Friday, October 19, 2012

FAQ for Hyperinflation Skeptics

This FAQ is for the frequently asked questions or objections common among hyperinflation skeptics.  The statements or questions in bold below are things hyperinflation skeptics say and my responses follow.

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.   There are many other definitions for hyperinflation but they almost all have something like "inflation over X per year" or "inflation over Y per month". People pick some level of price inflation as the cutoff between regular inflation and hyperinflation.  It is just the values for X or Y that differ.  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.  

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.  Most of the time such a currency dies within a few years.  That is where the name for this blog, "How Fiat Dies", comes from.

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. 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,  death spiral, chain reaction, tipping point, like an avalanche.    The setup has also been called a debt bomb.  Once the conditions are right, it can just go off.

The government or central bank would never 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. No group in any government or central bank has had a show of hands like, "all in favor of hyperinflation raise your hands". Not the way hyperinflation happens.  Hyperinflation is a market response sometime after government debt over 80% of GNP and deficit over 40% of spending.  The central bank starts printing money and buying up government debt to help lower interest rates.  But the more new money they make to buy bonds the less people want to hold bonds.   The less people want to hold bonds the more money the central bank has to make to try to control interest rates, and so that the government can keep in operation.  You get a feedback loop that goes out of control.  Nobody votes for hyperinflation. Nobody wants it. It just happens.

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 (I am trying to nail down how much short term the public holds, separate from the Fed and Social Security).   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.

Hyperinflation would never happen in America!  
There were cases of hyperinflation in America's colonial period.   There was hyperinflation during the Revolutionary War.  Remember, "not worth a Continental"?  There was hyperinflation in the South during the Civil War.     I also think that if the US had not made it illegal to own gold in 1933 that the Fed would have gone bankrupt, because they did not really 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.

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 tripple wammy that drives prices up really fast.

You have the cause and effect backward!
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. 

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 will fail.  If it can not pay its employees then nobody will show up for work and the government will collapse.
How could the Fed on its own cause hyperinflation?
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.

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.   It is correct to say that, "hyperinflation is always and everywhere a fiscal phenomenon".  In this sense hyperinflation is a political problem.  However, I think Milton Friendman was right when he said "inflation is always and everywhere a monetary phenomenon".  First off, hyperinflation is a process that can go on for years, not an event.   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.  For example, Modern Monetary Theory (MMT) as it stands does not explain hyperinflation.  They count bonds as money and monetization as "just an asset swap".  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 their theory (lots of experimental evidence of inflation getting out of control) they just say hyperinflation is a political event not a monetary event.      


The US is very different from Weimar 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.  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.

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

Other countries are even worse off than the US.
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.

There has never been hyperinflation of the world reserve currency before!
I have two contradictory answers for this one.  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.

The second answer is that the world reserve currency in Roman times had hyperinflation as they put less and less silver in the coins.  Please use whichever answer you like and ignore the other.  :-)

A helpful reader on reddit  said, "As soon as the Romans declared that the value of their coin was divorced from the market value of the silver those coins became fiat currency. So your first explanation holds for the roman situation too."

Why would the US central bank willingly destroy their currency?
If the Federal Reserve Notes become worthless then the Federal Reserve is probably done for, so why would they ever do such a thing?    Sounds logical.   But why did  that same logic not protect all  the other central banks from making hyperinflation?  The government writes the laws, appoints the people to the central bank, and controls the guns.  When the government is desperate for money from the central bank they get it.   But also remember that the central bank is created by the government.  If the government collapses  because  it does not have enough money to pay for things, the central bank will probably go down as well.  The survival of the central bank does depend on the survival of the government.   I think this is the core of why central bankers risk their currency to support their governments.

Don't we need more stimulus now and worry about the debt later?
The standard definition of GNP includes government spending.  So more government spending can increase the GNP number in the short term.  But it is not really helping and hurts in the long run.   In general anything that makes your government bigger hurts in the long run.   The government is an overhead on the productive parts of society.  The more the overhead the slower the long-term growth rate

How could the US dollar get hyperinflation as long as international commodities are priced in dollars?
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.  But it does seem doubtful that people would keep selling things in dollars if dollars are failing fast.  As fewer and fewer things are priced in dollars there will be less and less demand for them.  So the end of the dollar dominance will contribute to the hyperinflationary pressure.

If you can't predict the exact timing then you are no help to investors!
Hyperinflation is sort of a slow motion panic where people get out of bonds and then out of the currency altogether.  But as a human panic, it depends on humans, so 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.

But our government is just borrowing, not printing and spending!
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.


We have been at these debt levels after WWII and there was no hyperinflation.
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.


Deflation is as big a danger as inflation.
 The graph below shows that when the US was on a gold or silver standard the probabilities for price inflation and price deflation were similar.  However, after 1933 when the dollar partially moved away from gold there was little deflation.  After 1971, when the dollar became completely unbacked, there has been no more deflation.   It is wrong to use statistics from a time with gold money to predict dangers under a pure fiat money.  There have been 56 cases of hyperinflation with more than 50% per month inflation (12,970% per year).  There has not been one single case of double digit price deflation in a pure fiat currency (with no link to gold or silver nor returning to either). In pure fiat money the probability of price inflation is far higher than that of price deflation.

Most of the people predicting deflation are not even predicting price deflation, just a reduction in the money supply plus credit.   Hyperinflation destroys retirement funds, destroys life insurance values, and makes salaries not keep up with the cost of food and energy.   A reduction in the amount of credit that does not even impact prices is a non-event compared to hyperinflation.



Doesn't the deleveraging of huge private debt prevent hyperinflation?   Can you have deflation and hyperinflation at the same time?

If you define inflation and deflation in terms of the money supply, and you count bonds as part of the money supply, then you predict deflation when people are deleveraging.   Many people seem to see deflation coming, by this definition, and think that means you can not get hyperinflation.  This is not correct.   Hyperinflation is defined in terms of "price inflation" not "money supply including credit".  At the start of all hyperinflations bond values crash, so this definition of deflation will be met even as prices are shooting up.  So it is common to have deflation and hyperinflation at the same time, initially.  If inflation is 5% per month then a bond that pays 2% per year for 10 years is worth less than a penny on the dollar.  The bond collapse happens fast and the hyperinflation can go on for awhile.  History books will later say it was hyperinflation, not deflation. 

Bernanke says he is just temporarily monetizing debt.
You should not believe him.   He has to buy more and more to keep interest rates low enough that the government can handle the huge debt.  If he tried to sell the bonds he has the interest rates would shoot up and the government would not be able to afford the debt.

Can you simulate hyperinflation?
Yes, I have a nice web based simulation of hyperinflation.   The feedback loops of hyperinflation are a natural for simulation.   You can play with the inputs and see which ones end up making hyperinflation.  You can also clone the model and make any kinds of changes you want.  Please credit me if you do copy my work and publish it someplace.  People can easily use Google to see my very similar hyperinflation simulation, so it is probably not possible to steal it and get away with it.  :-)

If there is hyperinflation what makes you think you would be able to buy food with gold or silver? 
People will say, "you can't eat gold, what good is it?".   But commerce still goes on during hyperinflation.  In historical cases of hyperinflation people move to barter or selling in more stable currencies from another country, or gold and silver.  They do this even if it is illegal or "black market".  They do it even when people are getting their heads chopped off for selling things for gold instead of paper money.  To understand why this happens imagine two different store keepers, one that sells for gold and one that is selling for local hyperinflating paper money.  The one who has gold can go to his supplier a week later and his gold is worth enough to buy a new set of merchandise and stay in business.   The one who sold for paper money may find that his money is worth half as much next week and he can not buy a full set of merchandise, so he soon goes out of business.     If only those that ignore government rules to use paper money can stay in business, the fraction of the economy that is "black market" grows as hyperinflation gets worse.

Hyperinflation is for failed states and the US is not a failed state.
Not all hyperinflations are in failed states.  The US got hyperinflation as they won their independence.  However, there is certainly a high correlation between failed states and hyperinflation.   For a state where half of its spending power comes from taxes and half comes from printing money, it should not be surprising that as the currency fails the state fails.    Since paper money is issued by a state it is not surprising that the paper money is worthless after that state fails.  The question is, is it the failure of the state that causes the currency to fail or the failure of the currency that causes the state to fail?   The truth is that they often go down together.   Before they have failed they can both seem fine. 


They have printed trillions without trouble so far, why would more be different?
It may help to read the storey about the straw that broke the camel's back again.  There are situations where a small amount of something is ok but lots is not.  There are lots of medicines that are helpful in small doses but deadly in large doses.  If 2 people go walking on some ice they might be fine but 50 people walking in the same area might break through.  Hyperinflation has a human element.  There is sort of a panic to get out of the bonds and then a panic to get out of the currency.  It is hard to say exactly when the panic will start, but I don't think anyone ever prints more than the GNP in one year without getting hyperinflation and certainly not 3 times the GNP.

Isn't the Fed trying to push money out like trying to push on a rope?
Some note that the Fed can not give money away or spend it and that banks only want to lend to  credit-worthy businesses but those and consumers are still deleveraging.  So then how can the Fed push money into the economy? The government has no real limit on the amount they can borrow and spend.  They have a debt limit but they increase it anytime they get close, so it is not a real limit.   This government deficit spending, financed by the central bank making new money, is the real source of inflation.

Can't people just switch to another currency?
When there is hyperinflation in one country, say Zimbabwe dollar, the people there can switch to some other currency, like the US dollar, and life goes on.  This is called dollarization.  The government will probably fight this but people will still do it.   However, the world reserve currency is already dollars so switching to dollars is not an option.

If any major currency enters hyperinflation (Yen, Pound, Euro, Dollar) then plenty of people will start to worry about other similar major currencies (ones with large debts and deficits in their home countries).   People will flee bonds in these others, just to be safe.   This will cause the others to enter hyperinflation.   So soon after one major currency enters hyperinflation some other major ones will too.   So even the idea of people in the USA using Euros, Pounds, or Yen won't work out.

Another problem is that the central banks running other currencies use US dollars and other major currencies as reserves.    If they want to prop up the value of their currency they spend some dollars buying their currency and their currency goes up.  But if US dollars and their other reserves become worthless, then they will not be able to hold up the value of their own currencies.  So as the major currencies enter hyperinflation, currencies that use these major currencies as reserves will also enter hyperinflation.   This is nearly all paper money.

After the major currencies are in hyperinflation and the ones that use them as reserves are in hyperinflation even others will enter hyperinflation.    Even many currencies that are well run with governments not near the normal hyperinflation debt and deficit levels and not with reserves in dollars will be in trouble.    The distrust of paper money will be far greater than now so it will not take as much for people to flee a particular paper currency.  I would not be surprised to see international commerce clearing in gold, though within many countries I expect paper money will still be used.

There is no danger of hyperinflation as long as we are in a liquidity trap.
A liquidity trap is where even though the central bank has forced interest rates down near zero people are still paying down debts and not borrowing and spending.  In hyperinflation people are not in a hurry to pay off debts and are in a hurry to spend.  So by the definitions if you are in a liquidity trap you are not having hyperinflation.   The problem is that the liquidity trap could end next month or next week.  People might get worried about inflation, stop rolling over their bonds, and buy inflation hedges at any time.  There is no long term safety from calling the current situation a liquidity trap.  Hyperinflation often comes right after deflation.


Why would it matter if the US dollar was no longer the world reserve currency or oil was not priced in dollars?
Currencies are fungible, in seconds you can exchange any currency for any other currency, so you might think it does not matter what oil is priced in.   The US military burns lots of oil.  Right now the US can just print some money and get as much oil from the Arabs as they want.  If they could not do this but had instead to tax their people to get the money to buy oil it would be much harder.   Anyone who has an option to buy some amount of oil at some price in dollars 6 months from now will usually save up the money in dollars.   While they could save up the money in some other currency, there is a risk that the currency fluctuations over the next 6 months will be such that what they saved is not enough to buy the oil at that price.   So they can eliminate this currency risk by saving in dollars.   Having international commodities priced in dollars increases the demand for dollars.   If the Arabs and Chinese no longer took US dollars there is a good chance the US dollar would be headed for hyperinflation right away.

Bonds are money so monetization does not increase the money supply!
With most definitions of the "money supply" when the central bank makes new money and buys bonds the money supply is increased.  However,  there are some definitions of "money supply" that include government bonds.  With such a definition, monetizing government debt (exchanging new money for government bonds) does not increase the money supply.   So it may seem that by choosing this definition of the money supply that monetizing debt does not matter.

However, the price level should be understood from the equation of exchange.   It is not only the quantity of money but also the velocity of money and GNP that determine the price level.  If Grandma was holding a 30 year bond for the last 25 years and then sells it to the central bank (monetization) she then has cash.    The velocity was really low (not moving for 25 years) but now she can spend it and the velocity will be that of regular cash.   So the velocity is far higher.  When this is done with a trillion dollars worth of bonds you get a far higher average velocity of money.    With a money supply definition that includes bonds, hyperinflation is mostly about increasing money velocity.

With this type of definition of the money supply then deficit spending, which is financed by creating new bonds, is the reason the money supply is increased.     So the size of the deficit tells you how fast the money supply is increasing.   Here the blame for hyperinflation is put more on government deficits and less on the central bank.   Remember always that hyperinflation needs both deficits and monetization.    In this view, as long as the deficit is out of control the money supply is out of control.

While there is some flexibility in how you define the money supply, a correct view of reality has to match the many many historical cases of hyperinflation.   In historical cases of hyperinflation, monetization is the key part of what is going on, so it must make a difference in any correct theory.


Why worry about the debt when interest rates are so low?
 The interest on the national debt is a big item when interest rates are at record lows.  When interest rates get back to normal levels the interest on the debt will be clearly unsustainable.

Can't we wait till there are signs of inflation before doing anything?  Inflation should be a continuous function not a sudden tidal wave.  How can you worry about hyperinflation when things currently look more like deflation?
Deflation often comes before hyperinflation.  Deflation should really be viewed as a precursor to hyperinflation and not a blocker of hyperinflation.

Because the hyperinflation feedback loop is so strong it is hard to escape hyperinflation once it is started.  It is much easier to prevent it than to halt it after letting it start.  In other words, if you wait till hyperinflation starts it is probably too late.  Hyperinflation really does hit like a tidal wave.   It is not just a bit more regular inflation where the dials of monetary policy can be adjusted.  Things can flip from deflation to hyperinflation in a short period.

Couldn't the same method Volcker used to stop inflation stop it this time?
No it can't.  If interest rates got to Volcker levels then the interest on the debt would use up all the taxes collected.  If this happens nobody would want to buy US bonds so the Fed would be buying everything.  So newly printed money would have to be used for all non-interest budget items.   The quantity of new money would be high enough to cause hyperinflation.   The Fed can not let interest rates go up without making the government obviously bankrupt but if it tries to keep interest rates down then inflation will keep going up.   It ends badly either way.

There is no way people could panic out of bonds as there is nothing else big enough to absorb that much money.

Most of the value of bond market just goes away. If you have a 30 year bond at 3% and suddenly there is 5% inflation per month, the value of the bond is less than 1 penny on the dollar. The 99 cents are not absorbed into anything, just gone. 

When hyperinflation starts people buy real things.  This might be extra cans of tuna, a piano, land, gold, silver, etc.   In hyperinflation you can see things like a trillion dollar bill only buying 3 eggs.  So the idea that there is not enough real things to absorb the value of the bond market is wrong two ways.  First, the bond market value collapses.  Second the currency value collapses.   I think it is foolish to believe it can't happen when it has happened so many times before in the history of paper money.


Your theory that debt over 80% of GNP and deficit over 40% of spending results in hyperinflation is contradicted by Japan's case, so science says we must throw out the theory.
Economics is not an exact science.  If in 40 cases those numbers resulted in hyperinflation and in one case it has not yet resulted in hyperinflation, then the numbers should still be viewed as a good predictor of hyperinflation. Also, if Japan gets hyperinflation in 2013 then even this outlier will be gone.

Advanced Western democracies don't get hyperinflation.  But of these Japan is way ahead of the US.
Part of the idea here is that Japan has been a mess for 20 years so probably the US has lots longer till hyperinflation.   Since the debt level is so high and the politicians seem to be taking control of the central bank now, there is a good chance that Japan does get hyperinflation first.   The myth that advanced democracies can't get hyperinflation will be shattered if Japan does get hyperinflation.  Once this myth is broken people will not be so confident that the US is safe.   So they may start getting out of US government debt.   This could start the hyperinflation feedback loop for the US.   Sovereign defaults seem to trigger other sovereign defaults, hyperinflations may also.   When investors have lost money on one government's debt  they are less willing to leave their money with others.  So Japanese hyperinflation could well cascade to other countries, including the US.

Hyperinflation and even inflation predictions have been wrong so far, why take them seriously?  How is it they have printed so much money so far and had hardly any inflation?
It is certainly true that anyone predicting hyperinflation of the US dollar before Sept 1, 2012 was wrong.   This does not mean that all predictions of US hyperinflation are wrong or nonsense.   It seems that all fiat money will come to an end at some point, it is just hard to say when.  Note that anyone predicting price deflation in the US has also been wrong.

The equation of exchange is not just some quack idea.  It is a core economics formula that is always true.  With this formula it is very reasonable to expect that prices will be going up if the money supply is increased substantially.   There are 2 main factors that have fooled people.   The first is that the way they increased the money supply was by buying bonds, which lowers the interest rate, which lowers the velocity of money.  As the equation of exchange shows, a lower velocity of money can compensate for an increase in the money supply, for awhile.   The second big reason the inflation predictions were wrong is that Bernanke had a new trick of paying interest on excess reserves.   This has kept about $2 trillion in new money from really leaving the Fed.   If you make new money but don't let it out of the building it does not cause inflation.  People have not yet adapted their models to this new trick.   I believe the right adaptation is to view the excess reserves as part of government debt.  If you do this then the model will fit with low inflation so far but increased risk of hyperinflation as the government debt is really $2 trillion larger than people realize.

It might seem that paying 0.25% on excess reserves would not be enough to get banks to leave money at the Fed.   But the Fed has so suppressed short term interest rates that this is actually a reasonable choice for a bank to keep some "risk free" and "liquid" money.


What causes the velocity of money to slow down or speed up?
The interest rates affect the velocity of money  and inflation rates affect the velocity of money.   If money earns 0% and inflation is 0% there is no hurry to get it to the bank or spend it.   If money is earning 20% you don't leave it under your mattress but put it in the bank where it moves on.  When prices are going up 20% per day you run from where you get paid to where you will spend your money.    The initial response to a central bank printing lots of money and lowering interest rates is for the velocity of money to go down.  This means that for awhile prices don't reflect the new money.  One of the positive feedback loops in hyperinflation is that as prices go up the velocity of money goes up, which further drives prices up, which further drives up the velocity, etc.


But the US central bank is different!
There have been over 100 cases where the combination of a government spending way more than they got in taxes and a central bank printing money and buying their debt to help them out (often after changes in law or leadership) caused hyperinflation. What is the core difference in the US government or US central bank that anyone could think sets them apart from these 100 cases?


Could the US gold prevent hyperinflation of the US dollar?
 Having assets could slow the hyperinflation a bit but it does not matter how much gold a country is holding if they are spending twice what they get in taxes. They will have to keep printing money, so there is not a finite amount of paper money.  With a constantly increasing quantity of paper money it is not possible to hold any fixed exchange rate of dollars to gold. It is the debt and deficit, and the fact that government will always get the central bank to print money and buy government bonds when things get desperate, that causes hyperinflation.  When France took the extensive church land holdings and used that to back a currency they still got hyperinflation.   If assets could prevent hyperinflation France should have been safe, but they were not.   The ongoing deficit meant there was not a finite amount of paper money.   I highly recommend this article on France's experience. A more recent example is hyperinflation in Iran even though they have huge amounts of oil, which should have protected them if gold could protect the US.

Even though the Fed is making lots of money the banks are just hording it so there is no inflation.
The Fed is making money and loaning it to the banks who are then using it to buy Treasuries or earn interest from the Fed on their excess reserves.  In both of these two ways for the banks to earn interest the money is out of circulation.  However, the government is spending the money it gets from selling the Treasuries.   And at some point the banks will be able to earn higher interest loaning to companies and people who will put the money into general circulation.   Then they will redeploy their excess reserves and the money from Treasuries as they come due.

To get real hyperinflation you need lots of paper money and most US money is just electronic.
Anyone with electronic money can withdraw paper money.  The banks with electronic money at the Fed can withdraw paper money.  If the Fed did not have enough paper money they would have to print more.  Since electronic money can be converted to physical paper money, there is no real difference. 

The Fed could not print money fast enough to counter the deflationary forces.
In Zimbabwe they printed $100 trillion dollar notes.   Clearly the Fed could easily print $1 million, $1 billion, and $1 trillion dollar notes and buy up all  private and government bonds.  Since the Fed usually works on computers, it is even easier than printing up paper.   This would overpower the deflationary forces.

Hyperinflation is usually just a few bad years, why worry about it?
Hyperinflation destroys the middle class.  Saving are wiped out, retirement funds are wiped out, life insurance policies are worthless, etc.   It destroys the economy.   In Germany it arguably lead to Hitler coming to power and much more than a couple bad years.  In any case, it was so bad that generations later Germans still fear hyperinflation.

Why does it take both a large debt and a large deficit to get hyperinflation?
If a government just had a large debt but no deficit it could default and be fine, since it does not need to borrow.   Having lenders hate it is ok if it does not need to borrow more.   If it had little or no debt people would be happy to loan it money even with a large deficit.  When a government has both a large debt and a large deficit, such that nobody wants to loan it any more money, then it must get the central bank to make money and hand it over.

Could the US avoid hyperinflation by defaulting on the debt?
If hyperinflation comes from a large debt and deficit, why not just default on the debt?   Instead of printing lots of new money if people stop rolling over bonds you could just decide not to pay them.   Since a large part of the debt is held by foreigners they might just say they are defaulting on the debt held by foreigners, which would reduce the effective size of the debt to levels that are typically manageable.    The problem is that nobody would buy more bonds except the central bank.  After burning some or all of the bond investors you don't get more bond investors.   So then the full deficit has to be funded by newly made money and you get hyperinflation anyway.


Why would people ever stop buying US Treasuries?  How could there be a "bond panic"?
The yield is less than the inflation rate.  It is a guaranteed loss in real terms.  The Chinese yuan is going up in value compared to the dollar and has a higher interest rate.  The US rates have been going down for more than 30 years and are now near zero thanks to the central bank making lots of money and buying bonds.  All this new money will probably push the inflation rate higher.   If interest rates start going up then bond values go down.  Many of the bonds are held by traders, not long term investors, who have been speculating that the Fed would drive up bond prices.  If the price of bonds starts going down then many people will sell.   This will cause the price of bonds to go down further, which will in turn cause more people to sell.  So you can get a positive feedback loop or bond panic.

The deficit is about 10% of GDP not close to 40%!
The 40% number is 40% of government spending, not GDP.   If the government spends twice what it gets in taxes, then the deficit is 50% of spending.


The US deficit is not really 40% of spending.
At the moment that is correct.   From 2010 to 2013 spending has been stable and taxes have gone up so the deficit is smaller (see graph above).  But a rise in interest rates or another recession could easily put it over the 40% number.  So while hyperinflation is not guaranteed, the US situation is far from safe.

Quantitative Easing is different than printing money!
I have a collection of over 100 euphemisms for "printing money".   If the Central Bank is making new money and buying government bonds it is monetizing debt.  It is replacing bonds with new money.   It does not matter if they do it on computers since money on computers can later be withdrawn as paper money.

I can see inflation in "debt free money" but how does it work in "debt money"?
If the central bank prints money and loans it into existence, some people call this "debt money".  The idea is that money comes into existence with a debt which should take it back out of existence when the debt is paid back to the central bank.  If the Treasury just printed money and spent it they call that "debt free money".  Clearly if the Treasury just printed and spent money you would get inflation but how does it work with "debt money"?  The key to understanding this is that governments don't really pay down their debts.  The way they pay back old bonds is by first selling new bonds.   If the government never really pays back the central bank then there is no real difference between "debt money" and "debt free money", at least as far as the government use of it.

Why not have the Treasury mint some $1 trillion coins?
This would be very inflationary.  Even if the coin "does not circulate", once it has been deposited at the Fed there will be $1 trillion more in paper or electronic money that can circulate.  So the base money supply would go up by $1 trillion.   If the politicians are able to make $1 trillion without destroying things then you should expect them to make another and another.  It is foolish to think they would stop at one.

There is a saying something like, "the only thing worse than a currency run by a central bank is a currency run by politicians".   Once the politicians get the ability to make money or outright control of the central bank, then the central bank can no longer control inflation.  This typically seems to happen shortly before hyperinflation starts.   If they can get money just by making it then controlling spending no longer seems important.  Very soon the money making and spending grows fast enough that people will want to get out of bonds.  As people get out of bonds the government will have to make more money.   The more they make the less people will want to hold the bonds and eventually even the currency.   You get a positive feedback loop or death spiral and the currency goes down.

The law says "platinum bullion coins".   A bullion coin is one where the value is determined by the quantity of precious metal.  This is different than fiat money where you can stamp any quantity you want on it.   So probably making a coin and stamping $1 trillion on it is illegal.   However, I would not count on that stopping this from happening.

The demand for money is unlimited, particularly the world reserve currency, so people will always want it.
There is no guarantee that the US dollar will continue to be the world reserve currency.  If it starts to get hyperinflation it would quickly go from the majority of foreign central bank assets to a minority just because the value dropped, even if the banks did not sell any bonds or dollars.

People want money for what they can buy with it.  As long as it can buy something they will want it.   But if it is dropping in value fast they will buy fast and not hold the money for a long time.   The usual end result of hyperinflation is that you can not buy anything with that currency, so nobody wants it.

There are no bond vigilantes so nothing to worry about.
If a currency is at risk of hyperinflation then even if the bond values drop people shorting them can lose.  The problem is that they win in dollars that are worth less in real terms.   So shorting bonds when there is a risk of hyperinflation does not work well.   This may be  why there are so few bond vigilantes.

The bankers control the Fed and it is against their interest to have hyperinflation.
The government really controls the Fed, just like in all the other cases of hyperinflation.  When the government is faced with a choice of closing its doors because it can not pay people or forcing the central bank to buy government debt they never choose to close their doors.  Note that if the government shuts down the central bank will shut down too.   So it is actually in their interest to prop up the government by buying their bonds.

You can't have hyperinflation when house prices are falling.
The idea is that during hyperinflation the price of everything must go up fast, so clearly with asset prices falling we can't have hyperinflation now.   This is not accurate.  You might argue that we don't have hyperinflation yet but this in no way protects us from having it in the next year or two.  Also, at the start of hyperinflation when interest rates have first shot up the asset types that are bought with long term loans will drop in value because you will not be able to get long term loans any more.  Eventually, when houses are bought with cash, house prices will go up with everything else.

You can't have inflation when there is high unemployment.
The 1970s proved this is not true yet many people continue to believe it. High unemployment is normal in hyperinflation.  The economy is a mess.

But there is no inflation.
The CPI shows little inflation.  However, it does this by averaging in things like housing prices that are going down with food and energy that is going up.  The average person who is not buying a house just sees the inflation.  Also, when the central bank first starts printing lots of money and buying bonds it lowers the interest rate and lowers the velocity of money.  A lower velocity of money can compensate for an increased quantity of money, so at first prices don't go up.  But eventually they will.

Low interest rates prove the market is not worried about hyperinflation.
The current low interest rates are because the Fed is artificially driving up the price of bonds, which lowers the interest rate.  This is not a market rate.  If the Fed were to stop buying bonds the rates would shoot up, particularly now after they have printed so much money in the last few years.  However, it does seem the market is not yet worried about hyperinflation.  When the Fed is buying bonds faster than the Treasury is issuing bonds, then the private market will be exiting bonds.

I thought inflation was just from printing money.
Hyperinflation comes from an increasing money supply, an increasing velocity of money, and a decreasing real GNP.   But the increasing velocity of money and the damaged GNP are really the results of the increasing money supply.   So printing money is the key part of it.  But to me the interesting thing is why they keep printing money when it causes such devastation to a country.  The reason is the government is spending far more than it gets in taxes and the only way to fund the deficit is with new money.

The increase in prices for oil or food is from supply and demand issues and not due to monetary policy.
There is a chance that the price of one commodity going up is due to supply and demand factors for that commodity.   But if commodity prices across the board are going up then either it is an increase in the quantity of money, an increase in the velocity of money, or a reduction in the GNP, or some combination of these.    The equation of exchange is always true.

Don't you need a black market and loss of taxing ability to get hyperinflation?
When your plumber or the retail sales lady tell you they will give you a discount if you pay cash, you are probably dealing with people who are not paying all their taxes.  During hyperinflation there is usually a growing black market and lots more barter.  If you trade some sweet potatoes that you grew for some fish that your friend caught, neither of you will be paying VAT, sales tax, income tax, nor FICA on the transaction.   Loss of taxing ability increases deficits and so increases monetization, which probably drives up tax rates, which drives more people into the black market, which increases deficits, etc.    So loss of taxing ability is part of the hyperinflation feedback loop.  However, it need not be there to start hyperinflation.

People/countries won't get out of bonds because it would drive the price down.
The idea is that a place like China will not sell their US Bonds because selling would make the price go down.   This is just wrong.   If China understands that if Japan sells first then China gets less money they will be in a hurry to sell first.

Right now the Fed is propping up the price of bonds.  That makes now the  best time to get out.   People who wait a year or two will probably not do nearly as well.   In this situation there could be a rush for the exits at any time.  First ones out will be better off than the last ones out.  The logical move is to be first out.

Look at Japan.  The people that sold JGBs earlier did better than those selling now.  I expect those selling now will do better than those selling later.  The best move was to get out already.

People won't get out of US bonds because they are not worried about default.  
The idea here is that the reason people ran away from Greek bonds is that they were afraid they would not get paid but since the US can print money people don't have to worry about not getting paid, so they won't run.   This is not correct.  People also get out of bonds when they are afraid that inflation will destroy the value of their bonds.  This has happened in many other countries that printed their own money.

Don't you need to increase the money supply by 26% in a year to get 26% inflation?
Nope.  The most important thing to understand about price inflation during hyperinflation is that the velocity of money and GNP become important factors.  You might have 26% inflation where 10% was due to increase in the money supply, 10% was due to increased velocity of money, and 6% was due to lower GNP.

If a country had hyperinflation then clearly they had stupid politicians and/or stupid people running the central bank.  The US leaders are not stupid.
This is not correct.  The US leaders are no smarter than the ones in countries that had hyperinflation.  Leaders all over the world think they can control markets and make things better.  The idea that they can force the interest rate lower and make the world better by deficit spending and printing money has fooled many very smart people, including Bernanke and Krugman.  The problem is that in the short run it seems to work but in the long run you are worse off.   Leaders are too focused on the short run.

I read that hyperinflation is defined as inflation of 50% per month so 26% per year is nothing.
By defining hyperinflation as 50% per month some people make hyperinflation look like something that hardly every happens.   But the same thing that is going on at 50% per month is going on at 26% per year.  It is the same phenomenon with the same causes (high government debt and deficit,  central bank monetizing debt, velocity of money picking up, real GNP going down).   After getting to 26% per year the inflation rate usually keeps going up.  A few years of this and your life insurance and retirement fund won't be worth much.  It is foolish to think that 50% per month is not a real risk and that 26% per year is nothing to worry about.  If we define hyperinflation as 26% inflation per year then hyperinflation is very common and a very big problem.

France in 1920s did not get hyperinflation why should we worry?
The vast majority of the countries which printed their own currency and had debt over 80% of GNP and deficit over 40% of spending got hyperinflation.  The fact that a few did not might be cause for hope, but it is not sufficient reason to ignore the danger.  

Paper currencies backed by gold have also fallen.
When a paper currency that is backed by gold stops being backed by gold, as is common at the start of a war, then the currency can fall.  Paper backed by gold is not as good as a gold coin in your hand.

The government could take everyone's gold like they did in 1933.
I think there would be a lot less cooperation and a lot more shooting if they tried that again.

If China sells their treasuries then the renminbi goes higher and higher and their companies that export go bust.
It depends on what they do with the dollars as they sell the treasuries.  If China sells treasuries and buys renminbi, then the renminbi would go higher and higher.  However, China could sell treasuries and buy gold, and print renminbi fast enough to keep the value as low as they wanted compared to the US dollar.  If they did not know what else to spend renminbi on they could use some of those to buy gold as well.  In this case they end up with gold and get to spend a bunch of renminbi, but the value of the renminbi does not go up compared to the dollar.

The central bank controls the interest rates why would they ever let them go up?
If the central bank is willing to buy all bonds for sale then they can put a lid on interest rates.   If they do this they may have to make huge amount of new money to buy the bonds.  This can make people afraid that the value of the money will be dropping, so people may decide to sell their bonds.   Since there is a danger of an "adverse feedback loop" where the more people sell bonds, the more the central bank makes money, it is sometimes wise to let interest rates go up.   However, if the government will be clearly bankrupt when the interest on their debt is more than they get in taxes, the central bank is sometimes left without any good option.   If they let rates go up people will stop buying bonds because the government is clearly bankrupt.  If they keep forcing rates down then people will stop buying bonds because there is so much new money.  If the government has huge debt and deficit and the central bank becomes the only buyer of government bonds you get hyperinflation.  

What about debt deflation?
When the central bank loans money into existence there is more money.  Since demand deposits also count as money by most definitions, when   fractional reserve banks lend against demand deposits the money lent out and the demand deposit balance both count as money, so there is more money.  One definition of inflation is an increasing money supply.   If debts are being paid back faster than they are being created you could have the money supply decreasing, which is one definition of deflation.   When the government debt is going up by more than $1 trillion per year, this will eventually eclipse any finite amount of private debt that is being paid down.  At some point private debt will start to increase again and the government will still be borrowing a trillion a year, so there will be lots of inflationary pressure.     It is hard to say when inflation will really kick in though.  Note that in fiat money "price deflation" is very unusual.

By printing money they lower the value of the dollar and help the economy by increasing exports.
The US imports much more than it exports.  If the value of the dollar goes down it hurts the economy more than it helps.  In 2010, U.S. exports amounted to $1.3 trillion and imports amounted to $1.9 trillion. Trade deficit was around $600 billion.    A weaker dollar means that $1.3 trillion part of your economy can do a bit better but that a bigger $1.9 part of your economy suffers.   This is not a win.

The original definition of inflation was an increase in the money supply and it seems wrong to use the newer definition of inflation as an increase in prices.
In calmer times, where the velocity of money and GNP are more stable, it is a reasonable point of view.   If the velocity and GNP are not changing, then the equation of exchange shows that the quantity of money and prices are linked.   But during hyperinflation you need to understand how increasing velocity and  dropping GNP cause prices to go up too.

Doesn't much of the pain from the US money printing go to the rest of the world?  Does the US have an inflation tax on people outside the US?
Yes, many countries peg to the dollar using a Currency Board where they end up buying dollars and supporting the dollar.  It lets the US export some of the inflation.

The world reserve currency can win by printing money, for awhile.   If the US prints another $1 trillion dollars they get $1 trillion dollars.   Now existing dollars and bonds everywhere will eventually lose about the same total value, $1 trillion dollars.  But about half of the dollars and bonds are outside the US.  So the people inside the US lose $500 billion and gain $1 trillion, for a net win of $500 billion.  The people outside the US lose $500 billion.  In effect the US is able to collect an inflation tax from the rest of the world.   At some point the rest of the world will no longer put up with this and so will stop holding so many dollars.

The government/central-bank has a monopoly on the issuing of currency, so they have full control over the value of the currency.
The value of the currency is totally the responsibility of the government/central-bank and theoretically they could maintain the value.  However, the government/central-bank often does not show enough self control on the issues spending, debt, and deficit and so loses their ability to limit how much currency they issue.

A government budget is not like a family budget as they can always issue more currency.
True.  A government that issues a currency is really very analogous to a public company that issues stock in their own company.    A company/government with good income/taxes and low expenses/spending can issue more stock/currency and it will hold value.  But a company/government that is losing-money/running-a-deficit and still issuing more stock/currency will see the value of their stock/currency go down.  If the company/government is so desperate that it can not stop issuing stock/currency then the value of the stock/currency will plummet until there is a major reorganization of the company/government or it fails completely.

If inflation got as high as 10% then in only a few years it would eat away at the real value of the national debt and reduce it to manageable levels.  If you have a fixed rate 30 year mortgage at 4% and inflation goes to 10% you will find it gets easier and easier to make your payments, so why can't the government do the same thing?
I am sure that no country that had long term fixed rate debt in its own currency ever had hyperinflation.  If the debt was in 30 year fixed rate bonds then a few years of 10% inflation would destroy those bonds and the trick would work.  However, that is not the US situation.     The US debt is mostly short term, not long term.  The Fed has worked hard at buying up the long term debt and selling short term debt with their "operation twist".   So now it is like the US has a variable interest rate on their debt.  If inflation went to 10% and interest rates went to 12% the interest the US paid on $18 trillion (Treasury and Fed)  would be moving towards $2.1 trillion but the total taxes last year were only $2.4 trillion.  The deficit would increase drastically with the higher interest payments and it would be clear to all that the US was going to have to print money like crazy.  People would flee US bonds.  The Fed would step in as the government's lender of last resort and print money and "lend" it to the government.  Given the amount of short term debt, increasing inflation to 10% does not result in a stable situation that the government could keep for a few years, things would fall apart fast then.   It looks like we will see this sort of problem unfold with Japan.

I think that hyperinflation is caused by X, not high debt and deficit or the central bank monetizing debt during a bond panic.
If you think debt is not a factor, then why did the historical hyperinflations all come to governments with large debts and deficits?

That you think the Fed Prints Money shows how clueless you are.
In common jargon the phrase "printing money" means "making money" or "debasing the currency".  The fact that the actual printing is done at the Treasury instead of the Fed does not make a bit of difference to the reality that when you make a lot of new money then eventually the money won't be worth as much.   It also does not matter that it usually starts out as electronic money as the owner of the money could make a withdrawal in paper currency.   There are more than one hundred ways to say debasing the currency.

Doesn't the Phillips Curve prove that inflation reduces unemployment?
When Phillips wrote his paper in 1958 he was using data from under a gold standard.  Under a gold standard wages go up when labor is in short supply.  But it is the short supply of labor that is causing the wages to go up, not inflation that is causing full employment.    The people using this paper are getting cause and effect backward.  People have taken this study under a gold standard and totally misinterpreted the results to mean that printing money under a fiat standard is a good thing.   It was not a study of the effects of inflation under fiat money.   The only truth to this idea is what Keynes pointed out,  if people are not used to inflation, then inflation may be used trick people into accepting a lower real wage.   If people are working for lower real wages, then employers can hire more people.   So if inflation makes people poor enough then employment can go up.  


Conditions now are like during the deflationary period at the start of the Great Depression.
Nope, things are not the same at all.  Back then the Fed could only have   $1 paper dollar in circulation for every $0.40 they had in gold, even though they told everyone they could turn in $1 paper dollar and get $1 worth of gold.  This was a Ponzi gold scheme that was bound to fail.  As other countries took out gold the Fed had to reduce the money supply.  Eventually they had to outlaw gold or the Fed would have been bankrupt.  Once US citizens could not turn in their paper money for gold they were able to print more money and end the deflation.  Nothing like that is acting to reduce the money supply now.  With pure fiat money, no ties to gold, they can print trillions per year if they want to.

Can't inflation linked bonds protect you from hyperinflation?
Nope.    The Treasury Inflation-Protected securities (TIPs), do not adjust the interest rate, only the principal that the interest is calculated on.   So if the going interest rate is 1,000% you might still be earning 2%.  What is paid out will seem very small.  The currency may fail completely before the bond becomes due.  So the larger principal paid out at the end of the bond will be in worthless money.  Indexing the principal will not save you.  You do not want your money tied up in any kind of bond during hyperinflation. 

Nothing can replace the US dollar and bond market as nothing else is big enough.
After the bond market crashes it won't be so big.  Having huge amounts of debt does not make the US more attractive to investors it makes it less attractive.  The Chinese Yuan is going up in value relative to the dollar and pays higher interest rates and the government has far less debt than the US relative to GNP, and their GNP is growing much faster.  So over time it makes sense for investors to move away from US debt and toward something like Chinese debt.

How is hyperinflation stopped? 
There can be many things that cause government spending to get out of control (war, depression, foreign debt, etc) and so start hyperinflation.  So people often put the blame for hyperinflation on these many different things.  However, the only way hyperinflation ends is when central bank stops monetizing a large government deficit.  I think this is the best proof of what the core cause of hyperinflation really is.   This can happen if the government reduces or eliminates the deficit or if the government fails completely.   Along with cutting the deficit, governments often make a new currency and have new laws limiting the central banks ability to monetize debt.  But the key to success is controlling the deficit.  I think the only way the deficit is ever cut enough during hyperinflation to stop it is by cutting the size of government, as taxes are usually already so high that people are pushed into the black market or out of the country to avoid them. Governments that are not able to make the cuts seem to fail completely.

Debt currency issued by central banks is inherently deflationary.  
Since central banks charge interest on all the loans they make and make safe enough loans that they almost always get the principal back, it would seem they tend to reduce the total currency outstanding over time.  So in theory the central bank debt currency method should be inherently deflationary.  The problem with this idea is that governments just keep increasing their debt to the central bank.  Also, at least in the US case, any profits the central bank makes on this interest are paid to the government, not withdrawn from circulation.  So, in practice, this method results in more and more government debt and an ever increasing money supply.

There is always a buyer for each seller, so how can you have a bond panic where people get out of bonds?
Much of the debt is in short term bonds.  People can just not roll over their bonds.  So there does not have to be a buyer, people can get out of bonds by just waiting for the bond to mature and getting paid in cash.

When the central bank is trying to control interest rates it buys bonds.  So people can get out of bonds by selling to the central bank.

The government is running a huge deficit so it can not just pay off the bonds with tax money but in fact needs to sell more and more bonds all the time.  If others are getting out of bonds then, assuming the government is still getting money, it is the central bank that is buying.   As the central bank's holdings of bonds goes up there is more and more money in circulation.

People have been predicting the end of the world for a long long time.  It never happens.
Hyperinflation is not the end of the world, just the death throws of some fiat currency.   Inflation of 5% per month or even 50% per month is, amazingly, something that most people adjust to.   Crime will probably go up a bit, but hyperinflation is not a "mad max" thing.  Hyperinflation has happened many times around the world and even several times in America.

How does Krugman explain hyperinflation?
Inflation is really a government tax on those holding money.   In a country where a large part of a government's budget comes from an inflation tax it, like any other high tax,  can affect people's behavior.   The way people avoid a high inflation tax is by holding less real money.   But as people hold less real money the government has to make the inflation tax even more extreme to get enough real money to spend.   But the more extreme the inflation tax the more the public reduces their real money holdings to avoid the tax.  The process can easily spiral out of control.    As the government prints faster and faster the public reduces its real money holdings more and more.   Eventually the public is unwilling to hold any money at all.  Then the government has to abandon its use of the inflation tax. 

I am summarizing from "Krugmans Macroeconomics for AP*" pages 324 to 327.

I would not say there is anything untrue in Krugman's explanation.  However, hyperinflation always involves large debt and deficit and I am impressed that he could give a halfway decent explanation of hyperinflation without mentioning these.   A large fraction of Krugman's posts argue for more deficit spending and more monetization of bonds, or against austerity.   It is no doubt easier to advocate debt and deficit if you don't think they can result in hyperinflation.

If we added to his explanation "a high inflation tax makes people want to hold less money and also less bonds" and also "on top the inflation tax for the deficit the government also needs an inflation tax for all the bonds that people fail to roll over" we could get a more accurate explanation, though at the cost of making some of Krugman's favorite things look bad.

You don't understand our monitary system.  If you did you would realize that Government debt is not a huge deal, we will never run out of money, we aren't in danger of hyperinflation, and there is no chance we will run out of buyers of our debt.  The government can always meet its obligations in US dollars as it is the issuer of US dollars.
Our monetary system of fiat money created by a central bank is the same as the systems used in more than 100 cases of hyperinflation.    In all cases they did run out of buyers of government bonds.  The central bank monetized government bonds like crazy and they had hyperinflation.   In most cases the money died.  Government fiat currency was no longer accepted as money.   Think about this.   A government that prints fiat currency really can run out of money, as that paper can fail to be money at some point.  History contradicts your theory of how things work.   You don't understand history.

Many of the obligations, like social security, medicare, obamacare, unemployment, etc are real world obligations and not just debts denominated in US dollars.   As the government prints more money the prices for these real world obligations goes up, which means they have to print even more, which makes the prices go up further, etc.    If the government just had debt, and no deficit for real world obligations, there would be no risk of hyperinflation.

This FAQ is really long.  What is the shortest reasonable explanation of hyperinflation you can give?
Printing money can give you inflation but to get hyperinflation you need out of control money printing. For this you first need a large government debt (over 80% of GNP) and a large government deficit (over 40% of government spending) in a country that prints its own money. You can get a large debt and deficit in many different ways.  Next, the government needs to get the central bank to monetize debt.  This may require replacing people at the central bank, changing laws, or just breaking laws.   Once conditions are right, a death spiral or positive feedback loop emerges where the more people get out of government debt the more money the central bank has to print to monetize debt, but the more they print the less  people want to hold government debt.  This may be triggered by some event, which politicians will blame, along with speculators.  Politicians will use price controls and higher taxes to try to regain control of inflation but in doing so will hurt the real GNP of the country.     With the equation of exchange we can understand that a lower real GNP, a rapid increase in the money supply, and the rapid increase in the velocity of money (as people rush to buy real things before prices go up more) makes prices go up really fast. 

Isn't this a self fulfilling prophesy?  If everyone believes the dollar is going to crash then they will get out of the dollar and it will crash, so isn't this just a self fulfilling prophesy? Doesn't publishing this scare stuff help bring about the end?
 I think that the more people that understand the danger of hyperinflation the better chance we have of avoiding it.  So explaining the dangers could help save us from hyperinflation.  Preventing hyperinflation is far easier than stopping it.  I have worked for years to explain hyperinflation as clearly as I can.  Remember not to shoot the messenger.   In any case, at the end of 2012 this blog has 2 followers and one of them is the author.   Update: There are now a total of 3 in June 2013.  So if hyperinflation does happen it is not because I scared millions of people.

If the world gets hyperinflation I think Dr. Paul Krugman deserves more  credit than anyone else.  He has cheered money printing and deficit spending for many years.  He has been extremely critical of attempts by governments to cut spending.   He has ridiculed anyone who is worried about deficits, calling them austerians.   He writes for the New York Times.   He has millions of readers.  He has a Nobel prize in economics, so politicians feel justified in following his advice.   Even as Japan went crazy with money printing and deficit spending, bringing hyperinflation much closer, Krugman cheered Japan on.  Krugman has been providing the intellectual cover for the political choices leading up to hyperinflation, so when it comes, Krugman should get the most credit. 

Others Questions
Feel free to ask other questions in the comments. I will move some of the best questions from the comments into this FAQ.  If any of my answers does not seem satisfying enough, let me know.  If anyone knows of any site on the web that does a respectable job of defending deflation or attacking hyperinflation please mention them in the comments.   I would be particularly interested in any post responding to this post.

122 comments:

  1. This helped to clarify some things for me. Thanks for the informative post!

    Cheers

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  2. Very nice FAQ. But I'm not sure that a mere 26% annual inflation rate qualifies as "hyper" -- in the sense that it is qualitatively different from high but conventional inflation. One of the world experts on inflation, Peter Bernholz, defines hyperinflation as a rate exceeding 50% *per month*.

    Bernholz has some remarks here on the likelihood of hyperinflation in the U.S.: http://contraryinvesting.com/inflation/peter-bernholz-hyperinflation-not-threat-for-us-but-uk-may-fit-bill/. I tend to agree with John Mauldin that Bernholz is too optimistic here.

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  3. For people that are used to 2% inflation being at 26% will be qualitatively different. But yes, there are a bunch of different cutoffs used by different people.

    I think Bernanke has effectively hid a bunch of government debt in the open with the interest on excess reserves. Bernholz has not noticed that. As Mauldin said, monetizing Fannie and Freddie debt is really monetizing government debt as those are effectively nationalized. Also, things are worse since Bernholz was quoted.

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  4. Greetings,

    I must admit that I am in the deflationary camp as I'm sure Uncle Sam would false flag an alien invasion before allowing anything like hyperinflation. I am also of the opinion that you get the Great Depression that you deserve. I'll use the Great Depression as an example.

    Germany was a nation of thrifty savers. Germany, for reasons that need not be discussed here found itself in a pretty nasty inflationary depression. It robbed the people of everything they had and destroyed their savings. The United States, on the other hand, was not a nation of savers but a nation of borrowers. Our deflationary depression punished the borrowers as the money to repay all those debts just vanished. Hyperinflation then, like now, would have allowed those people to pay off their debts with worthless dollars.

    The author makes an excellent argument for hyperinflation but as unpredictable as hyperinflation is, a deflationary death spiral can just as easily pay us a Black Swan visit.

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    1. If you could cure hyperinflation by faking an alien invasion I am sure other countries would have done that too. That will not cure hyperinflation.

      There has never been a real "deflationary death spiral" under fiat money. There have been over 100 cases of hyperinflation (if you use 26%/year). How can you say one can happen just as easily as the other?

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  5. Thank you for linking this article to our site.People forget that with both hyperinflation and dramatic debt deflation, people will suffer, the argument between the two is really not as important, I think. However, as Gary North explained it hyperinflation may not be certain, but pertaining to the U.S, some type of eventual default seems very likely.

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  6. How top take advantage of the hyperinflation? Say if I want to buy a house at what stage of hyperinflation is it best to buy house?

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    1. If you get a 30 year fixed rate mortgage now, and money becomes worthless in a few years, you sort of get the house for a few years payments.

      An alternative is to invest in gold or silver now and wait for when you can't get long term loans and people are buying houses for cash. Then house prices will be far lower compared to average incomes or gold prices. Then use your gold to buy the house.

      Can't really say what will be best.

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  7. Thanks for your concise post on the reasons we are moving towards hyper price inflation.

    I think it is wrong to say that hyperinflation is defined in terms price inflation, I see price inflation as a symptom of hyperinflation of the money supply. As Milton Friedman is famous for saying "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."

    I agree that we are moving towards a period of hyper price inflation because the hyper inflation of the money supply has already happened through the noughties, caused by keeping interest rates too low and the securitisation of debt amongst other things.

    So in reality we have already passed into hyperinflation and there is nothing that can now be done to prevent the final symptoms from occuring.

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    1. The reason they can put out so much money and not get much inflation yet is that at first when they print money and drive down the interest rate they also drive down the velocity of money. The lower velocity of money compensates for the increased quantity of money and prices don't go up much. But eventually there will be some inflation. They can't get the velocity go down any more if inflation is picking up. Then it is really hard to get the genie back in the bottle. If they let interest rates go up then the velocity goes up even more. Anyway, velocity of money is an important part of hyperinflation.

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    2. I couldn't agree more, but think it is wrong to define inflation as an increase in prices rather than an increase in the money supply.

      Are we not seeing rising prices yet due to the fact that the expansion in central bank balance sheets is just combatting the deflation in credit being created by banks not lending?

      Rising prices is a symptom of hyperinflation of the money supply which will follow in due course as the velocity of money increases again. I would think this will happen when the bond bubble finally pops. The central banks will be forced to create more money to buy the bonds and keep rates low. The money taken from treasuries will find its way into the markets driving up the velocity.

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    3. The Ron Paul and Austrian way of defining inflation in terms of the money supply is fine and reasonable. But when you get to hyperinflation you also need to look at the velocity of money and GNP to understand what is going on. One way to define hyperinflation could be when the increase in velocity of money is a substantial part of the reason for price inflation.

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  8. Government doesn't need to confiscate Gold. They'll just slap 100% capital gains on it. See Karl Denninger.

    Good luck fighting the IRS.

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    1. If I trade a few silver coins I had for some fish my friend caught it is very hard for the government to tax us. If someone is faced with a choice of figuring out how to use the black market or starving, they usually figure it out. Black market and government taxing ability are real issues in hyperinflation.

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    2. two words. Black market. Two more. Tax evasion.

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    3. I don't see any reason for gold confiscation now. Back in 1933, there was a lot of gold in circulation - it *was* money, and they *needed* to confiscate it in order to force people into the paper money instead. But we've now had paper money for several generations, and that's all anyone knows anymore. The vast majority of American citizens don't even think of gold and silver as money. They think of it as "bling" at best - and they'd probably trade it willingly for dollars if times got tough.

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  9. Very interesting article and you seem to have researched the subject very well. I had, what I'll call, a discussion with a colleague the other day regarding this subject and the effect hyperinflation will potentially have on the stock market. He told me he his portfolio was "diversified" as he was holding communication stocks, transportation stocks, etc, etc. Bottom line was that he was happy to hold stocks of companies that "paid" him to hold their shares. In other words, he was collecting dividends from these companies and he said regardless of the economic situation, that these companies would continue to pay him dividends.

    My thought is that, while they may continue to pay dividends, the amount of the dividend will decrease because their revenue will decrease as result of economic situation where consumers will have less money to spend or will be unable to borrow to spend money. Therefore, the companies will eventually have to decrease the amount of the dividend in order to bolster their bottom lines during this time. I am also reading that companies are starting to hold more cash than they have in a long time to brace themselves for the tough economic climate ahead.

    Sorry for the long build up to my question but based on the above, can you tell me how hyperinflation (or for that matter, deflation) will affect how dividends are paid by companies and how hyperinflation will affect companies taking more of a cash position?

    Thanks

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    1. I think any asset that is often bought with a loan or on margin will drop in value relative to gold or some real measure. The problem is that as interest rates go up people just can't leverage as much. People will be buying houses for cash as you won't be able to get long term loans. So I expect stocks to not do well at first. Eventually they will go up with inflation.

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    2. Vincent, I think you make an error many others do. You're seeing hyperinflation as gradual. It really isn't. If one buys a $100,000 property with $10,000 down and a $90,000 before hyperinflation hits, pays maybe $5,000 in payments before dollars become worthless, then he did NOT pay $100,000 for the property. He paid $15,000 for a property worth $100,000, as he can pay off the balance with the proceedes from a few oz of gold or even a week's paycheck. There may be a period where it's not able to bring in sufficient rent, true, but wouldn't you forego 2 years rent to buy a $100,000 place for $15,000?

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    3. If you buy a house before hyperinflation and hold it for 2 years through hyperinflation you will of course be able to pay off the loan with cheap money and so do just fine. My point is that the first few months of hyperinflation housing prices can actually go down as interest rates go up so much. I am not saying hyperinflation is gradual. But things typically bought on loan can go down, or at least not go up as fast as things like gold or cans of tuna, as hyperinflation starts. Once people are buying houses with cash they will go up in price as fast as cans of tuna.

      Because you win so much on the loan becoming worthless it can be a very very good investment, maybe even better than gold as you probably are not so leveraged with gold.

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    4. There may also be favorable tax treatment of profits on a home.

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  10. I am NOT a Hyper-Inflationsta Skeptic. But we're NOT approaching Hyper-Inflation, currently we're in DEFLATION. Perhaps we'll see hyper-inflation after all the deflation has played out.

    What the hyper-inflationistas are overlooking is human behaviour and humans don't like falling prices. governments want (Hyper-)inflation. But the behaviour of "Mr. market" prevents that from happening.

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    1. By what measure do you see deflation?
      What makes you think governments want hyperinflation?
      What makes you think Mr Market can prevent hyperinflation?

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  11. If the world is moving towards Hyper-Inflation then why are people still wanting more dollar notes ? In Hyper-Iflation want to get rid of their money. Get rid of their dollar notes.

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    1. I think the problem is that few people know the world is moving toward hyperinflation.

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    2. This is cause the world is heading into the biggest deflationary crash ever witnessed.

      People need dollars, cause there isn't enough money to pay their bills. Banks are attempting to engage in a process of slow liquidation.

      Hyperinflation is what people will be begging for as they slowly become pi$$ poor. Unfortunately banks have no interest in making what you owe them worthless, Sorry!!!

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    3. Even during hyperinflation people feel very short of money. Often it is very hard just to survive.

      In the end the banks never seem to be in control. Somehow the government always gets money. In Japan the government is leaning on the central bank. The US might just print $1 trillion coins. Something will happen so that the government gets all the new money it needs. People will be poor though.

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  12. Hyper-Inflation can very easily be stopped. Literally stop printing banknotes.

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    1. The problem is that the government is spending far more than it is getting in taxes and has no place else to get the money except by printing banknotes. This is why it is hard to stop printing in hyperinflation. The government fails if they stop printing, can't pay their employees.

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  13. Wow! What a great post. This should be required reading by every member in congress and the White House. Unfortunately, it would then be banned because if this word ever gets out, we will have hyperinflation tomorrow. The music is still playing. Too bad there are only enough seats for less than half the crowd.

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  14. You made a couple of assertions that did not have your thought behind them to explain how you arrived at the conclusion you did, and a couple I did not fully agree with. For example:

    Can't people just switch to another currency?
    But if US dollars become worthless, then they will not be able to hold up the value of their own currencies. So soon after the US dollar fails, a bunch of other currencies will probably fail as well.

    If I have little US reserves and my currency currently stands alone, since I am mainly trading it within my own borders how does a collapse of some other currency impact me? I can only see other currencies failing if a great majority of their “reserves” were tied up in US dollars and still were after the event went on for any length of time.
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    There has never been hyperinflation of the world reserve currency before!
    It is not possible to get hyperinflation when using gold and silver. Hyperinflation happens to fiat currencies.

    You should probably clarify this further, which you did allude to further in one of your answers. But paper currencies “backed” by gold have also experienced hyper-inflationary events. Such as the confederate notes and the like. It is just the printing of un-backed additional paper currency that has caused it, not fiat currency (in and of itself). Since by definition it was not fiat currency at the time.
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    Bernanke says he is just temporarily monetizing debt.
    If he tried to sell the bonds he has the interest rates would shoot up and the government would not be able to afford the debt.

    It would be a simple enough process for the Fed/government to “default” on ALL the treasuries owned by the Fed. That immediately cuts the debt by a significant amount and has no impact on the interest rates.

    He is only going to “sell the debt” to pull back in cash in an overheated economy. Which we are not currently experiencing. He has no need, nor incentive, to do so otherwise. That is the purpose of Operation Twist, to avoid the problems of always having to re-monetize the debt “owned” by the Fed.

    end part 1

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    1. The problem is that if 5 major paper currencies fail and then a few dozen more that used these as reserves also fail the trust in all paper money drops like a rock. Even if you have a well run currency I bet it would go down relative to gold.

      The confederate money was not redeamable for gold.

      Even if the US defaulted on all their debt they still have the problem of the deficit. After defaulting nobody will be buying their bonds, except the central bank. So it is pure monetization of a huge deficit, which will still give them hyperinflation.

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    2. I expanded the section on other currencies. Thanks for the feedback by the way.

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  15. Part 2

    Even though the Fed is making lots of money the banks are just hording it so there is no inflation.
    However, the government is spending the money it gets from selling the Treasuries.
    The government spending the printed money alone should have caused inflation, all the holding of the debt does is stop that half of the potential velocity from happening. Say a velocity of 1 times the number of years that the banks hold it. But the initial spending should have taken production out of circulation and had more dollars chasing those fewer goods.
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    The bankers control the Fed and it is against their interest to have hyperinflation.
    Note that if the government shuts down the central bank will shut down too. So it is actually in their interest to prop up the government by buying their bonds.

    Actually I would argue that it is not due to “propping” up government, which is a byproduct of what they are doing. But the Fed realizes that our debt load is unsustainable, and non-payable (back to them as well). So the countries only option is to inflate away the value of the debt, and the government, or banks, gets first spending rights on the new dollars created. So of course the Fed will go along, after all they are just a collection of banks anyway. So it is also in their best interest to do so.
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    You can't have inflation when there is high unemployment.
    The 1970s proved this is not true yet many people continue to believe it. High unemployment is normal in hyperinflation. The economy is a mess.

    Actually many of the previous hyper-inflationary events were at times when there was 100% employment, especially in a global economy. It is strange, but the effects of hyper-inflation increases the amount of foreign currency buying local production. They can buy it cheaper and cheaper all the time. So in country industry gears up, but there are then fewer and fewer goods to go around (the companies want foreign currency not local). This just adds more fuel to the fires. This may be different in today’s one reserve currency scenario, but I doubt it.
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    By printing money they lower the value of the dollar and help the economy by increasing exports.
    In effect the US is able to collect an inflation tax from the rest of the world. At some point the rest of the world will no longer put up with this and so will stop holding so many dollars.

    Interesting point here, but I would also add. When the rest of the world loses faith in the reserve currency. What happens to that currency? It is all repatriated, maybe all at once, and is used to buy up as much physical assets as possible and ship it overseas. That is to say the only place that HAS to accept US dollars is America. So the inflation that we once exported is really only delayed in its return to us. And the return will be much worse for us. Of course the foreign countries will not get the same value of goods back they gave up, but at that point they don’t care. At that point they just want a return OF capital, not ON capital.

    Thank you for your interesting post!

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    1. The reason there is not much inflation so far is that the initial market response to lower rates is to lower the velocity of money. The lower velocity compensates for the higher quantity of money, and not much inflation, for awhile.

      The Fed and all other officials have to pretend that they are not propping up the government. They have to claim they are trying to stimulate the economy or jobs or something.

      I am not aware of this full employment during hyperinflation. Certainly there are lots of jobs being destroyed.

      Yes, when the rest of the world decides to get out of dollars they will go rushing back to the US. They will buy up anything that they can take out.

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    2. I think it's important to distinguish monetary inflation from "inflation" as used instead of "price increases".

      I would also point out to the commenter and others that we DO have high inflation, it simply manifests in different ways. Food prices are much higher, homes were for a long time lower. Some things go up, others go down. But one thing most miss is the "inflation tax" on savers. If artificial interest rates cause you to get 1.5% on your retirement fund instead of 6%, this is massive inflation of your earning potential. If the Fed forces you, via financial repression, into risky assets that pay a 3% dividend so you can retire comfortably and in coming years you lose 40% of your portfolio's value in a crash because you were forced into a market you shouldn't be in, that is another hidden effect of monetary inflation. When the bond market crashes soon I suspect this will become a much studied effect of monetary inflation in the future textbooks.

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  16. Great article! Thats definitely a keeper for my "how to educate my sheeple friends"-database ;-)

    I have a question on hyperinflation and gold and silver prices. I recently read that towards the end of Weimar HI the gold/silver ratio suddenly fell from moderate 16:1 to 160:1. As possible reason why it was mentioned that some ppl wanted to flee the country and wanted to change bulky silver to more compact gold.

    Are there any hints whether this change in the G/S ratio was a singular event during Weimar or has there been other examples? Do you think the above mentioned reason fits? Do you have other ideas why it happended?
    Do you think that during coming HI there could be a similar scenario like during Weimar?
    Or could it even be quite opposite this time because the fundamentals of silver (consumption without recycling) have changed so drastically during the past decades?

    thank you in advance for your ideas on that!

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    1. You could never have wildly different gold/silver ratios in different countries as long as there was free trade or much smuggling. If I could get 160 oz of silver for my 1 oz of gold in one country and then take that 160 oz and get 10 oz of gold in another country, then back to the first to get 1600 oz of silver, then 100 oz of gold, etc. I and lots of other people would be going back and forth as fast as possible.

      So there would have to be some government generated anomaly to get that.

      Looking at the data I suspect someone just got an extra zero on the price of silver and so it looks like there is a 160 ration when really it was just 16.

      http://www.marketoracle.co.uk/Article9232.html

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  17. Here's what I don't understand: Let's say America or the world will experience hyperinflation next year. Before hyperinflation comes, person A has gold coins that are worth $10,000, while person B has a holding of $10,000 in an ETF that tracks the price of gold. Will both persons have basically the same amount of wealth after hyperinflation? Or will hyperinflation make all dollar-denominated holdings--including the gold-price-tracking ETF--relatively worthless?

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    1. As long as the ETF, the exchange, and person B's stock broker all make it through without going bankrupt then they should have basically the same wealth after. But this is a big if. There are lots of people shorting that ETF. Imagine there are 10 million shares of long ETF owners and 5 million shares of short ETF owners at person B's broker. Then the broker only really has 5 million real shares in the ETF. If things go crazy over a weekend then the shorts might all not be able to pay what they owe the broker. Then the broker does not really have enough money and shares for all the longs. So he could go under and his customers who thought they owned shares in the ETF might only get a portion of what they should have gotten. Note also, if insiders at the ETF cheated the ETF somehow then people could be out as well.

      On the other hand, the guy who owns gold coins has to store them someplace and wherever they are they could get taken as well. A Swiss bank that has been around for 100 years probably does not cheat you but there is still some chance.

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    2. Interesting answer, but if you imagine this comparison of real gold to gold ETF taking place in Weimer Republic Germany just before hyperinflation hit that country, then it seems like the ETF investor will get hosed no matter how reputable and long-enduring the ETF, broker, and exchange are. Putting 10,000 pre-hyperinflation German marks in a Germany-based gold ETF would be a worthless investment, wouldn't it, since German marks would soon become for all practical purposes worthless, no matter how many of them you had?

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    3. I do think you would want to get out of the ETF before the money your account was denominated in became completely worthless. So that is another way you could lose. Most hyperinflations take some time. There is a chance that the US one happens much faster than previous ones. If there is a bank holiday so that you can not get your ETF profits out and convert them to physical gold and by the time the bank holiday is over the money can not buy anything, then an ETF investor could really lose.

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  18. Are there any historical examples of hyperinflation occurring in a nation with the type of military dominance that the US enjoys? If everyone in town knows that I'm the baddest gangster around, and can have anyone killed at any time, who will refuse to loan me money? Even if I stop making interest payments, won't people still continue to give me "loans"?

    I don't think the Chinese seriously believe that their UST holdings will ever be truly and honestly redeemed. They're just not that stupid. I think they continue to make those "loans" not as investments for the future, but for reasons of domestic politics and geopolitical relations in the here and now. So long as the US continues to hold a gun to the head of the entire world, I don't see that dynamic changing fundamentally.

    It's true that the US is paying for its global military hegemony not with domestically produced wealth, but with cash imported from the rest of the world. To my eyes, that cash flow looks more like imperial tribute payments than "loans." While such a system may not last forever, it might just outlast you and me.

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    1. Collapse of the Roman Empire resulted in 100's of years of DEFLATION, also known as the Dark Ages.

      If you think the collapse of Rome ended in Hyperinflation, you need to brush up on your history.

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    2. Over many years Rome debased their silver coins so there was less and less silver in them. This was sort of a slow motion hyperinflation. When they put in price controls people started leaving the jobs that could not pay well. So then they changed the law to say you had to do the same type of job as your father. This reduced the flexibility of the economy and was a big part of the Dark Ages. After the plague killed off many people there was such a shortage of labor that people were allowed to move to other jobs and improve the efficiency of the economy.

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    3. Rome debased there coins due to LACK of money. They tried to avoid reality by debasing coins, making RULES and calling them LAW. It did everything in it's power to avoid the on coming deflation.

      In the end the masses ran out of money and were forced into bondage. Sorry but Romans weren't carting around wheel barrels full of cash in the end.

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    4. But you are saying now there is a LACK of money. Like Rome, when hyperinflation starts next time the governments will pass price control laws to try to inflation. It will not help next time either. Price controls make shortages that hurt the real GNP and end up making hyperinflation worse as hyperinflation depends on quantity of money, velocity of money, and real GNP.

      The masses run out of money in hyperinflation.

      Rome was not using paper money so they did not have wheel barrels full of cash in the end. We may just switch to credit cards and never have wheel barrels full of cash either.

      I just made a post about a video from just over a year ago where a bag of cash was used to buy beer.

      http://howfiatdies.blogspot.com/2013/01/modern-video-of-hyperinflation.html

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    5. >>The masses run out of money in hyperinflation.

      If the masses run out of money in hyperinflation how are hyperinflated prices supported then?

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    6. The prices are supported by the central bank making lots of money and the government spending lots of money. The masses take what little nearly worthless money they get and spend it right away on food and other necessities. They feel very very short on money.

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    7. Sorry but the central bank has no interest in buy loafs of bread that will rot in their vault, so they have no desire in supporting the bread market.

      Sorry but once the government has spent more than its worth the central bank has no interest in giving it more money to further devalue the central banks debt holdings.

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    8. If you look at the history of hyperinflation the government always gets the central bank to keep monetizing the debt even if the people there did not like the idea. Maybe they change the laws or change the people running the bank, but the central bank is made to go along or clearly they never would get hyperinflation.

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    9. To review my original point: The US has set up a historically unique situation in which it enjoys the "exorbitant privilege" of emitting money at zero cost which is accepted worldwide for real goods and services.

      This system of exploitation is stable in the sense that policy-making elites in other countries also benefit from the arrangement, and if the guy on the street suffers from price inflation, that's just tough for him.

      If policy-making elites try to defect from the system -- like Saddam Hussein selling oil in euros instead of dollars -- such defection is punished swiftly, severely, and visibly.

      So the question is, by what mechanism can this system eventually unravel? I don't think hyperinflation is it. I think it only ends when the US is defeated in a major war.

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    10. Even if you are correct that the US punishes countries for no longer using dollars, if a bunch of countries gradually reduce their Treasury holdings the US can't attack all of them at once. Also, the US might is largely the result of economic might, partly from this exorbitant privilege. As the world stops giving them this privilege their might will be reduced. Like the USSR it might even collapse, if it can no longer pay for all the stuff it has promised to pay for.

      If China suddenly dumped most of their US Treasuries and the US got hyperinflation, it is certainly possible that US politicians would blame the US problems on "Chinese economic warfare" and want to go to war. But at that point, with hyperinflation and no exorbitant privilege, they might not be in any position to pay for a war.

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    11. Agreed -- a disciplined, multilateral, sustained campaign to shun Treasuries could cause real disruption to the system of tribute payments flowing to the US. Of course the Fed could still step in and buy up the debt, but by refusing to participate in the sham, other countries could gradually force the resulting inflation to be experienced in the US rather than being exported.

      Peter Schiff thinks other countries aren't doing this already because they just don't understand how they are being exploited by the current system. I used to agree with this view, but with four years since TARP and the dollar still standing strong, I think there just has to be something else holding the debt bubble together, besides the ignorance and delusion of foreigners.

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    12. It is a puzzle that I don't have a good answer for. Some people say the reason they buy Treasuries is to lower the value of their own currency relative to the dollar. But they could easily print lots of their local currency and buy gold or silver or any imports and lower the value of their local currency. The key to devaluing the local currency is printing lots of it, buying anything works, not just Treasuries. So that explanation does not work for me either.

      The oil producing countries seem to have a deal where if they sell oil in dollars the US will defend them if they are attacked. It is possible other countries have deals where if they hold a certain amount of Treasuries they get US defense, but I have not read this. The inflation tax would be a way for places to pay the US without it being obvious that a payment was being made. But this is speculation.

      Delete
    13. When I was in Russia a fellow told me how people all over the country had their savings in hundred dollar bills in their mattresses, if this is true we might assume this has happened all over the world. In my travels the dollar is often accepted, most Americans underestimate the power of being the worlds reserve currency. Where it could become a double edged sword is if, and when, these people decide it is time to dump this paper in search of something more real and tangible.

      Footnote; do not underestimate the power of "secret currency swaps!"

      Delete
  19. I do have a question. Bernholz's research covered 29 hyperinflation events where overall debt exceeded 80%, and deficits exceeded 40%. How many times, if any, have countries done this and there was no hyperinflation?

    ReplyDelete
    Replies
    1. It is a good question. I am not sure. There have been cases where they had hyperinflation and stopped it. So there may be cases that crossed those numbers and then cleaned up their act without ever getting hyperinflation. People always talk about Japan because their debt is clearly over the 80% of GPD (over 200% even) but I am not sure if their deficit has exceeded 40% of spending for any length of time.

      Delete
    2. Two factors about Japan as I understand. First the people of Japan hold the debt, that is they have bought the bonds of Japan over the years and are using these bonds as a savings account. this would mean that Japan is not as vulnerable as say America would be assuming an outside investor would decide to suddenly shed its investment. The second factor that many people forget is that Japan has for years enjoyed a large trade surplus that in many ways offsets the governments deficit spending. America suffers like the UK a huge trade deficit on top of a massive government deficit.

      Delete
  20. Can't inflation linked bonds protect you from hyperinflation?

    You write principle. Don't you mean principal?

    ReplyDelete
  21. Yes, thank you. Have fixed it now.

    ReplyDelete
  22. Vincent, this is a weighty tome. I will be more concise.

    Hyperinflation is the total loss of value of the credit instrument that you are considering. If this credit instrument happens to be the US dollar - the obligation of the Federal Reserve Bank - then hyperinflation of the US dollar is the total loss of value of the US dollar.

    How does a credit instrument, a financial obligation, lose all its value? It's far simpler than you describe - it loses its bid. It is the bid - the demand - that creates value. If there is no demand for something, that something has no value.

    When will the US dollar lose its bid? Difficult, if not impossible to say. The US dollar has traded 'money good' for a long time now & money has a peculiar demand - it verges on infinite. Simply put, money is the one & only thing you cannot have too much of, otherwise known as constant marginal utility.

    I can only leave you with a concatenation of quotes from around 1720:

    "Sunk in Lucre's sordid charms, all are swallow'd by the damn'd South Sea."

    ReplyDelete
    Replies
    1. Hyperinflation is a process that can go on for years. The bid does not suddenly go away. I think it is helpful to understand the feedback loops in the process.

      Delete
    2. Vincent,

      Kind of like the feed back loop of;
      To pay for your debt go out and beg for more debt.

      Wonder what happens when you can't find someone to give you more debt???
      You think Hyperinflation? LOL!!!!!!!!!!!

      Delete
    3. Yes, in simple terms, when a country that prints its own money can not borrow any more and prints for both the deficit and for bonds coming due, they get hyperinflation.

      Delete
    4. Sorry but the US government prints debt NOT money. It hasn't printed money since the Civil war.

      Delete
    5. I understand why you call it "debt money" but most people really do just call it "money".

      Delete
    6. I don't call anything 'debt money'. It is either debt or money NOT both.

      Problem is you and everyone else have been trained to call -2 +1.
      Sorry but -2 DOES NOT equal +1,
      debt DOES NOT equal money

      Delete
    7. Please help me make my FAQ sections on debt money better. I claim that because the government never really pays back the debt that debt money is not really much different from debt free money. Do I not make that point clear? How could I improve that?

      Delete
    8. If you are genuine in your request I will help you. However I find that hard to believe from some of the response I got.

      Delete
    9. I really would like to make this FAQ as good as possible. If something is false or unclear I will try to fix it.

      Delete
  23. I have been an avid reader of ZeroHedge and other independent blogs for 3 years, but I have never seen a clearer or more cogent analysis than this brilliant exposition of the current situation. Deserves to go viral.

    ReplyDelete
  24. Quite contrary to your title "How Fiat Dies" is reality as history has shown.

    In debt based fiat system, debt is what backs the monetary system.
    Before the monetary system is allowed to 'die' the debt that backed it must be liquidated. As there is always more debt than money this process is inherently deflationary despite what you'd have your readers believe.

    ReplyDelete
    Replies
    1. I have added a FAQ question for this one. Here is my entry. Let me know what you think.

      Debt currency issued by central banks is inherently deflationary.
      Since central banks charge interest in all the loans they make and make safe enough loans that they almost always get the principal back, it would seem they tend to reduce the total currency outstanding over time. The problem with this idea is that governments just keep increasing their debt to the central bank. Also, at least in the US case, any interest profits the central bank makes are paid to the government, not withdrawn from circulation.

      Delete
    2. Close but not quite right.

      At first a debt/(fractional reserve banking system) has an inflationary effect. This is due to extra spending, that wouldn't have been done if there was no access to credit. This only continues if public requests for debt creation is always greater than the previous request. Deflation starts when the public can not and/or refuses to take on more debt than the previous request for debt.

      Money is sucked out of the economy as debt is paid off/and or assets liquidated. Since there is always more than 1 dollar of debt for every dollar in existence, the banks are guaranteed to end out with all the assets/money.


      For example;
      The last 99 years of inflation in the US was due to an exponentially growing demand for bank loans (the FED only prints when people ask it to). Once population expansion could no longer be sustained at an increasing rate (Baby Boomers) the personal debt to income ratio had to be lowered to ward off collapse. Once all the responsible loans were made the government made it LAW to make irresponsible loans. If everyone didn't get there Hum V's amd McMansions the crash would have started in 2000.

      Eventually US citizens were financially incapable of taking on more debt than before and the crash of 2008 ensued. The US government desiring to stay in power as long as possible is attempting to slow down the deflationary crash via QE. It would have no desire to engage in Hyperinflationary spending as it would only hasten the destruction of the US and it's government. The banks have no interested in this either as they want people working and scrambling for money as long as possible so the maximise the productivity extracted from society.

      Those who don't understand global finance seem to think China can and will dump it's US bonds in a furry of spending resulting in hyperinflation. Reality is China is reliant on it's US bonds holding value to fund its various economic bubbles. Chinas along with every other global economy will be forced to collapse before the US does. China and other secondary economies will be desperate for more US dollars in the coming years, as the previous source for US dollars (US consumers requesting more debt) is drying up.

      Delete
    3. FYI the US government doesn't get all the interest on their loans to the FED back.

      Also the US keeps extending it's debt only to avoid default. The total debt level is meaningless now that QE has started. What matters most is the willingness and ability of the US citizens to go into further debt. The market for US citizen debt is over 50 trillion. Government issued debt is only a fraction of this.

      Typo in previous post:
      Meant 'income to debt ratio lowered' not 'debt to income'

      Delete
    4. FYI the Treasury gets the "profits" from the Fed. This is not all the interest as the Fed has some operating costs but it is most of the interest back.

      If the government is going more than a extra $1 trillion into debt every year it does not matter if the citizens are willing or able to go further into debt.

      I can not find any indication that private debt has any relevance to hyperinflation. If a country gets hyperinflation seems to only depend on the debt and deficit of the government and not at all on private debt. After hyperinflation starts private debt soon drops to almost nothing as the value of bonds crashes when interest rates shoot up, and yet the hyperinflation continues. So private debt does not seem a factor in hyperinflation. Do you have anything to indicate it does?

      Delete
    5. You saw my FAQ about how deflation and hyperinflation are not opposites? I do not argue that the US may fit definitions of deflation if private debt is going down faster than government debt is going up. I just think you can have hyperinflation and deflation at the same time and personally don't think deflation is nearly so interesting.

      Delete
    6. I don't think there has ever been a deflation in a pure fiat currency (not related to gold or silver or returning to either) that had double digit price deflation. Do you expect any price deflation? If prices are not going down why should anyone care if the world fits your definition of deflation?

      Delete
    7. I can't stop. In hyperinflation your retirement fund is usually destroyed, you life insurance becomes worthless, your salary will not keep up with the cost of food, electricity, and gas. Hyperinflation really hurts people. If your definition of deflation is met how will it impact someone's life?

      Delete
    8. >>FYI the Treasury gets the "profits" from the Fed. This is
      >>not all the interest as the Fed has some operating costs
      >>but it is most of the interest back.

      You apparently are unaware of how the FED / US government debt system functions.

      Step one Treasury issues debt via Tbill
      Step two FED buys debt at a given price (interest rate.)
      Step three FED does trades debt with the open market. FED attempts to set the rate via buying and selling its existing debt/assets. The market generally buys at a lower interest rate (higher price) than the FED.

      The FED then pockets the arbitrage money, issues a 6% divined of said profits to FRS shareholders. The rest of the profits are returned to the US government.

      However profits only cover arbitrage between the FED purchasing rates and the free market. All the interest on debt is still owed to those who purchased bonds on the open market.

      Sorry but this is NOT free money it is all owed back PLUS INTEREST!

      >>If the government is going more than a extra $1 trillion
      >>into debt every year it does not matter if the citizens are
      >>willing or able to go further into debt.

      And like I've explained before this debt doesn't matter unless it is spent into the free market. Sorry but the FED is allowing QE just to roll over previous debt, not to engage in a hyper-inflationary spending spree. This excess money/debt exists only on the FRS's balance sheet, it will never enter the free market.

      >>I can not find any indication that private debt has any
      >>relevance to hyperinflation. If a country gets
      >>hyperinflation seems to only depend on the debt and deficit
      >>of the government and not at all on private debt.

      Once private debt of a world reserve currency is unable to expand, deflation results until all of the private debt is liquidated. Only AFTER the liquidation phase is the currency re-valued lower.

      History has shown this many times over. The last world reserve currency the British sterling end in a deflationary crash when public became saturated in debt.

      Sorry but public debt saturation of a core economic power results in DEFLATION NOT HYPERINFLATION!

      >>hyperinflation starts private debt soon drops to almost
      >>nothing

      Your above comment should tell you why the banks and TPTB will NOT let hyperinflation happen. Sorry you but they have NO interest in devaluing what you already owe them PERIOD!!!

      >>as the value of bonds crashes when interest rates shoot up,
      >>and yet the hyperinflation continues. So private debt does
      >>not seem a factor in hyperinflation. Do you have anything
      >>to indicate it does?

      Hyperinflation is what happens when a NON CORE ECONOMY gets into debt trouble. The increased spending is driven by the CORE ECONOMY cannibalising said NON CORE economy's assets and productivity. The only reason Zimbabwe's unfortunate citizens were allowed to trade flakes of gold for bread is because the CORE ECONOMY still function to support the trade of bread for shiny objects. If the CORE ECONOMY where ever to collapse there would be nothing to support the trade of shiney trinkets for bread, Sorry!

      Delete
    9. When the federal government spends $1 trillion more than it gets in taxes do you think this is not "spent on the free market"?

      The Fed makes money out of thin air and then charges interest on it. This is a very profitable operation. When the Treasury pays interest on bonds held by the Fed the Fed has that interest as part of their income. The profits are given to the Treasury. The net result is that most of the money the Treasury spends on interest on bonds held by the Fed they get back.

      So if China became the CORE economy and the US a NON CORE then you would agree the US could get hyperinflation? All this takes is for the US dollar to drop by a factor of 2 and China is the bigger economy.

      There have been many many cases of hyperinflation. Why do you still believe your theory that "the banks would not allow hyperinflation" when your theory has failed in all these other cases? In the scientific method, a theory that is contradicted by experimental evidence is supposed to be thrown out.

      Delete
    10. At the start of every hyperinflation the "debt marked to market" goes down, as interest rates go up, which you probably call deflation. This contraction in the value of debt does not prevent hyperinflation, it is the opening act of hyperinflation.

      Delete
    11. >>You saw my FAQ about how deflation and hyperinflation are
      >>not opposites? I do not argue that the US may fit
      >>definitions of deflation if private debt is going down
      >>faster than government debt is going up. I just think you
      >>can have hyperinflation and deflation at the same time and
      >>personally don't think deflation is nearly so interesting.

      Your FAQ is wrong in too many ways to point out them all.
      Deflation and Hyperinflation of a currency does not occur at the same time.

      You are applying different definitions to opposing economic trends.

      Definition 1: Inflation/deflation is measured as a purely monetary phenomena. This view can lead to much confusion and incorrect conclusions if not properly understood and applied.

      Definition 2: Inflation/deflation is measured as the rate of change in prices for equivalent goods and services.

      Sorry but comparing definition 1 of deflation to definition 2 of inflation is like saying a shoe is both 12" long and 30.48" long at the same time. You then argue this is because when you measure with a yard stick the number says 12 and when you measure with a meter stick it says 30.48.

      Sorry but if you are going to compare two things you need to use the SAME measuring stick!

      BTW it is hyperinflation that is always short lived. Deflationary crashes are generally long and drawn out.

      >>I don't think there has ever been a deflation in a pure
      >>fiat currency (not related to gold or silver or returning
      >>to either)

      Wether a currency is back by silver or not, once the public of a core economic power is saturated with debt deflation must ensue.

      >>that had double digit price deflation. Do you
      >>expect any price deflation? If prices are not going down
      >>why should anyone care if the world fits your definition of
      >>deflation?

      Yes in general terms prices are going down and will continue to do so. There will be minor up trends and periods of stagnation as people adjust there lifestyles but this will take place within a larger downtrend.

      Prices of what you want will fall until they no longer make what you want.

      Prices of what you need will continue to rise until the market can no longer support the continued rise. Then they will fall until the market can support the price.

      Delete
    12. Everything on hyperinflation is in terms of price inflation. All the people who really seem to believe in deflation are talking money supply including debt. These two camps are using different yardsticks. I am just trying to understand them both.

      Again, suppose there is deflation by some definition including debt, why should anyone care? This deflation but not price deflation just does not seem to impact a normal human life. Hyperinflation really has an impact.

      Delete
    13. >>So if China became the CORE economy and the US a NON CORE
      >>then you would agree the US could get hyperinflation? All
      >>this takes is for the US dollar to drop by a factor of 2 and
      >>China is the bigger economy.

      Yes if the US no longer served a CORE function in the economy.
      Problem is for a debt based CORE Economy to become a NON CORE ECONOMY it must first liquidate all assets of value.

      Will have to discuss more later as I must go now for the night.

      Delete
    14. The Yuan is going up relative to the dollar and pays a higher interest rate than the dollar. It would make sense for any central bank around the world to get rid of their Treasury debt and get some Chinese debt. If they start doing this the dollar could easily drop by a factor of 2 and China could then have a larger GNP and be used more as a reserve currency. It seems this could all happen without the US first liquidating all assets of value. Why do you think the US would have to liquidate all assets of value to become NON CORE?

      Delete
    15. To reply to the rude post I deleted. The Treasury interest rates are so low because the Fed is buying around $1 trillion per year. This drives up the prices and drives down the interest rate. Please don't bother posting if you are going to be rude.

      Delete
    16. It's funny, when you read Vincent's musings they always make sense. When I read Anonymous' stuff it usually doesn't. I see this a lot with the Keynesian "borrow all you want it's fine" types. They say a lot of words but it rarely makes sense. I think they call that "baffle em with BS".

      Delete
  25. Let me say a word on my comment policy. If you are insulting me personally or hyperinflationists in general I will probably just delete the comment. If you are asking a question already in the FAQ I will probably just delete the comment. I really do want a clean debate and look forward to any attack on the ideas presented here. I hope that with feedback the FAQ can be improved.

    ReplyDelete
  26. What will happen to income producing real estate like retail shopping centers in a hyperinflation scenario? This type of property usually has long term leases with renewal options to the benefit of the tenant which prevents a landlord from increasing rents. My basic question is, would you consider income producing property a safe harbor for wealth during infaltionary/hyperinflationary periods?

    ReplyDelete
    Replies
    1. Property taxes and other expenses will go up with inflation. Governments often put price controls on rents during inflation. If the rent does not go up with inflation then an income producing property can quickly become an income taking property. During hyperinflation nobody can get a 30 year loan, so what the market can pay for any property becomes far less. People buy properties for cases of cash. If your property rights last till society recovers these can later turn out to be very good deals for the buyer. There is a saying, "buy when there is blood in the streets". Anyway, gold and silver seem safer than income producing real estate if you are investing to survive hyperinflation.

      Delete
  27. Sadly, a world war would seem to be the only course that doesn't take down the inflationary path. Hopefully that doesn't happen, but the alternative might not be any better. I would think 401k's primarily in stocks would do far better than 401k's in bonds. Is that true?

    ReplyDelete
    Replies
    1. I doubt a war would help things. Initially both bonds and stocks will go down in real terms as interest rates go up. But eventually stocks will keep up with inflation and bonds will keep going down. So yes, you are better off in stocks than bonds. I think gold and silver will do better than stocks initially.

      Delete
    2. War is part of the liquidation phase of deflation. War is used to accelerate the liquidation phase so inflation greater than the previous inflation can start again.

      Delete
  28. In Zimbabwe, the Government took from wealthy producers and gave to poor consumers. Once the economy went from producing to consuming in a major area, it was doomed. It seems we are doing the same thing, so the outcome may be the same.
    You did well on your information, I learned from it.
    Thank you

    ReplyDelete
  29. Great article, very informative. There absolutely has to be a consequence to printing that much money. It also makes perfect sense that now that so many are reaching retirement age and have their life savings in bonds and cash, these will be the next things to have their value stolen. You made a great case against holding cash. They should print a tulip on each bond to remind people how stupid this is. Much of the inflation already seems to be there, oil, gold, stocks, food, but not being counted in the Fed's inflation numbers. Not sure if the final advice is to own hard assets, commodities. Aren't they already high and toppy?

    ReplyDelete
    Replies
    1. Thanks. If we get hyperinflation then today's prices are not high and toppy.

      Delete
  30. How long would Hyperinflation last for before things start return to normal? (Aprox if no set time)

    What and some good measures I could take to help me and my family get though that period ?

    I'm really worried about this, your advice would be much appreciated

    Many thanks.

    ReplyDelete
    Replies
    1. You don't want to be holding bonds or too much cash. Holding gold or silver is good.

      It is really hard to say how long hyperinflation would go on. With the Internet you could make a case that people will understand things much faster and so things will move much faster. But the US dollar is the world reserve currency, so maybe things will go slower. Many hyperinflations seem to take a couple years. I think that we could get Yen, Pound, Dollar, Euro falling like dominos. From start to end might take awhile. With most of the world's paper money in trouble the recovery time could be long. It will be a big mess and hard to say how soon things get cleaned up.

      If you can afford a yatch by the Dashews, that would be a good way to distance yourself from any problems. :-)

      Delete
  31. Isn't hyperinflation also a deflation under the hood? I mean, prices rise, but total stock of money actually contracts, and if hyperinflation continues to its logical finale, in the end the total stock of money is worth exactly ZERO. So when people say 'we can't have inflation, cause we're gonna have deflation' there is no contradiction. Price inflation do not contradict monetary deflation.

    Therefore, the qualitative difference between normal and hyper-inflation is this: in normal inflation, the euphoric effect of monetary pumping is stronger than disphory of rising costs. People feel richer as a result. In galloping inflationary environment, inflationary expectations counter any monetary 'high', and even prevail, so that monetary pumping is unable to produce feelings of prosperous 'boom' but are still necessary to support the skewed structure of production? and inflation is 'neutra' in the same sense as drug addict feels when highs do not occur anymore due to tolerance. And hyperinflation is just an attempt to get rid of tainted, flawed money. the difference is qualitative and fuzzy, not 26% or 50%.

    ReplyDelete
  32. That dude is getting on my nerves, is he a shill?.. He said hording, didn't he mean hoarding? He said wheel barrel, didn't he mean wheel barrow?... Maybe he should buy one and start a garden, he may need it soon..... Outstanding article and feedback...

    ReplyDelete
  33. Isn't better to own stock of hard asset companies that pay a dividend and sell their commodities internationally? During hyperinflation, all goods rise, so why buy non-income producing assets like gold and silver?

    ReplyDelete
    Replies
    1. When hyperinflation starts things that are usually bought with loans will drop in price relative to gold. With higher interest rates the amount people can afford to pay goes down. You can view this as "deflation when priced in gold".

      Stocks are competing with long term bonds. As interest rates go up the price of bonds goes down, and stocks as well. This is the reverse of the central bank driving down interest rates to make stocks go up.

      Eventually stocks, realestate, etc will go up with inflation.

      The government can tax interest and public companies and stock sales. There are taxes on land. Inflation can make it look like you have lots of profits when in real terms you do not. Gold coins you can hide and use one by one years later without paying any tax. It can be that the taxes on the bonds, land, or stock eliminate what should be an advantage for productive assets.

      Outside of taxes, it does seem that a productive asset should win over the long term. But in the short term it still may not. If it was overpriced at the start it could do poorly.

      It is possible that stock in a hard asset company will do enough better than the stock market in general to be better than gold, but not clear to me.

      Delete
    2. Think about a "leveraged buy out" where a loan is used to buy up a company, and then the earnings used to pay off the loan. The price you can afford to pay for the company depends on the interest rate. If interest rates shoot up the price goes down.

      Delete
  34. Fantastic hyperinflation FAQ.

    One thing. You state that banks earning interest from excess reserives keeps the money out of the economy. True. But won't banks earning massive profits over time cause those earnings to enter the economy via their dividends and use of their profits to buy other assets?

    ReplyDelete
    Replies
    1. Eventually the money is going into the economy. The question is just how and when. Printing money and buying bonds makes interest rates lower in the short term but will make inflation higher and interest rates higher in the long term. Bad economists just look at the short term and say "in the long run we will all be dead". Profits from the banks going to shareholders, or bonuses to executives, is one of the ways money gets into the economy.

      Delete
    2. The "excess" reserves are not excess. Banks reserves are only a tiny fraction of the money they tell everyone they have in their account. This is why those who put money in Cyprus were forced to take a hair cut. Sorry but putting money in a bank and collecting interest is NOT saving it's INVESTING! When the investment goes sour don't expect your money back.

      So what do you think will happen when everyone is forced to take a hair cut? Sorry it's not Hyperinflation.

      Delete
  35. I got here from another Hyperinflation blog (fofoa) and I must say you have done a great job with your FAQ. Congratulations.

    ReplyDelete
  36. Vincent, a wonderfully clear and inspiring exposition, thank you. Some humorous misspellings - "yatch" and "degreasing GNP".

    I understand falling real GNP as a result of hyperinflation. Can you clarify why it is a cause? "Cause versus "result" is a really important distinction. In the 1970's inflation, interest rates rose and lagged behind inflation. Then Volker allowed rates to get ahead of inflation, which killed it. Interest rates shifted from being an effect to being a cause.

    - Smithy

    ReplyDelete
    Replies
    1. Thanks for pointing out the spelling errors, I fixed degreasing.

      In a "feedback loop" or "death spiral" things are both "cause" and "result". As the real GNP goes down there are less real goods. The same money chasing less goods results in more price inflation. But the high inflation, government price controls that always come with, impossibility of long term borrowing, and general chaos and unpredictability, result in less real GNP. So lower real GNP is both cause and effect of hyperinflation.

      Delete
    2. Maybe "de-Greece-ing" will eventually apply. : )

      Delete
  37. 2 words ....."incredible info" thanks

    ReplyDelete
  38. First Time i saw a blog such good as yours related with Hyperinflation.
    Excellent work , thanks for sharing us all this information and brainstorming.
    Please keep up good work.
    John

    ReplyDelete
  39. Vincent, thanks for a very interesting read, I have posted on my blog site about inflation but much of my focus has been on other economic and social matters. Since I came across your site on the Economist I suspect you are UK based. The euro, currencies, deficit spending, and bubbles are interesting variables that may spark or spook the next round of inflation. One post ask, What Is anything Worth? It points out the small amount of debt free, "proof of ownership" items that are in a persons possession in case of a rush to hard assets. If you have time check out the post, and my site, thanks again, the link is below,

    http://brucewilds.blogspot.com/2012/11/what-is-something-worth.html

    ReplyDelete
  40. As soon as the US starts (literally) printing money (banknotes) to finance its expenses then and only then Hyper-Inflation will occur.

    "Hyper-Inflation requires Hyper-Deflation"
    "Hyper-Inflation is a political choice"

    Source: Hugh Hendry & Robert Prechter.

    ReplyDelete
    Replies
    1. Argentina and other modern countries have had hyperinflation that was mostly electronic and not piles of banknotes. It is up to the users of the money if they keep their money electronic or as banknotes. If people in the US all decided they wanted physical Federal Reserves Notes, then physical Federal Reserve Notes would be printed. But it does not really change anything.

      Delete
    2. Nope. If a government creates "electronic" money (money = credit) then that money will go into the banking system. And the banks will bid up the asset that are going up in price. (USDs, gold, silver, etc.). The ordinary citizen won't get their hands on that credit/money.

      If the government literally prints money to pay its bills/employees then we're clearly in Hyper-Inflation. That could occur because then e.g. the US government can't issue T-bonds anymore. Also known as a bond market collapse.

      In that regard there's a similarity between deflation and inflation. In deflation credit dies, in HyperInflation both credit & money die.

      Delete
    3. We have entered a whole new world, the rules of the past may not apply. The following post on my blog site received a lot more attention then I had expected.

      http://brucewilds.blogspot.com/2013/01/fiscal-cliff-nothing-compared-to.html

      This is only one of many new instruments that are skewing and distorting the economic picture we see today. To think we have control of the situation and this time "it will be different" is a stretch.

      Delete
  41. Wonderful work! This really helped me make the historical connections btw government deficits and hyperinflation.

    ReplyDelete