Chapter 18 - Hoarded Money and Hyperinflation

Under a crisis situation, Hoarded Money has the potential to avalanche into the Circulating Money. All the money sitting idle in bank accounts and hidden under mattresses suddenly gets spent into the real economy. We should be thankful that the money in tax havens stays in tax havens. Try and imagine that those with money in vast quantities moved into your town and started buying everything in sight. They have wallets that never empty and more credit cards than you can count. No bread today. They have just bought all the bread to feed the ducks. No meat today. They just bought all the meat to feed to their dogs. No cakes today. They just bought all the cakes to have a bun fight. No plumbers, builders, electricians or odd job people. They hired all of them at twice the usual rate to build a swimming pool for their dogs. No food today. They just bought the contents of the shop for a party for out-of-town people. No locals are invited. In reality, it would be worse than this. The flood of money would cause high inflation which might possibly turn into hyperinflation.

When a crisis arrives, the movement of Hoarded Money into Circulating Money can be extremely rapid as the hoarders purchase anything that isn’t money. They want to get rid of their money because it is losing value faster than goods. This is the essence of hyperinflation. Money becomes unpopular because goods hold their value significantly better than money. Under a steady state economy, money holds its value better than goods. There are advantages of holding money rather than goods.

Under a steady-state economy, convertibility is the prime reason people use money. Imagine the performance selling an antique motorcycle. You may have to wait a year to find a suitable buyer. Imagine trying to exchange the same motorcycle for goods. If you accept any goods, your task is easier, but still way more difficult than selling for money. Imagine trying to exchange the motorcycle for an antique four poster bed. Tokens make the procedure so much easier.

Money only becomes more popular than goods, when the rise in value of goods significantly exceeds the value of money. Even in a steady state we see part of this issue as people ‘invest’ in shares or real-estate. They hold the value of their wealth as assets rather than money. The assets they purchase only have value because people wish to buy them. If owners of a particular class of assets all try to liquidate this class of asset at the same time, the convertibility to money erodes and the asset loses value. The asset value falls compared to money.

Under a crisis situation, when a few people become aware that goods hold value better than money, our tipping point has arrived. These persons will start to hold everyday goods rather than money. Up to that point, food, goods and services were being produced at a steady state. There is limited flexibility to expand the supply. The increased demand creates shortages. Demand inflating prices for these everyday goods. This is the tipping point that is the beginning of a runaway situation. At this time, people will start to buy useful goods. As the shop shelves empty, the people will buy almost anything that isn’t money. From this point, the vastly increased velocity becomes the main driver of inflation.

So, initially under hyperinflation, we have a mild inflation usually driven by expansion of the Money Supply, some of which increases the Circulating Money. At our tipping point, the inflation becomes driven by increased velocity. This next diagram illustrates the effect of Hoarded Money flooding into Circulating Money. This particular diagram shows an inflation of 300% over a short timespan. This is significantly higher than any government deficit requiring the printing of extra money.

Hoarded Money and Hyperinflation by Andy Chalkley. Creative Commons Attribute.

Hyperinflation always involves Hoarded Money flooding into Circulating Money.

It is feasible to have a hyperinflation without an increase in the Money Supply.

In hyperinflation, we have two drivers of inflation. In the early stages we have a high inflation usually caused by expansion of the Money Supply although it could be caused by a shortage of goods. When this creates a sufficiently high inflation rate, goods become favored over money and a ‘flight from money’ starts. This flight is Hoarded Money flooding into Circulating Money. Shortages occur which pushes the desire to rid oneself of money. By this panic stage, the banks have closed their doors and the government resorts to the printing of Cash Currency to pay its bills. The government neglects to reduce the Money Supply through taxation and other means (confiscation etc). To keep pace, the government goes into overdrive with printing presses to keep the government in the business of government. The situation is almost impossible to stop because there is no mechanism to tax the excess money out of circulation. It is necessary to setup appropriate taxing and slowdown mechanisms before the hyperinflation gets underway. There are methods and I shall have to teach you about them.

A graph of estimated velocity during the Weimar Hyperinflation showing the flight from money in November 1923. Origin unknown. Accuracy unknown. Original source unknown. Adapted from a graph on by Andy Chalkley

In bumpy economic times, the tax collected by the government can fall. Governments are encouraged to implement Income Tax and Sales Tax because this leaves the assets of the affluent untouched. It also leaves the transactions involved with wealth transfer and investment untouched. The Hoarded Money belonging to the affluent also escapes taxation. Income Tax and Sales Tax fall dramatically when business activity falls. Business activity falls when the volume of Circulating Money falls.

A fascinating side issue is that: “Hoarded Money has no value.” Although this may seem to be a silly statement, consider this reasoning: When Hoarded Money is converted to Circulating Money, it dilutes the pool of Circulating Money. Thus, Hoarded Money only has value, when brought back into circulation, if a similar amount of Circulating Money is turned into Hoarded Money. On the limit, a huge resumption of Hoarded Money will destroy the value of all money and may even destroy the money system. Scary will be the day that all the money in tax havens gets churned into the real economy. All money will be destroyed. At a velocity of 1, 92% of money is hoarded. Catastrophe awaits.

Velocity equals One by Andy Chalkley. Creative Commons Attribute.

Hoarded Money has no value.

(Hoarded Money only has value when brought back into circulation, if a similar amount of Circulating Money is turned into Hoarded Money.)

It is necessary to reduce Hoarded Money to encourage a vibrant economy. When there is a debt to money ratio of three, there is $3000 debt for each $1000 in the Money Supply. When 90% of money is hoarded, only 10% of this money is circulating. So for each $100 of Circulating Money, there is $3000 of debt. So for each $100 in circulation there is somewhere between $150 and $300 interest due each year. This makes it difficult to create more money because the debt is already a burden. The burden of the interest on the debt associated with Hoarded Money falls on those that only operate using Circulating Money. A debt to money ratio of three puts a nation close to a collapse scenario.

A graph showing Hoarded Money, Circulating Money, Private Debt, and Government Debt for the USA by Andy Chalkley. Creative Commons Attribute.

A study of the above graph will suggest that the only way to stop a hyperinflation is to remove the Hoarded Money or curtail its use.

Only by reducing Hoarded Money through taxation and otherwise, can debt be reduced under our experimental debt banking system. The Money Supply needs to be controlled for the benefit of the real economy rather than for the benefit the speculators. Money was invented to enable trade between strangers. It was not invented to be stored by hoarders and speculators. Hoarders and speculators do not realize that their hoards rely on circulation to give value to their money.

The hoarders do not realize that their Hoarded Money only has value because there is Circulating Money in a real economy. Any damage to the real economy damages their Hoarded Money. Any big move of Hoarded Money into Circulating Money devalues all money and creates the risk of a hyperinflation collapse. Hoarded Money only has value when converted to Circulating Money if an equal amount of Circulating Money becomes hoarded. I cannot find any reference to this anywhere. Any large movement of Hoarded Money into circulation (as might occur in a crisis) will cause the value of all money to fall. The Hoarded Money is like the buildup of snow on a hill ready to avalanche. It may be a bird that lands on the slope that triggers the avalanche. Hoarded Money creates the avalanche situation necessary to foment hyperinflation.

Hoarding is one of the worst things you can do with money. It completely removes money from circulation. It then requires more new tokens to be released. It is false saving as the Hoarded Money has no value. It creates instability. At high rates of hoarding, the economy becomes extremely sensitive to minor changes in Money Supply. High levels of hoarding enhance the chance of an avalanche collapse into hyperinflation. Hoarding also encourages a competitive hoarding mentality where individual aspirations override community needs to the extent that laws and tax arrangements get biased towards the hoarder. Saving money is an evil, not a virtue. The hoarding of money has become a competitive evil in our current age and the effects of the hoarding are little studied.

This Hoarded Money is like the snow on a mountainside waiting to avalanche. The Hoarded Money is a hyperinflation waiting to happen. If all the money in ‘tax havens’ suddenly came out to play in the real economy, a massive inflationary event would occur, from which we may not be able to recover. We may not be able to neutralize this cascading catastrophe. I discuss how to prevent this.

Consider a situation where 80% of the Money Supply is Hoarded Money and 20% is Circulating Money. If 20% of the Money Supply moves from the Hoarded Money component to the Circulating Money section, the volume of Circulating Money is doubled to 40% of the Money Supply. This has the potential to halve the purchasing power and double the prices. This is commonly reported as an inflation of 100%. This corresponds to a doubling of the velocity. This is ugly enough, but the problem may create a bigger problem. This inflation of 100% may cause the remaining 60% to come out of hoarding and reduce the purchasing power to one fifth of its original value. This would be reported as inflation of 400%. We have moved to levels of inflation occurring during hyperinflation. We have created hyperinflation simply by spending Hoarded Money into circulation. Excessive hoarding is thus a trigger for hyperinflation. Hoarded Money is like the snow on a hill, above a ski lodge, waiting to avalanche.

Hoarded Money is a money avalanche waiting to create hyperinflation.

Hoarding must be stopped to prevent ‘avalanche hyperinflation’.

If hoarding was banned, money would still function as money. Money can be used as a measure of value, but it does not need to be used as a measure of value. Under inflation, or even hyperinflation, money is functioning as money because it is still used as a means of enabling transactions. Under these conditions, it fails as a ‘measure of value’ and fails as a ‘store of value’, but it is still money.

If this vast quantity of hibernating money suddenly got spent into local economies, it would dwarf the volume of money spent in the locality. It would empty the shelves and buy everything in sight. The locals would go hungry. Very hungry.