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

Mish

I make the case hyperinflation is really a political event, not a monetary one.

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. 

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

Comments (56)
No. 1-24
Mish
Mish

Editor

I am out this morning - bad timing because there is a comment conversion (or supposed to be).

Comments will at some point be down for a few hours.

jivefive99
jivefive99

Based on my 54 years of watching the news, and having my Reggie bar in 1970s go from 25 cents a bar to 40 cents (I was sad for a year), I believe: there will never be any inflation until, for whatever reason, the price of a barrel of oil/gallon of gas goes up (1970s); that the US govt doesnt care about nor really measure price inflation except when it comes to gasoline prices -- all other prices can be "cheated" down; that companies are "monkey see, monkey do" when it comes to raising prices (if one of them starts it, they all do it -- blaming the other guy or Covid or something), the company consolidation/reducing by half the stocks on the exchanges that has happened only gives them an excuse to raise prices due to lack of competition, and remember what Jim Rickards is saying about inflation: without money velocity, there will be no inflation.

anoop
anoop

I'm not enough of an expert to comment on this post, but when someone like Burry says we are headed towards hyperinflation and that it takes multiple years to play out, I'm more inclined to believe that it's going to happen.

CoxSwane
CoxSwane

Great stuff, Mish. All of your recent stuff on inflation (lack thereof), as well as pointing to historical writings, is spot on and timely. Appreciate all the work.

Eddie_T
Eddie_T

First, I read your articles in 2010 and 2011 and they impacted my thinking a great deal. Thanks for being there when I needed you.

Second, please make the case for bonds. I still don’t quite see it. What am I missing? If yields fall, bond prices go up, but how far can yields fall before they bottom out? I could see it for a trade. I have a harder time seeing it for anything else.

Gold....I get gold, I think, and I still view it as safe but pretty boring in just about any likely scenario other than hyperinflation.

Doug78
Doug78

You should add to your list something that is much more likely to happen under Biden and that is a war with China over Taiwan. Instead of bottlenecks we would have total supply ruptures not to mention the monetary chaos we would have. It could be the spark that gives us hyperinflation.

KyleW
KyleW

"Currency collapse" would be a better term than hyperinflation. Inflation implies something is being inflated. Normally that's the money supply.

Carl_R
Carl_R

I believe hyperinflation can occur in one, and only one situation, that being where the debt of a country is denominated in something other than it's own currency. When the debt of a country is denominated in it's own currency, it always has the option of printing additional currency to pay off it's debt, a one time event. That may cause a decrease in the value of that currency, but can never create a runaway situation, i.e. hyperinflation.

By contrast, say you have a country, such as Germany, which has a debt denominated in gold. They can print more currency to buy gold to pay the debt, but as the currency loses value, the debt (as translated from gold to currency) becomes bigger, so the debt can never be paid off. The more they print, the further behind they become.

Say that you have a country, such as Argentina, and their debt is denominated in USD. If they try to print more currency to buy USD to make payments on the debt, and the currency loses value, the debt gets bigger. The more they print, the further behind they get.

What about the US? The US debt is almost exclusively denominated in USD, so hyperinflation is impossible. The one exception to debt denominated in USD are the TIPS bonds, which are inflation adjusted. Thus, for those, printing more USD to repay them, if it caused a loss of value of currency (i.e. inflation) would increase the value of the TIPS bonds.

TIPS bonds, however, are only a small portion of the debt, so for now, hyperinflation is impossible. If, at some point in the future, the USD loses it's currency reserve status, and other countries demand that our debt be denominated in some other entity that we don't control, then at that point, hyperinflation will become possible.

5 Replies

Mish
Mish

Editor

Zimbabwe had no debt in other currencies that I am aware of.

Carl_R
Carl_R

Just to be clear, I absolutely agree with you that you also need a precipitating event. A country can have debt in USD, for example, and not end up in hyperinflation. All they have to do is practice fiscal prudence. The Zimbabwe situation is murky. There they had more than enough precipitating events. Did they have debt in other currencies? I don't know either, but it appears that they had foreign spending in others currencies, for military expenses, for one, and most likely for food as well, since food production crashed.

Certainly the two are both aspects of hyperinflation, and they are often intertwined. For example, you termed the war reparations that Germany had to pay as a political event, while I would call them a debt in an outside form of money, in this case, gold. In reality, it was both.

Eddie_T
Eddie_T

I appreciate your responses. I think you have it nailed.

Zimbabwe had tons of capital flight because Mugabe was a populist demagogue who took it on himself to redistribute much of the wealth in the country. We might learn from that. It’s a popular idea in many corners these days, and the same thing is probably going to happen here at some point.

It’s interesting that after their currency became worth less than the (expensive) printing cost, they finally made it legal to use US dollars (which was already well underway in the black market).

At that point they got back to some stability....and then they made the USD illegal again and immediately started printing more of their own Zimbabwe dollars.....and they immediately went back into hyperinflation, which I think is still ongoing, although I don’t have much insight into the last year or so.

Carl_R
Carl_R

Are you familiar with the toxic loans that some companies took out about twenty years ago? It was much the same thing, on a corporate level, rather than a country level. Sharks loaned money to struggling companies based on the promise that the loan shark could be paid back by demanding stock as payment based on the market price at the time of the demand. On it's face that sounds reasonable enough, but in practice, it was not; it was toxic, and the share price always went to $.0, or a tiny shade higher, say $.00001/share.

Say the stock price at the time of the agreement was $2, and the company borrowed $2m dollars. The loan was was entitled to 1m shares, if they demanded the shares immediately. Rather than taking the shares, though, the loan shark would start shorting the stock, and just keep shorting more and more shares. Say they shorted 100m shares, and drove the price down to $.01. Now they were entitled to 200m shares, so they kept selling shares, and the stock eventually would go to $.0001/share.

This is no longer legal, thankfully, but, just like infinite printing of currency to pay a debt denominated in something outside the control of the country drives the price of the currency to $.00001, infinite printing of shares to pay something outside the control of the company drives their shares to $.00001.

Eddie_T
Eddie_T

I wasn’t really tuned in to this example, since it happened near the beginning of my real interest in such things. I’ve been trying to get my head around it.

Isn’t that really the whole scam of the IMF....and colonialism in general , fwiw. You loan poor countries (with natural resources) more money than they can possibly pay back.....get them to leverage their real estate....then take the collateral when they default? Or otherwise use it as leverage to do some other deal that benefits you?

Casual_Observer
Casual_Observer

This whole post is full of sound of fury signifying nothing.

Engaged_Titan82
Engaged_Titan82

Not an economist, just trying to understand all of this. You say "The above discussion pertains to CPI measures of inflation not monetary inflation which is 100% certain to continue." But from everything i have read (which is limited) most economists believe monetary inflation has a causal relationship to regular inflation. Are you saying that monetary inflation and inflation are going to start to diverge in opposite directions?

People might say look at japan or the US using QE, but your point is that QE cannot cause inflation so I would think that argument goes out the window. Have there been any examples where monetary inflation was followed by deflation in recent history?

simb555
simb555

I agree its currency depreciation we have to worry about which is caused too many $ in the economy so it loses value compared to commodities and houses in desirable locations. Gold, Silver and land have preserved wealth over the years.

Eddie_T
Eddie_T

OT...Apparently Bill and Melinda Gates are getting a divorce. He’s my age for goodness sake, That’s a little old for a mid-life crisis. I wonder what the real story is....

With their money you’d think they’d stay married just to keep up appearances.

davebarnes2
davebarnes2

Seems weird to not even mention Venezuela.

Anda
Anda

I don't see the seperation of power between fed and gov that you imply, not because the fed doesn't largely set monetary policy but because its balance sheet is based on government debt, which is political. That is to say that ultimately all fiat is political, and so a monetary cause would also be a political one.

Having said that, I don't think hyperinflation has to be a political event. We are balancing supply of money vs. supply of goods and services. Though politics (and money supply) has been the major factor affecting hyperinflation in the past, there are other elements. Natural destruction of an economic base, failure of the global financial system for reasons primarily apolitical, human nature even, could lead to hyperinflation. In fact it is disputable whether war would not count as a "natural destruction", political as it is in a sense the two overlap in definition.

So for example, with Weimar reparations was not primary cause of hyperinflation, it was a combination of political promises to unions and in reaction to rising prices hoarding by the population, the infamous "starving with barns full". Financial profiteering boosted that reality, which is one reason why certain segments of the population were then turned on. So you cannot just say it was political in my opinion, it was equally monetary and social.

Same goes for Zimbabwe, it was political or it was (one might say failed) social redemption of/by the population ? It was monetary because policy was to outrun inflation by printing more, so both.

Therefore I would not say hyperinflation was always a political event, but almost always there is a political facet needed for hyperinflation to occur, if nothing else because money supply tends to be integrated with political reality .

That all really won't help explain hyperinflation properly though, so I think the better definition is when goods (or potential goods, e.g. shares in companies) are prioritised and money is shunned for those. That could be due to loss of control of money supply, a herd-like speculative event or reverse of, loss of production of goods, and so on.

To say it is always a political event gives a false impression that hyperinflation is always controllable as long as politics is reasonable, and I don't think that is nescessarily true.

PecuniaNonOlet
PecuniaNonOlet

We are already in megahyperinflation of trash, pollution, over consumption and filth at all levels and dimensions. Thats the hyperinflation to worry about, everything else is irrelevant.

RonJ
RonJ

All i know is that Costco is apparently going to put 20 less sheets in a roll of their paper towels, for the same price.

jivefive99
jivefive99

Oh, and I forgot to mention, as the rich get richer and richer, it seems to me they will never allow any government to make their billions worth less under any circumstances.

Jacob Zuma
Jacob Zuma

Mish. The Fed can print money to buy paper debts then relieve the debt issuers from the obligation to repay the debt. Do this enough and you will get hyperinflation. I agree the Fed will not want to do this, but I think they can if they wanted to.

Jacob Zuma
Jacob Zuma

Mish, the Fed can print money to buy debt, then relieve the issuer from the obligation to repay it. Do this consistently and you will get hyperinflation. I agree the Fed doesn't want hyperinflation, but it can generate it should it wish to do so.

I think there are other examples of massive or hyperinflation you can add to the list. For example, the stagflation of the 1970s, while not hyperinflation, might have turned into such had it not been for the Fed raising rates drastically in the 1980s (an action it can no longer do without destroying the economy).

Doug78
Doug78

We can look at it this way. If we take a world view the Chinese export deflation and the Americans export inflation. Till recently there was a balance until the Americans upped by far their inflation production possibly overwhelming China's amount of deflation exportation.

corkball
corkball
  1. Concur that hyperinflation is political until such time as a gold volcano appears, or counterfeiting is legalized. But so what? The precursor elements are all in place. Massive indebtedness, no financial way out, etc.
  2. The US is in an odd situation relative to all the other hyperinflations of the past. USD is the world's reserve currency. Like FDIC, we have traded a short term problem for a longer term one. We can print and print and print no problem look ma no hands, but what happens when the dollars start to repatriate?

If I read this correctly, it is all still gonna happen, but just not as short term as the inflationistas think. Am I reading that right?

Lugnut
Lugnut

Yes Hyperinflation is a purely political one, it generally can't occur without the fiscal pre-requisites in place. Secondly, 'we' arent the ones to define the parameters of what triggers it; the foreign central banks and buyers of our debt are the ones to make that determination.

That said, hyperinflation need not occur, all's it will take is enough outside forces to push up interest rates to 'nominal' levels and the jig is up, as far as being able to continue to finance and monetize our profligate spending levels. I mean, long term, the Fed can't buy ALL the Treasuries to suppress rates, yes? Any attempt to do so if there is a significant tampering of appetite by foreign CB purchases, in and of itself, would be the political trigger you speak of.

Hyperinflation? Bah. In 1985 1-years were about 8.5%, and that was a breath of fresh air. If they went to that today, you'd get killed walking down Wall St by all the falling bodies. The political domino that would trigger it would be any credible threat to the $ reserve status.


Global Economics

FEATURED
COMMUNITY