There is a general pattern for the stages of hyperinflation – the stages of the “death of a fiat currency”. Here they are.
- Government spending gets out of control to where deficit is 40% or more of spending and debt is over 80% of GNP.
- If this is for a war that the markets believe will be won and ended so that the government can make drastic cuts in spending then there is some wiggle room in these numbers.
- The central bank starts buying up government debt with newly made money.
- If they are not naturally inclined to do this the government changes the laws or people running the central bank. (For the rest of this section I will write as if the central bank were just part of the government and ignore bond certificates printed by the government and handed to the central bank as these will become worthless anyway. With this simplification I will just say, “the government prints money”.)
- There is capital flight out of that currency and bond sales fail.
- If the government let bond interest rates rise to attract bond buyers the interest payments on the debt would be huge compared to taxes collected, so they keep interest rates down by printing more money. However, the private investors become less and less inclined to “roll over” their government bonds.
- This goes on for a couple years and with investors moving towards shorter term bonds it becomes clear the deficit is not going back down.
- Government is forced to print money to cover their budget and inflation picks up. The more bonds coming due the worse the printing is. Many short term bonds can make for huge amounts of printing, even more than the regular 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.
- People start to realize that the local currency is not a good store of value, though still used for transactions.
- Some people start to use foreign currencies or gold as a store of value.
- Because so many people take money out of their bank accounts and exchange it for a foreign currency, or gold, many banks are in danger of going under so the government often freezes bank accounts.
- This is very bad for the account holders, both because times are hard and they can’t get their money and also because by the time they are able to get it their money it is worth much less.
- Wages and prices become indexed to something more stable, like a foreign currency or gold…
- Wages become paid more often, like weekly or daily instead of monthly. The velocity of money picks up more.
- People start to use a foreign currency or gold as store of value, even though government may forbid it.
- The black market starts in currency exchange.
- Interest rates are very high and loans are for much shorter periods. Loans may be for a couple of months instead of 30 years.
- Hyperinflation makes for hard times and many people are forced to sell their land or house and, because of these things, the real prices for things usually bought with long term loans can drop in terms of something like gold. Houses can usually be bought with a bag of some foreign currency. ( Real estate is very different during hyperinflation and normal times.)
- People start to use barter or a foreign currency or gold for trade, even though government forbids it. This is a growing black market for commerce.
- If you trade a fish you caught for some potatoes your friend grew, neither of you is paying any taxes on the deal.
- In general once people are breaking the law by using a foreign currency for trade they don’t pay any taxes on trade either. The black market is tax free.
- Being tax free and with better store of value the black market eventually grows larger than the legal market.
- People no longer worry about the government requirement to use local paper currency, enforcement is impossible.
- A business that follows the law and sells for regulated prices in the local currency can not buy enough new inventory and soon goes out of business. This makes the percentage of the economy that is black market go up.
- People start to not want to accept the local paper money.
- Regular taxes are down because hyperinflation has devastated the economy and much of the economy is now in the “black market”.
- The government is finding it hard to buy things by printing money, as so much of the economy has moved to the black market.
- It is finding it hard to pay employees enough for them to live comfortably even though it keeps printing more all the time.
- The government is losing economic power. Tax collectors may be skipping work to tend to their own vegetable garden. There is a very real risk of the government failing at this step.
- At this point the government has some hard choices if it is not going to fail. It needs to do something so that the “black market” is legalized and taxable and deficits are nearly eliminated.
- It could just legalize a foreign currency or gold but then it would forever give up on collecting any “inflation tax”.
- It could get rid of budget deficits and stop printing money but people will still fear that it could start again at any time and so be hesitant to use that money.
I think the most frequent end to hyperinflation is by making a new fiat money but with enough governmental changes that deficits and inflation are under control and people will use the new money. If they switch to a new currency then the old money is no longer used as a store of value, or unit of account, or even as a medium of exchange. It has died.
For more details on the stages of hyperinflation, and historical examples, I highly recommend Monetary regimes and inflation: history, economic and political relationships by Peter Bernholz.
Hyperinflation is not an unusual phenomenon. 32 countries have experienced hyperinflation over the last 100 years of which no less than 21 have experienced it in the past 25 years and 3 in the past 10 years. The United States is one of the few countries to have experienced two currency collapses during its history (1812-1814 and 1861-1865). Could it happen again? Words: 1450
I have been reading a lot lately about the coming hyperinflation in America… [and while] I respect many of the writers [who express that opinion] I think they are jumping the gun. At this point none of the economic or political factors required to set off hyperinflation are present – and a careful analysis of theory, fact, and history leads me to conclude that inflation/stagflation is our future. It is quite a leap of fancy to say we are certain to have hyperinflation. Words: 2780
Many investors are treating inflation as a certainty because the Fed has expanded its balance sheet to unheard of levels through its quantitative easing strategy. Some have even gone so far as to say that this program will utterly destroy the U.S. currency. To demystify this conclusion, I’m going to explain quantitative easing and why the Fed is using this monetary strategy. Afterward, I’ll explain why gold is still positioned to rise even if inflation continues to be low. Words: 786
If inflation starts to head towards 5%, you can be sure it’s headed for 10% because they don’t have the ability to stop it now. The only antidote they have to the mess we are in, which is massively excessive debt reinforced by derivatives, is unlimited money printing. The idea that you can withdraw the punch bowl or sharply raise interest rates, it just doesn’t exist, unless you want to take a complete deflationary collapse.
James Turk believes hyperinflation is ahead. Bob Prechter believes massive deflation is coming. An interesting discussion between the two takes place in this audio. Ultimately, both lead to Depression. Only the route taken differs, but that is important.
The developed economies of the world have opened the money spigots…[and this] massive money and credit creation is sitting in the banking system like dry tinder just waiting for a spark to set it ablaze. How quickly it happens is anyone’s guess, but once it does we are likely to be enveloped in a worldwide inflation unlike anything before ever witnessed. [Let me explain further.] Words: 625
People get confused about the nature of mass inflation, hyperinflation, and what causes both. [Let me clarify the nature and causes of each.] Words: 930
Daniel Thornton, an economist at the Federal Reserve Bank of St. Louis, argues that the Fed’s policy of providing liquidity has “enormous potential to increase the money supply,” resulting in what The Wall Street Journal’s Real Time Economics blog calls “an inflation inferno.” [Personally,] I think it’s too soon to make significant changes to a portfolio based on inflation fears. Here’s why. Words: 550
The economic condition of the country continues to decline toward its rendezvous with an, as yet, unknowable catastrophe. As economic and political matters become more desperate, so will what the government considers acceptable. If a debt default cannot be engineered via continuous inflation, it will occur via a direct repudiation of obligations or a quasi-surreptitious one like the hypothetical one presented in this article…a look (not a prediction) at a series of not improbable events that could develop [and which] would change our economic world overnight. Viewed from this perspective, I don’t think such a move or something approximating it is out of the question. Words: 1300