2012-08-30

Mish talks sense on hyperinflation

Reader Questions On Hyperinflation; Would Printing $50 Trillion Tomorrow Do Anything?
Mish correctly describes hyperinflation as the loss of faith in the currency. He goes on to say that:
It's important to note that hyperinflation is not really a monetary event in the first place. Rather, hyperinflation is a political event caused by governments.
I once pissed off a University of Chicago economics grad by making a similar statement, although I describe it as a cultural event.

Mish lists a chart of many hyperinflations:
I would take Mish's argument one step further. In the worst hyperinflations, such as Wiemar, post-WWII Hungary and Zimbabwe, the entire cultural fell apart. In Wiemar, there were nationalists and communists engaged in civil warfare, executing political leaders, while parts of Germany were occupied by foreign powers. In Hungary, after being destroyed in WWII, saw the coming of the Red Army. In Zimbabwe, a policy of white genocide against farmers systematically destroyed the country's economy. If someone predicts this level of hyperinflation, they are predicting civil war or foreign invasion.

Moving up a bit on the list are cases such as Chile. Allende was feared to be installing a Marxist dictatorship and was subsequently overthrown by the military, led by General Pinochet. Others are post-Soviet collapse or during war.

Simply put, there's not going to be hyperinflation in the absence of a war, and that war must be one in which the United States is feared to lose, and not Vietnam lose, but more like Russian invading and taking Alaska or the entire Navy sunk and the U.S. forced to give Hawaii to China.

In reality, when you look back at what has taken place over the past 30 years, the inflation is in the past. It would take an extraordinary political act to spark inflation, let alone hyperinflation.

Earlier this week in How much money does the Federal Reserve need to print in order to end the the threat of deflation?, I used one method (the chart below) to estimate the Fed needs to monetize $8 trillion in order to stop the deflation. That's one estimate, using one simple method, but based on the debt problem facing the United States, it's in the ballpark.

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