Wednesday, November 20, 2013

Armstrong gets hyperinflation wrong

In Armstrong's latest post he says:

Hyperinflation - All Just Hype
Hyperinflation is a good sales pitch but it PRESUMES government will honor all its promises. There is no indication in history that any established government has EVER done such a thing. They will confiscate everything they can, raise taxes that kill the economy, and the less revenue they generate the higher interest rates will rise forcing further defaults on debts.

Hyperinflation PRESUMES they will honor their debt. If they do not, it just vaporizes and that is DEFLATIONARY.
If we use 26% inflation per year as the cutoff for hyperinflation, then hyperinflation has happened many many times.  In the US alone there are several in the colonial period, the revolutionary war, and the civil war.  Armstrong makes it sound like hyperinflation is something that can only happen in a bad theory with false assumptions.  Really it is something with many historical examples.  Plenty of real world experimental evidence.

Really, there is no history of a government ever defaulting on debt in their own currency.  They just print to pay off the bonds.   If you look at Japan now the interest is only 0.19% on 5 year bonds, not rising higher.  This is because the central bank of Japan is making money like crazy to buy up bonds.  This is the normal sort of thing leading up to hyperinflation.  In the end the value of the paper they are using to pay off debts is a small fraction of the original value, so this is not particularly honorable, but they do not default.  

Armstrong has hyperinflation all wrong.


  1. I think it's a matter of semantics and definitions. Martin has a post up now calling what you would call the start of hyperinflation - stagflation. He sees hyperinflation as a demand pull event with rising wages. He doesn't think the cost push scene can morph into a hyperinflation spiral. I guess it depends on how the government reacts.

    We are in a vastly different fiscal position than we were in the stagflation 70's....

    Mish also says it's not even possible to get hyperinflation in the US. But he then predicts a worldwide currency collapse( that would include the US right?).

    So call it a currency collapse instead of a hyperinflation? Seems like the same outcome to me. Or it hitting Japan first as Mish thinks or UK or the whole world at the same time.....Just arguing over the details of a world that has it's central banks printing to much currency to prop everything up.

    No one - And I mean NO ONE - knows how this freak of a monetary experiment is going to play out and/or end.....Most would agree badly anyway.

  2. Sorry for repeat post but one more thought about how the government might act or not. We have to remember when Bush sent out the $600 checks to everyone when the crises hit. So we could have a collapsing economy that scares the government into sending out $1000 checks. Didn't work? Try $2000.

    Well Martin thinks they won't and are heading in the opposite direction trying to grab as much for themselves as they can. And he may be right. Who knows?

  3. Even if we define hyperinflation as 50% per month, it has still happened many times. He only argues against my 26% cutoff, but that is not at all key to my argument above. There is no record of a government defaulting on bonds in a currency they can print. There are many cases of hyperinflation. Link below is to his reply:

  4. Martin's definitions have always confused me "EVERY major empire has collapse from DEFLATION, never HYPERINFLATION". I had always followed FOFOA's model that 'Hyperinflation == Deflationary Collapse' which works well in my head since I see the two terms are different perspectives of the same event. In my mind, we're only just jostling over when that waterfall event occurs (i.e. the 'hyper' part).

    Vincent, is Martin right about the '31.4 months' bit? I sense he is being selective with his own thresholds somewhat.

    1. Some hyperinflations have gone on longer than that.

      I think a good way to look at hyperinflation is as deflation when using ounces of gold as your pricing unit. In that way it is true that government failures are deflationary. :-)

  5. fantastic explanations in your articles ! good work

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