Monday, May 21, 2012

3 Reasons Why Hyperinflation is Unlikely

There are many Austro-libertarians who think that hyperinflation in the U.S. is practically inevitable.  There are certainly some good arguments to be made for the scenario.  The government debt is enormous, now exceeding 100 percent of the measured GDP.  The Federal Reserve has loaded its books with toxic assets that cannot be sold for what they are "worth" on the Fed's books.  The banking system is still a mess, despite the massive excess reserves built up from the Fed's monetary inflation over the last 4 years.

While I don't think the threat of hyperinflation can be discounted, I still believe that it is unlikely.  I will offer three reasons why.

Before listing my reasons, let's define hyperinflation.  The definition can vary.  Some people would say that 50% or more annual price inflation is hyperinflation.  Some might say that prices have to double or more every year.  Some might say that prices have to be rising every day.  Others would leave prices out of the equation and define it using the money supply.

For the sake of this discussion, we will say that hyperinflation is general prices rising 100% or more per year.  This would mean that prices are doubling each year or more.  (Note: I understand that Austrian school economists define inflation in terms of the money supply, but I would prefer to use prices for this discussion.)

So here are the top three reasons I see hyperinflation as unlikely:

1) The Bankers

The big bankers (and this includes the Fed) do not really want hyperinflation.  It does not benefit them.  It would destroy their pensions.  It would destroy their incomes.  It would destroy their standard of living.  It would probably remove them from their own power.

Why would the bankers commit financial suicide?  Even if they all had a stash of gold (which they probably don't), they would still be worse off.  The bankers like to redistribute wealth from the average American into their own pockets.  But they should know enough not to kill the goose that lays the golden eggs.

I hear people casually talking about how we are going to have hyperinflation.  I tell them that if they are serious and if they really think it is going to happen, then they should be making major preparations.  They should be a hard-core prepper.  They should really consider moving to another country, preferably somewhere with a lot of farmland.  Hyperinflation in the U.S. would mean a breakdown in the division of labor.  It means that your paycheck would be worth almost nothing.  It would mean that trucks would stop delivering gas to the gas stations and food to the grocery stores.

2) Ron Paul Supporters

When the Republican primaries and caucuses are over, Ron Paul will have received about two million votes.  Sure, this is out of a population of over 300 million, but it is still a significant number.  While a few of those two million may not be libertarians in the slightest, there are also some Ron Paul supporters who never changed their voting registration to Republican to vote for Paul.  So there may be more than two million Ron Paul supporters.

Of course, one of the big issues that Ron Paul has continued to hammer away on is the issue of the Fed.  He wrote a book called "End the Fed".  His supporters have a basic enough understanding of monetary policy.  They understand that overall price inflation is caused by monetary inflation, which is caused by the Fed.  They can explain to others that it is Fed policies that cause higher prices at the grocery store and gas station.  While some may not believe it right away, more people will be searching for answers if overall prices start going up like they did in the late 1970's, at a 10 to 20 percent annual rate.

Ron Paul supporters are a big enough group now that they can be a check on Bernanke and the Fed.

3) The Internet

The number three reason goes hand-in-hand with number two.  Open information and communication is the enemy of big government and central bankers.  This is why big government relies on propaganda.  They need the consent of at least the majority of the people, if not more.

The internet spreads information.  Ron Paul supporters on the internet really spread information.

Imagine a scenario where prices start going up at more than 10% per year.  Imagine grocery bills going up at 20% per year.  Now imagine someone with 300 Facebook "friends" complaining about their high grocery bill on Facebook.  Out of 300 people, there will probably be at least one Ron Paul supporter.  Now that Ron Paul supporter can post a message, or maybe even a video.  It could be a two minute cartoon video.  It would briefly explain that a general rise in prices is because there is more money chasing goods and services.  The only way there can be more money (aside from fractional reserve banking) is because the Fed is creating more money.

If this Ron Paul supporter had posted this on Facebook before, it might not have gotten much attention. But when people really start feeling the pinch, they may pay attention.  The person complaining on Facebook also has 300 friends who will see the response.

Now extrapolate these results over millions of people.  If we all of a sudden have tens of millions of people who understand that general price inflation over time has to be caused by the Fed, then the Fed cannot get away with it.  It will have to stop creating new money or risk a complete revolt by the populace.

In conclusion, while hyperinflation is possible in the U.S., I don't think it is likely.  I think high price inflation of 10 to 20 percent is somewhat likely.  The Fed cannot get away with things like it could in the past.  If you disagree with me and think hyperinflation is likely, then I hope you are making plans to get out of dodge.

2 comments:

John (Ad Orientem) said...

Money printing can cause inflation, but hyperinflation is a different animal. Hyperinflation is when you have a total collapse in confidence in the sovereign currency to the point where it begins sharply depreciating in value within days, if not hours of being printed. Reinhardt and Rogoff in their seminal work "This Time Is Different: Eight Centuries of Financial Folly" define hyperinflation as an inflation rate of 40% or higher per month.

In general I concur that hyperinflation is so unlikely that it is not something I am worried about, though for slightly different reasons. The complete collapse in confidence in the sovereign currency needed for a hyperinflation has historically required some catalyst beyond mere recklessness with the national printing press. If you look at historic hyperinflation dating from 1900 (the phenomenon was exceedingly rare prior to that period) every example that I am aware of had one or more of the following elements...

1. A ceding of monetary sovereignty (usually in the form of foreign denominated debt, a currency peg, etc).
2. Major war or civil war.
3. Regime change or revolution.
4. A general collapse in effective government i.e. a "failed state."

None of these conditions appear to be on the horizon. Could that change? Yes. The future is unpredictable, which is one of the reasons I am a huge fan of the late Harry Browne's Permanent Portfolio (4x25%). But the excesses of the Federal Reserve will not spark a hyperinflation. That would require an extraordinary or even catastrophic event.

Vincent Cate said...

I have a Hyperinflation FAQ that you might find interesting.

http://howfiatdies.blogspot.com/2012/10/faq-for-hyperinflation-skeptics.html