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What is a hyperinflationary depression and could it happen?

Posted on 14 January 2013 with 5 comments from readers

Think Zimbabwe a moment. This is the most recent example of a hyperinflationary depression. Basically in Zimbabwe the black nationalists ejected the white farmers and replaced them with locals who could not farm, crashed the economy and started printing money. Hey presto! Rampant hyperinflation and a very depressed economy.

The problem with printing money to solve economic problems is that once started it is very hard to stop. It is always easier to print more than deal with underlying issues such as over-spending and a government-dominated economy. Democratic politicians like turkeys do not usually vote for Thanksgiving.

Fed minutes

You could see the official concern mounting in the last minutes from the Federal Reserve’s main committee. The Fed is fully aware of the dangers of keeping interest rates too low for too long and printing money ad infinitum. But it only recently set a target of 6.5 per cent unemployment before it will rescind QE money printing, is that now in doubt?

Money printing is also highly contagious. It sets off competitive devaluation and invites the same policy action by other central banks who can justify their policy by reference to their peers. Besides so many countries also have the humungous debts that money printing is designed to cure by the supposedly painless process of robbing savers through inflation.

Take Japan. Its new government is copying the Fed with gusto, just as the Japanese once copied American automobiles until they overtook them. Actually the risk is very similar, namely that the Japanese version of QE succeeds in damaging the US economy, this time through a lower yen and cheaper Japanese imports.

Could the Fed take away the punch bowl of QE while the Bank of Japan is liberally welcoming guests? And Japan is hardly alone. The Bank of England QE program is reckoned to have been the largest per capita of any nation. The European Central Bank is committed to bond buying to support the national debts of the growing list of struggling eurozone members.

Odd man out?

Who is not printing money? We almost suggested the Gulf States but then all bar Kuwait have dollar-linked currencies so that is not true. You are left scratching around the global periphery and looking at countries like Norway and Sweden or perhaps Russia and sundry smaller Asian states.

But it is true that we have nothing like the Zimbabwe paradigm so far. Another earlier example was the Weimar Republic in the early 20s in Germany when war reparation debts were paid with paper. Could things get so far out of kilter this time?

You might be forgiven some skepticism. However, the Fed is taking a big risk in global bond markets. It cannot carry on buying its own paper forever. If the bond market crashes – and that will happen when inflation rises so high that all the remaining bond holders cash out – then how can the government finance itself except with the printing press?

Currency devaluation

Money in that case quickly loses its value. The dollar has lost half its value against a basket of gold and silver over the past five years, so this is already happening. It is not a question of whether it might happen, it already has already started.

Can this process accelerate to the point where money loses most of its value, the credit system crashes and business activity slumps? That unfortunately is the destination to which present central bank polices lead us.

Investors have few places to hide in such a scenario. Gold, silver and some real assets are the way to go. We might avoid the fate of Zimbabwe but get uncomfortably closer before things could be turned around in a great global currency reset, and in that case real assets will still the only place to be invested.

For a more detailed look at where to invest for the best returns in this economic climate our sister monthly investment newsletter has the top tips and is available now on special offer (subscribe here).

Low inflation figures

We know the instant rejoinder to the hyperinflation argument: show us the inflation. And it is true that headline inflation rates have stayed stubbornly low recently. However, these figures are manipulated to look lower than they really are and have been moving up sharply over the past year, whether you look at the US, UK or Japan.

The danger is that the central banks are being overly complacent about false figures while the trend is definitely up. Pump in more and more money, as all the central bank are doing and there is only one way for this inflation to go and that is up.

Crash the financial system and you end up with money printing to infinity and hyperinflation. Zimbabwe was once a low inflation economy.

Posted on 14 January 2013 Categories: Banking & Finance, Bond Markets, GCC Economics, Global Economics, Gold & Silver, Sovereign Wealth Funds, US Dollar, US Stocks

5 Comments posted by readers:

Comment by Vincent Cate - 14 January 2013

I have a Hyperinflation FAQ that people may find interesting:

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

Comment by John Mark - 14 January 2013

Vincent, your FAQ is brilliant and I haven’t finished reading it yet, for it is long. I note that one of your links is to a guy who, writing on on how hyperinflation begins, declared that it would occur in 2010, I think it was. Anyhow, he got the date hopelessly wrong and this rather puts me off his argument. As Ed. here says, “it’s the devil predicting when and how long”.

Ed., I still cling to the view that “Depressioin” is not an economic description but a psychological and social one for a nation. It seems to me that “Recession” is, in contrast, an economic term such that, for example, Greece has had many years of consecutive recession, and with the result that it’s people are now depressed or in a Depression.

A “depressed economy” can occur, presumably, after just three quarters (or less) of negative (or depressed) GDP but the people will not be depressed, so that it is, perhaps, confusing to talk about a depressed economy when there is no Depression amongst the people.

Comment by Vincent Cate - 15 January 2013

Thanks. I feel that understanding the mechanics of how hyperinflation works is very possible. I think I do. Predicting the exact timing of hyperinflation is probably not possible. Maybe you can predict it within a couple years but maybe even that is not really possible. It would seem with a lot of data about the start of previous hyperinflations it might be possible but not sure anyone has the kind of data needed or even what data that would be.

Comment by silvio - 17 January 2013

You cant forget the brazilian hyperinflation that last almost a decade in the early 80s….

the grocery stores changed the prices daily… a lot of zeros was printed on the currency notes… and after some time the zeros was being cutted.

and the worst of all… i’m brazilian and i was there.

Comment by hkm - 03 September 2014

Vincent Cate:

You got hyperinflation and statistics pegged !

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