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Will The U.S. Reach 1000% Inflationary Rate?

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EDITOR NOTE: January 2020 was the release date of Netflix”s Pandemic: How to Prevent an Outbreak. The timing of this release was haunting and ironic. Produced before the onset of the COVID-19 outbreak, it ended up becoming an immediate overture whose release date coincided with the pandemic’s downbeat in the US. Needless to say, what the documentary warned us about had already taken shape, and since then it has drastically changed the world we live in now. What’s interesting is that scientists have been warning about this for decades. If any scientist predicted, prior to 2020, that 2.56 million people would die within the first year of a pandemic that was soon to take place, hardly anyone would believe it. This leads us to another “unbelievable” disaster scenario: hyperinflation. Some experts are warning that the US will see an inflationary rate upwards of 1000%. No sane person would believe that either. It sounds too far-fetched. Yet it also seems credible. And if you apply logic to the current monetary and fiscal environment, it makes you wonder why it hasn’t yet happened. Smart investors are preparing for the potential of hyperinflation by converting their assets to non-CUSIP gold and silver. Are we fated to see a Weimar-like scenario in the US? By the time it’s confirmed, most of your financial assets will be reduced to almost nothing. Are you still of the mind to keep your assets unhedged?

Hyperinflation generally described as a series of rapid, excessive, out-of-control price increases, and is rare in developed countries. That's because a true hyperinflation has to meet a high bar—an inflationary rate of 1000% or more per year, according to most economists1

The U.S. Federal Reserve System (FRS) says an annual inflation rate of 2% is "most consistent with the Federal Reserve’s mandate for maximum employment and price stability2

The inflation rate in the United States in 2019 was 1.81%. The projected rate for 2020 is 0.62% and for 2021, 2.24%. The highest annual rate of inflation in the U.S. since 2010 was 3.14% in 2011.3

Economic Equilibrium and Inflation

In the world of economics, equilibrium is a theoretical state in which supply and demand are in perfect balance. In simple terms, the number of items for sale equals the number of people who want to buy them. When economic equilibrium is out of balance (which is pretty much all of the time), it's called disequilibrium. One possible cause of disequilibrium is inflation.

When disequilibrium is caused by inflation, prices for goods and services go up reflecting the imbalance between supply and demand. The net result of inflation is a decline in the purchasing power of your money. Inflation is why an item that costs $1 today might cost $1.25 a year from now. For most people this is just "the way things are."4

Hyperinflation: Inflation Gone Amuck

Hyperinflation is different. Hyperinflation is inflation on steroids. With hyperinflation, that $1 item today might cost $10 or $50 in a year.1 According to Anders Åslund of the Peterson Institute for International Economics, hyperinflation only happens under very special circumstances including the breakup of a currency, after wars, when fiscal authorities lose control, or when wild populism prevails5

One of the most striking examples of hyperinflation in history happened following World War I in the Weimar Republic of Germany. By attempting to pay war reparations and grow the economy at the same time, the German government printed so much money that a huge gap between supply and demand developed, resulting in an inflation rate of 322% per month or an annual rate of more than 3 billion percent by November 19236

The table below illustrates the impact of both normal annual inflation (2%) and hyperinflation (1000%) on the prices of some of the items in the basket of goods and services covered by the Consumer Price Index (CPI), used to calculate the inflation rate in the U.S.7

Causes of Inflation

Economists recognize two main causes of inflation: cost-push and demand-pull. Cost-push inflation happens when the cost of production increases (i.e., from higher costs of raw materials or wage boosts). This results in an increase in prices for goods and services since manufacturers pass their price increases along to consumers. With cost-push inflation, prices are "pushed" up by rising production costs.

Demand-pull inflation happens when supply is limited compared to demand. Demand can go up due to a strong economy, a natural disaster, or an oversupply of money. In these instances, demand outpaces supply and "pulls" prices higher.4

Causes of Hyperinflation

The two primary causes of hyperinflation are (1) an increase in money supply not supported by economic growth, which increases inflation, and (2) a demand-pull inflation, in which demand outstrips supply. Clearly these two causes are linked since both overload the demand side of the supply/demand equation.

The increase in money supply is typically caused by government action such as happened in Weimar in 1923. When government injects money into the economy, hyperinflation can result. Often the demand-pull inflationary effect happens primarily because people have more money creating a willingness to pay higher prices which increases demand.9

Hyperinflations Are Rare

Hyperinflations, as illustrated above, can be fiscally catastrophic to a nation. Fortunately, they are very rare. Aslund goes so far as to refer to hyperinflation as "an irrelevant concern for ordinary monetary policy."5

Hyperinflation can happen when the government prints more money in response to a crisis, as during the Weimar Republic. The crisis doesn't have to be a war. It can be a poor economy, disease, natural disaster, or even a sense of panic causing people to hoard. This, of course, lowers supply which increases demand.

Any of these factors, carried to an extreme can result in hyperinflation. As Aslund notes, however, this rarely leads to hyperinflation under ordinary monetary policy10

Inflation and hyperinflation happen only when prices in general go up. If coffee alone went up 1000%, for example, that would be due to some other factor, such as a catastrophe somewhere in the supply chain, and not a sign of hyperinflation.4

Important: Inflation and hyperinflation happen only when prices in general go up. If coffee alone went up 1000%, for example, that would be due to some other factor, such as a catastrophe somewhere in the supply chain, and not a sign of hyperinflation.4

Nevertheless, Rumors Persist

Despite the high bar to achieve hyperinflation, there are those who suggest that's exactly where the United States is headed. Here are samples from recent internet blog posts, displaying various approaches:

"[…] if markets realize that the US economy has become addicted to monetary stimulus and “can’t get off the drug,” then expectations for the long-term path of the monetary base will be revised up leading to what could be the most severe inflationary outbreak in modern US history." — Andrew Wurtis11

"Deficit to outlay ratio tops 60%, above the hyperinflationary threshold of 40%."12 — Albert Sung

"Eventually all major Nation State Empires go down and their people lose confidence in their leaders and, in tandem, the money they issue. It has happened in Ancient Babylon, in Egypt, China, Rome, various leading nation states in Europe, and it will eventually hit the US when the American people decide that they would rather live their lives as a free people rather than as slaves to a unpayable national debt whose interest will eventually consume more of the federal budget than military expenditures." — Joseph Holleman13

Is the United States Actually Headed for a Hyperinflation?

Some members of the general public may think so. But most authorities say, "No."

Economist Asher Rogovy, attacks the persistent internet rumor that the U.S. is printing too much money and that this will lead to hyperinflation.

Says Rogovy, "In the US, the central bank does not pay debt with the money it creates. Rather, it lends money at its targeted interest rate and the private sector employs that capital more productively. The money created is paid back, which is a crucial reason this monetary policy doesn't produce hyperinflation."

Professor L. Burke Files of Hayek Global College suggests that hyperinflation is unlikely in stable economies like the U.S., in part due to cost-control factors made possible by a world economy. "The interconnected nature of the world, Burke says, "is the 'pressure relief valve' for most nations. Those nations that print an absurd amount of money like Zimbabwe—or try to manipulate their currency and restrict trade like Argentina—become the outliers."

"I don't think we'll see inflation stay as low as the Federal Reserve's inflation outlook of just 2%," says Jim Pendergast, senior vice president of altLINE Sobanco. "That said, I doubt we'll see the kinds of hyperinflation touted in these apocalyptic article headlines. It'll be a mixed bag due to a specific set of circumstances lingering from COVID."

Finally, attorney Steven J.J. Weisman, Esq. addresses what he calls the potential "scam" side of some internet hyperinflation rumors. "Sometimes stories like this are perpetrated merely to be outrageous enough to lure people into reading the stories which may be posted on sites where they earn advertising dollars according to how many clicks they get," says Weisman.

Originally posted on Investopedia.com

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