand). It is this latter phenomenon that moves a country from very high inflation into hyperinflation.
- An arbitrary definition of hyperinflation might be in excess of 50% per month. The munKNEE source
- Historically, it generally has taken two to three years before growth in the money supply has translated into a meaningful acceleration in inflation. The munKNEE source
- The timing of the onset of full blown hyperinflation likely will be coincident with a broad global rejection/repudiation of the U.S. dollar. The munKNEE source
- The situation will quickly devolve from a deepening depression, to an intensifying hyperinflationary great depression and, while the resulting U.S. economic difficulties will have broad global impact, the initial hyperinflation should be largely a U.S. problem, albeit with major implications for the global currency system. The munKNEE source
- Bottom line: The larger the amount of outstanding debt is, the larger will be the potential increase in the money supply. The more the money supply grows, the more likely it is that there will be hyperinflation and a potential breakdown of money demand: the unfolding of a crack-up boom. The munKNEE source
Below is the Hanke-Krus World Hyperinflation Table which contains all 58 episodes of hyperinflation over the past 100 years:
Below is a table of the current worldwide hyperinflation situation:
What Would Cause Hyperinflation to Occur in the U.S.?
When the global economy encounters some domino chain combination of implosion, the threat of Great Depression 2.0 will come roaring back, bigger and uglier than before because all the “extend and pretend” actions that have been undertaken until now will trigger an economic collapse that rivals the conditions experienced during the Great Depression. At that juncture, it will be apparent to all that the Federal Reserve has run out of bullets – that “more stimulus” simply cannot work – that trillions have already been thrown down the drain. That is the point where true panic comes in.
It is then, when the monetary authorities wet their pants in the face of a new deflationary panic, that the real threat of hyperinflation will return to the fore. If all hope becomes lost we could see the Fed desperately propose something like QE2 times 10, on the order of not $600 billion but $6 trillion. That is when the real horror would begin. The munKNEE source
During these times, safety and liquidity will remain key concerns for investments, as investors look to preserve their assets and wealth through what are going to be the most difficult of times.
a) Gold and Silver
In such a circumstance, gold and silver would be primary hedging tools that would retain real value and also be portable in the event of possible civil turmoil. Also, at some point, the failure of the world’s primary reserve currency will lead to the structuring of a new global currency system and gold could well become part of the new system.
b) Real Estate
Real estate also would provide a basic hedge, but it lacks the portability and liquidity of gold.
c) Off-shore Investments
Having some funds invested offshore — outside of the U.S. dollar — would be a plus in circumstances where the government might impose currency or capital controls.
While equities do provide something of an inflation hedge — revenues and profits get expressed in current dollars — they also reflect underlying economic and political fundamentals. As such, I still look for U.S. stocks to take an ultimate 90% hit, peak-to-trough, net of inflation, during this period. The munKNEE source
Any and all moves to delay the onset of full hyperinflation will be limited and short-lived as there is no obvious course of action or external force at this point of the process that can meaningfully put off the nearing day of reckoning.
Efforts to save the system at any cost likely will continue as long as possible, however, with the government spending whatever money it and the Federal Reserve need to create, until such time as the global financial markets rebel.
The ultimate cost here will be the increasing debasement of the purchasing power of the U.S. Dollar, and an eventual dollar collapse beyond any government or Federal Reserve control resulting in hyper-inflation. The munKNEE source
The situation quickly would devolve from a deepening depression, to an intensifying hyperinflationary great depression. While resulting U.S. economic difficulties would have broad global impact, the initial hyperinflation should be largely a U.S. problem, albeit with major implications for the global currency system.
Material for the above article was sourced from the munKNEE.com archives on hyperinflation.
Originally posted on Munknee.com