Friday, October 19, 2012

Hyperinflation FAQ

This FAQ is for the frequently asked questions or objections about hyperinflation.  The statements or questions below are in bold and my responses follow.

How is hyperinflation defined?
In Cagen's 1956 paper on hyperinflation he used inflation of 50% per month as the cutoff for his study.  In a footnote he says,  "The definition is purely arbitrary but serves the purposes of this study satisfactorily.".  Since then many academic researches have taken this as the official definition of hyperinflation and ignored any cases of less than 50% per month as "not true hyperinflation".   Hyperinflation researcher Steve Hanke wrote a letter to the editor to complain when a company used 40% per year and a standards board used 100% in 3 years.      In the real world today people call 100% inflation in 3 years hyperinflation.    I don't think Cagen even meant to exclude 10% or 40% per month as "not true hyperinflation", I think it was just his way of reducing the cases to investigate down to a manageable number.  When millions of people call what they are living through "hyperinflation", I think it is wrong for academics to ignore them  because one guy used a higher cutoff in a paper long ago.

Normal  money functions as both a store of value and a medium of exchange.   A fiat currency experiencing hyperinflation is clearly not a good store of value but is still functioning as a medium of exchange.   The currency is sort of half money and half failed.  Kind of a one foot in the grave situation for money.  Much of the time such a currency dies within a few years.  That is where the name for this blog, "How Fiat Dies", comes from.  I am adding my own definition: Hyperinflation is that transition period when a paper money is clearly failing as a store of value but has not yet died as a medium of exchange.

In the International Accounting Standard of IAS 29 one of the guidelines for when hyperinflation accounting should be used is when "the cumulative inflation rate over three years approaches, or exceeds, 100%.".   They provide a number of guidelines but do "not establish an absolute rate" and "concludes that it is a matter of judgement".   As with Cagen's footnote, it is clear that the precise cutoff is arbitrary, but they are clearly far lower than what Cagen used.   If you have 26% per year for 3 years you would get 100% with compounding.  I contend that their other guidelines would be met if this one was.

There are many other definitions for hyperinflation but they are mostly something like "inflation over X per year" or "inflation over Y per month". People pick some level of price inflation as the cutoff between regular inflation and hyperinflation.  It is just the values for X or Y that differ. 

I think 26% inflation counts as "clearly failing as a store of value" and makes a good cutoff between regular inflation and hyperinflation.    This casts a wider net than most definitions, but I think it is wrong to exclude the cases between 26% per year and 50% per month.  It is the same phenomenon at 26% per year as it is at 50% per month.    When the public is faced with 50% per year you can bet they will call it hyperinflation, no matter what any academic says.   A country that is used to 2% inflation and suddenly facing 26% inflation will be in shock.  Excluding these is wrong because, after reaching 26% per year inflation, I think the odds  are they will have 100% total inflation over 3 years.  It is wrong because a few years of this wipes out life insurance, retirement funds, fixed pensions, and a life savings.   It is wrong because it gives the impression that 26% per year is nothing to worry about and 50% per month hardly ever happens.   If we use 26% per year, then hyperinflation is a common problem that needs to be better understood.   I really think it is a common problem that deserves more attention.

Note that hyperinflation is not defined in terms of the money supply alone, since the velocity of money and GNP are also key factors in the price level during hyperinflation.  

Hyperinflation is a process,  a positive feedback loop, that once entered is very hard to get out of.  This process can go on for years.  In the feedback loop the more the central bank prints money and buys bonds the less other people want to hold bonds.  At the same time, the less other people hold bonds, the more the central bank has to buy them so that the government has enough money to spend.  This feedback loop can also be called a death spiral, chain reaction, tipping point,  like an avalanche, slippery slope, or a debt bomb.  Once the conditions are right, it can just go off.

Definitions are important.  I hope this makes my position clear. 

Is there a real chance the US dollar could get hyperinflation?
Bernholz did a study of 29 cases of hyperinflation and looked at the circumstances that led up to them.  He found that the best predictor of hyperinflation is government debt over 80% of GNP and the deficit over 40% of government spending, in a country that prints its own money.  Note that 50% deficit spending would mean spending twice what was collected in taxes.  The US is over the debt number and not far from the deficit number,  so the danger of hyperinflation is real. 

The government or central bank would never decide to have hyperinflation.
In over 100 cases of hyperinflation I don't believe there has ever been a single "decision to have hyperinflation". Hyperinflation is when things get out of control. It is not something central banks or government voted on. No group in any government or central bank has had a show of hands like, "all in favor of hyperinflation raise your hands". Not the way hyperinflation happens.  Hyperinflation is a market response sometime after government debt over 80% of GNP and deficit over 40% of spending.  The central bank starts printing money and buying up government debt to help lower interest rates.  But the more new money they make to buy bonds the less people want to hold bonds.   The less people want to hold bonds the more money the central bank has to make to try to control interest rates, and so that the government can keep in operation.  You get a feedback loop that goes out of control.  Nobody votes for hyperinflation. Nobody wants it. It just happens.

Why would the Fed suddenly print trillions of dollars?
There can be a panic to get out of bonds.  There may be $3 trillion in bonds coming due in the next 12 months that might not get rolled over if people started not trusting bonds (I am trying to nail down how much short term the public holds, separate from the Fed and Social Security).   There is also the excess reserves of around $2 trillion that are earning interest, much like government bonds really.   The current deficit of around $1 trillion would also have to be financed with new money if nobody but the Fed was buying bonds.    Altogether this would be something like $6 trillion over 12 months.

Hyperinflation would never happen in America!  
There were cases of hyperinflation in America's colonial period.   There was hyperinflation during the Revolutionary War.  Remember, "not worth a Continental"?  There was hyperinflation in the South during the Civil War.     I also think that if the US had not made it illegal to own gold in 1933 that the Fed would have gone bankrupt, because they did not really have enough gold to back all of the notes they had issued, and that paper money would have become worthless then too.   Hyperinflation is more common than most people realize.  The time periods from the Revolutionary War hyperinflation, to the Civil War hyperinflation, to the 1930s currency crisis, to now, are all similar.   To me this looks like some major currency crisis cycle is about due.

What is the math for hyperinflation?
The math for hyperinflation  starts with the equation of exchange and with one transformation you get:

P = M * V / Q

Where the variables are:
P = Price level
M = Money supply
V = Velocity of money, how many times money turns over in a year
Q = Real GNP

In hyperinflation the money supply is going up, the velocity of money is going up, and the real GNP is going down, all at the same time.  It is a tripple wammy that drives prices up really fast.

You have the cause and effect backward!
People will argue things like, "it is not the monetization that causes the loss of confidence, it is the loss of confidence that causes the monetization".  While someone else argues the other way.   I have also seen both sides of, "hyperinflation causes money printing, not money printing causes hyperinflation".

Hyperinflation is really a positive feedback loop.  It is a circle, a death spiral.  To argue about what comes first in hyperinflation is a bit like arguing which came first, the chicken or the egg. 

Why can't you stop hyperinflation by just having the central bank stop monetizing debt?
It seems obvious that if you just have the central bank stop buying government debt the hyperinflation would stop. The problem is that the government needs money to operate and is spending far more than what it gets in taxes and has debt around the size of the GNP.  The deficit is so large that cutting government or increasing taxes enough is not possible.  The only way the government can keep in operation, when other people stop buying their bonds or even rolling over their bonds, is if the central bank steps in. So the government always makes sure the central bank steps in.   This may take changing laws or replacing people at the central bank, or just ignoring laws, but the government will get the money or it will fail.  If it can not pay its employees then nobody will show up for work and the government will collapse.
How could the Fed on its own cause hyperinflation?
It is always the combination of the government spending far more than it gets in taxes and the central bank printing money and buying government debt (monetizing debt).   It is the two together that result in hyperinflation, not one alone.

Isn't hyperinflation a political event and not a monetary event?
The root cause of hyperinflation is politicians spending far more than they get in taxes.   It is correct to say that, "hyperinflation is always and everywhere a fiscal phenomenon".  In this sense hyperinflation is a political problem.  However, I think Milton Friedman was right when he said "inflation is always and everywhere a monetary phenomenon".  First off, hyperinflation is a process that can go on for years, not an event.   The exact cutoff point between regular inflation and hyperinflation is arbitrary, so it makes no sense to say that below 26% it is a monetary phenomenon and above 26% it is a political phenomenon. 

I think the idea that hyperinflation, where the monetary unit rapidly becomes worth less and less, is not a monetary phenomenon is not only wrong but dangerous.  This wrong idea keeps people from understanding what is really going on.  For example, Modern Monetary Theory (MMT) as it stands does not explain hyperinflation.  They count bonds as money and monetization as "just an asset swap".  They do not see any tipping point, positive feedback loop, sudden risk, or danger of inflation getting out of control.   They think that you could always just make a bit less money if inflation got too high.  Instead of admitting the problem with their theory (lots of experimental evidence of inflation getting out of control) they just say hyperinflation is a political event not a monetary event.      By the way, with a small correction to MMT, making what I call CMMT, I can easily explain hyperinflation

The US is very different from Weimar Germany or Zimbabwe!
Each case of hyperinflation is unique, so if you are looking for differences you will always find them.   You need to understand the common characteristics.  Hyperinflation happens because government debt gets over 80% of GNP and deficit gets over 40% of spending.   It does not matter how you get into that situation.  Hyperinflation works the same if you lose a foreign war,  a civil war, a dictator goes crazy, a government with excessive foreign debt, nationalizing too many businesses, rampant corruption, productive collapse, excessive regulation, a regime change, too many taxpayers fleeing high taxes, a massive depression, or whatever.  It just matters that the government is spending nearly twice what they get in taxes and has already borrowed more than is reasonable.   When they are in this situation they can not borrow more, except from the central bank under their control.  So they get the central bank to make money and "loan" it to them.  When the reality is the only way they can pay back that "loan" from the central bank is by first getting another "loan" from the central bank you are probably headed for hyperinflation.

Another problem is that people often compare the US before hyperinflation to some country during hyperinflation, which is not a fair comparison.   For example, after prices are shooting up and interest rates go up no banks will be making 30 year loans.   So people will say the fact that the US is making loans shows that it is different than some country with hyperinflation.  This is silly.  Of course a country that does not yet have hyperinflation is different from a county in the midst of hyperinflation.   The real trick is recognizing the circumstances that lead to hyperinflation.

When a country gets hyperinflation there are a number of stages it goes through.   Things are very different as hyperinflation progresses.  

Other countries are even worse off than the US.
Other countries have all sorts of problems too, so the US dollar may not drop against those other currencies.   Hyperinflation is not really about exchange rates.  If the Pound, Yen,  Euro, and Dollar were all getting 26% inflation the exchange rates could stay the same but we would still have hyperinflation.

There has never been hyperinflation of the world reserve currency before!
I have two contradictory answers for this one.  The first is that it is only since 1971 that the world has had a fiat currency as a world reserve currency.  In the past it was always gold or silver or a currency convertible to gold or silver.   It is not possible to get hyperinflation when using gold and silver.  Hyperinflation happens to fiat currencies.

The second answer is that the world reserve currency in Roman times had hyperinflation as they put less and less silver in the coins.  Please use whichever answer you like and ignore the other.  :-)

A helpful reader on reddit  said, "As soon as the Romans declared that the value of their coin was divorced from the market value of the silver those coins became fiat currency. So your first explanation holds for the roman situation too."

Why would the US central bank willingly destroy their currency?
If the Federal Reserve Notes become worthless then the Federal Reserve is probably done for, so why would they ever do such a thing?    Sounds logical.   But why did  that same logic not protect all  the other central banks from making hyperinflation?  The government writes the laws, appoints the people to the central bank, and controls the guns.  When the government is desperate for money from the central bank they get it.   But also remember that the central bank is created by the government.  If the government collapses  because  it does not have enough money to pay for things, the central bank will probably go down as well.  The survival of the central bank does depend on the survival of the government.   I think this is the core of why central bankers risk their currency to support their governments.

Don't we need more stimulus now and worry about the debt later?
The standard definition of GNP includes government spending.  So more government spending can increase the GNP number in the short term.  But it is not really helping and hurts in the long run.   In general anything that makes your government bigger hurts in the long run.   The government is an overhead on the productive parts of society.  The more the overhead the slower the long-term growth rate

How could the US dollar get hyperinflation as long as international commodities are priced in dollars?
It may be that as inflation picks up the international commodities will no longer be priced in dollars.  Perhaps they will use Yuan or maybe they will use gold.  But it does seem doubtful that people would keep selling things in dollars if dollars are failing fast.  As fewer and fewer things are priced in dollars there will be less and less demand for them.  So the end of the dollar dominance will contribute to the hyperinflationary pressure.

If you can't predict the exact timing then you are no help to investors!
Hyperinflation is sort of a slow motion panic where people get out of bonds and then out of the currency altogether.  But as a human panic, it depends on humans, so hyperinflation is hard to predict with precise timing.  However, if bonds are paying 1% and going to suddenly lose more than half their value sometime in the next 10 years, then getting out years early is clearly a better plan than waiting.

But our government is just borrowing, not printing and spending!
People think their own government is just borrowing money and that in cases like Weimar Germany or Zimbabwe they were just printing and spending money.   However, the truth is that Germany and Zimbabwe had central banks that were buying government bonds just like the US central bank is doing.    If the central bank loans some money into existence (which is what buying a bond is really doing) that money should go away when the loan is paid back.   However, in Germany and Zimbabwe the only way the government could pay back a bond was by first selling another one.    So effectively they were just printing and spending money.   If in your mind you put a big black box around the central bank and the government and look at what comes out of the box, what you see is new money being spent.   The pretend loans that never really get paid back are all on books inside the black box.  It makes no difference to the world outside the black box if they were just printing and spending or have pretend loans inside the black box.   The US is now in the same situation.  The only way they pay back existing bonds is by first selling new bonds.    Because the historical narrative simplifies out the central bank, people don't realize that their own government is doing the same thing that previous hyperinflation governments were doing.    People think previous cases were just stupidly printing and spending and that their government is responsibly borrowing money, when really their government is doing the same thing.  So the same mistake is repeated again and again, and hyperinflation keeps happening.

We have been at these debt levels after WWII and there was no hyperinflation.
Some think there is no reason to worry since after WWII the debt was huge but the USA did not get hyperinflation.   After the war ended and the military was cut back there was no deficit.  If there is no deficit there is no reason to worry about hyperinflation.   Today there is a huge deficit and it does not seem politically possible to get rid of it.  So this is not the same situation and is far more dangerous.

Deflation is as big a danger as inflation.
 The graph below shows that when the US was on a gold or silver standard the probabilities for price inflation and price deflation were similar.  However, after 1933 when the dollar partially moved away from gold there was little price  deflation.  After 1971, when the dollar became completely unbacked, there has been no more price deflation.   It is wrong to use statistics from a time with gold money to predict dangers under a pure fiat money.  There have been 56 cases of hyperinflation with more than 50% per month inflation (12,970% per year).  There has not been one single case of double digit price deflation in a pure fiat currency (with no link to gold or silver nor returning to either). In pure fiat money the probability of price inflation is far higher than that of price deflation.

Most of the people predicting deflation are not even predicting price deflation, just a reduction in the money supply plus credit.   Hyperinflation destroys retirement funds, destroys life insurance values, and makes salaries not keep up with the cost of food and energy.   A reduction in the amount of credit that does not even impact prices is a non-event compared to hyperinflation.

Doesn't the deleveraging of huge private debt prevent hyperinflation?   Can you have deflation and hyperinflation at the same time?

If you define deflation in terms of the money supply, and you count bonds as part of the money supply, then you predict deflation when people are deleveraging.   Many people seem to see deflation coming, by this definition, and think that means you can not get hyperinflation.  This is not correct.   Hyperinflation is defined in terms of "price inflation" not "money supply including credit".  At the start of all hyperinflations bond values crash, so this definition of deflation will be met even as prices are shooting up.  So it is common to have deflation and hyperinflation at the same time, initially.  If inflation is 5% per month then a bond that pays 2% per year for 10 years is worth less than a penny on the dollar.  The bond collapse happens fast and the hyperinflation can go on for awhile.  History books will later say it was hyperinflation, not deflation. 

Bernanke says he is just temporarily monetizing debt.
You should not believe him.   He has to buy more and more to keep interest rates low enough that the government can handle the huge debt.  If he tried to sell the bonds he has the interest rates would shoot up and the government would not be able to afford the debt.

Can you simulate hyperinflation?
Yes, I have a nice web based simulation of hyperinflation.   The feedback loops of hyperinflation are a natural for simulation.   You can play with the inputs and see which ones end up making hyperinflation.  You can also clone the model and make any kinds of changes you want.  Please credit me if you do copy my work and publish it someplace.  People can easily use Google to see my very similar hyperinflation simulation, so it is probably not possible to steal it and get away with it.  :-)

If there is hyperinflation what makes you think you would be able to buy food with gold or silver? 
People will say, "you can't eat gold, what good is it?".   But commerce still goes on during hyperinflation.  In historical cases of hyperinflation people move to barter or selling in more stable currencies from another country, or gold and silver.  They do this even if it is illegal or "black market".  They do it even when people are getting their heads chopped off for selling things for gold instead of paper money.  To understand why this happens imagine two different store keepers, one that sells for gold and one that is selling for local hyperinflating paper money.  The one who has gold can go to his supplier a week later and his gold is worth enough to buy a new set of merchandise and stay in business.   The one who sold for paper money may find that his money is worth half as much next week and he can not buy a full set of merchandise, so he soon goes out of business.     If only those that ignore government rules to use paper money can stay in business, the fraction of the economy that is "black market" grows as hyperinflation gets worse.

Hyperinflation is for failed states and the US is not a failed state.
Not all hyperinflations are in failed states.  The US got hyperinflation as they won their independence.  However, there is certainly a high correlation between failed states and hyperinflation.   For a state where half of its spending power comes from taxes and half comes from printing money, it should not be surprising that as the currency fails the state fails.    Since paper money is issued by a state it is not surprising that the paper money is worthless after that state fails.  The question is, is it the failure of the state that causes the currency to fail or the failure of the currency that causes the state to fail?   The truth is that they often go down together.   Before they have failed they can both seem fine. 

They have printed trillions without trouble so far, why would more be different?
It may help to read the storey about the straw that broke the camel's back again.  There are situations where a small amount of something is ok but lots is not.  There are lots of medicines that are helpful in small doses but deadly in large doses.  If 2 people go walking on some ice they might be fine but 50 people walking in the same area might break through.  Hyperinflation has a human element.  There is sort of a panic to get out of the bonds and then a panic to get out of the currency.  It is hard to say exactly when the panic will start, but I don't think anyone ever prints more than the GNP in one year without getting hyperinflation and certainly not 3 times the GNP.

Isn't the Fed trying to push money out like trying to push on a rope?
Some note that the Fed can not give money away or spend it and that banks only want to lend to  credit-worthy businesses but those and consumers are still deleveraging.  So then how can the Fed push money into the economy? The government has no real limit on the amount they can borrow and spend.  They have a debt limit but they increase it anytime they get close, so it is not a real limit.   This government deficit spending, financed by the central bank making new money, is the real source of inflation.

Can't people just switch to another currency?
When there is hyperinflation in one country, say Zimbabwe dollar, the people there can switch to some other currency, like the US dollar, and life goes on.  This is called dollarization.  The government will probably fight this but people will still do it.   However, the world reserve currency is already dollars so switching to dollars is not an option.

If any major currency enters hyperinflation (Yen, Pound, Euro, Dollar) then plenty of people will start to worry about other similar major currencies (ones with large debts and deficits in their home countries).   People will flee bonds in these others, just to be safe.   This will cause the others to enter hyperinflation.   So soon after one major currency enters hyperinflation some other major ones will too.   So even the idea of people in the USA using Euros, Pounds, or Yen won't work out.

Another problem is that the central banks running other currencies use US dollars and other major currencies as reserves.    If they want to prop up the value of their currency they spend some dollars buying their currency and their currency goes up.  But if US dollars and their other reserves become worthless, then they will not be able to hold up the value of their own currencies.  So as the major currencies enter hyperinflation, currencies that use these major currencies as reserves will also enter hyperinflation.   This is nearly all paper money.

After the major currencies are in hyperinflation and the ones that use them as reserves are in hyperinflation even others will enter hyperinflation.    Even many currencies that are well run with governments not near the normal hyperinflation debt and deficit levels and not with reserves in dollars will be in trouble.    The distrust of paper money will be far greater than now so it will not take as much for people to flee a particular paper currency.  I would not be surprised to see international commerce clearing in gold, though within many countries I expect paper money will still be used.

There is no danger of hyperinflation as long as we are in a liquidity trap.
A liquidity trap is where even though the central bank has forced interest rates down near zero people are still paying down debts and not borrowing and spending.  In hyperinflation people are not in a hurry to pay off debts and are in a hurry to spend.  So by the definitions if you are in a liquidity trap you are not having hyperinflation.   The problem is that the liquidity trap could end next month or next week.  People might get worried about inflation, stop rolling over their bonds, and buy inflation hedges at any time.  There is no long term safety from calling the current situation a liquidity trap.  Hyperinflation often comes right after deflation.

Why would it matter if the US dollar was no longer the world reserve currency or oil was not priced in dollars?
Currencies are fungible, in seconds you can exchange any currency for any other currency, so you might think it does not matter what oil is priced in.   The US military burns lots of oil.  Right now the US can just print some money and get as much oil from the Arabs as they want.  If they could not do this but had instead to tax their people to get the money to buy oil it would be much harder.   Anyone who has an option to buy some amount of oil at some price in dollars 6 months from now will usually save up the money in dollars.   While they could save up the money in some other currency, there is a risk that the currency fluctuations over the next 6 months will be such that what they saved is not enough to buy the oil at that price.   So they can eliminate this currency risk by saving in dollars.   Having international commodities priced in dollars increases the demand for dollars.   If the Arabs and Chinese no longer took US dollars there is a good chance the US dollar would be headed for hyperinflation right away.

Bonds are money so monetization does not increase the money supply!
With most definitions of the "money supply" when the central bank makes new money and buys bonds the money supply is increased.  However,  there are some definitions of "money supply" that include government bonds.  With such a definition, monetizing government debt (exchanging new money for government bonds) does not increase the money supply.   So it may seem that by choosing this definition of the money supply that monetizing debt does not matter.

However, the price level should be understood from the equation of exchange.   It is not only the quantity of money but also the velocity of money and GNP that determine the price level.  If Grandma was holding a 30 year bond for the last 25 years and then sells it to the central bank (monetization) she then has cash.    The velocity was really low (not moving for 25 years) but now she can spend it and the velocity will be that of regular cash.   So the velocity is far higher.  When this is done with a trillion dollars worth of bonds you get a far higher average velocity of money.    With a money supply definition that includes bonds, hyperinflation is mostly about increasing money velocity.

With this type of definition of the money supply then deficit spending, which is financed by creating new bonds, is the reason the money supply is increased.     So the size of the deficit tells you how fast the money supply is increasing.   Here the blame for hyperinflation is put more on government deficits and less on the central bank.   Remember always that hyperinflation needs both deficits and monetization.    In this view, as long as the deficit is out of control the money supply is out of control.

While there is some flexibility in how you define the money supply, a correct view of reality has to match the many many historical cases of hyperinflation.   In historical cases of hyperinflation, monetization is the key part of what is going on, so it must make a difference in any correct theory.

Why worry about the debt when interest rates are so low?
 The interest on the national debt is a big item when interest rates are at record lows.  When interest rates get back to normal levels the interest on the debt will be clearly unsustainable.

Can't we wait till there are signs of inflation before doing anything?  Inflation should be a continuous function not a sudden tsunami.  How can you worry about hyperinflation when things currently look more like deflation?
Deflation can come right before hyperinflation.  It has been said that "many of the worst periods of hyperinflation are preceded by deflation" but someone I respect disputes this and so far I can not find data to support this claim.

Because the hyperinflation feedback loop is so strong it is hard to escape hyperinflation once it is started.  It is much easier to prevent it than to halt it after letting it start.  In other words, if you wait till hyperinflation starts it is probably too late.  Hyperinflation really does hit like a tsunami.   It is not just a bit more regular inflation where the dials of monetary policy can be adjusted.  Things can flip from deflation to hyperinflation in a short period.

There are many other words for this kind of phenomenon: tipping point, positive feedback loop, avalanche, stampede, chain reaction, explosion, death spiral,  point of no return, adverse feedback loop, vicious circle, last straw, tsunami, passing the Rubicon, discontinuity, non-linearity, etc.    The reason for so many words like this is that the world is full of examples of phenomenon like this.    

Couldn't the same method Volcker used to stop inflation stop it this time?
No it can't.  If interest rates got to Volcker levels then the interest on the debt would use up all the taxes collected.  If this happens nobody would want to buy US bonds so the Fed would be buying everything.  So newly printed money would have to be used for all non-interest budget items.   The quantity of new money would be high enough to cause hyperinflation.   The Fed can not let interest rates go up without making the government obviously bankrupt but if it tries to keep interest rates down then inflation will keep going up.   It ends badly either way.

There is no way people could panic out of bonds as there is nothing else big enough to absorb that much money.

Most of the value of bond market just goes away. If you have a 30 year bond at 3% and suddenly there is 5% inflation per month, the value of the bond is less than 1 penny on the dollar. The 99 cents are not absorbed into anything, just gone. 

When hyperinflation starts people buy real things.  This might be extra cans of tuna, a piano, land, gold, silver, etc.   In hyperinflation you can see things like a trillion dollar bill only buying 3 eggs.  So the idea that there is not enough real things to absorb the value of the bond market is wrong two ways.  First, the bond market value collapses.  Second the currency value collapses.   I think it is foolish to believe it can't happen when it has happened so many times before in the history of paper money.

Your theory that debt over 80% of GNP and deficit over 40% of spending results in hyperinflation is contradicted by Japan's case, so science says we must throw out the theory.
Economics is not an exact science.  If in 40 cases those numbers resulted in hyperinflation and in one case it has not yet resulted in hyperinflation, then the numbers should still be viewed as a good predictor of hyperinflation. Also, if Japan gets hyperinflation in 2013 then even this outlier will be gone.

Advanced Western democracies don't get hyperinflation.  But of these Japan is way ahead of the US.
Part of the idea here is that Japan has been a mess for 20 years so probably the US has lots longer till hyperinflation.   Since the debt level is so high and the politicians seem to be taking control of the central bank now, there is a good chance that Japan does get hyperinflation first.   The myth that advanced democracies can't get hyperinflation will be shattered if Japan does get hyperinflation.  Once this myth is broken people will not be so confident that the US is safe.   So they may start getting out of US government debt.   This could start the hyperinflation feedback loop for the US.   Sovereign defaults seem to trigger other sovereign defaults, hyperinflations may also.   When investors have lost money on one government's debt  they are less willing to leave their money with others.  So Japanese hyperinflation could well cascade to other countries, including the US.

Hyperinflation and even inflation predictions have been wrong so far, why take them seriously?  How is it they have printed so much money so far and had hardly any inflation?
It is certainly true that anyone predicting hyperinflation of the US dollar before Sept 1, 2012 was wrong.   This does not mean that all predictions of US hyperinflation are wrong or nonsense.   It seems that all fiat money will come to an end at some point, it is just hard to say when.  Note that anyone predicting price deflation in the US has also been wrong.

The equation of exchange is not just some quack idea.  It is a core economics formula that is always true.  With this formula it is very reasonable to expect that prices will be going up if the money supply is increased substantially.   There are 2 main factors that have fooled people.   The first is that the way they increased the money supply was by buying bonds, which lowers the interest rate, which lowers the velocity of money.  As the equation of exchange shows, a lower velocity of money can compensate for an increase in the money supply, for awhile.   The second big reason the inflation predictions were wrong is that Bernanke had a new trick of paying interest on excess reserves.   This has kept about $2 trillion in new money from really leaving the Fed.   If you make new money but don't let it out of the building it does not cause inflation.  People have not yet adapted their models to this new trick.   I believe the right adaptation is to view the excess reserves as part of government debt.  If you do this then the model will fit with low inflation so far but increased risk of hyperinflation as the government debt is really $2 trillion larger than people realize.

It might seem that paying 0.25% on excess reserves would not be enough to get banks to leave money at the Fed.   But the Fed has so suppressed short term interest rates that this is actually a reasonable choice for a bank to keep some "risk free" and "liquid" money.

What causes the velocity of money to slow down or speed up?
The interest rates affect the velocity of money  and inflation rates affect the velocity of money.   If money earns 0% and inflation is 0% there is no hurry to get it to the bank or spend it.   If money is earning 20% you don't leave it under your mattress but put it in the bank where it moves on.  When prices are going up 20% per day you run from where you get paid to where you will spend your money.    The initial response to a central bank printing lots of money and lowering interest rates is for the velocity of money to go down.  This means that for awhile prices don't reflect the new money.  One of the positive feedback loops in hyperinflation is that as prices go up the velocity of money goes up, which further drives prices up, which further drives up the velocity, etc.

But the US central bank is different!
There have been over 100 cases where the combination of a government spending way more than they got in taxes and a central bank printing money and buying their debt to help them out (often after changes in law or leadership) caused hyperinflation. What is the core difference in the US government or US central bank that anyone could think sets them apart from these 100 cases?

Could the US gold prevent hyperinflation of the US dollar?
 Having assets could slow the hyperinflation a bit but it does not matter how much gold a country is holding if they are spending twice what they get in taxes. They will have to keep printing money, so there is not a finite amount of paper money.  With a constantly increasing quantity of paper money it is not possible to hold any fixed exchange rate of dollars to gold. It is the debt and deficit, and the fact that government will always get the central bank to print money and buy government bonds when things get desperate, that causes hyperinflation.  When France took the extensive church land holdings and used that to back a currency they still got hyperinflation.   If assets could prevent hyperinflation France should have been safe, but they were not.   The ongoing deficit meant there was not a finite amount of paper money.   I highly recommend this article on France's experience. A more recent example is hyperinflation in Iran even though they have huge amounts of oil, which should have protected them if gold could protect the US.

Even though the Fed is making lots of money the banks are just hording it so there is no inflation.
The Fed is making money and loaning it to the banks who are then using it to buy Treasuries or earn interest from the Fed on their excess reserves.  In both of these two ways for the banks to earn interest the money is out of circulation.  However, the government is spending the money it gets from selling the Treasuries.   And at some point the banks will be able to earn higher interest loaning to companies and people who will put the money into general circulation.   Then they will redeploy their excess reserves and the money from Treasuries as they come due.

To get real hyperinflation you need lots of paper money and most US money is just electronic.
Anyone with electronic money can withdraw paper money.  The banks with electronic money at the Fed can withdraw paper money.  If the Fed did not have enough paper money they would have to print more.  Since electronic money can be converted to physical paper money, there is no real difference. 

The Fed could not print money fast enough to counter the deflationary forces.
In Zimbabwe they printed $100 trillion dollar notes.   Clearly the Fed could easily print $1 million, $1 billion, and $1 trillion dollar notes and buy up all  private and government bonds.  Since the Fed usually works on computers, it is even easier than printing up paper.   This would overpower the deflationary forces.

Hyperinflation is usually just a few bad years, why worry about it?
Hyperinflation destroys the middle class.  Saving are wiped out, retirement funds are wiped out, life insurance policies are worthless, etc.   It destroys the economy.   In Germany it arguably lead to Hitler coming to power and much more than a couple bad years.  In any case, it was so bad that generations later Germans still fear hyperinflation.

Why does it take both a large debt and a large deficit to get hyperinflation?  Could the US avoid hyperinflation by defaulting on the debt?
If a government just had a large debt but no deficit it could default and be fine, since it does not need to borrow.   Having lenders hate it is ok if it does not need to borrow more.   If it had little or no debt people would be happy to loan it money even with a large deficit.  When a government has both a large debt and a large deficit, such that nobody wants to loan it any more money, then it must get the central bank to make money and hand it over.

What if much of the debt is held by foreigners?  It does not upset voters so much if the government defaults on debt held by foreigners.    Instead of printing lots of new money if people stop rolling over bonds you could just decide not to pay them.   Since a large part of the debt is held by foreigners they might just say they are defaulting on the debt held by foreigners, which would reduce the effective size of the debt to levels that are typically manageable.    The problem is that nobody would buy more bonds except the central bank.  After burning some or all of the bond investors you don't get more bond investors.   So then the full deficit has to be funded by newly made money and you get hyperinflation anyway.

What if Japan defaulted?   Most of Japan's debt is held by Japanese banks and retirement funds.  The banks in Japan get deposits and then buy government bonds.   If the government defaulted on the bonds the banks would be bankrupt.   The Deposit Insurance Corporation of Japan could not handle such a widespread bank failure.   Probably voters would expect the government to backstop this organization and failed retirement funds.  So really even if the government defaulted it would still be on the hook for the money or the voters would be very angry.  

Why would people ever stop buying US Treasuries?  How could there be a "bond panic"?
The yield is less than the inflation rate.  It is a guaranteed loss in real terms.  The Chinese yuan is going up in value compared to the dollar and has a higher interest rate.  The US rates have been going down for more than 30 years and are now near zero thanks to the central bank making lots of money and buying bonds.  All this new money will probably push the inflation rate higher.   If interest rates start going up then bond values go down.  Many of the bonds are held by traders, not long term investors, who have been speculating that the Fed would drive up bond prices.  If the price of bonds starts going down then many people will sell.   This will cause the price of bonds to go down further, which will in turn cause more people to sell.  So you can get a positive feedback loop or bond panic.

The deficit is about 10% of GDP not close to 40%!
The 40% number is 40% of government spending, not GDP.   If the government spends twice what it gets in taxes, then the deficit is 50% of spending.

The US deficit is not really 40% of spending.
At the moment that is correct.   From 2010 to 2013 spending has been stable and taxes have gone up so the deficit is smaller (see graph above).  But a rise in interest rates or another recession could easily put it over the 40% number.  So while hyperinflation is not guaranteed, the US situation is far from safe.

Quantitative Easing is different than printing money!
I have a collection of over 100 euphemisms for "printing money".   If the Central Bank is making new money and buying government bonds it is monetizing debt.  It is replacing bonds with new money.   It does not matter if they do it on computers since money on computers can later be withdrawn as paper money.

I can see inflation in "debt free money" but how does it work in "debt money"?
If the central bank prints money and loans it into existence, some people call this "debt money".  The idea is that money comes into existence with a debt which should take it back out of existence when the debt is paid back to the central bank.  If the Treasury just printed money and spent it they call that "debt free money".  Clearly if the Treasury just printed and spent money you would get inflation but how does it work with "debt money"?  The key to understanding this is that governments don't really pay down their debts.  The way they pay back old bonds is by first selling new bonds.   If the government never really pays back the central bank then there is no real difference between "debt money" and "debt free money", at least as far as the government use of it.

Why not have the Treasury mint some $1 trillion coins?
This would be very inflationary.  Even if the coin "does not circulate", once it has been deposited at the Fed there will be $1 trillion more in paper or electronic money that can circulate.  So the base money supply would go up by $1 trillion.   If the politicians are able to make $1 trillion without destroying things then you should expect them to make another and another.  It is foolish to think they would stop at one.

There is a saying something like, "the only thing worse than a currency run by a central bank is a currency run by politicians".   Once the politicians get the ability to make money or outright control of the central bank, then the central bank can no longer control inflation.  This typically seems to happen shortly before hyperinflation starts.   If they can get money just by making it then controlling spending no longer seems important.  Very soon the money making and spending grows fast enough that people will want to get out of bonds.  As people get out of bonds the government will have to make more money.   The more they make the less people will want to hold the bonds and eventually even the currency.   You get a positive feedback loop or death spiral and the currency goes down.

The law says "platinum bullion coins".   A bullion coin is one where the value is determined by the quantity of precious metal.  This is different than fiat money where you can stamp any quantity you want on it.   So probably making a coin and stamping $1 trillion on it is illegal.   However, I would not count on that stopping this from happening.

The demand for money is unlimited, particularly the world reserve currency, so people will always want it.
There is no guarantee that the US dollar will continue to be the world reserve currency.  If it starts to get hyperinflation it would quickly go from the majority of foreign central bank assets to a minority just because the value dropped, even if the banks did not sell any bonds or dollars.

People want money for what they can buy with it.  As long as it can buy something they will want it.   But if it is dropping in value fast they will buy fast and not hold the money for a long time.   The usual end result of hyperinflation is that you can not buy anything with that currency, so nobody wants it.

There are no bond vigilantes so nothing to worry about.
If a currency is at risk of hyperinflation then even if the bond values drop people shorting them can lose.  The problem is that they win in dollars that are worth less in real terms.   So shorting bonds when there is a risk of hyperinflation does not work well.   This may be  why there are so few bond vigilantes.

The bankers control the Fed and it is against their interest to have hyperinflation.
The government really controls the Fed, just like in all the other cases of hyperinflation.  When the government is faced with a choice of closing its doors because it can not pay people or forcing the central bank to buy government debt they never choose to close their doors.  Note that if the government shuts down the central bank will shut down too.   So it is actually in their interest to prop up the government by buying their bonds.

You can't have hyperinflation when house prices are falling.
The idea is that during hyperinflation the price of everything must go up fast, so clearly with asset prices falling we can't have hyperinflation now.   This is not accurate.  You might argue that we don't have hyperinflation yet but this in no way protects us from having it in the next year or two.  Also, at the start of hyperinflation when interest rates have first shot up the asset types that are bought with long term loans will drop in value because you will not be able to get long term loans any more.  Eventually, when houses are bought with cash, house prices will go up with everything else.

You can't have inflation when there is high unemployment.
The 1970s proved this is not true yet many people continue to believe it. High unemployment is normal in hyperinflation.  The economy is a mess.

But there is no inflation.
The CPI shows little inflation.  However, it does this by averaging in things like housing prices that are going down with food and energy that is going up.  The average person who is not buying a house just sees the inflation.  Also, when the central bank first starts printing lots of money and buying bonds it lowers the interest rate and lowers the velocity of money.  A lower velocity of money can compensate for an increased quantity of money, so at first prices don't go up.  But eventually they will.

Low interest rates prove the market is not worried about hyperinflation.
The current low interest rates are because the Fed is artificially driving up the price of bonds, which lowers the interest rate.  This is not a market rate.  If the Fed were to stop buying bonds the rates would shoot up, particularly now after they have printed so much money in the last few years.  However, it does seem the market is not yet worried about hyperinflation.  When the Fed is buying bonds faster than the Treasury is issuing bonds, then the private market will be exiting bonds.

I thought inflation was just from printing money.
Hyperinflation comes from an increasing money supply, an increasing velocity of money, and a decreasing real GNP.   But the increasing velocity of money and the damaged GNP are really the results of the increasing money supply.   So printing money is the key part of it.  But to me the interesting thing is why they keep printing money when it causes such devastation to a country.  The reason is the government is spending far more than it gets in taxes and the only way to fund the deficit is with new money.

The increase in prices for oil or food is from supply and demand issues and not due to monetary policy.
There is a chance that the price of one commodity going up is due to supply and demand factors for that commodity.   But if commodity prices across the board are going up then either it is an increase in the quantity of money, an increase in the velocity of money, or a reduction in the GNP, or some combination of these.    The equation of exchange is always true.

Don't you need a black market and loss of taxing ability to get hyperinflation?
When your plumber or the retail sales lady tell you they will give you a discount if you pay cash, you are probably dealing with people who are not paying all their taxes.  During hyperinflation there is usually a growing black market and lots more barter.  If you trade some sweet potatoes that you grew for some fish that your friend caught, neither of you will be paying VAT, sales tax, income tax, nor FICA on the transaction.   Loss of taxing ability increases deficits and so increases monetization, which probably drives up tax rates, which drives more people into the black market, which increases deficits, etc.    So loss of taxing ability is part of the hyperinflation feedback loop.  However, it need not be there to start hyperinflation.

People/countries won't get out of bonds because it would drive the price down.
The idea is that a place like China will not sell their US Bonds because selling would make the price go down.   This is just wrong.   If China understands that if Japan sells first then China gets less money they will be in a hurry to sell first.

Right now the Fed is propping up the price of bonds.  That makes now the  best time to get out.   People who wait a year or two will probably not do nearly as well.   In this situation there could be a rush for the exits at any time.  First ones out will be better off than the last ones out.  The logical move is to be first out.

Look at Japan.  The people that sold JGBs earlier did better than those selling now.  I expect those selling now will do better than those selling later.  The best move was to get out already.

People won't get out of US bonds because they are not worried about default.  
The idea here is that the reason people ran away from Greek bonds is that they were afraid they would not get paid but since the US can print money people don't have to worry about not getting paid, so they won't run.   This is not correct.  People also get out of bonds when they are afraid that inflation will destroy the value of their bonds.  This has happened in many other countries that printed their own money.

Don't you need to increase the money supply by 26% in a year to get 26% inflation?
Nope.  The most important thing to understand about price inflation during hyperinflation is that the velocity of money and GNP become important factors.  You might have 26% inflation where 10% was due to increase in the money supply, 10% was due to increased velocity of money, and 6% was due to lower GNP.

If a country had hyperinflation then clearly they had stupid politicians and/or stupid people running the central bank.  The US leaders are not stupid.
This is not correct.  The US leaders are no smarter than the ones in countries that had hyperinflation.  Leaders all over the world think they can control markets and make things better.  The idea that they can force the interest rate lower and make the world better by deficit spending and printing money has fooled many very smart people, including Bernanke and Krugman.  The problem is that in the short run it seems to work but in the long run you are worse off.   Leaders are too focused on the short run.

France in 1920s did not get hyperinflation why should we worry?
The vast majority of the countries which printed their own currency and had debt over 80% of GNP and deficit over 40% of spending got hyperinflation.  The fact that a few did not might be cause for hope, but it is not sufficient reason to ignore the danger.  

Paper currencies backed by gold have also fallen.
When a paper currency that is backed by gold stops being backed by gold, as is common at the start of a war, then the currency can fall.  Paper backed by gold is not as good as a gold coin in your hand.

The government could take everyone's gold like they did in 1933.
I think there would be a lot less cooperation and a lot more shooting if they tried that again.

If China sells their treasuries then the renminbi goes higher and higher and their companies that export go bust.
It depends on what they do with the dollars as they sell the treasuries.  If China sells treasuries and buys renminbi, then the renminbi would go higher and higher.  However, China could sell treasuries and buy gold, and print renminbi fast enough to keep the value as low as they wanted compared to the US dollar.  If they did not know what else to spend renminbi on they could use some of those to buy gold as well.  In this case they end up with gold and get to spend a bunch of renminbi, but the value of the renminbi does not go up compared to the dollar.

The central bank controls the interest rates why would they ever let them go up?
If the central bank is willing to buy all bonds for sale then they can put a lid on interest rates.   If they do this they may have to make huge amount of new money to buy the bonds.  This can make people afraid that the value of the money will be dropping, so people may decide to sell their bonds.   Since there is a danger of an "adverse feedback loop" where the more people sell bonds, the more the central bank makes money, it is sometimes wise to let interest rates go up.   However, if the government will be clearly bankrupt when the interest on their debt is more than they get in taxes, the central bank is sometimes left without any good option.   If they let rates go up people will stop buying bonds because the government is clearly bankrupt.  If they keep forcing rates down then people will stop buying bonds because there is so much new money.  If the government has huge debt and deficit and the central bank becomes the only buyer of government bonds you get hyperinflation.  

What about debt deflation?
When the central bank loans money into existence there is more money.  Since demand deposits also count as money by most definitions, when   fractional reserve banks lend against demand deposits the money lent out and the demand deposit balance both count as money, so there is more money.  One definition of inflation is an increasing money supply.   If debts are being paid back faster than they are being created you could have the money supply decreasing, which is one definition of deflation.   When the government debt is going up by more than $1 trillion per year, this will eventually eclipse any finite amount of private debt that is being paid down.  At some point private debt will start to increase again and the government will still be borrowing a trillion a year, so there will be lots of inflationary pressure.     It is hard to say when inflation will really kick in though.  Note that in fiat money "price deflation" is very unusual.

By printing money they lower the value of the dollar and help the economy by increasing exports.
The US imports much more than it exports.  If the value of the dollar goes down it hurts the economy more than it helps.  In 2010, U.S. exports amounted to $1.3 trillion and imports amounted to $1.9 trillion. Trade deficit was around $600 billion.    A weaker dollar means that $1.3 trillion part of your economy can do a bit better but that a bigger $1.9 part of your economy suffers.   This is not a win.

The original definition of inflation was an increase in the money supply and it seems wrong to use the newer definition of inflation as an increase in prices.
In calmer times, where the velocity of money and GNP are more stable, it is a reasonable point of view.   If the velocity and GNP are not changing, then the equation of exchange shows that the quantity of money and prices are linked.   But during hyperinflation you need to understand how increasing velocity and  dropping GNP cause prices to go up too.

Doesn't much of the pain from the US money printing go to the rest of the world?  Does the US have an inflation tax on people outside the US?
Yes, many countries peg to the dollar using a Currency Board where they end up buying dollars and supporting the dollar.  It lets the US export some of the inflation.

The world reserve currency can win by printing money, for awhile.   If the US prints another $1 trillion dollars they get $1 trillion dollars.   Now existing dollars and bonds everywhere will eventually lose about the same total value, $1 trillion dollars.  But about half of the dollars and bonds are outside the US.  So the people inside the US lose $500 billion and gain $1 trillion, for a net win of $500 billion.  The people outside the US lose $500 billion.  In effect the US is able to collect an inflation tax from the rest of the world.   At some point the rest of the world will no longer put up with this and so will stop holding so many dollars.

The government/central-bank has a monopoly on the issuing of currency, so they have full control over the value of the currency.
The value of the currency is totally the responsibility of the government/central-bank and theoretically they could maintain the value.  However, the government/central-bank often does not show enough self control on the issues spending, debt, and deficit and so loses their ability to limit how much currency they issue.

A government budget is not like a family budget as they can always issue more currency.
True.  A government that issues a currency is really very analogous to a public company that issues stock in their own company.    A company/government with good income/taxes and low expenses/spending can issue more stock/currency and it will hold value.  But a company/government that is losing-money/running-a-deficit and still issuing more stock/currency will see the value of their stock/currency go down.  If the company/government is so desperate that it can not stop issuing stock/currency then the value of the stock/currency will plummet until there is a major reorganization of the company/government or it fails completely.

If inflation got as high as 10% then in only a few years it would eat away at the real value of the national debt and reduce it to manageable levels.  If you have a fixed rate 30 year mortgage at 4% and inflation goes to 10% you will find it gets easier and easier to make your payments, so why can't the government do the same thing?
I am sure that no country that had long term fixed rate debt in its own currency ever had hyperinflation.  If the debt was in 30 year fixed rate bonds then a few years of 10% inflation would destroy those bonds and the trick would work.  However, that is not the US situation.     The US debt is mostly short term, not long term.  The Fed has worked hard at buying up the long term debt and selling short term debt with their "operation twist".   So now it is like the US has a variable interest rate on their debt.  If inflation went to 10% and interest rates went to 12% the interest the US paid on $18 trillion (Treasury and Fed)  would be moving towards $2.1 trillion but the total taxes last year were only $2.4 trillion.  The deficit would increase drastically with the higher interest payments and it would be clear to all that the US was going to have to print money like crazy.  People would flee US bonds.  The Fed would step in as the government's lender of last resort and print money and "lend" it to the government.  Given the amount of short term debt, increasing inflation to 10% does not result in a stable situation that the government could keep for a few years, things would fall apart fast then.   It looks like we will see this sort of problem unfold with Japan.

I think that hyperinflation is caused by X, not high debt and deficit or the central bank monetizing debt during a bond panic.
If you think debt is not a factor, then why did the historical hyperinflations all come to governments with large debts and deficits?

That you think the Fed Prints Money shows how clueless you are.
In common jargon the phrase "printing money" means "making money" or "debasing the currency".  The fact that the actual printing is done at the Treasury instead of the Fed does not make a bit of difference to the reality that when you make a lot of new money then eventually the money won't be worth as much.   It also does not matter that it usually starts out as electronic money as the owner of the money could make a withdrawal in paper currency.   There are more than one hundred ways to say debasing the currency.

Doesn't the Phillips Curve prove that inflation reduces unemployment?
When Phillips wrote his paper in 1958 he was using data from under a gold standard.  Under a gold standard wages go up when labor is in short supply.  But it is the short supply of labor that is causing the wages to go up, not inflation that is causing full employment.    The people using this paper are getting cause and effect backward.  People have taken this study under a gold standard and totally misinterpreted the results to mean that printing money under a fiat standard is a good thing.   It was not a study of the effects of inflation under fiat money.   The only truth to this idea is what Keynes pointed out,  if people are not used to inflation, then inflation may be used trick people into accepting a lower real wage.   If people are working for lower real wages, then employers can hire more people.   So if inflation makes people poor enough then employment can go up.  

Conditions now are like during the deflationary period at the start of the Great Depression.
Nope, things are not the same at all.  Back then the Fed could only have   $1 paper dollar in circulation for every $0.40 they had in gold, even though they told everyone they could turn in $1 paper dollar and get $1 worth of gold.  This was a Ponzi gold scheme that was bound to fail.  As other countries took out gold the Fed had to reduce the money supply.  Eventually they had to outlaw gold or the Fed would have been bankrupt.  Once US citizens could not turn in their paper money for gold they were able to print more money and end the deflation.  Nothing like that is acting to reduce the money supply now.  With pure fiat money, no ties to gold, they can print trillions per year if they want to.

Can't inflation linked bonds protect you from hyperinflation?
Nope.    The Treasury Inflation-Protected securities (TIPs), do not adjust the interest rate, only the principal that the interest is calculated on.   So if the going interest rate is 1,000% you might still be earning 2%.  What is paid out will seem very small.  The currency may fail completely before the bond becomes due.  So the larger principal paid out at the end of the bond will be in worthless money.  Indexing the principal will not save you.  You do not want your money tied up in any kind of bond during hyperinflation. 

Nothing can replace the US dollar and bond market as nothing else is big enough.
After the bond market crashes it won't be so big.  Having huge amounts of debt does not make the US more attractive to investors it makes it less attractive.  The Chinese Yuan is going up in value relative to the dollar and pays higher interest rates and the government has far less debt than the US relative to GNP, and their GNP is growing much faster.  So over time it makes sense for investors to move away from US debt and toward something like Chinese debt.

How is hyperinflation stopped? 
There can be many things that cause government spending to get out of control (war, depression, foreign debt, etc) and so start hyperinflation.  So people often put the blame for hyperinflation on these many different things.  However, the only way hyperinflation ends is when central bank stops monetizing a large government deficit.  I think this is the best proof of what the core cause of hyperinflation really is.   This can happen if the government reduces or eliminates the deficit or if the government fails completely.   Along with cutting the deficit, governments often make a new currency and have new laws limiting the central banks ability to monetize debt.  But the key to success is controlling the deficit.  I think the only way the deficit is ever cut enough during hyperinflation to stop it is by cutting the size of government, as taxes are usually already so high that people are pushed into the black market or out of the country to avoid them. Governments that are not able to make the cuts seem to fail completely.

Debt currency issued by central banks is inherently deflationary.  
Since central banks charge interest on all the loans they make and make safe enough loans that they almost always get the principal back, it would seem they tend to reduce the total currency outstanding over time.  So in theory the central bank debt currency method should be inherently deflationary.  The problem with this idea is that governments just keep increasing their debt to the central bank.  Also, at least in the US case, any profits the central bank makes on this interest are paid to the government, not withdrawn from circulation.  So, in practice, this method results in more and more government debt and an ever increasing money supply.

There is always a buyer for each seller, so how can you have a bond panic where people get out of bonds?
Much of the debt is in short term bonds.  People can just not roll over their bonds.  So there does not have to be a buyer, people can get out of bonds by just waiting for the bond to mature and getting paid in cash.

When the central bank is trying to control interest rates it buys bonds.  So people can get out of bonds by selling to the central bank.

The government is running a huge deficit so it can not just pay off the bonds with tax money but in fact needs to sell more and more bonds all the time.  If others are getting out of bonds then, assuming the government is still getting money, it is the central bank that is buying.   As the central bank's holdings of bonds goes up there is more and more money in circulation.

People have been predicting the end of the world for a long long time.  It never happens.
Hyperinflation is not the end of the world, just the death throws of some fiat currency.   Inflation of 5% per month or even 50% per month is, amazingly, something that most people adjust to.   Crime will probably go up a bit, but hyperinflation is not a "mad max" thing.  Hyperinflation has happened many times around the world and even several times in America.

How does Krugman explain hyperinflation?
Inflation is really a government tax on those holding money.   In a country where a large part of a government's budget comes from an inflation tax it, like any other high tax,  can affect people's behavior.   The way people avoid a high inflation tax is by holding less real money.   But as people hold less real money the government has to make the inflation tax even more extreme to get enough real money to spend.   But the more extreme the inflation tax the more the public reduces their real money holdings to avoid the tax.  The process can easily spiral out of control.    As the government prints faster and faster the public reduces its real money holdings more and more.   Eventually the public is unwilling to hold any money at all.  Then the government has to abandon its use of the inflation tax. 

I am summarizing from "Krugmans Macroeconomics for AP*" pages 324 to 327.

And in a blog post he wrote:  "Hyperinflation is actually a quite well understood phenomenon, and its causes aren’t especially controversial among economists. It’s basically about revenue: when governments can’t either raise taxes or borrow to pay for their spending, they sometimes turn to the printing press, trying to extract large amounts of seignorage — revenue from money creation. This leads to inflation, which leads people to hold down their cash holdings, which means that the printing presses have to run faster to buy the same amount of resources, and so on."

I would not say there is anything untrue in either of these explanations.  However, hyperinflation always involves large debt and deficit and I am impressed that Krugman could give two reasonable explanations of hyperinflation without mentioning these.   A large fraction of Krugman's posts argue for more deficit spending and more monetization of bonds, or argue against austerity.   It is no doubt easier to advocate debt and deficit if you don't think they are part of hyperinflation.

If we added to his explanation "a high inflation tax makes people want to hold less money and also less bonds" and also "on top the inflation tax for the deficit the government also needs an inflation tax for all the bonds that people don't roll over" we could get a more accurate explanation, though at the cost of making some of Krugman's favorite things look bad.   He is missing out on the "tipping point" problem of bond monetization getting out of control, which is the real key to understanding hyperinflation.

Isn't this the Quantity Theory of Money and wasn't that discredited?
The Quantity Theory of Money uses the equation of exchange, as do I, but then says that over long periods of time the velocity of money does not change much, so that prices are proportional to the quantity of money.  

Over a short time period the quantity theory of money does not hold as the velocity of money can change.  Over a short time period you can say the quantity theory of money does not apply or that it is discredited.

The theory also fails badly during hyperinflation.  In hyperinflation the velocity of money is going up fast so that prices go up much faster than the money supply. So this is different than the quantity theory of money.

Your usual explanation of hyperinflation relies on The Equation of Exchange.  Could you explain it in other terms?
Yes, I can explain hyperinflation using the Real Bills Doctrine, also hyperinflation with Corrected Modern Monetary Theory, as well as many other ways.   It should be possible to explain hyperinflation using any theory of money that fits the historical experimental record, as hyperinflation has happened many times.  If you have some other theory you would like me to use, just say so in the comments.

A central bank buying government bonds is "just an asset swap" and does not matter.  
If the government was not running a deficit and the central bank were just buying short term bonds it would not matter much.

However, if the government is spending twice what it gets in taxes, making and selling new bonds to get the needed cash, and the central bank is making new money to buy bonds, the net result is as if the government were just making huge amounts of new money and spending it.   This does matter.  History is clear on this point.

The problem is that the government never pays down the total debt.  They pay off old bonds with money from new bonds, so it really is just like they are printing money and spending it.

You don't understand our monitary system.  If you did you would realize that Government debt is not a huge deal, we will never run out of money, we aren't in danger of hyperinflation, and there is no chance we will run out of buyers of our debt.  The government can always meet its obligations in US dollars as it is the issuer of US dollars.
Our monetary system of fiat money created by a central bank is the same as the systems used in more than 100 cases of hyperinflation.    In all cases they did run out of buyers of government bonds.  The central bank monetized government bonds like crazy and they had hyperinflation.   In most cases the money died.  Government fiat currency was no longer accepted as money.   Think about this.   A government that prints fiat currency really can run out of money, as that paper can fail to be money at some point.  History contradicts your theory of how things work.   You don't understand history.

Many of the obligations, like social security, medicare, obamacare, unemployment, etc are real world obligations and not just debts denominated in US dollars.   As the government prints more money the prices for these real world obligations goes up, which means they have to print even more, which makes the prices go up further, etc.    If the government just had debt, and no deficit for real world obligations, there would be no risk of hyperinflation.

Isn't this a self fulfilling prophesy?  If everyone believes the dollar is going to crash then they will get out of the dollar and it will crash, so isn't this just a self fulfilling prophesy? Doesn't publishing this scare stuff help bring about the end?
 I think that the more people that understand the danger of hyperinflation the better chance we have of avoiding it.  So explaining the dangers could help save us from hyperinflation.  Preventing hyperinflation is far easier than stopping it.  I have worked for years to explain hyperinflation as clearly as I can.  Remember not to shoot the messenger.   In any case, at the end of 2012 this blog has 2 followers and one of them is the author.   Update: There are now a total of 3 in June 2013.  So if hyperinflation does happen it is not because I scared millions of people.

If the world gets hyperinflation I think Dr. Paul Krugman deserves more  credit than anyone else.  He has cheered money printing and deficit spending for many years.  He has been extremely critical of attempts by governments to cut spending.   He has ridiculed anyone who is worried about deficits, calling them austerians.   He writes for the New York Times.   He has millions of readers.  He has a Nobel prize in economics, so politicians feel justified in following his advice.   Even as Japan went crazy with money printing and deficit spending, bringing hyperinflation much closer, Krugman cheered Japan on.  Krugman has been providing the intellectual cover for the political choices leading up to hyperinflation, so when it comes, Krugman should get the most credit.

Productivity improvements will keep hyperinflation at bay.
Productivity improvements are on the order of 1% per year.  Hyperinflation rates are far higher than this, so this can not make even a noticeable dent, let alone prevent hyperinflation.  Also note that all the historical cases of hyperinflation normal productivity progress failed to prevent hyperinflation.  So this claim fails by both the magnitude of the numbers and historical evidence.

Couldn't you get hyperinflation without a huge debt because of a war?
Yes.  If a country was attacked and clearly going to lose, the currency could fail even if it did not have a huge debt before the war.  The embargo of Iranian oil caused Iran to get hyperinflation even though it did not have a huge debt ahead of time.   If a government is overpowered their currency can be killed.

This is a simple to understand case, and worth mentioning, but I find general case of hyperinflation much more interesting.

Real hyperinflation is one where the currency does not survive.  It is a complete loss of faith in the currency to where nobody accepts it any more.
The problem with this type of definition is you can only use it after it is all over.   When people are losing their life savings and ask you, "is this hyperinflation" all you can say is "I don't know yet".     What you are talking about is "death of a currency".   Hyperinflation is the process a currency  goes through when it is dying.  It is the decaying sickness of the currency, not the death itself.

The equation of exchange is at the core of your position but this formula has been discredited.
The velocity of money in the equation of exchange is usually solved for, as it is easier to get measurements of the other factors.  So some have argued that velocity is just a made up number to make things work.  But the concept is reasonable.  And using algebra to solve for things is not cheating.   The formula does explain what is going on and help understand how things work.   While I have seen the claim that it was discredited a number of times I have never seen anything that came close to really discrediting it.  I don't believe there is a respected economist anywhere who would say the equation of exchange is not true.

Collapsing asset bubbles are deflationary.
Collapsing asset bubbles usually contribute to deflation.  However, when a bond bubble collapses and the central bank starts buying up huge numbers of bonds with new money, you don't have deflation.  This flood of new money makes hyperinflation.

Hyperinflation is a kind of extreme thing, why are you so focused on it?
Hyperinflation is the reason that the Keynesian, MMT, MR, and other economic schools that advocate "government stimulus" are wrong.  These schools ignore the end that their ideas lead to.   If every time there is a problem you grow the size of your government then eventually the spending is too much for the productive parts of the economy to support and debt and monetization get out of control.   If people understand hyperinflation they can see the flaw in these schools of economic thought.   So I think understanding hyperinflation is very important for understanding economics in general, yet far too few people do understand hyperinflation.  So it seems like an area I could contribute to.

This FAQ is really long.  What is the shortest reasonable explanation of hyperinflation you can give?
Printing money can give you inflation but to get hyperinflation you need out of control money printing. For this you first need a large government debt (over 80% of GNP) and a large government deficit (over 40% of government spending) in a country that prints its own money. You can get a large debt and deficit in many different ways.  Next, the government needs to get the central bank to monetize debt.  This may require replacing people at the central bank, changing laws, or just breaking laws.   Once conditions are right, a death spiral or positive feedback loop emerges where the more people get out of government bonds the more money the central bank has to print to monetize bonds, but the more they print the less  people want to hold government bonds.  This may be triggered by some event, but in most cases this is just a trigger or a last straw.  Politicians will use price controls and higher taxes to try to regain control of inflation but in doing so will hurt the real GNP of the country.    The faster prices go up the harder people work to spend their money fast.  With the equation of exchange we can understand that a lower real GNP, a rapid increase in the money supply, and the rapid increase in the velocity of money makes prices go up really fast. 

The above paragraph summary is still too long.  I want a 2 sentence summary. It is ok to skip over some stuff.
When a government that prints its own money gets too much debt, and the central bank starts monetizing debt, you can get a positive feedback loop where the more the central bank buys bonds the less anyone else wants to hold them or buy them and the less others buy bonds the more the central bank has to so that the government can have money to operate.   Hyperinflation is where this out of control monetization and an increasing  velocity of money combine to make prices go up really fast. 

Others Questions
Feel free to ask other questions in the comments. I will move some of the best questions from the comments into this FAQ.  If any of my answers does not seem satisfying enough, let me know.  If anyone knows of any site on the web that does a respectable job of defending deflation or attacking hyperinflation please mention them in the comments.   I would really like to debate hyperinflation with another economics blogger.    I will link to any post that replies to this post. 

8/11/13  Armstrong Economics 


  1. This helped to clarify some things for me. Thanks for the informative post!


  2. Very nice FAQ. But I'm not sure that a mere 26% annual inflation rate qualifies as "hyper" -- in the sense that it is qualitatively different from high but conventional inflation. One of the world experts on inflation, Peter Bernholz, defines hyperinflation as a rate exceeding 50% *per month*.

    Bernholz has some remarks here on the likelihood of hyperinflation in the U.S.: I tend to agree with John Mauldin that Bernholz is too optimistic here.

  3. For people that are used to 2% inflation being at 26% will be qualitatively different. But yes, there are a bunch of different cutoffs used by different people.

    I think Bernanke has effectively hid a bunch of government debt in the open with the interest on excess reserves. Bernholz has not noticed that. As Mauldin said, monetizing Fannie and Freddie debt is really monetizing government debt as those are effectively nationalized. Also, things are worse since Bernholz was quoted.

  4. Greetings,

    I must admit that I am in the deflationary camp as I'm sure Uncle Sam would false flag an alien invasion before allowing anything like hyperinflation. I am also of the opinion that you get the Great Depression that you deserve. I'll use the Great Depression as an example.

    Germany was a nation of thrifty savers. Germany, for reasons that need not be discussed here found itself in a pretty nasty inflationary depression. It robbed the people of everything they had and destroyed their savings. The United States, on the other hand, was not a nation of savers but a nation of borrowers. Our deflationary depression punished the borrowers as the money to repay all those debts just vanished. Hyperinflation then, like now, would have allowed those people to pay off their debts with worthless dollars.

    The author makes an excellent argument for hyperinflation but as unpredictable as hyperinflation is, a deflationary death spiral can just as easily pay us a Black Swan visit.

    1. If you could cure hyperinflation by faking an alien invasion I am sure other countries would have done that too. That will not cure hyperinflation.

      There has never been a real "deflationary death spiral" under fiat money. There have been over 100 cases of hyperinflation (if you use 26%/year). How can you say one can happen just as easily as the other?

  5. Thank you for linking this article to our site.People forget that with both hyperinflation and dramatic debt deflation, people will suffer, the argument between the two is really not as important, I think. However, as Gary North explained it hyperinflation may not be certain, but pertaining to the U.S, some type of eventual default seems very likely.

  6. How top take advantage of the hyperinflation? Say if I want to buy a house at what stage of hyperinflation is it best to buy house?

    1. If you get a 30 year fixed rate mortgage now, and money becomes worthless in a few years, you sort of get the house for a few years payments.

      An alternative is to invest in gold or silver now and wait for when you can't get long term loans and people are buying houses for cash. Then house prices will be far lower compared to average incomes or gold prices. Then use your gold to buy the house.

      Can't really say what will be best.

  7. Thanks for your concise post on the reasons we are moving towards hyper price inflation.

    I think it is wrong to say that hyperinflation is defined in terms price inflation, I see price inflation as a symptom of hyperinflation of the money supply. As Milton Friedman is famous for saying "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."

    I agree that we are moving towards a period of hyper price inflation because the hyper inflation of the money supply has already happened through the noughties, caused by keeping interest rates too low and the securitisation of debt amongst other things.

    So in reality we have already passed into hyperinflation and there is nothing that can now be done to prevent the final symptoms from occuring.

    1. The reason they can put out so much money and not get much inflation yet is that at first when they print money and drive down the interest rate they also drive down the velocity of money. The lower velocity of money compensates for the increased quantity of money and prices don't go up much. But eventually there will be some inflation. They can't get the velocity go down any more if inflation is picking up. Then it is really hard to get the genie back in the bottle. If they let interest rates go up then the velocity goes up even more. Anyway, velocity of money is an important part of hyperinflation.

    2. I couldn't agree more, but think it is wrong to define inflation as an increase in prices rather than an increase in the money supply.

      Are we not seeing rising prices yet due to the fact that the expansion in central bank balance sheets is just combatting the deflation in credit being created by banks not lending?

      Rising prices is a symptom of hyperinflation of the money supply which will follow in due course as the velocity of money increases again. I would think this will happen when the bond bubble finally pops. The central banks will be forced to create more money to buy the bonds and keep rates low. The money taken from treasuries will find its way into the markets driving up the velocity.

    3. The Ron Paul and Austrian way of defining inflation in terms of the money supply is fine and reasonable. But when you get to hyperinflation you also need to look at the velocity of money and GNP to understand what is going on. One way to define hyperinflation could be when the increase in velocity of money is a substantial part of the reason for price inflation.

  8. Government doesn't need to confiscate Gold. They'll just slap 100% capital gains on it. See Karl Denninger.

    Good luck fighting the IRS.

    1. If I trade a few silver coins I had for some fish my friend caught it is very hard for the government to tax us. If someone is faced with a choice of figuring out how to use the black market or starving, they usually figure it out. Black market and government taxing ability are real issues in hyperinflation.

    2. two words. Black market. Two more. Tax evasion.

    3. I don't see any reason for gold confiscation now. Back in 1933, there was a lot of gold in circulation - it *was* money, and they *needed* to confiscate it in order to force people into the paper money instead. But we've now had paper money for several generations, and that's all anyone knows anymore. The vast majority of American citizens don't even think of gold and silver as money. They think of it as "bling" at best - and they'd probably trade it willingly for dollars if times got tough.

  9. Very interesting article and you seem to have researched the subject very well. I had, what I'll call, a discussion with a colleague the other day regarding this subject and the effect hyperinflation will potentially have on the stock market. He told me he his portfolio was "diversified" as he was holding communication stocks, transportation stocks, etc, etc. Bottom line was that he was happy to hold stocks of companies that "paid" him to hold their shares. In other words, he was collecting dividends from these companies and he said regardless of the economic situation, that these companies would continue to pay him dividends.

    My thought is that, while they may continue to pay dividends, the amount of the dividend will decrease because their revenue will decrease as result of economic situation where consumers will have less money to spend or will be unable to borrow to spend money. Therefore, the companies will eventually have to decrease the amount of the dividend in order to bolster their bottom lines during this time. I am also reading that companies are starting to hold more cash than they have in a long time to brace themselves for the tough economic climate ahead.

    Sorry for the long build up to my question but based on the above, can you tell me how hyperinflation (or for that matter, deflation) will affect how dividends are paid by companies and how hyperinflation will affect companies taking more of a cash position?


    1. I think any asset that is often bought with a loan or on margin will drop in value relative to gold or some real measure. The problem is that as interest rates go up people just can't leverage as much. People will be buying houses for cash as you won't be able to get long term loans. So I expect stocks to not do well at first. Eventually they will go up with inflation.

    2. Vincent, I think you make an error many others do. You're seeing hyperinflation as gradual. It really isn't. If one buys a $100,000 property with $10,000 down and a $90,000 before hyperinflation hits, pays maybe $5,000 in payments before dollars become worthless, then he did NOT pay $100,000 for the property. He paid $15,000 for a property worth $100,000, as he can pay off the balance with the proceedes from a few oz of gold or even a week's paycheck. There may be a period where it's not able to bring in sufficient rent, true, but wouldn't you forego 2 years rent to buy a $100,000 place for $15,000?

    3. If you buy a house before hyperinflation and hold it for 2 years through hyperinflation you will of course be able to pay off the loan with cheap money and so do just fine. My point is that the first few months of hyperinflation housing prices can actually go down as interest rates go up so much. I am not saying hyperinflation is gradual. But things typically bought on loan can go down, or at least not go up as fast as things like gold or cans of tuna, as hyperinflation starts. Once people are buying houses with cash they will go up in price as fast as cans of tuna.

      Because you win so much on the loan becoming worthless it can be a very very good investment, maybe even better than gold as you probably are not so leveraged with gold.

    4. There may also be favorable tax treatment of profits on a home.

  10. I am NOT a Hyper-Inflationsta Skeptic. But we're NOT approaching Hyper-Inflation, currently we're in DEFLATION. Perhaps we'll see hyper-inflation after all the deflation has played out.

    What the hyper-inflationistas are overlooking is human behaviour and humans don't like falling prices. governments want (Hyper-)inflation. But the behaviour of "Mr. market" prevents that from happening.

    1. By what measure do you see deflation?
      What makes you think governments want hyperinflation?
      What makes you think Mr Market can prevent hyperinflation?

  11. If the world is moving towards Hyper-Inflation then why are people still wanting more dollar notes ? In Hyper-Iflation want to get rid of their money. Get rid of their dollar notes.

    1. I think the problem is that few people know the world is moving toward hyperinflation.

    2. This is cause the world is heading into the biggest deflationary crash ever witnessed.

      People need dollars, cause there isn't enough money to pay their bills. Banks are attempting to engage in a process of slow liquidation.

      Hyperinflation is what people will be begging for as they slowly become pi$$ poor. Unfortunately banks have no interest in making what you owe them worthless, Sorry!!!

    3. Even during hyperinflation people feel very short of money. Often it is very hard just to survive.

      In the end the banks never seem to be in control. Somehow the government always gets money. In Japan the government is leaning on the central bank. The US might just print $1 trillion coins. Something will happen so that the government gets all the new money it needs. People will be poor though.

  12. Hyper-Inflation can very easily be stopped. Literally stop printing banknotes.

    1. The problem is that the government is spending far more than it is getting in taxes and has no place else to get the money except by printing banknotes. This is why it is hard to stop printing in hyperinflation. The government fails if they stop printing, can't pay their employees.

  13. Wow! What a great post. This should be required reading by every member in congress and the White House. Unfortunately, it would then be banned because if this word ever gets out, we will have hyperinflation tomorrow. The music is still playing. Too bad there are only enough seats for less than half the crowd.

  14. You made a couple of assertions that did not have your thought behind them to explain how you arrived at the conclusion you did, and a couple I did not fully agree with. For example:

    Can't people just switch to another currency?
    But if US dollars become worthless, then they will not be able to hold up the value of their own currencies. So soon after the US dollar fails, a bunch of other currencies will probably fail as well.

    If I have little US reserves and my currency currently stands alone, since I am mainly trading it within my own borders how does a collapse of some other currency impact me? I can only see other currencies failing if a great majority of their “reserves” were tied up in US dollars and still were after the event went on for any length of time.
    There has never been hyperinflation of the world reserve currency before!
    It is not possible to get hyperinflation when using gold and silver. Hyperinflation happens to fiat currencies.

    You should probably clarify this further, which you did allude to further in one of your answers. But paper currencies “backed” by gold have also experienced hyper-inflationary events. Such as the confederate notes and the like. It is just the printing of un-backed additional paper currency that has caused it, not fiat currency (in and of itself). Since by definition it was not fiat currency at the time.
    Bernanke says he is just temporarily monetizing debt.
    If he tried to sell the bonds he has the interest rates would shoot up and the government would not be able to afford the debt.

    It would be a simple enough process for the Fed/government to “default” on ALL the treasuries owned by the Fed. That immediately cuts the debt by a significant amount and has no impact on the interest rates.

    He is only going to “sell the debt” to pull back in cash in an overheated economy. Which we are not currently experiencing. He has no need, nor incentive, to do so otherwise. That is the purpose of Operation Twist, to avoid the problems of always having to re-monetize the debt “owned” by the Fed.

    end part 1

    1. The problem is that if 5 major paper currencies fail and then a few dozen more that used these as reserves also fail the trust in all paper money drops like a rock. Even if you have a well run currency I bet it would go down relative to gold.

      The confederate money was not redeamable for gold.

      Even if the US defaulted on all their debt they still have the problem of the deficit. After defaulting nobody will be buying their bonds, except the central bank. So it is pure monetization of a huge deficit, which will still give them hyperinflation.

    2. I expanded the section on other currencies. Thanks for the feedback by the way.

  15. Part 2

    Even though the Fed is making lots of money the banks are just hording it so there is no inflation.
    However, the government is spending the money it gets from selling the Treasuries.
    The government spending the printed money alone should have caused inflation, all the holding of the debt does is stop that half of the potential velocity from happening. Say a velocity of 1 times the number of years that the banks hold it. But the initial spending should have taken production out of circulation and had more dollars chasing those fewer goods.
    The bankers control the Fed and it is against their interest to have hyperinflation.
    Note that if the government shuts down the central bank will shut down too. So it is actually in their interest to prop up the government by buying their bonds.

    Actually I would argue that it is not due to “propping” up government, which is a byproduct of what they are doing. But the Fed realizes that our debt load is unsustainable, and non-payable (back to them as well). So the countries only option is to inflate away the value of the debt, and the government, or banks, gets first spending rights on the new dollars created. So of course the Fed will go along, after all they are just a collection of banks anyway. So it is also in their best interest to do so.
    You can't have inflation when there is high unemployment.
    The 1970s proved this is not true yet many people continue to believe it. High unemployment is normal in hyperinflation. The economy is a mess.

    Actually many of the previous hyper-inflationary events were at times when there was 100% employment, especially in a global economy. It is strange, but the effects of hyper-inflation increases the amount of foreign currency buying local production. They can buy it cheaper and cheaper all the time. So in country industry gears up, but there are then fewer and fewer goods to go around (the companies want foreign currency not local). This just adds more fuel to the fires. This may be different in today’s one reserve currency scenario, but I doubt it.
    By printing money they lower the value of the dollar and help the economy by increasing exports.
    In effect the US is able to collect an inflation tax from the rest of the world. At some point the rest of the world will no longer put up with this and so will stop holding so many dollars.

    Interesting point here, but I would also add. When the rest of the world loses faith in the reserve currency. What happens to that currency? It is all repatriated, maybe all at once, and is used to buy up as much physical assets as possible and ship it overseas. That is to say the only place that HAS to accept US dollars is America. So the inflation that we once exported is really only delayed in its return to us. And the return will be much worse for us. Of course the foreign countries will not get the same value of goods back they gave up, but at that point they don’t care. At that point they just want a return OF capital, not ON capital.

    Thank you for your interesting post!

    1. The reason there is not much inflation so far is that the initial market response to lower rates is to lower the velocity of money. The lower velocity compensates for the higher quantity of money, and not much inflation, for awhile.

      The Fed and all other officials have to pretend that they are not propping up the government. They have to claim they are trying to stimulate the economy or jobs or something.

      I am not aware of this full employment during hyperinflation. Certainly there are lots of jobs being destroyed.

      Yes, when the rest of the world decides to get out of dollars they will go rushing back to the US. They will buy up anything that they can take out.

    2. I think it's important to distinguish monetary inflation from "inflation" as used instead of "price increases".

      I would also point out to the commenter and others that we DO have high inflation, it simply manifests in different ways. Food prices are much higher, homes were for a long time lower. Some things go up, others go down. But one thing most miss is the "inflation tax" on savers. If artificial interest rates cause you to get 1.5% on your retirement fund instead of 6%, this is massive inflation of your earning potential. If the Fed forces you, via financial repression, into risky assets that pay a 3% dividend so you can retire comfortably and in coming years you lose 40% of your portfolio's value in a crash because you were forced into a market you shouldn't be in, that is another hidden effect of monetary inflation. When the bond market crashes soon I suspect this will become a much studied effect of monetary inflation in the future textbooks.

  16. Great article! Thats definitely a keeper for my "how to educate my sheeple friends"-database ;-)

    I have a question on hyperinflation and gold and silver prices. I recently read that towards the end of Weimar HI the gold/silver ratio suddenly fell from moderate 16:1 to 160:1. As possible reason why it was mentioned that some ppl wanted to flee the country and wanted to change bulky silver to more compact gold.

    Are there any hints whether this change in the G/S ratio was a singular event during Weimar or has there been other examples? Do you think the above mentioned reason fits? Do you have other ideas why it happended?
    Do you think that during coming HI there could be a similar scenario like during Weimar?
    Or could it even be quite opposite this time because the fundamentals of silver (consumption without recycling) have changed so drastically during the past decades?

    thank you in advance for your ideas on that!

    1. You could never have wildly different gold/silver ratios in different countries as long as there was free trade or much smuggling. If I could get 160 oz of silver for my 1 oz of gold in one country and then take that 160 oz and get 10 oz of gold in another country, then back to the first to get 1600 oz of silver, then 100 oz of gold, etc. I and lots of other people would be going back and forth as fast as possible.

      So there would have to be some government generated anomaly to get that.

      Looking at the data I suspect someone just got an extra zero on the price of silver and so it looks like there is a 160 ration when really it was just 16.

  17. Here's what I don't understand: Let's say America or the world will experience hyperinflation next year. Before hyperinflation comes, person A has gold coins that are worth $10,000, while person B has a holding of $10,000 in an ETF that tracks the price of gold. Will both persons have basically the same amount of wealth after hyperinflation? Or will hyperinflation make all dollar-denominated holdings--including the gold-price-tracking ETF--relatively worthless?

    1. As long as the ETF, the exchange, and person B's stock broker all make it through without going bankrupt then they should have basically the same wealth after. But this is a big if. There are lots of people shorting that ETF. Imagine there are 10 million shares of long ETF owners and 5 million shares of short ETF owners at person B's broker. Then the broker only really has 5 million real shares in the ETF. If things go crazy over a weekend then the shorts might all not be able to pay what they owe the broker. Then the broker does not really have enough money and shares for all the longs. So he could go under and his customers who thought they owned shares in the ETF might only get a portion of what they should have gotten. Note also, if insiders at the ETF cheated the ETF somehow then people could be out as well.

      On the other hand, the guy who owns gold coins has to store them someplace and wherever they are they could get taken as well. A Swiss bank that has been around for 100 years probably does not cheat you but there is still some chance.

    2. Interesting answer, but if you imagine this comparison of real gold to gold ETF taking place in Weimer Republic Germany just before hyperinflation hit that country, then it seems like the ETF investor will get hosed no matter how reputable and long-enduring the ETF, broker, and exchange are. Putting 10,000 pre-hyperinflation German marks in a Germany-based gold ETF would be a worthless investment, wouldn't it, since German marks would soon become for all practical purposes worthless, no matter how many of them you had?

    3. I do think you would want to get out of the ETF before the money your account was denominated in became completely worthless. So that is another way you could lose. Most hyperinflations take some time. There is a chance that the US one happens much faster than previous ones. If there is a bank holiday so that you can not get your ETF profits out and convert them to physical gold and by the time the bank holiday is over the money can not buy anything, then an ETF investor could really lose.

  18. Are there any historical examples of hyperinflation occurring in a nation with the type of military dominance that the US enjoys? If everyone in town knows that I'm the baddest gangster around, and can have anyone killed at any time, who will refuse to loan me money? Even if I stop making interest payments, won't people still continue to give me "loans"?

    I don't think the Chinese seriously believe that their UST holdings will ever be truly and honestly redeemed. They're just not that stupid. I think they continue to make those "loans" not as investments for the future, but for reasons of domestic politics and geopolitical relations in the here and now. So long as the US continues to hold a gun to the head of the entire world, I don't see that dynamic changing fundamentally.

    It's true that the US is paying for its global military hegemony not with domestically produced wealth, but with cash imported from the rest of the world. To my eyes, that cash flow looks more like imperial tribute payments than "loans." While such a system may not last forever, it might just outlast you and me.

    1. Collapse of the Roman Empire resulted in 100's of years of DEFLATION, also known as the Dark Ages.

      If you think the collapse of Rome ended in Hyperinflation, you need to brush up on your history.

    2. Over many years Rome debased their silver coins so there was less and less silver in them. This was sort of a slow motion hyperinflation. When they put in price controls people started leaving the jobs that could not pay well. So then they changed the law to say you had to do the same type of job as your father. This reduced the flexibility of the economy and was a big part of the Dark Ages. After the plague killed off many people there was such a shortage of labor that people were allowed to move to other jobs and improve the efficiency of the economy.

    3. Rome debased there coins due to LACK of money. They tried to avoid reality by debasing coins, making RULES and calling them LAW. It did everything in it's power to avoid the on coming deflation.

      In the end the masses ran out of money and were forced into bondage. Sorry but Romans weren't carting around wheel barrels full of cash in the end.

    4. But you are saying now there is a LACK of money. Like Rome, when hyperinflation starts next time the governments will pass price control laws to try to inflation. It will not help next time either. Price controls make shortages that hurt the real GNP and end up making hyperinflation worse as hyperinflation depends on quantity of money, velocity of money, and real GNP.

      The masses run out of money in hyperinflation.

      Rome was not using paper money so they did not have wheel barrels full of cash in the end. We may just switch to credit cards and never have wheel barrels full of cash either.

      I just made a post about a video from just over a year ago where a bag of cash was used to buy beer.

    5. >>The masses run out of money in hyperinflation.

      If the masses run out of money in hyperinflation how are hyperinflated prices supported then?

    6. The prices are supported by the central bank making lots of money and the government spending lots of money. The masses take what little nearly worthless money they get and spend it right away on food and other necessities. They feel very very short on money.

    7. Sorry but the central bank has no interest in buy loafs of bread that will rot in their vault, so they have no desire in supporting the bread market.

      Sorry but once the government has spent more than its worth the central bank has no interest in giving it more money to further devalue the central banks debt holdings.

    8. If you look at the history of hyperinflation the government always gets the central bank to keep monetizing the debt even if the people there did not like the idea. Maybe they change the laws or change the people running the bank, but the central bank is made to go along or clearly they never would get hyperinflation.

    9. To review my original point: The US has set up a historically unique situation in which it enjoys the "exorbitant privilege" of emitting money at zero cost which is accepted worldwide for real goods and services.

      This system of exploitation is stable in the sense that policy-making elites in other countries also benefit from the arrangement, and if the guy on the street suffers from price inflation, that's just tough for him.

      If policy-making elites try to defect from the system -- like Saddam Hussein selling oil in euros instead of dollars -- such defection is punished swiftly, severely, and visibly.

      So the question is, by what mechanism can this system eventually unravel? I don't think hyperinflation is it. I think it only ends when the US is defeated in a major war.

    10. Even if you are correct that the US punishes countries for no longer using dollars, if a bunch of countries gradually reduce their Treasury holdings the US can't attack all of them at once. Also, the US might is largely the result of economic might, partly from this exorbitant privilege. As the world stops giving them this privilege their might will be reduced. Like the USSR it might even collapse, if it can no longer pay for all the stuff it has promised to pay for.

      If China suddenly dumped most of their US Treasuries and the US got hyperinflation, it is certainly possible that US politicians would blame the US problems on "Chinese economic warfare" and want to go to war. But at that point, with hyperinflation and no exorbitant privilege, they might not be in any position to pay for a war.

    11. Agreed -- a disciplined, multilateral, sustained campaign to shun Treasuries could cause real disruption to the system of tribute payments flowing to the US. Of course the Fed could still step in and buy up the debt, but by refusing to participate in the sham, other countries could gradually force the resulting inflation to be experienced in the US rather than being exported.

      Peter Schiff thinks other countries aren't doing this already because they just don't understand how they are being exploited by the current system. I used to agree with this view, but with four years since TARP and the dollar still standing strong, I think there just has to be something else holding the debt bubble together, besides the ignorance and delusion of foreigners.

    12. It is a puzzle that I don't have a good answer for. Some people say the reason they buy Treasuries is to lower the value of their own currency relative to the dollar. But they could easily print lots of their local currency and buy gold or silver or any imports and lower the value of their local currency. The key to devaluing the local currency is printing lots of it, buying anything works, not just Treasuries. So that explanation does not work for me either.

      The oil producing countries seem to have a deal where if they sell oil in dollars the US will defend them if they are attacked. It is possible other countries have deals where if they hold a certain amount of Treasuries they get US defense, but I have not read this. The inflation tax would be a way for places to pay the US without it being obvious that a payment was being made. But this is speculation.

    13. When I was in Russia a fellow told me how people all over the country had their savings in hundred dollar bills in their mattresses, if this is true we might assume this has happened all over the world. In my travels the dollar is often accepted, most Americans underestimate the power of being the worlds reserve currency. Where it could become a double edged sword is if, and when, these people decide it is time to dump this paper in search of something more real and tangible.

      Footnote; do not underestimate the power of "secret currency swaps!"

  19. I do have a question. Bernholz's research covered 29 hyperinflation events where overall debt exceeded 80%, and deficits exceeded 40%. How many times, if any, have countries done this and there was no hyperinflation?

    1. It is a good question. I am not sure. There have been cases where they had hyperinflation and stopped it. So there may be cases that crossed those numbers and then cleaned up their act without ever getting hyperinflation. People always talk about Japan because their debt is clearly over the 80% of GPD (over 200% even) but I am not sure if their deficit has exceeded 40% of spending for any length of time.

    2. Two factors about Japan as I understand. First the people of Japan hold the debt, that is they have bought the bonds of Japan over the years and are using these bonds as a savings account. this would mean that Japan is not as vulnerable as say America would be assuming an outside investor would decide to suddenly shed its investment. The second factor that many people forget is that Japan has for years enjoyed a large trade surplus that in many ways offsets the governments deficit spending. America suffers like the UK a huge trade deficit on top of a massive government deficit.

  20. Can't inflation linked bonds protect you from hyperinflation?

    You write principle. Don't you mean principal?

  21. Yes, thank you. Have fixed it now.

  22. Vincent, this is a weighty tome. I will be more concise.

    Hyperinflation is the total loss of value of the credit instrument that you are considering. If this credit instrument happens to be the US dollar - the obligation of the Federal Reserve Bank - then hyperinflation of the US dollar is the total loss of value of the US dollar.

    How does a credit instrument, a financial obligation, lose all its value? It's far simpler than you describe - it loses its bid. It is the bid - the demand - that creates value. If there is no demand for something, that something has no value.

    When will the US dollar lose its bid? Difficult, if not impossible to say. The US dollar has traded 'money good' for a long time now & money has a peculiar demand - it verges on infinite. Simply put, money is the one & only thing you cannot have too much of, otherwise known as constant marginal utility.

    I can only leave you with a concatenation of quotes from around 1720:

    "Sunk in Lucre's sordid charms, all are swallow'd by the damn'd South Sea."

    1. Hyperinflation is a process that can go on for years. The bid does not suddenly go away. I think it is helpful to understand the feedback loops in the process.

    2. Vincent,

      Kind of like the feed back loop of;
      To pay for your debt go out and beg for more debt.

      Wonder what happens when you can't find someone to give you more debt???
      You think Hyperinflation? LOL!!!!!!!!!!!

    3. Yes, in simple terms, when a country that prints its own money can not borrow any more and prints for both the deficit and for bonds coming due, they get hyperinflation.

    4. Sorry but the US government prints debt NOT money. It hasn't printed money since the Civil war.

    5. I understand why you call it "debt money" but most people really do just call it "money".

    6. I don't call anything 'debt money'. It is either debt or money NOT both.

      Problem is you and everyone else have been trained to call -2 +1.
      Sorry but -2 DOES NOT equal +1,
      debt DOES NOT equal money

    7. Please help me make my FAQ sections on debt money better. I claim that because the government never really pays back the debt that debt money is not really much different from debt free money. Do I not make that point clear? How could I improve that?

    8. If you are genuine in your request I will help you. However I find that hard to believe from some of the response I got.

    9. I really would like to make this FAQ as good as possible. If something is false or unclear I will try to fix it.

  23. I have been an avid reader of ZeroHedge and other independent blogs for 3 years, but I have never seen a clearer or more cogent analysis than this brilliant exposition of the current situation. Deserves to go viral.

  24. Quite contrary to your title "How Fiat Dies" is reality as history has shown.

    In debt based fiat system, debt is what backs the monetary system.
    Before the monetary system is allowed to 'die' the debt that backed it must be liquidated. As there is always more debt than money this process is inherently deflationary despite what you'd have your readers believe.

    1. I have added a FAQ question for this one. Here is my entry. Let me know what you think.

      Debt currency issued by central banks is inherently deflationary.
      Since central banks charge interest in all the loans they make and make safe enough loans that they almost always get the principal back, it would seem they tend to reduce the total currency outstanding over time. The problem with this idea is that governments just keep increasing their debt to the central bank. Also, at least in the US case, any interest profits the central bank makes are paid to the government, not withdrawn from circulation.

    2. Close but not quite right.

      At first a debt/(fractional reserve banking system) has an inflationary effect. This is due to extra spending, that wouldn't have been done if there was no access to credit. This only continues if public requests for debt creation is always greater than the previous request. Deflation starts when the public can not and/or refuses to take on more debt than the previous request for debt.

      Money is sucked out of the economy as debt is paid off/and or assets liquidated. Since there is always more than 1 dollar of debt for every dollar in existence, the banks are guaranteed to end out with all the assets/money.

      For example;
      The last 99 years of inflation in the US was due to an exponentially growing demand for bank loans (the FED only prints when people ask it to). Once population expansion could no longer be sustained at an increasing rate (Baby Boomers) the personal debt to income ratio had to be lowered to ward off collapse. Once all the responsible loans were made the government made it LAW to make irresponsible loans. If everyone didn't get there Hum V's amd McMansions the crash would have started in 2000.

      Eventually US citizens were financially incapable of taking on more debt than before and the crash of 2008 ensued. The US government desiring to stay in power as long as possible is attempting to slow down the deflationary crash via QE. It would have no desire to engage in Hyperinflationary spending as it would only hasten the destruction of the US and it's government. The banks have no interested in this either as they want people working and scrambling for money as long as possible so the maximise the productivity extracted from society.

      Those who don't understand global finance seem to think China can and will dump it's US bonds in a furry of spending resulting in hyperinflation. Reality is China is reliant on it's US bonds holding value to fund its various economic bubbles. Chinas along with every other global economy will be forced to collapse before the US does. China and other secondary economies will be desperate for more US dollars in the coming years, as the previous source for US dollars (US consumers requesting more debt) is drying up.

    3. FYI the US government doesn't get all the interest on their loans to the FED back.

      Also the US keeps extending it's debt only to avoid default. The total debt level is meaningless now that QE has started. What matters most is the willingness and ability of the US citizens to go into further debt. The market for US citizen debt is over 50 trillion. Government issued debt is only a fraction of this.

      Typo in previous post:
      Meant 'income to debt ratio lowered' not 'debt to income'

    4. FYI the Treasury gets the "profits" from the Fed. This is not all the interest as the Fed has some operating costs but it is most of the interest back.

      If the government is going more than a extra $1 trillion into debt every year it does not matter if the citizens are willing or able to go further into debt.

      I can not find any indication that private debt has any relevance to hyperinflation. If a country gets hyperinflation seems to only depend on the debt and deficit of the government and not at all on private debt. After hyperinflation starts private debt soon drops to almost nothing as the value of bonds crashes when interest rates shoot up, and yet the hyperinflation continues. So private debt does not seem a factor in hyperinflation. Do you have anything to indicate it does?

    5. You saw my FAQ about how deflation and hyperinflation are not opposites? I do not argue that the US may fit definitions of deflation if private debt is going down faster than government debt is going up. I just think you can have hyperinflation and deflation at the same time and personally don't think deflation is nearly so interesting.

    6. I don't think there has ever been a deflation in a pure fiat currency (not related to gold or silver or returning to either) that had double digit price deflation. Do you expect any price deflation? If prices are not going down why should anyone care if the world fits your definition of deflation?

    7. I can't stop. In hyperinflation your retirement fund is usually destroyed, you life insurance becomes worthless, your salary will not keep up with the cost of food, electricity, and gas. Hyperinflation really hurts people. If your definition of deflation is met how will it impact someone's life?

    8. >>FYI the Treasury gets the "profits" from the Fed. This is
      >>not all the interest as the Fed has some operating costs
      >>but it is most of the interest back.

      You apparently are unaware of how the FED / US government debt system functions.

      Step one Treasury issues debt via Tbill
      Step two FED buys debt at a given price (interest rate.)
      Step three FED does trades debt with the open market. FED attempts to set the rate via buying and selling its existing debt/assets. The market generally buys at a lower interest rate (higher price) than the FED.

      The FED then pockets the arbitrage money, issues a 6% divined of said profits to FRS shareholders. The rest of the profits are returned to the US government.

      However profits only cover arbitrage between the FED purchasing rates and the free market. All the interest on debt is still owed to those who purchased bonds on the open market.

      Sorry but this is NOT free money it is all owed back PLUS INTEREST!

      >>If the government is going more than a extra $1 trillion
      >>into debt every year it does not matter if the citizens are
      >>willing or able to go further into debt.

      And like I've explained before this debt doesn't matter unless it is spent into the free market. Sorry but the FED is allowing QE just to roll over previous debt, not to engage in a hyper-inflationary spending spree. This excess money/debt exists only on the FRS's balance sheet, it will never enter the free market.

      >>I can not find any indication that private debt has any
      >>relevance to hyperinflation. If a country gets
      >>hyperinflation seems to only depend on the debt and deficit
      >>of the government and not at all on private debt.

      Once private debt of a world reserve currency is unable to expand, deflation results until all of the private debt is liquidated. Only AFTER the liquidation phase is the currency re-valued lower.

      History has shown this many times over. The last world reserve currency the British sterling end in a deflationary crash when public became saturated in debt.

      Sorry but public debt saturation of a core economic power results in DEFLATION NOT HYPERINFLATION!

      >>hyperinflation starts private debt soon drops to almost

      Your above comment should tell you why the banks and TPTB will NOT let hyperinflation happen. Sorry you but they have NO interest in devaluing what you already owe them PERIOD!!!

      >>as the value of bonds crashes when interest rates shoot up,
      >>and yet the hyperinflation continues. So private debt does
      >>not seem a factor in hyperinflation. Do you have anything
      >>to indicate it does?

      Hyperinflation is what happens when a NON CORE ECONOMY gets into debt trouble. The increased spending is driven by the CORE ECONOMY cannibalising said NON CORE economy's assets and productivity. The only reason Zimbabwe's unfortunate citizens were allowed to trade flakes of gold for bread is because the CORE ECONOMY still function to support the trade of bread for shiny objects. If the CORE ECONOMY where ever to collapse there would be nothing to support the trade of shiney trinkets for bread, Sorry!

    9. When the federal government spends $1 trillion more than it gets in taxes do you think this is not "spent on the free market"?

      The Fed makes money out of thin air and then charges interest on it. This is a very profitable operation. When the Treasury pays interest on bonds held by the Fed the Fed has that interest as part of their income. The profits are given to the Treasury. The net result is that most of the money the Treasury spends on interest on bonds held by the Fed they get back.

      So if China became the CORE economy and the US a NON CORE then you would agree the US could get hyperinflation? All this takes is for the US dollar to drop by a factor of 2 and China is the bigger economy.

      There have been many many cases of hyperinflation. Why do you still believe your theory that "the banks would not allow hyperinflation" when your theory has failed in all these other cases? In the scientific method, a theory that is contradicted by experimental evidence is supposed to be thrown out.

    10. At the start of every hyperinflation the "debt marked to market" goes down, as interest rates go up, which you probably call deflation. This contraction in the value of debt does not prevent hyperinflation, it is the opening act of hyperinflation.

    11. >>You saw my FAQ about how deflation and hyperinflation are
      >>not opposites? I do not argue that the US may fit
      >>definitions of deflation if private debt is going down
      >>faster than government debt is going up. I just think you
      >>can have hyperinflation and deflation at the same time and
      >>personally don't think deflation is nearly so interesting.

      Your FAQ is wrong in too many ways to point out them all.
      Deflation and Hyperinflation of a currency does not occur at the same time.

      You are applying different definitions to opposing economic trends.

      Definition 1: Inflation/deflation is measured as a purely monetary phenomena. This view can lead to much confusion and incorrect conclusions if not properly understood and applied.

      Definition 2: Inflation/deflation is measured as the rate of change in prices for equivalent goods and services.

      Sorry but comparing definition 1 of deflation to definition 2 of inflation is like saying a shoe is both 12" long and 30.48" long at the same time. You then argue this is because when you measure with a yard stick the number says 12 and when you measure with a meter stick it says 30.48.

      Sorry but if you are going to compare two things you need to use the SAME measuring stick!

      BTW it is hyperinflation that is always short lived. Deflationary crashes are generally long and drawn out.

      >>I don't think there has ever been a deflation in a pure
      >>fiat currency (not related to gold or silver or returning
      >>to either)

      Wether a currency is back by silver or not, once the public of a core economic power is saturated with debt deflation must ensue.

      >>that had double digit price deflation. Do you
      >>expect any price deflation? If prices are not going down
      >>why should anyone care if the world fits your definition of

      Yes in general terms prices are going down and will continue to do so. There will be minor up trends and periods of stagnation as people adjust there lifestyles but this will take place within a larger downtrend.

      Prices of what you want will fall until they no longer make what you want.

      Prices of what you need will continue to rise until the market can no longer support the continued rise. Then they will fall until the market can support the price.

    12. Everything on hyperinflation is in terms of price inflation. All the people who really seem to believe in deflation are talking money supply including debt. These two camps are using different yardsticks. I am just trying to understand them both.

      Again, suppose there is deflation by some definition including debt, why should anyone care? This deflation but not price deflation just does not seem to impact a normal human life. Hyperinflation really has an impact.

    13. >>So if China became the CORE economy and the US a NON CORE
      >>then you would agree the US could get hyperinflation? All
      >>this takes is for the US dollar to drop by a factor of 2 and
      >>China is the bigger economy.

      Yes if the US no longer served a CORE function in the economy.
      Problem is for a debt based CORE Economy to become a NON CORE ECONOMY it must first liquidate all assets of value.

      Will have to discuss more later as I must go now for the night.

    14. The Yuan is going up relative to the dollar and pays a higher interest rate than the dollar. It would make sense for any central bank around the world to get rid of their Treasury debt and get some Chinese debt. If they start doing this the dollar could easily drop by a factor of 2 and China could then have a larger GNP and be used more as a reserve currency. It seems this could all happen without the US first liquidating all assets of value. Why do you think the US would have to liquidate all assets of value to become NON CORE?

    15. To reply to the rude post I deleted. The Treasury interest rates are so low because the Fed is buying around $1 trillion per year. This drives up the prices and drives down the interest rate. Please don't bother posting if you are going to be rude.

    16. It's funny, when you read Vincent's musings they always make sense. When I read Anonymous' stuff it usually doesn't. I see this a lot with the Keynesian "borrow all you want it's fine" types. They say a lot of words but it rarely makes sense. I think they call that "baffle em with BS".

  25. Let me say a word on my comment policy. If you are insulting me personally or hyperinflationists in general I will probably just delete the comment. If you are asking a question already in the FAQ I will probably just delete the comment. I really do want a clean debate and look forward to any attack on the ideas presented here. I hope that with feedback the FAQ can be improved.

  26. What will happen to income producing real estate like retail shopping centers in a hyperinflation scenario? This type of property usually has long term leases with renewal options to the benefit of the tenant which prevents a landlord from increasing rents. My basic question is, would you consider income producing property a safe harbor for wealth during infaltionary/hyperinflationary periods?

    1. Property taxes and other expenses will go up with inflation. Governments often put price controls on rents during inflation. If the rent does not go up with inflation then an income producing property can quickly become an income taking property. During hyperinflation nobody can get a 30 year loan, so what the market can pay for any property becomes far less. People buy properties for cases of cash. If your property rights last till society recovers these can later turn out to be very good deals for the buyer. There is a saying, "buy when there is blood in the streets". Anyway, gold and silver seem safer than income producing real estate if you are investing to survive hyperinflation.

  27. Sadly, a world war would seem to be the only course that doesn't take down the inflationary path. Hopefully that doesn't happen, but the alternative might not be any better. I would think 401k's primarily in stocks would do far better than 401k's in bonds. Is that true?

    1. I doubt a war would help things. Initially both bonds and stocks will go down in real terms as interest rates go up. But eventually stocks will keep up with inflation and bonds will keep going down. So yes, you are better off in stocks than bonds. I think gold and silver will do better than stocks initially.

    2. War is part of the liquidation phase of deflation. War is used to accelerate the liquidation phase so inflation greater than the previous inflation can start again.

  28. In Zimbabwe, the Government took from wealthy producers and gave to poor consumers. Once the economy went from producing to consuming in a major area, it was doomed. It seems we are doing the same thing, so the outcome may be the same.
    You did well on your information, I learned from it.
    Thank you

  29. Great article, very informative. There absolutely has to be a consequence to printing that much money. It also makes perfect sense that now that so many are reaching retirement age and have their life savings in bonds and cash, these will be the next things to have their value stolen. You made a great case against holding cash. They should print a tulip on each bond to remind people how stupid this is. Much of the inflation already seems to be there, oil, gold, stocks, food, but not being counted in the Fed's inflation numbers. Not sure if the final advice is to own hard assets, commodities. Aren't they already high and toppy?

    1. Thanks. If we get hyperinflation then today's prices are not high and toppy.

  30. How long would Hyperinflation last for before things start return to normal? (Aprox if no set time)

    What and some good measures I could take to help me and my family get though that period ?

    I'm really worried about this, your advice would be much appreciated

    Many thanks.

    1. You don't want to be holding bonds or too much cash. Holding gold or silver is good.

      It is really hard to say how long hyperinflation would go on. With the Internet you could make a case that people will understand things much faster and so things will move much faster. But the US dollar is the world reserve currency, so maybe things will go slower. Many hyperinflations seem to take a couple years. I think that we could get Yen, Pound, Dollar, Euro falling like dominos. From start to end might take awhile. With most of the world's paper money in trouble the recovery time could be long. It will be a big mess and hard to say how soon things get cleaned up.

      If you can afford a yatch by the Dashews, that would be a good way to distance yourself from any problems. :-)

  31. Isn't hyperinflation also a deflation under the hood? I mean, prices rise, but total stock of money actually contracts, and if hyperinflation continues to its logical finale, in the end the total stock of money is worth exactly ZERO. So when people say 'we can't have inflation, cause we're gonna have deflation' there is no contradiction. Price inflation do not contradict monetary deflation.

    Therefore, the qualitative difference between normal and hyper-inflation is this: in normal inflation, the euphoric effect of monetary pumping is stronger than disphory of rising costs. People feel richer as a result. In galloping inflationary environment, inflationary expectations counter any monetary 'high', and even prevail, so that monetary pumping is unable to produce feelings of prosperous 'boom' but are still necessary to support the skewed structure of production? and inflation is 'neutra' in the same sense as drug addict feels when highs do not occur anymore due to tolerance. And hyperinflation is just an attempt to get rid of tainted, flawed money. the difference is qualitative and fuzzy, not 26% or 50%.

  32. That dude is getting on my nerves, is he a shill?.. He said hording, didn't he mean hoarding? He said wheel barrel, didn't he mean wheel barrow?... Maybe he should buy one and start a garden, he may need it soon..... Outstanding article and feedback...

  33. Isn't better to own stock of hard asset companies that pay a dividend and sell their commodities internationally? During hyperinflation, all goods rise, so why buy non-income producing assets like gold and silver?

    1. When hyperinflation starts things that are usually bought with loans will drop in price relative to gold. With higher interest rates the amount people can afford to pay goes down. You can view this as "deflation when priced in gold".

      Stocks are competing with long term bonds. As interest rates go up the price of bonds goes down, and stocks as well. This is the reverse of the central bank driving down interest rates to make stocks go up.

      Eventually stocks, realestate, etc will go up with inflation.

      The government can tax interest and public companies and stock sales. There are taxes on land. Inflation can make it look like you have lots of profits when in real terms you do not. Gold coins you can hide and use one by one years later without paying any tax. It can be that the taxes on the bonds, land, or stock eliminate what should be an advantage for productive assets.

      Outside of taxes, it does seem that a productive asset should win over the long term. But in the short term it still may not. If it was overpriced at the start it could do poorly.

      It is possible that stock in a hard asset company will do enough better than the stock market in general to be better than gold, but not clear to me.

    2. Think about a "leveraged buy out" where a loan is used to buy up a company, and then the earnings used to pay off the loan. The price you can afford to pay for the company depends on the interest rate. If interest rates shoot up the price goes down.

  34. Fantastic hyperinflation FAQ.

    One thing. You state that banks earning interest from excess reserives keeps the money out of the economy. True. But won't banks earning massive profits over time cause those earnings to enter the economy via their dividends and use of their profits to buy other assets?

    1. Eventually the money is going into the economy. The question is just how and when. Printing money and buying bonds makes interest rates lower in the short term but will make inflation higher and interest rates higher in the long term. Bad economists just look at the short term and say "in the long run we will all be dead". Profits from the banks going to shareholders, or bonuses to executives, is one of the ways money gets into the economy.

    2. The "excess" reserves are not excess. Banks reserves are only a tiny fraction of the money they tell everyone they have in their account. This is why those who put money in Cyprus were forced to take a hair cut. Sorry but putting money in a bank and collecting interest is NOT saving it's INVESTING! When the investment goes sour don't expect your money back.

      So what do you think will happen when everyone is forced to take a hair cut? Sorry it's not Hyperinflation.

  35. I got here from another Hyperinflation blog (fofoa) and I must say you have done a great job with your FAQ. Congratulations.

  36. Vincent, a wonderfully clear and inspiring exposition, thank you. Some humorous misspellings - "yatch" and "degreasing GNP".

    I understand falling real GNP as a result of hyperinflation. Can you clarify why it is a cause? "Cause versus "result" is a really important distinction. In the 1970's inflation, interest rates rose and lagged behind inflation. Then Volker allowed rates to get ahead of inflation, which killed it. Interest rates shifted from being an effect to being a cause.

    - Smithy

    1. Thanks for pointing out the spelling errors, I fixed degreasing.

      In a "feedback loop" or "death spiral" things are both "cause" and "result". As the real GNP goes down there are less real goods. The same money chasing less goods results in more price inflation. But the high inflation, government price controls that always come with, impossibility of long term borrowing, and general chaos and unpredictability, result in less real GNP. So lower real GNP is both cause and effect of hyperinflation.

    2. Maybe "de-Greece-ing" will eventually apply. : )

  37. 2 words ....."incredible info" thanks

  38. First Time i saw a blog such good as yours related with Hyperinflation.
    Excellent work , thanks for sharing us all this information and brainstorming.
    Please keep up good work.

  39. Vincent, thanks for a very interesting read, I have posted on my blog site about inflation but much of my focus has been on other economic and social matters. Since I came across your site on the Economist I suspect you are UK based. The euro, currencies, deficit spending, and bubbles are interesting variables that may spark or spook the next round of inflation. One post ask, What Is anything Worth? It points out the small amount of debt free, "proof of ownership" items that are in a persons possession in case of a rush to hard assets. If you have time check out the post, and my site, thanks again, the link is below,

  40. As soon as the US starts (literally) printing money (banknotes) to finance its expenses then and only then Hyper-Inflation will occur.

    "Hyper-Inflation requires Hyper-Deflation"
    "Hyper-Inflation is a political choice"

    Source: Hugh Hendry & Robert Prechter.

    1. Argentina and other modern countries have had hyperinflation that was mostly electronic and not piles of banknotes. It is up to the users of the money if they keep their money electronic or as banknotes. If people in the US all decided they wanted physical Federal Reserves Notes, then physical Federal Reserve Notes would be printed. But it does not really change anything.

    2. Nope. If a government creates "electronic" money (money = credit) then that money will go into the banking system. And the banks will bid up the asset that are going up in price. (USDs, gold, silver, etc.). The ordinary citizen won't get their hands on that credit/money.

      If the government literally prints money to pay its bills/employees then we're clearly in Hyper-Inflation. That could occur because then e.g. the US government can't issue T-bonds anymore. Also known as a bond market collapse.

      In that regard there's a similarity between deflation and inflation. In deflation credit dies, in HyperInflation both credit & money die.

    3. We have entered a whole new world, the rules of the past may not apply. The following post on my blog site received a lot more attention then I had expected.

      This is only one of many new instruments that are skewing and distorting the economic picture we see today. To think we have control of the situation and this time "it will be different" is a stretch.

  41. Wonderful work! This really helped me make the historical connections btw government deficits and hyperinflation.

  42. Vincent, you write:

    "And at some point the banks will be able to earn higher interest loaning to companies and people who will put the money into general circulation. Then they will redeploy their excess reserves and the money from Treasuries as they come due."

    This is incorrect. Excess reserves are mostly in the form of electronic Fed deposits. Only certain institutions can have Fed deposits (Tsy, banks, GSEs). This does not include the non-bank private sector (i.e. the bulk of the private economy). The aggregate banking sector cannot "redeploy" Fed deposits to the non-Fed deposit holding private sector. The banking sector in aggregate can ONLY buy things (including new loan agreements) from the private sector by crediting the bank deposits of private sector entities ex-nihilo (meaning the banks create this money ("inside money") out of thin air). When banks sell to the private sector, and when private loans are paid down this inside money is destroyed. Aggregate banking reserve levels are not affected AT ALL by either transaction. Fed deposits can only go three places:

    1. To another Fed deposit holder (bank, Tsy, GSE)
    2. Withdrawn as cash
    3. Back to the Fed as payment (where it is destroyed)

    They CANNOT got to non-bank private individuals, businesses, or organizations.

    Also, cash is only withdrawn by bank customers for convenience. When it's redeposited it regains its status as "vault cash" which is a component of bank reserves. No major loans are made in cash. No major assets the aggregate banking sector purchases are made with cash.

    Looking at the simulation model you created, I don't think you properly accounted for this fact. You modeled the pool of excess reserves as being able to flow into the private economy, which it cannot do (except as physical cash).

    How can you update your model to take this fact into account?

    Also, with excess reserve (ER) levels > 0, then the federal funds rate (FFR) is pushed down to the interest on reserves rate (IORR). As long as ER > 0 then FFR = IORR. If the Fed leaves the IORR close to 0, then this gives Tsy the option of auctioning only short term debt which will always be at the IORR as long as ER > 0. And ER levels will not decrease until a HUGE amount of cash is withdrawn into the private economy, or 10x more than this level of cash is made in new loans (thus converting a small fraction of the loan amount in ER to required reserves: that means about $18T in new loans), or Tsy starts accumulating a surplus, or the Fed conducts open market sales (OMS). So with ER > 0, if long term rates rise, the gov can simply stop issuing long term debt. Short term debt will continue to be pegged to the IORR.

    Also, the Fed can adjust the reserve requirement to anything it wants. It could make it 0% (thus ending the conversion of ER to RR with new loans) or it could make it 100% or even higher!

    Also, the gov could stop issuing cash, forcing us onto an all electronic system. In such a situation, all escape routes of the Fed deposits from the aggregate banking system into the private economy would be cut off. This kind of a drastic step would almost certainly not be necessary though.

    1. Banks make money if we count demand deposits balances as money and the real money sent off in a loan. It is not that they really make money out of thin air. If it were just like that, why would a bank every go bankrupt? Why would they worry if people could not pay them back? Why not loan out infinite amounts at 1%?

      If when the Fed paid to a reserve account a bank were in any way restricted on what they could do with this money, then banks would charge a higher price to the Fed than other bond buyers. They do not. There is no restriction or limitation.

      Clearly anyone paying taxes, or buying Treasuries, causes money to go from the bank's reserve account to the Treasury, which keeps very little extra money around (running at a huge deficit) so you should think of it as going from excess reserves into the economy.

      At the moment any individual can get physical cash if he has an electronic balance, and any bank can get physical cash if they have excess reserves. So electronic money and physical currency are interchangable at 1:1 exchange rate. If there was a bank holiday, you might get a friend coming to you asking if he can get $100 cash from you in exchange for a $120 check that you can cash when/if the banks reopen. So if the banks and electronic money shuts down for awhile (which has happened in the US and many other countries) then we could see a divergence in the value of electronic and physical money.

      The "excess reserves" is just the portion of a bank's reserve account that is above the requirement. If I pay my credit card bill online, eventually money goes out of my banks reserve account into the credit card company, which has already transferred money to the merchant's account. The merchant might be paying his taxes or getting cash to go shopping someplace. So what started out as excess bank reserves could end up with an individual or the government after a few electronic hops.

  43. "Banks make money if we count demand deposits balances as money and the real money sent off in a loan. It is not that they really make money out of thin air. If it were just like that, why would a bank every go bankrupt? Why would they worry if people could not pay them back? Why not loan out infinite amounts at 1%?"

    Capital constraints. Here's how they work:

    "If when the Fed paid to a reserve account a bank were in any way restricted on what they could do with this money, then banks would charge a higher price to the Fed than other bond buyers. They do not. There is no restriction or limitation."

    It's not that there's any restriction OTHER than the FACT of who is allowed to have a Fed deposit. Do you have a Fed deposit? I don't. Ask your friends and family and local businesses (aside from banks). Who has a Fed deposit??

    "Clearly anyone paying taxes, or buying Treasuries, causes money to go from the bank's reserve account to the Treasury,"

    Yes, that's true. However it also causes (if the tax payer / bond buyer is a non-bank private entity) and equal measure of bank deposits to cease to exist.

    "which keeps very little extra money around (running at a huge deficit) so you should think of it as going from excess reserves into the economy."

    This isn't true. The Fed can ONLY spend from it's TGA (Treasury General Account) which is a kind of Fed deposit. Guess where Fed deposits can go (see my list above)? Yup, they go straight back to bank Fed deposits. Now I'll grant you that the bank in turn ex-nihilo re-creates those bank deposits (that were destroyed when the taxes were paid or the bond purchases by non-banks), provided the Tsy spends on non-banks.

    "So what started out as excess bank reserves could end up with an individual or the government after a few electronic hops."

    Government, yes, it can get those in electronic form. Individual, no, except for cash. The individual can ONLY get his hands on outside money (look up the Fed's definition) in the form of paper reserve notes or coins. So the ONE way that reserves are eliminated from the aggregated bank balance sheet and enter the non-bank private sector is through cash. (Cash at the bank is considered "vault cash" and is counted as part of their reserves).

    1. So while I'll grant you that Fed deficit spending adds net financial assets to the private sector, and I'll grant you that if QE is performed after this, the result is that some of those added NFAs turn into inside money (bank deposits), I don't think it's quite accurate to depict the ERs (resulting from turning NFAs into bank deposits via QE) as a pool of money ready to flood out into the economy. It's not like that. The ERs really can't do that.. EXCEPT through physical cash. But I don't buy the idea that the cash route is that important... especially since it flows both ways.

      Here's what Fed deficit spending looks like:

      and QE:

    2. That should read "gov" or "Tsy" deficit spending, not "Fed" in the above.

    3. You agree that reserves go down if banks take out cash or if money moves to the Treasury. But you don't think they will go down. I think they will go down. Hum.

      You agree that if 1 year Treasuries were offering 3% a bank might decide this was better than 0.25% and instead of keeping its money as excess reserves it might buy a government bond. Right?

    4. Hyperinflation does sometimes include a flood of paper money. So the idea that this money comes flooding out as paper money does not seem unreasonable to me.

    5. Bank holidays often keep people from getting their money while it is devaluing fast. Once this happens once, people realize the advantage of paper cash. Also, if it takes days to clear a check and cash can be spent right away, cash is better than checks if there is high inflation. So I think it makes sense that the fraction of commerce that is done with cash goes up during hyperinflation.

    6. Tom, what I would really love is for you to go point by point down my FAQ in a post on your blog addressing anything that you thought was wrong. Are you up for that?

    7. "You agree that reserves go down if banks take out cash or if money moves to the Treasury. But you don't think they will go down. I think they will go down. Hum."

      With cash, yes, they will go down. To the Tsy, yes also, *IF* we're talking reserves. Fed deposits held by banks are classified as one of two components of "reserves." Fed deposits elsewhere are not. So if we're talking about aggregate Fed deposit levels (across all Fed deposit holders) going down (when deposits are moved from banks to Tsy) they do not. And, as you partially pointed out, the *reserve* levels (at the banks) will climb right back up again once Tsy spends!

      "You agree that if 1 year Treasuries were offering 3% a bank might decide this was better than 0.25% and instead of keeping its money as excess reserves it might buy a government bond. Right?"

      Absolutely! And if that was offered at a Tsy auction, I'd even say the banks in aggregate would put in a very good bid for them, and perhaps the aggregte ER level would drop in exchange for them. But this wouldn't change the aggregate Fed deposit level across all Fed depositors.

      "Hyperinflation does sometimes include a flood of paper money. So the idea that this money comes flooding out as paper money does not seem unreasonable to me."

      I'm not convinced. But again, if that were a real problem some steps could be taken, such as limiting cash available (or altogether) or upping the IORR (which would also up the FFR if ER > 0).

      "cash is better than checks if there is high inflation."

      for the person accepting the payment, yes.

      So let me ask you this Vincent, if we were to eliminate cash altogether (not a crazy idea actually):

      What would that do to your model and your simulation? Does hyperinflation in the US DEPEND on the existence of cash?

    8. No it does not depend on cash. It just the ability spend money. If it were all done on credit cards, as I understand some places have done, it really works the same way. For checkout clerks at a grocery store piles of cash are a real pain to count.

    9. If the government takes steps to keep people from getting cash out of the bank, as they often do with bank holidays or limits on daily withdrawls, it just means that electronic money is not as good as paper money and the preference for paper money goes up. So then everyone takes out whatever the daily limit is. Government "fixes" rarely really fix things you know.

    10. Rather thank keep on this one point, I think it might be more fun to look over other points in the FAQ.

    11. "Tom, what I would really love is for you to go point by point down my FAQ in a post on your blog addressing anything that you thought was wrong. Are you up for that?"

      Well, I'm flattered that you'd like me to do that, but I'm probably underqualified. I basically just scanned down your list until I found one I felt comfortable challenging. I'll grant you that you are a lot more knowledgeable than me on many of the issues you cover. I'm am amateur at ALL this stuff! Everything I know I learned from Cullen, Scott Fullwiler,, JKH, beowulf, "Joe in Accounting" and a few other people over the past year online. ... AND from making blog posts trying to help myself and others understand the basics of double entry accounting and its relationship to banking.

      So, perhaps I could do that in a limited way... maybe there's a few other points I could discuss.

      I'm curious though, why would you want me to do that on MY blog? It's not really the topic there: banking examples is more my thing. Not that I'm dead set against it...(I do go on tangents) but why not right here in the comments, or in that other post you just put up on your home page?

    12. You have a great list of ways that reserves can leave the banking system. As reserves leave, the excess reserves goes down. Looks like plenty of ways.

    13. It just seems like it would be long enough to be better as a blog post than as comments. You can edit and correct posts. You can link to other things. I can link to it etc. Looks like a reasonable topic for you blog. And partly because so far no other economics blog seems to be willing to even comment about a single point in my FAQ, so it would be a first. :-)

    14. Moving to another FAQ: OK, sure, I guess we beat this one to death. But regarding the restrictions on cash: yes, what you're saying makes sense. It doesn't really apply though to the case of raising the IOR. I understand that's a potential double edged sword because if ER > 0, then FFR rises too. But IOR high enough, the banks are going to pay more interest to their depositors too, which will help keep deposits at the bank.

      And if payment clearing is speeded up w/ electronic deposits, it's possible that could be MORE desirable than cash for the payee, right? You get on your smart phone, and move those funds right away, rather than have to physically carry cash around. Online banking, 24/7 investing... I think the future looks promising for preferring electronic money over cash in an inflationary environment.

    15. Yes, I think this video makes it clear that credit cards have advantages over piles of cash.

    16. "You have a great list of ways that reserves can leave the banking system. As reserves leave, the excess reserves goes down. Looks like plenty of ways."

      Sure, well I'm glad you like those. It got to be too complicated though: it started off with 3 or 4, then kept climbing. My list of three is much cleaner and I think more insightful.

      I may have mentioned, I could just boil it down to two places reserves could go:

      1. To entities accepting Fed deposits (including the Fed, banks, Tsy, GSEs, etc.)

      2. Cash (carried out the door of banks)

    17. Vincent, I'll take a look at the video later. Got to go! thanks, good conversation. ;)

    18. Yes, thank you too.
      It is just a 1 minute video of some poor checkout lady counting a pile of money so someone can buy some beer.

    19. Tom I am just am amateur too. I just started this blog as a hobby. I am a bit obsessive compulsive though, so have spent a lot of time on hyperinflation. :-)

    20. I have a new angle on the "excess reserves getting out" debate. If a bank makes a loan to an individual their reserve requirements go up and an individual gets money. So they have less excess reserves and an individual has some money to spend. This is true even if everything is electronic and there is no physical cash. Now how much less excess reserves depends on reserve requirements but in effect the money is going to individuals, and so getting out onto the street. A simple loan is all it takes.

    21. Yes, you are correct: when the banks in aggregate buy anything from the private non-bank sector (loan agreements, office supplies, electricity) some of the banking sector's reserves change status from ER to RR. But NONE of the reserves leave the banking system. Likewise, when the non-banks "transfer money" (i.e. allow their inside money deposits to be destroyed/debited) to banks (principal, interest, fees, or fines) then some RR changes status back again to ER, again w/o any change in overall reserve levels at the banks.

      Inside money creation and destruction (the way the banks do commerce with the non-banks) has almost nothing to do with reserve levels regardless of their status as ERs or RRs. If ALL ER is converted to RR in the banking sector, the Fed, (in it's never ending effort to control the FFR) is forced to provide the reserves needed whatever the banks may buy or sell via ex-nihilo inside money creation. I see these as uncoupled from one another.

    22. ... and of course in countries like Canada, the UK and Australia, were reserve requirements = 0%, this is not true: inside money creation/destruction by the banks does not result in any change in status of ER to RR or vice versa: of course the banks have very little incentive to hold ANY overnight reserves in these countries, so generally their reserve levels are tiny on an overnight basis. The BoC (for example) creates reserves during the day to facilitate payment clearing and account transfers, but they are repaid in full each night.

    23. Well,... perhaps not currently: e.g. in the UK where they've had QE as well: their banks are stuck with ERs long term until the CB sucks them back out again with OMOs.

    24. ... "repaid in full each night."

      The situation would look very much like this:

      or this:

      With reserves on loan from one bank to another, but no actual reserves in any of the banks deposits.

  44. Hey Vincent

    A link Tom put on Cullens site brought me here and I'm interested in responding to this;

    ""Banks make money if we count demand deposits balances as money and the real money sent off in a loan. It is not that they really make money out of thin air. If it were just like that, why would a bank every go bankrupt? Why would they worry if people could not pay them back? Why not loan out infinite amounts at 1%?"

    I really dont understand this paragraph. A bank is a private entity that wishes to make profit. Loaning out infinite amounts of money at 1% AND not worrying if they could be paid back are most definitely counter to the idea of making a profit. That would probably be the WORST model to use if you want to make a profit it seems to me. So until banks become simply interested in just trashing the economy, making a mockery of the money system and stop being banks I cant even fathom your scenario.

    Banks do issue credit however out of thin air. They base the amount they issue on the ability of the borrower to repay and not on available reserves.

    1. There is no more "base money" when a banker takes in $100,000 in deposits and then loans out $90,000 to someone who takes it as physical cash. However, M2 counts bank deposits as money. So M2 has gone up, since both the $100,000 listed in "demand deposit accounts" and the $90,000 cash are in M2. Neither the $100,000 nor the $90,000 come out of thin air. It is just the way M2 is defined that makes it so when a loan is made M2 goes up.

      It is not like you can form a new bank and then just extend me $100 billion in credit which I could then take to Grand Cayman, and put $50 billion in a special account for you and $50 billion for me. Really, this does not work or many others would have done so.

      If you could really make money out of thin air then even loaning huge amounts at 1% makes lots of profits. If you could make money out of thin air why would you worry if people did not pay you back?

      MMT and MR people seem to think banks have some magical power to make money. It is not really so. Just that they can increase some of the definitions of money supply, like M2.

    2. Actually, M1 counts bank deposits as money, specifically demand deposits:

      "M1: The total amount of M0 (cash/coin) outside of the private banking system plus the amount of demand deposits, travelers checks and other checkable deposits"

      And actually, a bank can make money out of thin air AND meet their capital requirements too, w/o taking in a single transfer deposit or even selling a single share of stock:

      The model you describes no one believes anymore: not the Keynsians, Monetarists, the PKEers or the Fed itself. Only a few politicians and some Austrians still buy the fractional reserve lending (FRL) and money multiplier concepts. Look up the Fed papers on this. I think one is called Modern Monetary Mechanics.

      And regarding making money out of thin air, even prominent Austrians acknowledge that they do (even if they do get the details wrong). Look up Murry Rothbard on that, or this guy:

      Banks look for transfer deposits because they help them achieve a better spread on their balance sheets. That's all! For example, let's say we start with your example:

      "There is no more "base money" when a banker takes in $100,000 in deposits and then loans out $90,000 to someone who takes it as physical cash."

      With this example you're implying that the old discredited FRL model is true. The Rothbard model. The bank certainly isn't LIMITED to only loaning out $90k by a 10% reserve requirement. For one thing, reserve requirements ONLY apply to demand deposit liabilities, and have nothing at all to do with lending. I think Greg is arguing nicely from a fundamental business practices sense. I'll stick to the regulatory sense. From a regulatory position CAPITAL requirements are REAL. Your Grand Cayman example would not stand up. And others DID attempt to do so! Look at the history of the S&L scandal. That's pretty much what they did!... only they went to prison for it (unlike today). It's called "fraud." William K. Black has a lot of good examples of how the S&L's kept making fraudulent loans to a series of investors to boost the price of a bad commercial real estate investment (rather than write it down like they should have)... resulting in huge BOOKED (but not actualized) earnings for the S&L and huge bonuses (in the present) for the S&L management. Of course these frauds eventually fell apart, the S&Ls were put in receivership, and the management went to prison (ah! the good old days!).

      You keep on about MMT and MR being the odd balls here... when in fact this concept is widely accepted amongst all schools of thought, the banking industry, regulators, and the people who are in the know in government (i.e. Not politicians: Rand Paul thinks Friedman is still alive!).

      Sure, once in a while somebody who should know better writes something boneheaded on this and then is forced to take it back again (like Krugman), but that's becoming more and more of a rarity. I doubt Krugman would make that mistake again!

      Here's the result of searching for "endogenous" on Glasner's site. He's a well respected neo-Classical and a Market Monetarist sympathizer (not TRULY an MMer).

      I can find similar posts from Sumner, Rowe, Beckworth, etc.

      You seem to think that ONLY "base" money is "real" money. I think that's not an accurate way to view our system. Base money is only a small fraction of the pie, and probably less likely (on a dollar basis) of being used as a medium of exchange (the most important defining characteristic of money).

    3. I never did get to what I wanted to say about your example:

      Which is that you imply here the bank can only loan out $90k in cash (presumably with a 10% reserve requirement). I already touched on the fact that RRs apply to deposits, NOT loans, and only some deposits at that, but there's another important point: Provided the bank had or could make sufficient capital, these figures have nothing to do w/ how much it could loan out! Capital requirements limit lending: reserve requirements don't. Your example says NOTHING about the bank's capital position, and since lending is only dependent on that (in a regulatory sense), there's no saying how much they could lend out. IF the $100k of reserves (that came w/ the deposit) stood as the bank's only asset, and the $100k deposit its only liability, then unless the bank can make some money in points (loan origination fees) or sell some subordinated debt or stocks... they've got $0 equity and $0 capital, and they can't loan out a cent! In fact if that was all that was on their books, by all rights the regulators should shut them down for being in violation of capital constraints.

      More realistically, the bank could raise some capital (to meet requirements) and then the amount they could loan out would depend on that and still having nothing whatsoever to do with these balance sheet entries that you've described.

      The idea that deposits have ANYTHING to do with lending is a misunderstanding widely held by the public. The ONLY reason a bank wants to attract transfer deposits is that they come $ for $ with reserve assets, which can be useful to meet RRs or for payment clearing, etc, and deposits are a notoriously cheap offsetting liability to maintain on the other side of their balance sheets. If fact with annual fees, fines etc, charged to depositors, they may actually make money from certain deposits. But a bank normally doesn't want to keep the reserve assets the deposit came with... they'd rather replace them with a more profitable asset, but they keep the deposits because they're cheap. Ultimately they want deposits because they help w/ the spread on their balance sheet, and that's it. They have nothing to do with how much the bank can loan out.

    4. The proper way to look at this is that the aggregate commercial banking sector has a charter from the government to buy things by creating ex-nihilo (out of thin air) inside money (dollar denominated bank deposits, which ARE real money in every sense). Since the aggregated banks are in the business of buying and selling, this gives them a means to buy stuff (anything at all) from the non-bank private sector: loans, donuts, electricity, etc. When the bank purchases assets from the Fed or Tsy, however, it must use the Fed's money (outside money) to do so, which is "outside" precisely because it was created outside the private sector.

    5. And of course, as I stated above, from a regulatory perspective (only) the banks are NOT free to buy the whole world! They NEED capital to legally buy loans (i.e. lend money) or buy anything else for that matter. What is captial? Look up capital adequecy ratio (CAR) and Tier 1 and Tier 2 and Basel Accords in wikipedia. They give a pretty good run down. Basically it's not bags of paper reserve notes: it's a condition which exists on it's balance sheet. To violate the constraints risks being prosecuted for fraud and having the bank put in receivership (which will not make the shareholder's happy!)

      Greg does an excellent job below of why a bank (as a private business) has more fundamental reasons to limit their lending behavior. From another businesses point of view, they might call these concerns about the "accounting captial" or "working capital" position of the bank (again, Wikipedia has goon info). Reserve requirements don't really come into play. We could raise the RRs to 100% or above and banks could continue to obtain reserves and maintain a positive spread on their balance sheets.. and continue to expand inside money supplies endogenously. Mish Shedlock is confused if he thinks 100% RRs will put a stop to the mythical FRL he's always talking about. Sure, it'll cut into their spread a tiny bit, and they may not want to attract deposits anymore, but it won't significantly clamp down on inside money expansion. (Personally I think the unintended consequence of this would be the growth of a new, not necessarily bank, cash vaulting business): i.e. it would lead to stupid inefficiencies, but nothing else.

  45. "If you could really make money out of thin air then even loaning huge amounts at 1% makes lots of profits. If you could make money out of thin air why would you worry if people did not pay you back?"

    Think about this. You seem to be suggesting that if it were true that banks create their own credit money out of thin air then they wouldnt have to worry about being paid back. How does that follow? A bank is an entity that uses credit to make a profit. If it issues credit and never receives any repayment where is the profit going to come from? The behavior you are describing is not banking, its something else. Obviously our Fed system would never permit a bank to issue credit in the manner you describe. It could never happen. It does however allow banks to extend loans, based on the ability to pay of the borrower. The point of the "out of thin air" comment is simply to say that banks do not look in their own vaults to see if they have available money to make a loan, they simply look at the assets and income stream of the borrower. There is not an infinite amount of credit which can be extended

    I liken your scenario to someone asking "Well what if your physician starts suffocating his patients during their physical?" Obviously he's not being a physician any more he is a murderer. Physicians are healers, banks make loans they expect to be repaid.

    1. Do you understand that a brand new bank that gets a cash deposit of $100,000 and loans out $90,000 in cash will add $90,000 to M2 measure of the money supply?

    2. Well, your scenario is very unreal, no one takes loans out in cash, (Very very few do) especially at the amounts you are talking about. But that aside, Im not sure why its really relevant to my point about banks being profit making entities that M2 measures increase under such a scenario. Im sorry, maybe Im dense, but I really cant follow your point on this one.

    3. This little example illustrates the only sense in which "banks make money". So I think it is very important to be able to understand what is going on in this example. It is best to think about cash coming in and going out because it is simpler to understand. Of course the example works fine if you are doing wire transfers or anything else, just that it is easier for people to get lost. In this simple example we don't even need computers or anything that might "magically make money" and yet we get M2 going up by $90,000. The guy who deposited his $100,000 still thinks he has his $100,000 "on demand" and yet the guy who got the loan went with $90,000. So now there are sort of 2 different people who think they have this $90,000 (one who also thinks he has another $10,000). Since both think they have it, economists count both as part of the money supply. So when a loan is made this M2 definition of the money supply goes up. So we say "the bank made the money supply go up". But it did not really make money out of thin air. Do you see?

    4. Well that is the problem, I think, with using the "and he takes it out in cash" provision of your story. He usually doesnt, especially in that amount. A loan is usually used to create a depost which is then spent for a car, a house whatever. It becomes immediate buying power. The guy with the 100,000 deposit CAN still go buy a stock for 100,000$ at the same time the guy is buying the house!! 190,000$ can be spent at the same time!

      And what creates the ability for the bank to create the "stock" of 90,000$ to loan for said house? Its not the 100,000 deposit I just made, its the mortgagees flow of income which the bank has determined will satisfy the principle and interest over time. Thats all.

      In the real world, the guy gets his 90,000 to buy the house (the builder or previous owner now get spending power) and the depositor can spend his 100,000$ too!

      Now, the whole system does depend on everyone operating in a...... rational manner. IOW everyone cant go running to the bank or running to the stock trading desk and get full price for their assets at once. There has to be an orderly procedure to all this or else we fall victim to the fallacy of composition. The reason for this should be obvious and with an asset like a share of stock its clear that if all stockholders are trying to sell there are no buyers! With the banking system bank runs are destabilizing for obvious reasons.

    5. You don't get it yet. If the depositor tries to spend or take out his $100,000 in our new bank while the $90,000 has been loaned out the bank has "a liquidity crisis". At this point it could shut down or it might get "extra liquidity" from a central bank. Just today the 2 local banks in Anguilla have had their boards fired and been taken over by the East Caribbean Central bank.

      Any bank using the "fractional reserve banking system" could fall to a bank run at any time. Anguilla might get runs on the two local banks in the next few days.

      We live in exciting times.

      In our toy example of a new bank with one depositor of $100,000 and one loan of $90,000 you are wrong to think the depositor can actually spend his $100,000. If we add to our example that the bank has some capital of its own, or that the central bank will loan money to banks, then it could work. But in the example as it was the depositor could not really spend his money.

      Fractional reserve banking works for many years at a time because with thousands of customers most of them don't try to spend their money on any given day. But it could fail at any time. Crazy system really.

    6. Actually I think I do get it. You are setting up a situation that is completely unlike what our banking and CB system works like. Now, you may not agree with our system and wish to change it but its not right to define a bank in a narrow way which our current US$ system does not define a bank!

      So yes, in your example if the bank does not have capital requirements, does not have a CB which will provide liquidity and settle payments then you are correct. It can only lend the depositors money. Now, do you wish to discuss how loans and such affect output and money supply in our US$ system? You have dedicated your blog to showing how the US system, and other fiat systems , will die. At least use the framework of the system, not some made up system that is not really even a close facsimile of our system.

      Fractional reserve as you are describing it is 180 degrees from how it is operated. Banks are not limited to only loaning a fraction of their deposits they must obtain a fraction of reserves to cover deposits created by the loans they have made

      "Fractional reserve banking works for many years at a time because with thousands of customers most of them don't try to spend their money on any given day. But it could fail at any time. Crazy system really."

      I agree with the way our system works, but could it be any other way? Every one of our markets works because only a fraction of people are accessing the market at any one time. If everyone runs for the same trade..... no matter what the trade is, the market will fail... it will lock up. That wouldnt change if we returned to the wet dream of Austrians ...... the gold standard and no govt. The fallacy of composition holds everywhere in all markets. Gold standards dont prevent irrational behavior

    7. The question of fractional reserve banking does not depend on if the currency is backed by gold. A better system would be where banks had to sell 10 year bonds to get money to make 10 year loans. The law could require that the duration of a banks deposits matched the duration of their loans.

      Having a central bank that can "provide liquidity" in the case of a bank run is a patch or hack and not really a good solution. One problem is that the central bank can have a hard time telling if the bank will really be in a position to pay back this "temporary emergency liquidity". It also exposes the central bank to fraud by bankers.

      The only way banks are not limited to loaning out what they have on deposit is if they can borrow from someone else, probably the central bank. They do not have any magical ability to "make money out of thin air". It is just that some definitions of the money supply sort of count money more than once when a bank makes a loan.

    8. Vincent, you are completely wrong about this. Here's some good information about this, starting with a fairly recent article by the Fed itself:

      I like Rosser's quote here, about the presentation of the above paper:

      "Someone had us discuss a paper that changed the minds of pretty much everybody in the room who did not already agree with the paper, which includes a highly diverse group ranging from Austrian, Old Monetarist, New Classical, New Keynesian, Old Keynesian, Post Keynesian, and some generally eclectic pragmatists."

      Don't you think you MIGHT be marginalizing yourself just a bit, if you don't look into this (read the paper) and give it another thought?


      Even Sumner, and Rowe are on board:

      "The only way banks are not limited to loaning out what they have on deposit is if they can borrow from someone else, probably the central bank."

      Completely false: For example the case when someone borrows to buy something from someone else who banks at the same bank: Absolutely no reserves required at all. What about muliple banks? Reserves *may* be required on a TEMPORARY basis from the Fed (an overdraft) but the reserves are generally there on the inter-bank market bot borrow. The Fed only has to provide 10% of the NET increase in DEMAND deposits (only!). The banking system in aggregate ONLY *needs* Fed deposits to cover this requirements on anything more permanent than an overnight basis. And if the RR was dropped to 0% (ala Canada), then in aggregate the banks don't need ANY Fed deposits overnight. Fed deposits are there to facilitate payment clearing and to meat the RR. That's it!

      I make my arguments above why CAPITAL requirements are the only legal limit on bank lending. Greg covers a much more fundamental concern here in his comments.

      In fact the ONLY person I've ever seen argue your position and stick to it (after someone pointed out where they went wrong) is from this guy:

      Who argues that the money multiplier is a myth (which it is) but for EXACTLY the wrong reason! This guy is so wrong, he's right (about the myth part)!!

      Tamny's conception of money is that it's a physical dollar that we pass around between us. Only one of us can use the dollar at a time. He never comes out and states this, but it's clear that's how he thinks about it by implication. Even the Austrians are left jaws agape at the at the wrongness of this view:

      You are the ONLY other person I've seen make this argument and not retreat from it immediately (like Krugman did with his famous "Banking Mysticism" article, in which he argued the long discredited "loanable funds" view... which even his defenders spanked him for!).

    9. I talk about aggregation at the bottom of this one:

      But my Example #3 (captial requirements) is probably a better overall, since it folds in reserve requirements too. Example #2 is just the reserve requirements.

      John Carney inspired #3 w/ this write up, which I highly recommend (but read the Fed paper first!):

  46. Here's the Krugman/Keen debate relating to this issue:

  47. Tom, you reference me to a 58 page paper, and some of your own very complex examples. This is just a hobby for me. Can you make a very simple example, like my new bank getting a deposit and making a loan, showing some other ability to make money than what this loan does?

    Oh, and I have a new post "honest banking" where I would like to move further discussion of "bank made money" type things.

  48. Tom, I tried to post a question to Ask Cullen and could not do so. Even tried making a new user name and could not. Could you try asking a question like the one below. You can do it yourself or say it is from me, either way.

    Cullen, Tom asked me a really good question. He asked what could falsify my theory of hyperinflation. I listed 3 things and could list many others.

    Currently prices are going up more than 26% per year in Argentina, Syria, Venezuala, Iran, and North Korea. There are many many historical cases and ma
    y even be more current cases. In all of these the central bank is monetizing debt from a government with a big deficit. This fits my theory. You say
    the central bank buying government bonds does not cause inflation. Why do these 5 examples not falsify your theory? What would falsify your theory?

    Below was my answer to Tom:

  49. when will the fed grow a pair and tell the spenders to stop,

  50. Hey Vincent, just cross posting this from my blog where you linked to my post where I was skeptical of the value of monetary policy. See below why I think your FAQ doesn't answer the questions that matter to me in terms of explaining why hyperinflations start.

    Hi Vincent,

    I read the faq early last week actually. I'm still a hyperinflation skeptic however, mainly because I don't think the quantity theory of money does a good enough job of explaining the major hyperinflation scenarios we've seen in the past. James Montier sums up my position on the topic nicely in this paper:

    Basically hyperinflations are caused by a collapse in the production base of an economy, increasing imports while shrinking exports. If that economy has foreign denominated debts (which the US doesn't but Weimar did) then it has to acquire foreign currency to pay those debts but because it has no production it can't sell anything to acquire them. In Weimar, after WWI the Germans were forced by the allied forces to make enormous war reparation payments that had to be paid in gold. With a manufacturing base devastated by the Allies occupation of Ruhr Valley, and France demanding a pound of flesh, Germany was forced to sell its coal mines and export all of its energy to France and Britain. They no longer had anything to export to acquire gold to pay off the war debts. So ultimately money printing hyperinflation is the last shoe to drop, but the depreciation of the mark was caused by the destruction of production and foreign denominated debts, not money printing. It's a very important part of the puzzle that you never address in the FAQ. You could in theory have a huge increase in the quantity of money but have that money spent on increased productive capacity (oil platforms, natural gas fracking, solar panel fields, bridges, road, railways etc.) Also, where are the wage pressures in the states with such a marginalized union portion of the labor force and so much unemployed surplus labor. If workers don't have the negotiating power to increase wages then it's one less thing that could push up producer prices. So even a high inflation scenario like the 1970s is unlikely.

    As such, hyperinflation in the US isn't on my radar. Financial instability and fragility certainly are, but not a collapse in the dollar.

    1. When Spain was able to take gold from thew New World it was as if they were just making money. It did destroy their production capacity. But notice that the same has really happened to the US. Production jobs have been vanishing for a long time.

      The US imports more than it exports but does not have to work to acquire money to pay for these because the world accepts US dollars so far. But if that ends, then the US is in the same situation. If the US had to export goods to be able to import oil or goods from China the US would be suddenly in big trouble.

  51. Hi Vincent,

    I picked up the link to your FAQ from your recent exchange of comments with Warren James over at Screwtape Files. Some very good work here sir. My compliments to you.

    FWIW I outlined an argument on why I think that the Euro cannot hyperinflate over at victorthecleaners blog in the comments on this post:

    It is near the end of the comments - 17 August 2013 at 02:51. It might offer you a counter-argument for the Euro but otherwise it doesn't contradict your HI research and analysis.

    There are a couple of points that may hellp to bolster your case. Firstly deflation was the mechanism which automatically corrected imbalances under a gold standard. It's called the "price-specie-flow" mechanism (described by David Hume 1752). Correcting imbalances by either deflation or inflation IS a choice but take a look at the political hurdles for a deflationary solution today as described in this paper "What Role For Currency Boards?" here:

    The description starts on Page 17 of "2. A Consideration Of The Pros And Cons".

    Secondly it is worth noting how little gold was actually in circulation in the USA by the time FDR called in the balance held in the banking system. This paper that FOFOA linked in a recent post asserts:

    "... in the United States where the amount of gold coin in circulation halved between 1917 and 1930, while gold stocks held by domestic banks (as opposed to the Treasury or Federal Reserve) fell from over 350 m.t. in 1913 to 21 m.t. by 1930.."

    Most of the world's gold bullion was already in the major nations Treasuries. FDR seized the opportunity to take the general public off the gold standard while keeping international trade on a quasi-gold standard and securing a competitive devaluation of the US dollar against other currencies.

    You can find the paper here:

    That paper also discusses the changing attitudes of governments toward gold in the aftermath of WW1. The situation today is very different. Gold confiscation today wouldn't help the USA avoid HI or solve any of its other problems either.


    1. Thanks!

      If the Euro follows the rules they would have no risk of hyperinflation. But a key rule is that the central bank can not monetize government debt and they have already tossed that rule.

      The Euro could also get a non-standard hyperinflation from the EU falling apart in some way.

      So while I would say Japan fits my model and scores a high chance of hyperinflation, I would say the Euro is too different from the normal hyperinflation case for my theory to make a prediction.

    2. Hi Vincent,

      The ECB has bent the rule about monetizing government debt but they haven't tossed it. There is an underlying assumption in Bernholz analysis about monetizing government debt i.e. it is issuing currency to fund ongoing budget deficits. As long as the ECB refuses to fund ongoing deficit spending with currency emissions they haven't crossed the Rubicon. The budgets of the Club Med countries are moving toward, or already in, primary balance net of interest payments.

      To date the ECB has acted to stabilize interest rates that were factoring in a potential break up of the EMU. Draghi's "whatever it takes" commitment has only been a verbal assurance thus far. Most of the ECB's book has a bank counterparty standing between them and the sovereign bond issuer.

      FWIW I agree 100% about Japan but I think that India and SE Asia are ground zero at present. Interesting times we live in.


    3. When a central bank is buying bonds and the government is deficit spending how do you decide if this is "issuing currency to fund ongoing budget deficits" or not?

      The US has guys like Goldman Sachs between the central bank and the Treasury but what difference does that really make?

      In the following URL India's debt is 67% of GNP and Japan is 211%. From this it seems like Japan should fall first but there are other factors that really skew the starting point, so I don't know who goes first. I am near certain that Japan will go eventually but I am not sure how to predict the timing.

  52. Hi Vincent,

    Likewise from Screwtape comments...your figure of debt at 80% of GDP combined with deficits of 40% of spending as being a trigger for, or precursor to, HI seems very similar to Reinhart & Rogoff's numbers which in fact vary wildly from case to case.

    You acknowledge this at one point but then keep referring to it as if it is a meaningful measure. Surely there are so many other variables as to render it almost meaningless in the case of the United doubt you have addressed this, can you point me to a link?

    Thank you.

    1. This is in the second question in the FAQ. These numbers come from Bernholz. Yes, different cases are different but these are the best predictors I have seen. What other quantifiable variables do you think would help in predicting hyperinflation?

  53. Thanks Vincent,

    It is such a moving target, with so many variables. I am late to your party, I apologise if the following has already been referenced.

    In October 2010 Prof Bernholz said of the US "There is no danger of hyper inflation, but this depends on the reaction of the Feds. The situation is dangerous no doubt." I note there is no danger, but it is dangerous.

    I have only found one more recent (quoted) comment from him, March 2011:

    “But does this mean that inflation may evolve into a hyperinflation in the United States? I believe not. Though it is true that budget deficits with government expenditures covered by 40 percent or more through credits have historically led to hyperinflation, it has been stressed in Monetary Regimes and Inflation that it is not only the size of these credits but also their composition that is important."

    In answer to your question: Why not ask Prof Bernholz his views as they have evolved over the last two years, particularly with regard to the extent of the Fed purchases at the long end, the reduced rate of growth of the deficit and then of the recent net sales of UST by foreigners? He might also more fully address the issue of excess reserves, whether it is Bernanke's brilliance or just a lack of demand for new loans that is keeping inflation at bay.

    All the best,

    1. I have tried to contact him and not gotten any reply.

      I look at it as he has covered the history and the raw data. I am trying to provide a theory that can explain how hyperinflation works. The process, the feedback loops, the mechanics of hyperinflation.

      I hope I am working towards something that will be able to provide better predictive ability than the simple numbers he has found from history but can't really claim that yet. I have a post on predicting hyperinflation but it is mostly just a bunch of ideas. Predicting when hyperinflation starts is still a hard problem even after a good understanding of the mechanics of how hyperinflation works.

    2. Here is my post on research ideas for predicting the start of hyperinflation:

  54. I think the key factor is when debt service costs/tax revenue ratios get very high while government debt/income ratios are high and all the debt has been refinanced at flat yield curves across the ZLB. Debt service costs move exponentially to shifts in interest rates while tax revenues move linearly to NGDP. When you hit that situation, inflation starts to push up rates so the central bank has to come in and peg the yield curve. When that happens, the floodgates open in the FX market.

  55. Vincent

    Martin Armstrong writes there is no risk of Hyperinflation in countries with developed Bond markets. See his comments

    The hyperinflation takes place only in countries without bond markets and have been typically the interim revolutionary government as was the case in Germany. The reason why hyperinflation takes place is because there is a new government that typically repudiates all debts of the previous. Even the USA when through such a period with the transition from the Continental Currency to the US dollar that was swapable into bank shares at 100:1.
    When there is a government in place, what you end up with the Draconian attack against all resources of the people. This results in the collapse of the rule of law, rising taxes, and asset confiscation. This is how great empires collapse. This is what we are going through currently.
    The government is sucking up a larger and larger share of national wealth. November 1st, you will see the first cut in food stamps. Entitlements are curtailed. The government will not simply print money to meet promises. They default on those promises just as we see plans for BAIL-INS taking depositor’s money rather than BAIL-OUTS as was the case following 2007.
    This period is extremely hard to predict because the rule of law is collapsing. Privacy is under threat and they are hunting down every penny. When Hitler outlawed Germans having accounts outside of his reach, the Swiss passed their secrecy laws in 1934. Today, the Swiss government has given up everyone and has lost its real sovereignty in that regard where not even Hitler acted so recklessly as has the USA, Germany, and Britain not to forget France. They are all attacking the Swiss and demand their pound of flesh.
    3FACESn of Inflation
    The system will flip to asset inflation as capital begins to leave the public sector. But this is not DEMAND led inflation inspired by consumers, but Asset Inflation caused by a shift in strategy. There is also Currency Inflation where by assets rise because they are undervalued in the eyes of foreign capital. Both of these are distinctly different from the classic DEMAND led inflation because the economy is doing well and that manifests in an increase in buying power.
    3FACESn of Deflation
    The deflationary aspect is also three-dimensional. Classic Deflation by definition is declining prices concurrent with Monetary Restraint Deflation in a Keynesian system whereby government deliberately attempts to prevent a boom in some sector. When a currency rises too high, a nation is unable to sell its goods overseas and thus prices are too high relative to the international value causing discounts and price declines creating Currency Deflation. Then there is the normal Demand Deflation that unfolds because of an economic decline resulting in a collapse in demand and uncertainty emerges.
    We are really trying hard to address the confiscation of pension funds. This is a serious risk and part of this deflationary atmosphere where government is sucking up everything it can. I would not retire. Withdrawing funds from a 401K may be an option. But that is premature just yet. This monumental question will be address. What will be the best solution is not yet identifiable.

    Armstrong goes on with ... see next post

  56. Here is Armstrong's definition of Hyperinflation

    Some define hyperinflation as merely the cumulative inflation rate over three years approaching or exceeding 100% with an annual rate above 25%. The reason I do not agree with that definition is because many countries have had brief periods of inflation at that level, survived, and even the currency lives for another day. The USA experienced about 20%+ going into 1980.


    Measuring debt to GDP does not really work. The US national debt stood at $1 trillion in 1980 and it exploded during the economic collapse following 2007. You cannot truly test that before 1900 authoritatively. The hyperinflation v inflation to me is distinguished such as Germany or Zimbabwe as the end game where the currency does not survive.

    If you are going to claim that 20-25% annual inflation is hyperinflation, sorry. That does NOT guarantee the collapse of a country or a currency. New Zealand saw that in the 1980s and the USA reached at least 20% in 1980.

    Napoleon Consul 1803 1fr

    To me, hyperinflation is the point of no return. Those countries that have entered that phase have no bond markets, have been typically revolutionary, and emerge with a new currency. Between 1360 and 1641, the currency of France was the basic unit of 1 livre tournois. The French Revolution led to a hyperinflation that forced monetary reform re-introducing (in decimal form) the French franc in 1795 with the portrait of Napoleon. The French franc remained the national currency until the introduction of the euro in 1999.

    1900$X-M 1931 Sovereign Debt

    My definition of hyperinflation is one where the currency does NOT survive regardless of the rate of inflation be it 100% annually or 10,000%. The capital flows must take us to extremes on both sides in order to create the economic damage to cause change. This pendulum movement wipes out generally everyone on both sides. We can see as Europe moved into its crisis for 1931, the capital poured into the USA forcing the dollar higher. The rally in the Euro right now has been the typical false move before the storm that should not really unfold until after September. The capital inflows will send the dollar up wiping out the dollar loans exporting deflation to third world nations rolling in dollar debt, then the pendulum should swing in the opposite direction against the dollar.

  57. Part III

    This type of violent price action is what is necessary to see major political-economic reform. Will inflation in the USA then reach the 20% level? Perhaps not officially. But the chaos of shifting capital from debt to equity (Public to Private) should begin to force interest rates higher and that will then fuel the debt. As confidence declines in government debt, then and only then do we get the political-economic reform.

    The hyperinflation scenario is government merely goes willy-nilly into the light printing money. We have a debt market. Government is restrained by that and cannot simply print into oblivion and yet still sell the debt. This is why government is hunting every dime they can find, raising taxes, and causing the economy to implode internationally.

    Part of hyperinflation is the increase in the velocity of money because people do not hold it spending it as fast as they can get it. Right now, our problem is the opposite. The velocity has declined as has liquidity is still down by 50% and people have not been investing as they were prior to 2007. The flood of laws hunting money globally has reduced investment dramatically and this has been highly deflationary shrinking the velocity of money as well as liquidity of markets.

    The only alternative for smart money is now to buy equities to get the cash out of the banks. It no longer pays to keep cash in a bank and the bank in Europe are in major trouble because their reserves are spread throughout the sovereign member bond issues. Cyprus lost because the banks held Greek sovereign debt. The EU is adopting Bail-In strategies because they do not want to PRINT money to cover losses – i.e. avoiding hyperinflation driving straight into the dark abyss of deflation and depression.

    The pension funds are moving toward insolvency because the Fed has kept rates artificially low. The banks have been making a fortune paying nothing for your money but have not been lending without 100% collateral and the spread is huge paying 0.5% for 3 year CDs while asking 4% for a secured 3 year car loan. NORMALLY, the low rates should have helped the economy. But they have helped only the bankers accounting for the slow recovery.

    If you cannot see why governments are turning in the opposite direction from hyperinflation and are actually destroying civilization by tearing apart the global economy reducing job growth, then I do not see what else I can say. Just sit and wait for what you prefer to think is happening rather than observe what is happening.

  58. Part IV

    The end-game is clear. There will be a international monetary reform because the postwar Marxist-Keynesian system is crumbing to dust. Hyperinflation unfolds in a country with no debt markets for they are typically revolutionary that disavow the former debts of the government they have overthrown wiping out capital formation. We have debt markets and the bankers will be advising and screaming: “Are you crazy! Raise taxes and hunt everyone down for if you do not pay us, you collapse!” We are in the midst of a sovereign debt crisis. This is serious stuff. Go too far and we end up in a Mad Max event.


    The current monetary system was NEVER designed. There was no Bretton Woods. This entire monetary system is a ad hoc patch-work that is far beyond anything normal. Everything will have to be restructured from the ground up. Money is electronic. They are now lobbying to Switzerland demanding they end the 1000sf notes and to stop the big notes in the Euro. They are trying to cut off all cash forcing money into the electronic world. Forget gold standards and tangible money. That is an ancient relic of the past that we will never see again. But cheer up. If money is electronic, we can also get our rights back and end taxation as well since that was needed only because money was tangible that government could not create out of thin air.

    The dollar will lose its reserve status because of (1) political reasons, and (2) this results in the exportation of domestic policy objectives to the rest of the world. Russia and China will exert pressure when the time is right to kill the dollar as the reserve currency. But we have to get there first and that is not by simply printing money mindlessly. There are major political restraints both from countries like China holding US debt and bankers. What we are seeing with the Fed informing the banks they will NOT be covered for losses in proprietary trading is a MAJOR step in severing the umbilical-cord between government and its primary dealers. In Europe, proprietary trading will be outlawed.

    The NEW CURRENCY will most like be an electronic reserve currency whereby each nation will still retain its own currency, but to conduct international transactions you will then convert to the reserve currency. This will be similar to a two-tier system that still isolates the domestic economy from infections internationally as the Swiss encountered with the flight from the euro. This will eliminate the dollar as the reserve currency and the new world currencies will be purely electronic.


    Why people insist hyperinflation MUST take place because that is what they want to see happen is beyond me. I am only interested in how history demonstrates these trends resolve themselves for the one thing that is certain, human reaction is always the same. Hammurabi in the 18th century BC imposed wage and price controls. Athens attempted that as well. Diocletian (284-305AD) tried wage and price controls with his edict in Rome. So did Richard Nixon in 1971. Present the same situation and you will illicit the same human response no matter who is in office or what century it takes place in. Obama criticized Bush for the NSA. Now he justifies the NSA 10 fold. The king is dead. Long live the new king. It is always the same thing.

    1. If you define hyperinflation as the death of a currency, or even 50% per month inflation, then of course the bond market will die long before. Saying "we can't get hyperinflation because we have a bond market" is not good logic. What you can really say is "we don't yet have hyperinflation of 50% per month since our bond market is not dead yet".

      If you define hyperinflation to mean the death of a currency then you can never tell while you are in it if you have "true hyperinflation". You have to wait till it is all over and then the history books can say if the currency died or not. This is just not a reasonable definition for those currently living through the high inflation.

      I sent Armstrong an email and then he posted that. But he never addressed the meat of my arguments, like the positive feedback loop of printing more money and people getting out of bonds. It is very bogus for him to try to say I want hyperinflation. I am the one who is trying to understand history and how things work for hyperinflation. He won't see it coming till is is already there.

    2. You're trying to understand how you're right, not how things work. If you made an honest attempt and the latter you've figured out you're wrong.

      To address what you're calling "meat", I rebut that what you're claiming is money isn't money. It's actually debt or negative money. The consequences of printing too much negative money are the opposite of printing too much money. People aren't "getting" out of bonds by choice, they're running out of money to purchase said bonds.

    3. Zimbabwe, Argentina, Venezuala, Germany, etc all had the same setup with a central bank and the same kind of money and government bonds. If it was "negative money" then none of them would have had hyperinflation.

      I am making an honest attempt but if you think you know were I am wrong, more than "negative money" which does not fit history, then please do explain it instead of trying to say what is in my head lets stick to what is written in the blog. Ok?

    4. Another alternative is for you to explain the mechanism of hyperinflation. If you do not like any of the many different ones I have in the following post, please write your own explanation.

    5. Armstrong, I removed your comment because it was mostly a personal attack on me and did not have any meat. If you think you can refute my blog posts, then why not make a post on your blog, linking to mine, and refute it? This how the econoblogs usually work.

    6. I'm not Armstrong and the comments you refer to are from me, not him. I do not agree with many things Armstrong writes, but his views are far closer to reality then what has been posted here. BTW I did write my own explanation many times, which you responded by deleting and calling "personal attacks". The PM's have been going down just, as I predicted. Deflation is the future regardless of your explainations of what hyperinflation is. Sorry but reserve currencies DO NOT HYPERINFLATE. Reserve currencies only loose their status AFTER debt liquidation, history has shown this time and time again!


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