Friday , 20 October 2017


15 Questions & Answers Regarding Hyperinflation

So writes Vincent Cate (http://howfiatdies.blogspot.ca)in edited excerpts from his article* entitled Hyperinflation FAQ as posted on Seeking Alpha.

This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Cate goes on to say in further edited excerpts:

The statements or questions below are in bold and my responses follow.

1. How is hyperinflation defined?

The International Accounting Standard of IAS 29 says there is hyperinflation when “the cumulative inflation rate over three years approaches, or exceeds, 100%.”This works out to 26% per year….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.

2. Is there a real chance the U.S. dollar could get hyperinflation?

Hyperinflation happens when government debt is over 80% of GNP and the deficit is over 40% of government spending. The U.S. is at or near these numbers, so the danger of hyperinflation is real. What happens is that the more the central bank prints money and buys bonds the less other people want to hold bonds – but the less other people hold bonds, the more the central bank has to buy them so the government has enough money to spend. You get a positive feedback loop or death spiral.

3. Could a government or central bank decide to have hyperinflation?

In over 100 cases of hyperinflation I don’t believe there has ever been a single “decision to have hyperinflation”. Hyperinflation is when things get out of control. It is not something central banks or government voted on….Nobody votes for hyperinflation. Nobody wants it. It just happens.

4. Why would the Fed suddenly print trillions of dollars?

There can be a panic to get out of bonds. There may be $3 trillion in bonds coming due in the next 12 months that might not get rolled over if people started not trusting bonds…There is also the “excess reserves” of around $2 trillion that are earning interest, much like government bonds really. The current deficit of around $1 trillion would also have to be financed with new money if nobody but the Fed was buying bonds. Altogether this would be something like $6 trillion over 12 months.

5. Has hyperinflation ever happened in America?

There were cases of hyperinflation in America’s colonial period. There was hyperinflation during the Revolutionary War (remember, “not worth a Continental”?) and in the South during the Civil War. I also think that if the U.S. had not made it illegal to own gold in 1933 that the Fed would have gone bankrupt because they did not have enough gold to back all of the notes they had issued, and that paper money would have become worthless then too. Hyperinflation is more common than most people realize. The time periods from the Revolutionary War hyperinflation, to the Civil War hyperinflation, to the 1930s currency crisis, to now, are all similar. To me this looks like some major currency crisis cycle is about due.

6. What is the math for hyperinflation?

The math for hyperinflation starts with the equation of exchange and with one transformation you get:

P = M * V / Q

Where the variables are:

P = Price level

M = Money supply

V = Velocity of money, how many times money turns over in a year

Q = Real GNP

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.

7. What comes first, hyperinflation or money printing?

People will argue things like, “it is not the monetization that causes the loss of confidence, it is the loss of confidence that causes the monetization”. While someone else argues the other way. I have also seen both sides of, “hyperinflation causes money printing, not money printing causes hyperinflation”.

Hyperinflation is really a positive feedback loop. It is a circle, a death spiral. To argue about what comes first in hyperinflation is a bit like arguing which came first, the chicken or the egg.

8. Why can’t you stop hyperinflation by just having the central bank stop monetizing debt?

It seems obvious that if you just have the central bank stop buying government debt the hyperinflation would stop. 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 is bankrupt.

9. Could the Fed cause hyperinflation on its own?

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.

10. Isn’t hyperinflation a political event and not a monetary event?

The root cause of hyperinflation is politicians spending far more than they get in taxes. In this sense hyperinflation is a political problem. However, I think Milton Friedman was right when he said “inflation is always and everywhere a monetary phenomenon”….

I think the idea that hyperinflation, where the monetary unit rapidly becomes worth less and less, is not a monetary event is not only wrong but dangerous. This wrong idea keeps people from understanding what is really going on. For example, Modern Monetary Theory (MMT), as it stands, does not explain hyperinflation. They do not see any tipping point, positive feedback loop, sudden risk, or danger of inflation getting out of control. They think that you could always just make a bit less money if inflation got too high. Instead of admitting the problem with the theory (lots of experimental evidence of inflation getting out of control) they just say hyperinflation is a political event not a monetary event. This is like science with a bit of magical thinking – just wrong.

12. Isn’t the U.S. very different from Wiemar Germany or Zimbabwe?

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…[only] 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 [that] 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 U.S. 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 U.S. 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.

When a country gets hyperinflation there are a number of stages it goes through. Things are very different as hyperinflation progresses.

13. In a hyperinflation scenario would the U.S. dollar fall relative to other currencies?

Other countries have all sorts of problems too, so the US dollar may not drop against those other currencies. Hyperinflation is not really about exchange rates. If the Pound, Yen, Euro, and Dollar were all getting 26% inflation the exchange rates could stay the same but we would still have hyperinflation.

14. Where do the debt 80% of GNP and deficit 40% of spending numbers come from?

Bernholz did a study of 29 cases of hyperinflation and looked at the circumstances that lead up to them. He found that the best predictor of hyperinflation were these numbers for debt and deficit.

15. Can hyperinflation happen to the USD – the world’s reserve currency?

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 [so, yes, hyperinflation can happen to the U.S. dollar].

Concluding Thoughts

While fiat money is created out of thin air, no alchemy yet can make gold out of nothing. So while any paper money always has some risk of becoming worthless, the same is not true for gold and silver. So let me conclude this first article by saying that when fiat money is at risk of failing, the “hard money”, gold and silver, seems to do well.

Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://seekingalpha.com/article/1137071-hyperinflation-faq

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One comment

  1. RE: Could the Fed cause hyperinflation on its own?

    Behold, to me it seems like they are doing their best to avoid it but by not changing their tight money lending practices to average Americans they are going to make it a reality!

    Greed of the Ultra Wealthy, is pushing the USA toward yet another conflict we cannot afford, and that conflict may be between those that have and those that have not! Many believe that the First Financial Civil War (FFFCW or F3CW) has already begun and the middle class was its first victim!