How Likely is Hyperinflation in the U.S? Part One
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Since the great financial crisis (GFC) of 2008-2009, perhaps the most talked about scenario for the next crisis to hit the U.S. has been hyperinflation due to high levels of Treasury debt and Federal Reserve Bank liabilities. Fortunately, the logic that produces this chain of events is specious.
Still, experts and pundits propose various scenarios for whether, why, how and when hyperinflation will hit the U.S. At least one writer has predicted hyperinflation almost every year since 2010. Even U.S. politicians have asserted that Fed money printing will result in hyperinflation, illustrating how easily it is misunderstood. These warnings may sound to the public like Chicken Little's cry that the sky is falling.
Other experts are more cautious, and some even dismissive. An article in The Economist recently asserted that extrapolating hyperinflation from the ugly scene in Washington is to misunderstand how America works.
Because there are so many conflicting and different views among analysts relating to hyperinflation, it is difficult for the average American investing for retirement – or just self-preservation – to know what to believe and how to act. What is hyperinflation, why does it happen, how is it different from high inflation, how might it happen in the U.S. and if it does, how do we prepare?
This article sifts through the best resources available, including Bank for International Settlements (BIS), International Monetary Fund (IMF), Cato Institute and Fed papers to provide answers.
The process and effects of hyperinflation
The effects of hyperinflation have been frightening whenever they have occurred. In Weimar Germany from 1922-1923, bread lines were common, homes were lost, paper currency was burned for heat and many died from starvation. In Brazil during the late 1980s to early 1990s, the middle class virtually disappeared when wage advantages and savings were lost to consistently rising prices. And, in Zimbabwe, just a few years ago, food shortages forced those once well-fed to make meals out of caterpillars.
Regardless of how quickly it comes, how it begins and how high it goes, hyperinflation results in crisis for a nation's inhabitants. At the beginning of a hyperinflation, prices double about every two months, but this tends to increase rapidly. The Weimar inflation saw a top inflation rate of 29,500% per month. The Brazil hyperinflation's top rate was 82.4% per month. The highest hyperinflation rate occurred in post-WWII Hungary and was 4.19 × 10-to-the-16th power percent. This is equal to a daily rate of 208% with prices doubling every 15 hours. Most of us have no ability to comprehend inflation of this nature and its effects.
As one observer noted, inflation is an immoral tax that leads to immoral values. Hyperinflation is worse. The generic process and effect of historical hyperinflations from Revolutionary France to Weimar Germany to the more recent Zimbabwe is something like this:
First, prices may increase imperceptibly; then, due to a supply shock, capital event, war or political mismanagement of a regime trying to stay in power they increase quickly. The national stock markets rise higher. Wages may spiral upward to match price increases. Hoarding begins.
Consuming is no longer entertainment – it is war. Goods at markets begin to sell out almost as quickly as products hit shelves. This is especially true of essential staples and food. Approximately a third of essential goods become unavailable. In Weimar Germany, renters gained over landlords when prices rose faster than government rent controls. Those on fixed incomes with most of their assets in local or government bonds begin to struggle due to falling values followed by bond default. Those who borrowed before inflation increases have an advantage over lenders – as long as they can make the payments, and mortgages don't have inflation clauses. Many who can't make payments lose their homes, which are either repossessed by the banks or bought on the cheap by the super-wealthy or the prescient. True class separation occurs, with a dwindling middle class giving way to a lower impoverished class, creating social tension.
In the investment arena, most domestic stock holdings decrease. No one holds cash because it devalues so quickly. Every essential or investable product for sale disappears fast. A black market develops, usually based on a stable foreign currency. Flight to foreign currencies and international securities has already begun. But since the government institutes fines for foreign currency purchases, premiums are 300% or more. Banks are either closed for a time, or a strict limit is put on withdrawals. In extreme cases gold stored in safety deposit boxes may be confiscated.
Bartering as a substitute for cash becomes commonplace. Goods like flour, sugar, wine, precious metals and jewelry, artwork and musical instruments are common tradable items. Pianos were a valuable trading item in Weimar Germany for example. Some who are savvy enough to arbitrage, using border nations, make a little profit. Only those who have thought ahead do more than survive. They use gold, silver or foreign currency stores to buy up assets and real estate at cheap prices. But, those with assets, land or agriculture become targets of roving criminal gangs, looking for food to survive or engaged in looting for profit. Lawlessness takes root and grows, and only the armed can defend themselves.