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The Fed Can't Trigger Hyperinflation, It's Not Even a Monetary Event!

I make the case hyperinflation is really a political event, not a monetary one.
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Hyperinflation could it happen

Raising Eyebrows 

The title of this post will raise eyebrows. I suspect some will skip reading this article simply because of the title.

After all, every hyperinflation in history has been accompanied by massive monetary inflation.

The key word is "accompanied". But accompany does not imply cause.

Hyperinflation Q&A

Q: What is hyperinflation?
A: Hyperinflation is a sudden complete lack of faith in currency. 

Professor Steve Hanke, the leading authority on hyperinflation says "hyperinflation occurs when a country's inflation rate exceeds 50% per month."

That may be a sufficient condition but it makes for a poor definition. For example, 40% inflation monthly for six months would result in a 95% decline in purchasing power and for nine months would result in a 99% loss in purchasing power but neither would technically qualify.

50% in a month would not constitute hyperinflation in my definition but in practice inflation at 50% in a month has never suddenly stopped at that level.

We need better parameters and I propose 95% over two years or 99% over three is sufficient. Thus, sudden means three years or less and complete means 95% or more loss in value. Perhaps there is a better word than complete.

Hyperinflation is a Political Event

The hyperinflation topic repeats itself with great regularity. It came up again over the weekend in a huge series of Tweets.

What About the Fed?

Eventually, one person asked me for examples and a prior article to make my case.

Previous Discussion

I have written about hyperinflation many times, always mocking US predictions. The articles are in an "archive blog". 

The following three links work, but some embedded references within may not because they were reformatted improperly for a move to TheStreet. However, the discussion is important and still stands today.

  1. December 12, 2010: Williams Calls for “Great Hyperinflationary Great Depression”; A Very Easy Rebuttal
  2. May 25, 2011: Hyperinflation Nonsense in Multiple Places
  3. August 5, 2016: Hyperinflation Silliness (Times Two)

Please review those articles, especially #2 which I also refer to below.

Nonsensical Hyperinflation Calls

Hyperinflation calls have been going on for decades and continue now. It's complete silliness in light of the 50% inflation in a month definition.

Even high inflation as measured by the CPI is highly unlikely in the US. 

Hyperinflation is a Political Event

Let’s go back to the beginning, with a definition of the word: Hyperinflation is a sudden, complete loss of faith in currency. 

Here are three examples of the politics involved.

Zimbabwe Hyperinflation

In Zimbabwe, the Mugabe government initiated a “land reform” program intended to correct the inequitable land distribution created by colonial rule. Ultimately, Mugabe’s attempt to to bail out the poor at the expense of the wealthy is what triggered capital flight and loss of faith of the currency.

His reforms not only caused a flight of capital and human capital (the wealthy), they also led to sanctions by the US and Europe. In response, Mugabe turned on the printing presses but the loss of faith in the currency had already occurred.

Weimar Hyperinflation

In Weimar Germany, mandated war reparations kicked off hyperinflation. 

Wikipedia provides a good accounting in Inflation in the Weimar Republic.

John Law Mississippi Bubble Hyperinflation

The John Law Hyperinflation episode is my favorite example. 

In 1716 Law convinced the French government to let him open a bank, the Bank Generale, that could issue paper money, or bank notes. The paper notes would be supported by the bank's assets of gold and silver and would circulate as a medium of exchange. Paper money was a new concept for the French; money to them was silver and gold. Law believed that paper notes would increase the money in circulation, which, in turn, would increase commerce. 

The company next purchased the right to mint new coins for France, and by October it had purchased the right to collect most French taxes. In January 1720, Law became the Controller General and Superintendent General of Finance. Law now controlled all of France's finance and money creation. He also controlled the company that handled all of France's foreign trade and colonial development. Furthermore, by holding much of the French government's debt, he had created a stable source of income for future business ventures. Law had created Europe's most successful conglomerate.

Law paid for these activities and privileges by issuing additional shares in the company. These shares could be paid for with bank notes (from his bank) or with government debt. 

In the end, many of the new millionaires were financially destroyed. So was France. It would be eighty years before France would again introduce paper money into its economy. 

Can The Fed Cause Hyperinflation?

I do not think the Fed itself can cause hyperinflation and more importantly I am sure they would not if they could. The reason is “Hyperinflation Would End The Game“

  • Hyperinflation by definition would destroy the currency and thus the banks
  • Hyperinflation would destroy the wealthy and all their corporate bond holding
  • Hyperinflation would destroy the Fed
  • Hyperinflation would destroy the wealthy political class

To understand how powerless the Fed is, one needs to understand the difference between credit and money, how much the former dwarfs the latter, and what the Fed’s role is in getting banks to lend

Note that the Fed has no power to give money away. Nor would they do so if they could.

Unlike the Fed, Congress could give money away.

I do not know if giving everyone in the US $60,000 would do it or not, but giving everyone $60,000 a month indefinitely would sure do it.

How likely is that?

May 25, 2011 Flashback 

The discussion above under the subtitle "Can the Fed Cause Hyperinflation" is from Hyperinflation Nonsense in Multiple Places.

Nothing has changed! The above paragraphs stood the test of time.

The Politics of Hyperinflation

The Politics of Hyperinflation

There is not a single hyperinflation event in history that was not triggered by a political event.

Efforts to Stimulate Bank Lending

On May 25, 2011 I wrote "To understand how powerless the Fed is, one needs to understand the difference between credit and money, how much the former dwarfs the latter, and what the Fed’s role is in getting banks to lend." (emphasis added).

On April 20, 2021 I wrote The Fed Wants to Stimulate Bank Lending, Charts Show the Fed Failed

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A decade of QE did not spur inflation or lending in the EU. Three decades of QE did nothing for Japan. 

In the US, give the Fed credit for goosing housing but a lot of that was pent up demand.

Low interest rates and QE did keep zombie corporations alive in the US, Japan, and EU. That is a net negative for the economy.

QE also boosted financial speculation, especially in the US, but again that is a net negative for the economy. 

I count that financial speculation and housing prices as inflation, but misguided economists only look at the CPI, not bubbles. 

Helicopter Drop 

The Fed cannot give away money and would not if it could because it is beholden to the banks.

Thus, all this talk of a "helicopter drop" by the Fed is complete nonsense. 

The real "helicopter drop" was Covid-19 stimulus first by Trump then by Biden. 

But this was "one" time, now "three". It supported spending but there are no indications of further drops. 

The US recovered faster then the EU because it gave away far more free money. The pain will come later.

What About Biden's American Family Plan?

Biden's "American Family Plan" is a political event in which the Fed would have to go along with.

A more accurate name would be "American Socialists' Plan"

Politics Lead, Not Follow

Biden's plan is another example of how politics lead rather than follow monetary events

However, that plan to give away free stuff has stalled in Congress as noted in Democrat's DC Statehood Idea Is Dead Already. What Else is Dead?

Moreover, even that plan would not cause hyperinflation as defined above. 

Hyperinflation Scenario

I was asked to come up with a "plausible" event that could cause hyperinflation in the US. It would take something like this:

  • Progressives get in charge of the Executive and Legislative branch. 
  • They guarantee a right to a "living wage" coupled with free shelter, free education, and free food. 
  • They vote to spend a hundred trillion dollars to fix climate change and whatever it takes to end homelessness.
  • They vote to tax the wealthy at 90% top pay for it.
  • Finally, they open the borders and give all this stuff away for "free" to all alleged political refugees. 

I leave it to the reader to decide the "plausibility" of that political setup, but the existing Fed would not want any part of it as it would destroy the dollar.  

The politics of the matter would require Congress to replace the Fed, which they would do. 

Indeed, removing a central bank and replacing its members is in and of itself a potential hyperinflation trigger. 

Fed's Asset Purchases

The above discussion is how one needs to think of hyperinflation. 

All of the hyperinflation predictions have failed because the Fed, as it exists today, cannot and will not trigger hyperinflation

The Fed's asset purchase program is not remotely sufficient for anything other than blowing bubbles.

Also, most people are too US centric. It is extremely difficult to trigger hyperinflation, even strong inflation when all of the key central banks and governments are doing the same thing.

Japan has tried to produce inflation for three decades and failed. How pathetic is that?

Yet, properly measured inflation is easy to spot in housing bubbles and other financial speculation.

Hello Fed, Inflation is Rampant and Obvious

My post Hello Fed, Inflation is Rampant and Obvious, Why Can't You See It? still stands as accurate.

Inflation is way understated but it is primarily manifested in asset bubbles, not prices of consumer goods. 

Q: Guess what?
A: Bubbles pop.

CPI Inflation is Transitory

By definition, bubbles must pop. Popping asset bubbles are anything but inflationary. 

This is why I side with those who do believe CPI inflation is transitory.

For discussion, please see Don't Worry, the Fed Says the Recent Jump in Inflation is Transitory

On April 9, I commented Expect Inflation to Accelerate? Here's 8 Reasons to Expect Decelerating Inflation

In that post I quoted Lacy Hunt at Hoisington Management as follows.

"Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year end and will undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation."

Transitory Jokes

It is easy to make jokes about "transitory" but the disinflationary forces are huge.

In addition to the 6 factors Lacy noted, I added two. Then in subsequent posts I added more reasons including tax hikes and demographics.

Yes, It's transitory!

The above discussion pertains to CPI measures of inflation not monetary inflation which is 100% certain to continue.

That said, the demographic forces impacting prices coupled with Biden's tax hikes (something will pass) are indeed price deflationary as would be declining asset valuations.

How to Play?

Please ponder The Odd Couple, US Treasuries and Gold, Good Time to Buy Both?

Meanwhile, forget about hyperinflation or even high inflation unless we see a political even like the one I described above. A political trigger always happen first. The printing follows.

Mish