Big Mac Hyperinflations

I thought it would be interesting to look at The Economists Big Mac Index and see how many times we saw more than 26% price increase in the local currency.   From 1987 to 2012 this happens more than 100 times.

One Year Hyperinfltion
USA: 1.6(1987), 2.39(1988) 49.38% up
Yugoslavia: 2300(1988), 7000(1989) 204.35% up
Yugoslavia: 16(1990), 32(1991) 100.00% up
Russia: 3.75(1990), 10(1991) 166.67% up
Singapore: 2.8(1991), 4.75(1992) 69.64% up
Russia: 10(1991), 58(1992) 480.00% up
Brazil: 3800(1992), 77000(1993) 1926.32% up
China: 6.3(1992), 8.5(1993) 34.92% up
Russia: 58(1992), 780(1993) 1244.83% up
Russia: 780(1993), 2900(1994) 271.79% up
Russia: 2900(1994), 8100(1995) 179.31% up
Mexico: 8.1(1994), 10.9(1995) 34.57% up
Mexico: 10.9(1995), 14.9(1996) 36.70% up
Chile: 950(1996), 1200(1997) 26.32% up
Hungary: 214(1996), 271(1997) 26.64% up
Indonesia: 9900(1998), 14500(1999) 46.46% up
Turkey: 649152.9(2000), 1577827.5(2001) 143.06% up
Turkey: 1577827.5(2001), 4000000(2002) 153.51% up
Colombia: 4200.02(2001), 5700(2002) 35.71% up
Brazil: 3.6(2002), 4.55(2003) 26.39% up
Argentina: 2.5(2002), 4.1(2003) 64.00% up
Venezuela: 2500(2002), 3700(2003) 48.00% up
South Africa: 9.7(2002), 13.95(2003) 43.81% up

Uruguay: 42.3(2006), 55.0(2007) 30.02% up
Czech Republic: 52.1(2007), 66.1(2008) 26.87% up
Costa Rica: 1.130(2007), 1800(2008) 159192.04% up
Slovakia: 57.98(2007), 77.00(2008) 32.80% up
Argentina: 8.25(2007), 11.00(2008) 33.33% up
Egypt: 9.09(2007), 13.0(2008) 43.01% up
Colombia: 6.900(2007), 7000(2008) 101349.28% up
Iceland: 469.00(2008), 640(2009) 36.46% up
Chile: 1.550(2008), 1750(2009) 112803.23% up
Ukraine: 11.00(2008), 14(2009) 27.27% up
Indonesia: 18.700(2008), 20900(2009) 111664.71% up
Pakistan: 140.00(2008), 190(2009) 35.71% up
South Korea: 3.200(2008), 3400(2009) 106150.00% up
Uruguay: 61(2009), 79.0(2010) 29.51% up
Argentina: 14.0(2010), 20.0(2011) 42.86% up
Pakistan: 205(2011), 260(2012) 26.83% up

Two Years of Hyperinflation
Russia: 3.75(1990), 10(1991) 166.67% up, 58(1992) 480.00% up
Russia: 10(1991), 58(1992) 480.00% up, 780(1993) 1244.83% up
Russia: 58(1992), 780(1993) 1244.83% up, 2900(1994) 271.79% up
Russia: 780(1993), 2900(1994) 271.79% up, 8100(1995) 179.31% up
Mexico: 8.1(1994), 10.9(1995) 34.57% up, 14.9(1996) 36.70% up
Turkey: 649152.9(2000), 1577827.5(2001) 143.06% up, 4000000(2002) 153.51% up

The Mother of All Painted-In Corners

I highly recommend the paper, The Mother of All Painted-In Corners by John Mauldin.   It talks about how Japan has gotten themselves into a situation where there is no good way out.

 
Let me give my own highlevel overview of Japan's predicament.   Japan spends about twice what they get in taxes and has debt approaching 250% of GNP.   If they let interest rates go up just 2% then interest on the debt would use up nearly all their tax  money.  If that happened then nobody would loan the government money and they would have to print for all their expenses and get hyperinflation.   However, if they hold interest rates down then people will keep getting out of bonds till they have printed for all the bonds and they will get hyperinflation.   Either way, they get hyperinflation.

To avoid hyperinflation they could cut the government budget in half and default on all the debt; however, that is just not going to happen.   On any given day or week it seems like printing money is the easier answer.   So they will keep on printing money, week after week.  This will go on till it is too late to avoid hyperinflation, if it is not already too late.

Bank of Japan Printing at Hyperinflation Rates

In the 10 days from Apr 10th to Apr 20th the Bank of Japan increased the base money supply by 7.3%. From May 20 to May 31 they increased the money supply by 4.1%.   Apr 10 to May 20 they increased it by about 9%.  Last Thursday they increased the money supply by 1% in one day.

The BOJ data is released every 10 days.  With compounding a steady  0.65% every 10 days comes to over 26% per year.  With no change in velocity of money or GNP this would result in prices going up 26% per year and count as hyperinflation.   So any 10 day period below with over 0.65% can be viewed as printing money at hyperinflation rates.  Normally the velocity of money would start going up, and the real GNP would start going down, so even less than 0.65% increase in the money supply every 10 days should be enough to get hyperinflation.  They are aiming to double the money supply in 2 years which is about 1% every 10 days.  If the trend starts to go well above this then they are probably losing control and people are getting out of bonds.

It seems the BOJ is working hard to keep interest rates down.   If they have decided to peg interest rates then they have given up on limiting the amount of money creation.

I think this money creation will soon be out of control with the  panic/avalanche/death-spiral/hyperinflation as people get out of Japanese bonds and the central bank makes money faster and faster.  The more new money the central bank makes, the less people will want to hold bonds.  But the less people want to hold bonds, the more the central bank will have to make money and buy bond so that the government has enough money to keep spending twice what they get in taxes.   So I expect the money creation to speed up, not slow down.  At some point prices will start going up.

I highly recommend this video on Japan by OtterWood and also a talk by Kyle Bass on Japan.

Updating below with new releases.

Date        thousand yen          percent change in 10 day period
Mar 31   164,312,302,598
Apr 10    162,832,490,238   -1%
Apr 20    174,711,567,512   7.3%
Apr 30    174,691,381,195    0%
May 10   173,033,334,459   -1%
May 20   177,091,303,645    2.3%
May 31   184,286,172,619    4.1%
June 10   184,283,135,009    0%
June 20   185,895,479,817    0.9%
June 30   187,068,441,810    0.6%
July 10    189,355,201,934    1.2%
July 20    191,731,282,912    1.3%
July 31    196,758,169,295    2.6%
Aug 10    199,135,657,856    1.2%
Aug 20    198,973,150,602   -0.1% 
Aug 31    205,691,877,619    3.4% 
Sep 10    207,289,120,593    0.8%
Sep 20    208,722,749,341    0.7%
Sep 30    208,189,436,612   -0.3%
Oct 10    211,828,333,555     1.7% 
Oct 20    212,494,170,740     0.3%
Oct 31    215,514,238,129     1.4% 
Nov 10   217,667,308,260     1%
Nov 20   220,364,015,346     1.2%
Nov 30   224,088,843,446     1.7%
Dec 10   224,678,737,264     0.3%
Dec 20   223,456,178,374    -0.5%
Dec 31   224,189,765,264     0.3%
Jan 10    228,969,324,231     2.1%
Jan 20    224,986,639,860    -1.7%
Jan 31    232,178,071,091     3.2%
Feb 10   235,222,967,993      1.3%

From March 31 to Oct 20 this is up 37.7%.    This is 20 periods.  With compounding this is equal to about 1.6% per 10 day period.  This is more than twice what is needed to get hyperinflation with a constant velocity of money.  Again, I expect the velocity of money to start going up.  So it is much more than what is needed to make it to hyperinflation. 

The reports are found here and the release schedule is here.

The missing Bond Vigilantes are now Currency Vigilantes

The central banks are so aggressive on buying bonds that they are effectively controlling the price of the bonds.   Because of this investors are not shorting bonds but instead shorting the currency.   As the central banks print like crazy to control interest rates on bonds they devalue the currency.   So while there are not many Bond Vigilantes, there are Currency Vigilantes.