Saturday, September 28, 2013

USA Hyperinflation Risk

If the US were to head into hyperinflation we know where the extra money would come from.  It would come from excess reserves, monetization of debt held by the public, and monetization of the new deficit.    Imagine that we are going to have hyperinflation over the next 12 months so we count both the current debt and the deficit coming over the next 12 months.   We can combine these 3 things in a graph and see how the potential pool for hyperinflation money is changing over time.  Below is a FRED Graph with these 3 things combined.  The only reason it looks like it is flattening out at the end of the curve is that the deficit data does not go as far as the other data.

Also during hyperinflation the velocity of money goes up and this adds to inflationary pressure.  The lower the velocity of money is to start with the easier it is for it to start going up.  We are currently at record low velocities.

The potential for hyperinflation is going up fast.  In practice as prices start to go up the actual deficit will as well but this makes a nice way of estimating what resources will be available to trigger hyperinflation.


  1. Vincent,

    This is good stuff as usual, it seems like from what I see in the real world we are in a stagflation environment. The people that have jobs seem pretty secure, they are not getting any large raises or bonuses. So I don't see how wage growth will fuel higher money velocity.

    You can see more bubbles forming, the stock market and housing market have been re-inflated. The housing market has started turing back down because of interest rates lately.

    I can't see a method for those excess reserves to make it into circulation, unless the government just started massive transfer payments. Free healthcare for everyone, student loan forgiveness, etc.

    I'm sure once the velocity is unleashed, the path will be clear but it's very foggy from my viewpoint now.

    1. The excess reserves are privately owned. It does not take any action by government to get those out. It just takes the owners figuring out how they can make more than 0.25% interest. The more other interest rates go up the more this money will move out into the world.

  2. I was too young in the seventies to be aware of the inflation that was happening, but I know so many people today that are living paycheck to paycheck that if I told them "Gas is going to double in price tomorrow better go get what you can" they would not be able to fill up their car until they got paid.

    Again in the seventies did most people have savings they were worried about protecting, if so I can see how they would run out a trade money for something of value, but when people don't have the money to start with....

    I do believe hyperinflation is coming, it's hard to see how out government will ever slow down spending, but it just seems like most of the money is available to the ultra rich and not making it down to the lower classes yet.

    1. If last month prices went up between when you shopped near the start of the month and when you shopped near the end of the month then after your next paycheck you shop for the whole month right away. This increases the velocity of money. It does not require savings.

    2. If there were enough people in government that they could really hold up a budget limit increase, then they might be able to avoid hyperinflation. But I think the chances are higher that the limit is removed altogether.

    3. Anonymous, check this out:
      It seems that in the 1970s one of the big problems for people were their wages going up AND prices going up: this resulted in people being pushed into higher tax brackets and thus a "stealth tax" was implemented.

    4. Here's the same video starting at the point I was referring to:

    5. You might be interested in this too (I asked Mike Sproul a question). Here's his answer:


      Tom Brown:

      "if you were invited to design the monetary systems for two (or more) separate brand new Martian colonies..."

      Sorry Tom, I didn't see this earlier.

      To test the validity of the QT vs. the BT, we just have to remember that the BT says that the value of money depends on the ratio of money (M) issued to the issuer's assets (A), while the QT says the issuer's assets are irrelevant, and the value of money depends on the ratio of money to goods produced (Q). (The BT says quantity of goods produced is irrelevant.)

      So in an ideal experiment, I'd vary M, A, and Q every which way, and see if the value of money is explained better by M/A or by M/Q."

  3. “The Fed is merely exchanging interest-bearing reserves, which are liability of the federal government, for Treasury securities, which are different liability of the federal government. The Fed is not monetizing the debt.”

    If you don’t like it, I suggest you go set Sumner straight! :D

    1. Thanks! My comment is now awaiting moderation. I am saving a copy here in case it gets lost.

      For it to be reasonable for you to claim we are not headed for hyperinflation you should first explain your theory of hyperinflation. What causes it? How does it start so suddenly? Why does it go on so long? Why is it hard to stop? Does your theory match historical cases? Etc. After you explain your theory then look at the current situation and see if your theory says there is a risk of hyperinflation or not.

      I have collected about 30 different explanations for hyperinflation. Looking at these, I think Japan, the USA, and UK are really at risk. But if you have a theory of hyperinflation different from all of these, I would really like to hear it. I will be fascinated if your theory matches historical cases but says these 3 countries currently have no risk.

    2. I begin to wonder if people who think there is no risk of hyperinflation don't even have a real theory of hyperinflation. Like they don't think there is a risk so they don't try to understand it.

  4. Vincent, Nick Rowe brought up Zimbabwe too just the other day while arguing against Mike Sproul:

    Look for his comment at October 01, 2013 at 10:36 PM on the second page of comments, which this link should take you to:

    ... and don't forget Bill Woolsey, who also commented at Sumner's site:

    Bill Woolsey has his own blog, so you can address him there if you want too:

  5. Thanks as always. In the first one someone pointed out that it was not clear why including both debt and deficit was not double counting. I have tried to clear that up in the post, but basically because I was thinking about the coming 12 month period.

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