Reading Up on Hyperinflation

Pragmatic Capitalism has gone some distance towards assuaging my concerns about hyperinflation. In the post PC, unlike so many influential economists, correctly notes the distinction between hyperinflation and ordinary inflation:

Hyperinflation is a disorderly economic progression that leads to complete psychological rejection of the sovereign currency.

Contrary to popular opinion deficit spending and high government debt levels are not the actual cause of a hyperinflation. In most cases they have been the result of other exogenous events such as ceding of monetary sovereignty, war, rampant corruption or regime change. It is these exogenous events that result in the public’s rejection of the currency, a collapse in the tax system and the government response of printing more money to fill in the confidence void. Ultimately the confidence void cannot be filled and the currency is fully rejected by the public in the form of hyperinflation.

and reviews the major cases of hyperinflation over the period of the last century. Based on his review foreign denominated debt is clearly a sufficient cause but not a necessary one since two of the five cases of hyperinflation in the post war period did not involve foreign denominated debt.

I also think that what he characterizes as “regime change” would be better thought of us mismanagement as a consequence of regime change or, in other words, regime change did not cause a failure of confidence in the sovereign currency but mismanagement by the incoming regime did.

Right now we have mismanagement to burn which explains my continuing concern about hyperinflation. In analyzing risk you’ve got to take a number of things into consideration. Among them you’ve got to consider the severity of the consequences in combination with the likelihood of occurence. In my view a number of the factors that have lead to hyperinflation including mismanagement, severe problems with the tax system, loss of faith in government, serious problems with the domestic economy, and a combustible political environment are all in place or have been fulminating for quite some time.

13 comments… add one
  • john personna

    Most hyperinflation arguments are way too shallow. I mean, many operate the on “too much debt(*) equals hyperinflation” level. That may be true, but without an understanding of what “too much” really means, it’s pretty useless.

    * – or money supply

    Or worse, people will borrow “too much” from another discussion. Too much from a simple debt standpoint may be no where near enough for a hyperinflationary trigger.

    I think we are dealing with much simpler kinds of “too much.”

  • PD Shaw

    I knew that several European countries experienced very high inflation rates after WWI, but hadn’t really heard the term hyperinflation applied to any of them except Germany. A quick google indicates prices in Germany were a billion times pre-war levels, while prices in Poland (the next highest) were 2.5 million times pre-war levels. (And I frankly don’t know what any of this really would have meant to the Soviets, who were withdrawing from the world economy anyway)

    The Weimar Republic lacked the legitimacy to do anything since the government was the result of a “stab in the back” while German troops were occupying foreign territory. That type of deligitimization does not seem likely in the U.S., but it’s not impossible.

  • john personna
  • Sam

    Go out and get some of that easy money the Fed has “printed”. There has to be a wage component to hyperinflation, and I just don’t see that part happening. Commodity prices will go up in the near term, but it will push housing further down – and unemployment up until commodity prices go down with deflation fears again. Much more likely than hyperinflation is a long sawtooth shaped recovery.

  • Drew

    I was actually disappointed in the piece, as I perceive an intellectual sleight of hand: he never defined hyperinflation. Is 1%/yr hyperinflation? 5%? 10%? 50%? 1000%?

    One could say that it was implicit: when people lose faith in the currency, but that presents real technical and social problems.

    The whole point of quantity theory is that it rests on the concept of stable velocity, at least over reasonable timeframes. Hence, excess money quantity (above GDP driven transaction requirements) flows through to price.

    In the here and now, the quantity of money has exploded, but low interest rates and banks repairing balance sheets has resulted in lower velocity. Inflation is relatively tame. Imagine if velocity picks up? What would we see in inflation? What if it was perceived that the Fed was going to solve a portion of the national debt problem by inflating it? Would inflation be 5%/yr? 10%/yr? 15%? And can you be sure? And is that hyperinflation? If – just for shixts and giggles – you had, say $20MM in the bank, and its purchasing power was declining by 10%/yr, or $2MM, you might call that hyperinflation. You are wiped out in roughly 10 years. Would you flee the currency (that’s velocity, not wanting to hold cash balances) for perceived hard assets? Would you alter investment decisions? If you were a lender, you could a) reprice loans into the stratosphere or b) not make loans.

    Inflation? Hyperinflation or currency collapse? A currency collapse appears to be the PC definition of “hyperinflation.”

    In the movie ‘The Departed’ the Jack Nicholson -Frank Costello/Whitey Bulger character has a monologue about the relative virtues of cops vs gangsters which winds up with “when you’re looking down the barrel of a loaded gun, what’s the difference?”

    I feel the same way here. If “hyperinflation” is only defined as precipitated by wartime etc and manifested in the tipping point of total collapse of the currency, well, fine. The essay has merit. But if hyperinflation is defined as the point where all types of socially unfortunate outcomes occur: implicit debt abrogation, time financed assets becoming unaffordable, funneling of liquid assets into hard assets or investment abroad…………..”what’s the difference?”

  • If it helps, I’ll provide a definition of hyperinflation (I just finished defining inflation over at OTB so I’m feeling a bit like an economics instructor). Hyperinflation is a general increase in the prices of goods and services that approaches or exceeds 100% over a period of three years. That doesn’t mean it takes three years to tell. Just that a rate of about 25% per year and a vicious cycle is enough to do it.

  • Sam

    you had, say $20MM in the bank, and its purchasing power was declining by 10%/yr, or $2MM …You are wiped out in roughly 10 years

    0.9^10 = 0.35 – not quite wiped out. I imagine you’ll also shift your money into a higher than 0% savings account too, so the amount you’re losing to inflation will be far lower than this. I was getting 4% in my savings account in August ’08. If you’re keeping 20 MM under your mattress then inflation NEEDS to be higher because it should never be worth it to do so.

    If you were a lender, you could a) reprice loans into the stratosphere or b) not make loans.

    And then the velocity will go down, no?

    If velocity doesn’t ever go up, we’re also pretty screwed. So if Ben is doing enough to make inflation hawks nervous about high velocity when it’s low, he’s probably just doing his job.

  • Drew

    “0.9^10 = 0.35 – not quite wiped out.”

    When I wrote it I said to myself “what math nerd is going to come on and correct the declining pct of balance ” so I added “roughly”……….and now I know.

    “the amount you’re losing to inflation will be far lower than this.”

    And real rates right now are? Also: think three words – risk adjusted return – and get back to me.

    This is dancing on the head of a pin. If you want to make a case for inflation, quit farting around and do it.

  • Sam

    If you want to make a case for inflation, quit farting around and do it.

    I’m not making the case for inflation in general as much as I’m making the case for Fed-induced fear of inflation in some people being o.k. when inflation is low or negative. Higher inflation is also something that has a more straight-forward and agreed-upon prescription than what we’re dealing with now.

    My other point there is simply to call you out on your long period of inflation / hyperinflation equivalence. At 10% inflation the risk averse will probably be earning 8-9% in a savings account. In hyperinflation banks will just shut down because you’ll be bartering for guns with coal from your mine and heating your house with bails of US dollars. It’s really not equivalent at all.

  • john personna

    At 10% inflation the risk averse will probably be earning 8-9% in a savings account.

    That’s more than enough to bring back real estate as an investment.

  • Drew

    Well, for this paragraph I’m reminded of the “if a thousand monkeys typed for years we’d have Shakespeare…..”

    “I’m not making the case for inflation in general as much as I’m making the case for Fed-induced fear of inflation in some people being o.k. when inflation is low or negative. Higher inflation is also something that has a more straight-forward and agreed-upon prescription than what we’re dealing with now.”

    “My other point there is simply to call you out on your long period of inflation / hyperinflation equivalence. At 10% inflation the risk averse will probably be earning 8-9% in a savings account.”

    Really? Priced TIPS recently? Looked at Treasuries vs real inflation? Don’t bother responding to me, call Bill Gross; if he takes your call you’ll be hired for millions…….

    “In hyperinflation banks will just shut down because you’ll be bartering for guns with coal from your mine and heating your house with bails of US dollars. It’s really not equivalent at all.”

    Dumb response. My entire point was that we reach – and have to define, as the essay quoted did not – a tipping point. Dave proffered 15%-20% at OTB. You? 5%? 10% 20% 100%? When do societal norms get warped? And when do the banks shut down?

    Yer just jerkin’ off.

  • Sam

    Really? Priced TIPS recently? Looked at Treasuries vs real inflation?

    My bank is giving me 1%. cpi with food and gas is 2.1%, but underlying inflation is still only 1.1%. Back when we were running closer to 4% CPI my savings account was pretty close to that as well.
    I’m not buying it if you think shadowstats.com is real inflation.

    5 year tips have a negative yield because people are expecting about 2.7% inflation and overall low real yield on treasuries is due what I like to call “fear premium”.

    My entire point was that we reach – and have to define, as the essay quoted did not – a tipping point.

    What makes you think 10%+ inflation wouldn’t be Volkerized like in the 80s? Purposeful inflation doesn’t help the U.S. debt situation at all in the future since it’s all Medicare and SS which are indexed to inflation or higher anyway.

  • john personna

    What would the government have to do, to allow inflation without paying high interest rates? They’d have to flood their own auctions, wouldn’t they? Rather than QE1, QE2, it would just be QE(n) from there on out.

    Pretty extreme, and unlikely, imo.

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