Saturday, May 12, 2012

Predicting the Timing of Hyperinflation

Bernholz found that debt over 80% of GNP and deficit over 40% of spending historically means a country is headed for hyperinflation.  However, it may be a few years.   Hyperinflation is a positive feedback loop that is sort of a slow motion panic as the population comes to realize that the currency is going down.  It would be nice if we had other data or ratios that could predict the timing of the onset of this panic with higher precision.   Here are some possibilities I think are worth investigating.   This post should be viewed as a list of ideas for hyperinflation researchers and not as an attempt to explain things.  Numbers below are just to make it easier to understand and not known values.  If you have other ideas or know of investigations into how any of these would work please post in the comments.

  1. Central bank monetization relative to size of debt.  Eventually the central bank will be monetizing everything in hyperinflation, so maybe after some level we can tell we will get hyperinflation soon.  Maybe when the central bank owns 25% of the national debt then hyperinflation usually starts soon.  
  2. Central bank monetization relative to size of deficit.  Maybe when more than 50% of the deficit (new debt) is being monetized there is no turning back and when it gets over 100% people take notice and events start happening faster.
  3. Central bank monetizing at hyperinflation rates.  If they are increasing the money supply at 5% per month then probably prices will be going up fast in the near future.
  4. Bond Panic.    If everyone stops rolling over their bonds then the end is probably near.
  5. How far inflation is above interest rates.  Maybe if the central bank keeps interest rates some amount below inflation for some period of time then things go bad.
  6. Money printing rate vs interest rate.  Maybe if they are increasing the money supply by a larger percentage each month than the yearly interest rate on 10 year bonds, then they are headed for trouble.
  7. When interest on debt is over 10% of GNP.   In one article it mentions that when interest on the national debt gets to 10% of GNP then you get a crisis.  
  8. When debt is 15 or 20 times national taxes.   If debt is 20 times taxes then at a 5% interest rate the interest on the debt would use up all the taxes. 
  9. When interest on debt is over 40% of taxes.   In one article it says that no country has gotten to where interest was more than 40% of taxes without getting hyperinflation. 
  10. When taxes don't even cover mandatory spending.  If taxes can't cover non-discretionary spending, which government can't cut, let alone interest on the debt or discretionary spending, then could be trouble.
  11. Rising interest rates.   When interest rates are rising the interest payments on the national debt will be going up.    This will increase the size of the deficit.  It also means getting closer to Debt/GDP,  interest/GDP,  and interest/taxes numbers that might indicate trouble. 
  12. Savings rate for the population.   If people have figured out that you lose money by saving in the local currency then maybe hyperinflation is near.  In hyperinflation people will convert savings into tangible objects.   So maybe you can see this coming by looking at the savings rate in the local currency vs gold, foreign currencies,  or tangible objects.
  13. How fast the price of gold is going up in that currency.   If gold is going up fast maybe hyperinflation is near.  For example, maybe when the price of gold in a currency triples in less than 1 year hyperinflation of that currency often follows.  
  14. Trade deficit.   If the US dollar is going to be rejected as the international currency then the trade deficit will reverse.
  15. Foreign Treasury holdings.    The amount of treasuries held outside the US will probably start to go down just before hyperinflation really starts.  It could be foreigners are the first to dump bonds and so foreigners getting out of a bond market is a good predictor of hyperinflation in general.
  16. Debt in foreign currency.  A country that is about to get hyperinflation may find it hard to get loans in their own currency and so have to borrow in a foreign currency. 
  17. Not enough money.   If the public becomes convinced that there is "not enough money" then politicians will soon make the central bank print more.
  18. Velocity of money.    Maybe the velocity starts to pick up ahead of time or maybe the velocity always slows down so the central bank can  increase the money supply and then it starts to pick up again.
  19. Stealth monetization.   Sometimes central banks have printed money but not told people as they think that what people don't know won't hurt them.  Bad sign.
  20. Legislature increasing control over central bank.   If politicians get control of the printing press it seems they always switch it into high gear.
  21. Increase in rate of printing.   If they are printing faster and faster then hyperinflation is probably near.  Maybe before hyperinflations the government usually buys lots of new equipment for printing money.  So maybe this could be a predictor of hyperinflation.   
  22. Third major printing of money.      There was some French hyperinflation where after the third major batch of  money printing it became clear to people that the money printing would be ongoing.   With a QE3 that is also QE-infinity it might become clear there is no exit strategy and that they are going to keep printing huge amounts of money.  
  23. Public realizes printing won't stop.  Maybe when the public realizes the money printing won't stop is when things go bad.   When large money printing starts it is usually claimed to be a temporary measure.  But at some point it can become clear it is not going to stop.  
  24. Polling Data.   I suspect it is possible to develop a set of polling questions to predict when hyperinflation was coming.   These could be used in countries that were at risk for hyperinflation.   Hyperinflation depends on certain  actions and beliefs of people that result in a positive feedback loop.   A poll should be able to tell when this was about to start.  
  25. Printing larger bills.       Maybe after they start to print larger denomination bills hyperinflation is soon.  Maybe if the US mints a $1 trillion coin hyperinflation would soon follow.
  26. After losing 99% of value.     Maybe a currency is in danger after losing 99% of its original value.
  27. Empty shelves.   When everyone runs out and buys extra food and tangible objects then hyperinflation is coming.  Mises called this a "crack up boom".   Maybe you can tell when there is a "crack up boom" and so tell that hyperinflation is coming soon.  My guess is canned Tuna will be one of the first things to be cleaned out since it last years.
  28. How heavy bonds are toward short term.   People seem to first move into short term bonds before they try to get out of bonds and cash.   If everyone is in 3 month bonds then maybe hyperinflation is soon.   If a large fraction is in 30 year bonds then probably no danger.  So some measure of short term vs long term debt may predict hyperinflation. 
  29. Bond Traders vs Investors.  If the people buying bonds intend to hold them till maturity then hyperinflation is probably not coming soon.  If the people buying bonds are doing so because they think the central bank is going to buy bonds at higher prices and they just want to flip the bonds, then it would seem the risk of hyperinflation is higher.  The ratio of traders vs long term investors in bonds can probably help in predicting the risk of a bond collapse and hyperinflation.
  30. When 10% firmly believe.     There is a theory that when 10% of a population believe something it will become true.  So maybe you can predict hyperinflation by seeing when 10% of the population expects it.
  31. Black market and reduced GNP.      When higher taxes, higher inflation, and price controls ravage the economy people move to barter to survive.   As the government loses taxing ability they print money faster.  Maybe some level of black market activity signals hyperinflation is coming.
  32.  Risk-on Risk Off Oscillations.   The risk on risk off market swings could get larger right before hyperinflation.   Sort of increasing oscillations till something snaps.
  33. Reserve currency / Oil currency status.  If countries stop using dollars for oil, international trade, or central bank reserves, the dollar would probably be in trouble.  
  34. Deflation often happens before hyperinflation.  I think of it like the tide going out before a Tsunami comes in.  Maybe some measure of deflation can predict hyperinflation. 
  35. Prices for Interest rate sensitive assets vs smaller tangibles.  When interest rates are going up then big things like houses that are usually bought with loans tend to drop in price.   As we get close to hyperinflation we may see the prices for food and smaller tangible things going up fast at the same time that houses and larger things are dropping in price.  Maybe this can be used to predict hyperinflation.
  36. Necessities vs Luxuries.  Hyperinflation is a very hard time where people have to struggle just to get the necessities of life.  Luxury purchases go way down.   So prices of necessities go up faster.  Maybe looking at the market for luxuries vs necessities can help predict when hyperinflation is coming. 
  37. Gold vs Paper as Safe Haven.  Currently when there is some crisis people rush into dollars.  At some point a crisis will cause a rush into gold.  If we could look at how dollars and gold are used as safe havens over time we might be able to predict hyperinflation.  
  38. Currency Controls.  Often a government tries to keep people from getting out of their currency by passing new laws.  This could be a tell that hyperinflation was coming.
  39. Price Controls.  Price controls cause shortages and reduce economic activity.  Lower real economic activity leads to less real taxes and more money printing.  This is often part of the run up to hyperinflation. 
  40. International Commodities.  Prices for international commodities like oil, rice, sugar, etc. probably adjust faster than local prices as a currency devalues.  So these probably hit hyperinflationary levels (say 26% per year) before the local CPI type index does.  Something like the CRB index could be an early warning sign.
  41. Sudden Bank Holiday.   Often when things are falling apart a government will declare a bank holiday and close all the banks.   This may be too late of a hyperinflation warning to be of much use.
  42. Foreign exchange rate.  The foreign exchange rate may go down sooner than prices go up.   It can take time for the higher cost of imports and the higher price demand for exports to percolate through the whole economy.  So this could give some warning. 
  43. Price of imported goods shoots up.  In Belarus in 2011 the price of imported pampers shot up before the prices of locally produced goods did.  So prices on imported goods shooting up could be a warning signal. 
  44. Propping up currency.  If the central bank or government are intervening in the currency markets to prop up their currency then maybe things are about to get out of control.
  45. Excess Reserves going into economy.   The US bank excess reserves earn interest, which really makes them just like short term Treasuries.  When money comes out of these reserves, or Treasuries, into the economy the inflation is probably going to go up. 
  46. Domino Theory.  There is this widely believed myth that advanced democracies can't get hyperinflation.  Once one of them does (my guess is Japan first) then others probably will follow.  So any of Japan, UK, Europe getting hyperinflation probably indicates that the US hyperinflation is getting close. 
  47. Search Frequency.  Using Google Trends to see how often hyperinflation is searched might give us a clue.   Or see how often the Hyperinflation FAQ is accessed.   If people are really getting worried about hyperinflation we should be able to see this on the net somehow.  If FAQ readers are coming from some country it might indicate trouble there.
  48. Simulating Hyperinflation.  A simulation of hyperinflation could be adjusted to try to make it fit, as well as possible, many historical cases of hyperinflation.   Once it was tuned, the current situation could then be fed in and a good estimate of when hyperinflation would hit should come out. 
  49. Big Mac Index.  Government measures of inflation often are distorted and late.  The Big Mac Index may show inflation first.  It is interesting that in Japan the Big Mac has gone up in price by 20%.
  50. Central bank viewed as funding the deficit.   When popular opinion has it that the central bank is funding the government deficit, then there will be trouble.  Might do polls and when this view got over some limit you might have a good predictor.
  51. Using Multiple Theories.  Using descriptions of hyperinflation from many different theories we could make a bunch of polling questions to see when we were getting close to hyperinflation. 
  52. Borrowing for Interest.  If the government has to borrow not only for the primary deficit but also for the interest payments, then the markets might think this is too much.
  53. Smart Money Fleeing Country.  When the smart money is getting out of a country it may be that they see the hyperinflation coming. 
  54. Monetization equal to debt X years back.   Maybe when the total monetization equals the debt from X years go (maybe 6 to 10 years or something) then you will get hyperinflation. 
  55. Years of interest comparable to days of volatility.  Maybe when 5 years of interest makes you about as much as you lose in one week of currency drop then people give up.   Maybe it is 10 years vs 10 days, or some other numbers.  But at some point the risk/reward is clearly that of a bad investment and people flee.
  56. Monthly bond loss more than yearly interest for X months.  Maybe after some amount of loss on the value of the bonds compared to the yearly interest then people get fed up and leave bonds.
  57. Net Debt.   The net debt is the debt owed by the government to the public, ignoring any bonds from one part of government to another.   In the US case all the "social security fund" is just internal pretend bonds that should be ignored.  It seems that Japan's 240% of GNP drops to around 100% of GNP if we just look at net debt.  This would explain why they have lasted so long. 
  58. Money supply going up fast.   Maybe the current M2 measure of the money supply will go up faster right before hyperinflation starts.
If some hedge fund (or anyone else) wants to hire me to investigate this and would provide me with some assistants to collect and process the data I am interested.  I am sure that understanding exactly when hyperinflation was coming would let one make exceptional profits.


  1. I would add two related ideas:

    1. when price manipulation of gold and silver become more aggressive and overt, the end is probably near
    2. When demand for physical precious metals surges despite falling nominal prices -- the end could be near.

    And we'd be happy to discuss working to expand this project. Let us know the best way to contact you.

    1. My email is I am interested in discussing this.

  2. All of these are late indicators of hyperinflation. They are likely to fire off at about the same time as you go to the supermarket to buy a carton of eggs, but the supermarket has no eggs, and someone furtively offers you a carton of eggs for a thousand dollars.

    The objective is to panic when the smart money panics, and then unload your government paper on the dumb money.

    The 2008 financial crisis was for me the 2005 financial crisis. A mad panic stricken rush to the exits began in 2005 November, which the government denounced as markets behaving irrationally, but the exits did not close down until 2007-2008.

    So you want to jump ship when you see a significant number of people jumping ship, but before so many are jumping ship as to up end the markets.

    1. So what are the early indicators that the smart money is jumping ship?

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Looking for polite debate on ideas. Never attack a person. Be nice.