Government Watch / Politics

Could We See Hyperinflation?

hyperinflation

The Biden White House and Democrat-led Congress tells us all is well – if only we trust them with the economy. Doubt is rising, inflation too. Could we ever see hyperinflation, rapid dollar devaluation, the sort that bankrupts countries, leads to panic buying, shortages, unemployment, market collapse?

Probably not. That said, uncontrolled federal spending can trigger it – and Congress is binging.

Historically, “hyperinflation” refers to irrational inflationary expectations taking over the public mind, a level of reduced confidence in the value of the currency – to the point where prices spiral upward, jobs downward, government loses control over operations, more paper dollars chase falling production.

To get to this odd, surreal place – where wheelbarrows of dollars are needed to buy basic staples – many things must go wrong. Typically, production must fall, dependence on government rise, market predictability vanish, and management of government operations – especially spending, tax collection, benefit disbursement, and public safety – get out of control.

We are not there, not yet. In effect, imbalances we are seeing now can be remedied, but they do offer cause for concern. Here is why.

Today, the national debt is bumping up against $30 trillion – unprecedented. The economy is struggling. Jobs, while slowly coming back, remain 5.7 million below early 2020, unfilled as people prefer free benefits to work, and new pandemic fears fresh stoke slowdowns, commerce interruptions, and personal restrictions – all unprecedented.

Meantime, Democrats controlling the White House, Senate, and House continue to push new taxes, sure to further slow US production and employment, trigger job cuts, slow reinvestment, and growth.

Most arrestingly, Democrats continue to spend taxpayer dollars that will not be collected for decades at a rate never seen, not in billions, hundreds of billions, but in trillions, approaching tens of trillions. Keep in mind that a trillion is a million times a million, a one with 12 zeros behind it.

Moreover, this runaway federal spending is for untested, untenable programs – creating government centralization and control of a kind most Americans do not want, much unannounced until irreversible.

So, where does all this lead? Will it produce hyperinflation, that is, double-digit monthly inflation, approaching 50 percent, hundreds per year, triggering loss of confidence by the public in control over their government, loss of government’s control over currency value?

Probably not, not yet.

Examples of hyperinflation include the German Weimar Republic during inter-war years when the productive capacity of that country could not sustain a growth rate to support debt payments, wage-price balance, and a predictable future.

Another example is post-Soviet Yugoslavia, when internal ethnic divisions foretold a country coming apart, headed for war, inflation jumping to 76 percent annually, then – with public corruption unmanageable – doubling daily, until it topped out at more than 300 million percent, requiring to adopt of the relatively stable German mark as currency.

Venezuela represents another sad case of a healthy economy flying apart, with a combination of mismanagement, overspending, communist control, runaway crime, and total loss of confidence – no predictability, amputated confidence in the future.

On the numbers, 2016 was probably the tipping point for Venezuela, as confidence in the economy and currency plunged – communist control proving an utter disaster. That year, annual inflation – once in single digits – sprang to 274 percent, then 863 percent in 2017, suddenly to 130,060 percent in 2018, bouncing down to 9,586 percent in 2019, and today remains thousands of percent, the overall inflation rate of 53,798,500 since 2016.

In short, between a private sector economy restricted, taxed, leveraged, and reduced to sputtering growth, uncontrolled government spending, and massive mismanagement, one of the continent’s strongest economies suddenly fell into hyperinflation and has remained there.

For perspective, current US inflation is roughly 5.4 percent, and while high has not been in double digits since Jimmy Carter’s edgy, troubled economic leadership. That said, economists are not sure if it will rise or fall ahead, although many agree massive federal spending raises the risk of inflation – especially at a time when COVID lingers, supply chains are not restored, and government restrictions abound.

Again, on the numbers, our inflation rate is presently just unsettling, not on the way to hyperinflation – by all indications. While it jumped almost one percent between May and June, substantially above the 0.2 percent monthly average from 2000 to 2019, this is not hyperinflation.

The worry is that if the federal government continues to crack down on the private sector, disincentivizing investment, employment, production, and growth, while raising taxes, spending trillions on programs no one wants, failing to keep crime at bay, and centralizing power – confidence will fall, and inflation jump.

We are a long way from hyperinflation, as we are not the Weimar Republic, Yugoslavia, or Venezuela – but none of the three imagined that idea. Nor did their leaders, who spouted the virtues of centralized government, lectured the private sector, blithely spent money they did not have (none by trillions), made promises they could not keep, ignored mounting national debt, told people all was well. If we keep our government accountable, stop the madcap spending, all will be well. If not, one wonders.

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China Joek
3 months ago

Why can’t we just print more money? Oh, that’s what Venezuela did, and Germany after WW-I, and Cuba, and Chile, and Brazil, and…

Moket
3 months ago

So, I‘ve read about modern monetary theory, according to which gvmt can spend itself into oblivion. The balance supposedly never comes due.
Now, applied to one‘s own pocketbook, not sure how this would work, but my experience has been, if there‘s no money in the bank, there ain‘t no money to be had/ spend. Economics 101—I‘m curious, how this works for gvmt. Or does it?

Paul Dean
3 months ago

Yes, hyperinflation is coming. Biden axed local oil exploration and drilling. Placing a significant portion of our economy in OPEC control. Having sold treasury bonds to (the now belligerent) China over the last few decades. So, essentially, their investment is financing the military. And giving them further ability to devalue the US dollar. How can we expect loyalty from our allies after the example the Biden administration has just made with Afghanistan? We, as a nation, are in jeopardy of major financial collapse and potential default. I am fearful of the probable social engineering the Democrats will attempt in any sort of financial recovery. It is their nature of never letting a crisis go unused.

Max
3 months ago
Reply to  Paul Dean

Hyperinflation is here now.

PaulE
3 months ago

RBC,

When I worked at the Federal Reserve years ago, the policies that the Biden administration and the Democrats are now actively pursuing would be called a textbook example of how to create economic stagflation. The government sets about creating economic policies that both suppresses productive economic activity that drives GDP growth, while at the same time suppressing jobs and flooding the economy with ever more worthless fiat currency (U.S. dollars) chasing more expensive goods and services.

Can stagflation be engineered to lead to eventual hyperinflation? Sure. That’s not all that hard to do with the proper level of gross governmental incompetence or malicious intent from the same. Government incompetence or malicious policies have always been the root cause of hyperinflation.

Right now the government is moving quickly to expand the social welfare portion of the U.S. economy, while simultaneously under-cutting the productive economy that actually generates the wealth and prosperity that has to pay for the government’s largess. Remember, government doesn’t create wealth. It simply acts as a transfer mechanism between one group to another group. In simple terms for the average person to grasp, the government is playing Sugar Daddy using someone else’s credit card (the American taxpayer footing the bill in this case), so the government can shower an ever larger portion of the American population, that is increasingly non-productive, with transfer payments (what is erroneously called “free money”) so they can live as well as the productive segment of society. In some cases even better than their productive counter-parts.

If the Democrats can successfully enact their so-called Human Infrastructure / Budget Reconciliation bill via the reconciliation process, then our economy will be locked on a flight path of massively higher social welfare spending, higher taxes being diverted from the private sector economy to fund the permanently expanded social welfare state, higher permanent annual deficits to pay for the increased federal interest payments the Treasury will be paying to the buyers of our ever more worthless and risky treasury debt. All while companies either go back to fleeing off-shore (China or Southeast Asia. Anywhere where capital and business is treated better.), domestic jobs disappear and more people are forced onto what will be either permanent unemployment or welfare roles. My bet is the Democrats will respond with a renewed push for UBI under “the jobless crisis” that they will be responsible for creating. They are so easy to read as they are so predictable. All while the costs for all goods and services increase in price to reflect the additional costs and shortages of the same become more common place.

So near term, we are looking at stagflation not hyperinflation. Should the Democrats get their Human Infrastructure bill passed, then we will be seeing what I would deem hyperinflation within 12 to 24 months. The United States economy will mirror the moribund economies of much of southern Europe if we’re lucky. If not, then we may more closely resemble Argentina or even Venezuela. Most Americans are totally unprepared with the massive change in quality of life that would entail, but that is a topic for another day.

Dan
3 months ago
Reply to  PaulE

I believe your insight is right.So sad to see our once strong economy disappearing.

Rbc
3 months ago
Reply to  PaulE

Fascinating analysis, thank you Paul!

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