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.