Chapter 65 - Quotes about Hyperinflation

Vincent Cate

Hyperinflation is that transition period when a paper money is clearly failing as a store of value but has not yet died as a medium of exchange. [650]

History Squared

hyperinflation is always and everywhere a fiscal [taxation] phenomenon. [651]

Vincent Cate

Earthquakes, volcanoes, forest fires, avalanches, etc. are things where an expert can tell when there is a danger, but still not be able to say exactly when the trigger will be. I think it is the same with hyperinflation.

Comment: "The average currency is dead in about 25 years."

Comment: "Hungary after WWII? That's perhaps the worst hyperinflation in recorded history, ... this hyperinflation could have been engineered as part of a communist plot to destroy the upper and middle class resources and solidify the communist party's resources."

Comment: "how about Khmer Rouge in Democratic Kampuchea from 1975 to 1979: there's a government that effectively stamped out any possibility of hyperinflation by banning money altogether. Their grateful citizens sing the praises of the Khmer Rouge to this day for protecting them from the evils of hyperinflation." [650]

At the start of all hyperinflations bond values crash.

Vincent Cate

Normal money functions as both a store of value and a medium of exchange. A fiat currency experiencing hyperinflation is clearly not a good store of value but is still functioning as a medium of exchange. The currency is sort of half money and half failed. Kind of a one foot in the grave situation for money. Much of the time such a currency dies within a few years. ...

In the International Accounting Standard of IAS 29 one of the guidelines for when hyperinflation accounting should be used is when 'the cumulative inflation rate over three years approaches, or exceeds, 100%.'.

I think 26% inflation counts as "clearly failing as a store of value" and makes a good cutoff between regular inflation and hyperinflation.

Note that hyperinflation is not defined in terms of the money supply alone, since the velocity of money and GNP are also key factors in the price level during hyperinflation.

Hyperinflation is a process, a positive feedback loop, that once entered is very hard to get out of. This process can go on for years. In the feedback loop the more the central bank prints money and buys bonds the less other people want to hold bonds. At the same time, the less other people hold bonds, the more the central bank has to buy them so that the government has enough money to spend. This feedback loop can also be called a death spiral, chain reaction, tipping point, like an avalanche, slippery slope, or a debt bomb. Once the conditions are right, it can just go off. Is there a real chance the US dollar could get hyperinflation?

Bernholz did a study of 29 cases of hyperinflation and looked at the circumstances that led up to them. He found that the best predictor of hyperinflation is government debt over 80% of GNP and the deficit over 40% of government spending, in a country that prints its own money. Note that 50% deficit spending would mean spending twice what was collected in taxes. The US is over the debt number and not far from the deficit number, so the danger of hyperinflation is real.

In over 100 cases of hyperinflation I don't believe there has ever been a single "decision to have hyperinflation".

"hyperinflation causes money printing, not money printing causes hyperinflation".

Hyperinflation is really a positive feedback loop. It is a circle, a death spiral.

The problem is that the government needs money to operate and is spending far more than what it gets in taxes and has debt around the size of the GNP. The deficit is so large that cutting government or increasing taxes enough is not possible. The only way the government can keep in operation, when other people stop buying their bonds or even rolling over their bonds, is if the central bank steps in. So the government always makes sure the central bank steps in. This may take changing laws or replacing people at the central bank, or just ignoring laws, but the government will get the money or it will fail. If it can not pay its employees then nobody will show up for work and the government will collapse.

It is always the combination of the government spending far more than it gets in taxes and the central bank printing money and buying government debt (monetizing debt). It is the two together that result in hyperinflation, not one alone.

The exact cutoff point between regular inflation and hyperinflation is arbitrary, so it makes no sense to say that below 26% it is a monetary phenomenon and above 26% it is a political phenomenon.

I think the idea that hyperinflation, where the monetary unit rapidly becomes worth less and less, is not a monetary phenomenon is not only wrong but dangerous. This wrong idea keeps people from understanding what is really going on.

Each case of hyperinflation is unique, so if you are looking for differences you will always find them. You need to understand the common characteristics. Hyperinflation happens because government debt gets over 80% of GNP and deficit gets over 40% of spending. It does not matter how you get into that situation. Hyperinflation works the same if you lose a foreign war, a civil war, a dictator goes crazy, a government with excessive foreign debt, nationalizing too many businesses, rampant corruption, productive collapse, excessive regulation, a regime change, too many taxpayers fleeing high taxes, a massive depression, or whatever. It just matters that the government is spending nearly twice what they get in taxes and has already borrowed more than is reasonable. When they are in this situation they can not borrow more, except from the central bank under their control. So they get the central bank to make money and "loan" it to them. When the reality is the only way they can pay back that "loan" from the central bank is by first getting another "loan" from the central bank you are probably headed for hyperinflation.

Another problem is that people often compare the US before hyperinflation to some country during hyperinflation, which is not a fair comparison. For example, after prices are shooting up and interest rates go up no banks will be making 30 year loans. So people will say the fact that the US is making loans shows that it is different than some country with hyperinflation. This is silly. Of course a country that does not yet have hyperinflation is different from a county in the midst of hyperinflation. The real trick is recognizing the circumstances that lead to hyperinflation.

The first is that it is only since 1971 that the world has had a fiat currency as a world reserve currency. In the past it was always gold or silver or a currency convertible to gold or silver. It is not possible to get hyperinflation when using gold and silver. Hyperinflation happens to fiat currencies.

It may be that as inflation picks up the international commodities will no longer be priced in dollars. Perhaps they will use Yuan or maybe they will use gold. It does seem doubtful that people would keep selling things in dollars if dollars are failing fast.

Hyperinflation is sort of a slow motion panic where people get out of bonds and then out of the currency altogether. As a human panic, hyperinflation is hard to predict with precise timing. However, if bonds are paying 1% and going to suddenly lose more than half their value sometime in the next 10 years, then getting out years early is clearly a better plan than waiting.

People think their own government is just borrowing money and that in cases like Weimar Germany or Zimbabwe they were just printing and spending money. However, the truth is that Germany and Zimbabwe had central banks that were buying government bonds just like the US central bank is doing. If the central bank loans some money into existence (which is what buying a bond is really doing) that money should go away when the loan is paid back. However, in Germany and Zimbabwe the only way the government could pay back a bond was by first selling another one. So effectively they were just printing and spending money. If in your mind you put a big black box around the central bank and the government and look at what comes out of the box, what you see is new money being spent. The pretend loans that never really get paid back are all on books inside the black box. It makes no difference to the world outside the black box if they were just printing and spending or have pretend loans inside the black box. The US is now in the same situation. The only way they pay back existing bonds is by first selling new bonds. Because the historical narrative simplifies out the central bank, people don't realize that their own government is doing the same thing that previous hyperinflation governments were doing. People think previous cases were just stupidly printing and spending and that their government is responsibly borrowing money, when really their government is doing the same thing. So the same mistake is repeated again and again, and hyperinflation keeps happening.

Some think there is no reason to worry since after WWII the debt was huge but the USA did not get hyperinflation. After the war ended and the military was cut back there was no deficit. If there is no deficit there is no reason to worry about hyperinflation. Today there is a huge deficit and it does not seem politically possible to get rid of it. So this is not the same situation and is far more dangerous. [650]

The Twentieth Flaw of Economics

   Hoarded Money is a money avalanche waiting to create hyperinflation.