Hyperinflation

Inflation. A word understood by all. Its effect on households, although somewhat tame in recent decades, is now ravaging balance sheets, both on individuals and companies alike. I have warned that inflation was coming multiple times here in Money & Sense, but I have never used the “H” word, HYPERinflation.

We all know inflation is rising prices, and there can be many different causes. Monetary inflation is the most insidious and the most common. Monetary inflation is simply an increase in the money supply (printing more dollars). For a conceptual moment of monetary inflation, just think Mexican Peso.

Other types of inflation are demand inflation which is more people want whatever it is that is rising in price for whatever the reason. There is supply-side inflation, which is a shortage of something. Regulatory inflation is a tax or levy added by a governing body, making the good or service more expensive. 

There are other types of obscure inflation, but whatever causes it, the symptom is a rise in general prices over time. 

How much and how fast prices rise has a lot to do with what is called “inflation expectations”.  

To conceptualize “inflation expectations,” just think back to the housing bubble, when people scurried to buy a home in fear of quickly rising prices. During the housing bubble, when prices were rising fast and furiously, the fact that homebuyers knew and expected a fast increase in prices caused a “rush to buy” mindset to lock in a price before it went even higher. This “rush to buy” was a self-fulling prophesy. The faster prices rose, the faster people bought. This is a perfect example of inflation expectations. 

Although inflation can steadily and seriously erode a family’s purchasing power and subsequently cause an increase in the homeless and the poor, “hyperinflation” is devastating to the vast majority of consumers, businesses, and to the economy itself. 

When hyperinflation occurs, it is always monetary inflation that causes it, and the speed of which prices increase can be astounding. History is rife with examples of hyperinflation (Mexico, Argentina, Venezuela, Germany in the early 1900s and Zimbabwe’s hyperinflation starting in 2007. It was estimated at 79.6 billion percent month-on-month and 89.7 sextillion percent year-on-year in mid-November 2008). 

Although I have forecasted the coming of significant inflation in my many articles over the past year, I have never mentioned a hyperinflationary threat here in the U.S. 

Surprisingly, however, more than a few notables have warned that a hyperinflationary threat is brewing in the United States. Twitter CEO Jack Dorsey and well know market analyst Marc Faber (among others) have spelled out the reasons they believe a hyperinflationary event may be coming. They believe massive government bailouts, stimulus, and deficit spending will result not only in rising prices, which we are seeing now, but quickly turn into the exponential price explosion that is hyperinflation.

Specifically, they point to the 5 trillion or so dollars spent in the last year for CoVid relief, coupled with the massive deficit spending the government has undertaken since the late 1990’S. With more spending programs in government debate as we speak, the amount of money entering the economy and that has entered it in recent decades has already “baked it into the cake”, or so they believe.

Hyperinflation is a very serious event. It can quickly force millions into poverty, empty store shelves, and destroy businesses. It also is very difficult to eradicate, and the measures to do so also wreak havoc on an economy and its people. In the case of hyperinflation, the cure is almost as bad as the disease. 

Measures to deal with hyperinflation are the same for measured inflation but on a much more drastic scale. The government has to stop spending, social programs must be eliminated or scaled back, interest rates must rise a lot and quickly, and fiscal restraint by the government must be practiced on almost all levels. If all that occurs, the world will change as you know it. 

Should hyperinflation indeed be in our future, so will be untold misery for all. 

This article is opinion only of Marc Cuniberti, and may not represent those of this news media and should not be construed as investment advice nor represents the opinion of any bank, investment or advisory firm.  Neither Money Management Radio (“Money Matters”) nor Bay Area Process receive, control, access or monitor client funds, accounts, or portfolios.  Contact: (530)559-1214 or [email protected]