The Case For Hyperinflation In The United States

The Case For Hyperinflation In The United States

More than 35% of all US Dollars in existence were printed in 2020. While the United States is still far away from hyperinflation, the printing press is running hotter than ever before. When central banks like the Federal Reserve inflate the money supply, this leads to price inflation. When there are more dollars in circulation to purchase the same number of goods and services, due to supply and demand, the prices of those goods and services rise.

Table of Contents

The Inflationary Economy

Most central banks aim for around 2% year-over-year inflation.

Inflation is viewed as something beneficial because we live in a debt based economy. Inflation is good for anyone who is borrowing money because they can pay back the debt with money that is worth less.

Inflation also encourages people to spend money instead of saving it, which is thought to help stimulate the economy. But the central idea in Keynesian economic theory is that government spending and money printing are necessary crisis intervention strategies.

Whenever there is a market crash or recession, central banks pump money into the economy to prevent a meltdown. This happened during the Great Recession in 2008 and more recently during the Covid-19 crisis.

The problem is that central banks merely kicked the can down the road. Printing money never solved the underlying economic problems responsible for the Great Recession. Instead, they bailed out financial institutions and injected billions of dollars to counteract deflation. Printing money can be thought of as a temporary solution, like putting a bandaid on an open wound.

When central banks print money, it’s kind of like when a psychiatrist prescribes anti-depressant drugs that temporarily mask the symptoms of depression. But it leads to more severe long-term problems. The root cause of the depression is never addressed. It’s still bubbling beneath the surface. Suppressing it with drugs, or in the case of central banks with economic stimulus, creates a vicious circle that is hard to break.

The bottom line is that since the Great Recession the economy is “addicted” to receiving a continuous influx of freshly printed money. If central banks ever stopped, the economy would suffer serious “withdrawal symptoms”.

The depression that was never resolved in the first place would return more viciously than ever before.

The Control Fallacy Of Central Banks

What this means is that the economy is in an “Everything Bubble” that is only kept from popping due to governments and central banks continuously resorting to the printing press.

The problem is that governments and central banks don’t have any real long-term control over inflation or the economy as a whole. This could recently be seen in the United States when the inflation numbers ended up being far higher than predicted by the Federal Reserve.

This has to do with inflation expectations.

Fiat currencies are only stable as long as citizens have trust in the currency’s ability to store value. When governments and central banks inject money into the economy and business owners begin to expect price inflation, this expectation is enough to cause prices to rise.

When business owners feel like the currency they’re being paid in is worth less because there is more of it in circulation, they will increase the prices of goods and services they’re selling. And rising prices, per definition, equals inflation.

It doesn’t matter what the Federal Reserve or any other government or central bank thinks. Since inflation expectations can lead to inflation, and the U.S. government and Federal Reserve don’t have any sustainable way to control these expectations, their options are limited. To actually control inflation, governments would need to find a way to control the minds of their citizens.

How Central Banks Attempt To “Control” Inflation

So what options do central banks have? The first option would be to stop printing money or even remove money from circulation. But just like a depressed patient quitting to take anti-depressants, the withdrawal symptoms would be serious. If the Federal Reserve abruptly stopped printing money, the “Everything Bubble” that the economy has been in for the last decade would pop. Deflation would kick in, leading to a prolonged and severe economic depression. The economic meltdown of 2008 that was prevented last-minute would finally take place.

But the U.S. government and Federal Reserve won’t let that happen. Neither will nor have other governments in the past. When a “quick fix” is available, when governments can lean on a temporary crutch that preserves their political power, they will likely make use of it.

Another alternative would be for central banks to change the narrative around inflation in an attempt to control inflation expectations. They can use terms like “Quantitative Easing” or “Troubled Asset Relief Program” to obfuscate the act of money printing. They can downplay inflation and say that it won’t be a problem or that it’s only temporary. They can change the way inflation is measured or even stop reporting inflation numbers all together.

Price Controls And Outlawing Foreign Currencies As Last Resort

These strategies can’t be kept up forever though. Once business owners and consumers come to the realization that the currency they’ve trusted has been debased to the point where they don’t feel comfortable holding it anymore, inflation starts to accelerate.

When people lose trust in a currency they tend to flee to foreign currencies, gold or commodities. This increases the velocity of money. In other words, money moves hands faster as people try to get rid of it. It’s like a game of musical chairs: Whoever is left holding the debased currency is the loser. As a result, business owners increase prices even faster. Inflation expectations lead to more inflation and vice versa. It’s a self-fulfilling prophecy.

At this point, governments usually resort to price controls and outlawing foreign currencies. But enforcing price controls and banning alternative forms of money is difficult and has mostly proven fruitless during prior periods of hyperinflation. Companies and civilians will choose illegality over loss of purchasing power. Black markets emerge.

All of this accelerates the loss of confidence in the currency. As inflation continues getting out of control, the only thing central banks can do to keep the economy going is to flush it with more money.

At some point the trust in the currency reaches such a low point that the currency collapses. As a result, the economy grinds to a halt which leads to a tremendous amount of poverty and suffering. People lose their life savings and those who depend on fixed income are left with nothing. Only those who are invested in stocks, commodities and foreign currencies profit from the inflation. Hyperinflation is usually accompanied by food riots, starvation and drastic increases in prostitution and petty crimes. The economy breaks down to the point where people start bartering goods and services. Banknotes are littering the streets because they’re worthless.

Eventually the debased currency is pulled from circulation and a new government-issued currency is introduced. Economic stability gradually returns as trust in the new currency is gained.

But the scars of hyperinflation stay forever.

Recent Examples Of Hyperinflation

The most commonly accepted definition of hyperinflation is a month-over-month inflation rate of 50% or more.

As of writing this article only Venezuela meets this criteria for hyperinflation. The Venezuelan Bolívar is losing purchasing power at 5,500% per year which equals a monthly inflation rate of 458%.

Sudan is approaching hyperinflation as well with a yearly inflation rate of 423%, which translates to around 35% month-over-month inflation.

The United States is still far from experiencing hyperinflation. Although the year-over-year inflation rate increased dramatically from 1.2% to 5.4% between October 2020 and July 2021, it would need to reach 600% to be classified as hyperinflation. This is why it is relatively unlikely that we will see hyperinflation in the United States in the next few years.

But it’s important to remember that during hyperinflation the inflation rate increases exponentially. It can happen a lot faster than expected. In 2013 the year-over-year inflation rate of Venezuela was 56% as reported by the Central Bank of Venezuela. In 2018 it reached 130,000%. On the other hand, the International Monetary Fund expected Venezuela’s hyperinflation to be at 39% in 2013 and 929,790% in 2018.

That’s a huge increase in just five years.

And as we have seen there is no reason to believe the United States is immune to fast and unexpected inflation increases.

Hyperinflation in Venezuela (Here’s a graph of Venezuela’s exponentially growing inflation rate)

Venezuela’s conflicting inflation numbers illustrate another problem: Inflation rates are hard to measure. There are different methods of estimating and measuring inflation. The U.S. government and Federal Reserve, and anyone else for that matter, don’t know the true inflation numbers. And even if they did, in an attempt to prevent inflation expectations from getting out of hand, governments would have a bias towards underreporting inflation numbers or downplaying them if they are higher than expected.

Influencing the public narrative is one way governments try to keep the lid on inflation. Some alternative measurements suggest that true inflation in the United States is closer to 10% per year.

Zimbabwe experienced one of the worst periods of hyperinflation between 2007 and 2008. The Zimbabwean Dollar reached an inflation rate of 79,600,000,000% per month in November 2008. Two decades before, in 1988, the year-to-year inflation rate was only at 7%. Zimbabwe’s inflation rate increased slightly but remained relatively steady for the next two decades. And then it started going up exponentially between 2007 and 2008.

Similarly, a loaf of bread cost around 160 Marks in Weimar Germany at the end of 1922. A few months later, as the German hyperinflation went parabolic, the price of a loaf of bread increased to 200,000,000,000 Marks.

Is the United States Next?

Given that the year-to-year inflation rate of the United States is reported to be 5.4% and the true inflation rate could be much higher, it begs the question whether the United States might experience hyperinflation in the next few decades. It further sparks the question whether all government-issued fiat currencies eventually end up being worthless.

One could argue that fiat currencies, which governments can inflate at will, always lead to price inflation and eventually hyperinflation. It just depends on the time horizon.

The United States went off the gold standard in 1971. Before World War I, all countries backed their currencies with gold. Fiat currencies, Keynesian economics and modern monetary theory appeared on the world stage relatively recently. We only have around 50 years of historic data. Before that, during and after World War I, countries like Germany, Austria and Hungary experienced hyperinflation because they temporarily abandoned the redeemability of paper money into gold. They did this to create money in order to increase government spending beyond their means to fund the war.

Before that, the earliest reported incident of hyperinflation took place during the French Revolution in 1795, when the revolutionary National Assembly issued an excessive amount of paper currency. All other recorded incidences of hyperinflation happened once the world was off the gold standard.

A Grim Preview Of What Might Be Coming

This modern monetary experiment, where governments issue fiat currencies that aren’t backed by anything but faith and can create as many units of the currency as they want, is a blip in history. It might take another decade or two, or even a century, before we fully understand the impacts of this monetary experiment.

But if history is an indicator, we can expect all fiat currencies to eventually lose a significant amount of their purchasing power. Every government that lived beyond its means, experienced economic troubles and flooded the market with an excess of paper money, regardless of the reasons for it, eventually experienced heightened inflation or hyperinflation. It’s simply a matter of how much money is printed, over what period of time and what other economic factors make a country vulnerable to hyperinflation.

Given the increased government spending and more aggressive money printing that followed the Great Recession, and more recently, the Covid-19 pandemic, the question remains whether incidences of hyperinflation such as reported in Germany, Zimbabwe and Venezuela are simply a taste of what history has in stock for many other countries in the next few decades.

There is a clear correlation between money supply and inflation. Many countries have expanded the money supply steeper and more aggressively than ever before in response to the Covid-19 pandemic.

In the United States, for example, the money supply increased significantly in 2008 after the Great Recession and then went parabolic in 2020 as the Federal Reserve printed money in response to the pandemic.

(The M2 Money Stock of the United States saw a steep increase in 2020)

Why Aren’t We Seeing More Inflation Or Even Hyperinflation In The United States?

Inflation is usually measured with the Consumer Price Index (CPI), which is a complex measurement tool. It measures a broad basket of goods and services but doesn’t account for rising asset prices such as real estate and stocks.

The S&P 500 has gone up over 20% in 2021. And real estate prices have increased at similar rates. While inflation measured with the Consumer Price Index has jumped from 1.2% to 5.4%, and possibly more if other inflation measurement methods and criteria would be used, asset prices have surged in a much more noticeable way.

How can it be that the stock market is trading this high in the midst of the Covid-19 crisis? And how could the stock market experience the fastest recovery in history after the initial sell off in March 2020? It’s not that the underlying value of these companies has increased. Rather, it’s because the currency these stocks are denominated in has lost purchasing power. In other words, inflation is making itself noticeable in the form of asset bubbles in the stock market and real estate market.

There might be other reasons why we aren’t seeing hyperinflation in the United States though.

After the Great Recession in 2008 many people expected heightened inflation or hyperinflation. While consumer prices moderately increased, hyperinflation didn’t take place. This can be explained because the printed money the Federal Reserve gave to the banks simply refinanced the banks but didn’t create any additional dollars. It simply counteracted deflation.

Another explanation is that higher inflation was present but under-reported by the Consumer Price Index.

Understanding Deflation

Before I wrap up this article, we have to talk about deflation.

Deflation is the opposite of inflation and means that prices fall. It’s one of the government’s worst nightmares because it can lead to economic depression. This depression, while painful in the short term, might be necessary for an economic reset. Over-leveraged banks, “zombie companies” without profitable business models and speculators who took insane risks have to learn their lessons.

Instead, the Federal Reserve bailed out these financial institutions and investors with the slogan “Too Big To Fail”. This reinforced the message that no matter what happens, the government will be there to bail them out. There are no consequences for harmful behavior and speculation in financial markets. Bankruptcies are a thing of the past. Financial predators won’t be prosecuted.

The Federal Reserve has effectively outlawed economic depressions. Whenever economic crises, deflation and depression show their ugly face, the Federal Reserve prints more money. The economy is like a huge bucket of water with multiple leaks. Whenever a new leak appears, the Federal Reserve temporarily plugs it by stuffing in money. We are in an “everything bubble” that isn’t allowed to pop. The economy is propped up artificially. And the longer the Federal Reserve does this, the more painful the economic depression will be once the printing press is turned off.

The Battle Between Deflation And Hyperinflation In The United States

In this situation, the Federal Reserve is stuck between a rock and a hard place. They have to keep the economy afloat by printing more money, and as the “everything bubble” gets bigger with every consecutive crisis, they have to print larger and larger amounts of money to prevent an economic collapse.

The other option would be to let the bubble burst which would cause a painful economic depression that flushes everything foul out of the system and allows for an economic reset. Since neither the Federal Reserve nor any politician wants to be responsible for a deflationary economic meltdown, they continue printing money.

But the vicious circle can’t be kept up forever.

It will eventually either lead to hyperinflation or deflation. If the game is played until the end, the “everything bubble” will continue growing while requiring more and more monetary stimulus to prevent from popping. This would almost inevitably lead to hyperinflation at some point.

Alternatively, the Federal Reserve lets the “everything bubble” pop. Either they willingly scale back their money printing or fail at averting one of the upcoming economic crises. This would cause deflation and be followed by a painful depression. Whether hyperinflation or deflation, both would result in a temporary economic and social collapse. And both would lead to immeasurable suffering.

How To Preserve Wealth During Hyperinflation

While the United States is still far away from hyperinflation, it’s probably not a bad idea to be prepared for the worst case.

Stocks, gold and scarce commodities have historically proven to be a decent hedge against hyperinflation. While it’s hard to preserve wealth in times of hyperinflation, there are always profiteers and people that position themselves in a way that allows them to benefit from the currency collapse.

A collapse of the U.S. dollar would have much more far reaching consequences than any past hyperinflation though because of the U.S. dollar’s status as world reserve currency. The ripple effects would likely lead to global crisis of unimaginable scale.

Bitcoin, due to its limited supply, deflationary nature and decentralized network should be part of every investor’s portfolio.

Apart from that, food shortages are common during hyperinflation so for those who want to go full-on “apocalyptic” having a small piece of farm land or a garden with water supply and a way to grow your own food might protect from the more ugly sides of hyperinflation. Even if you hold stocks, gold and Bitcoin and they skyrocket in value, if supply chains are disrupted, supermarket shelves are empty and nearby farmers are hoarding their produce, you might be grateful for having your own food garden or farm land.

That being said, periods of hyperinflation usually don’t last very long. Most historic periods of hyperinflation were quick and nasty. Inflation accelerates exponentially, leading to a temporary economic collapse and an eventual currency reset. It is remarkable how fast Weimar Germany recovered and regained economic stability after experiencing one of the worst episodes of hyperinflation in history.

It provides hope that should we ever experience hyperinflation in the United States, it won’t be the end of the world.

October 26, 2021